My Lords, I will also speak to other amendments in this group. This amendment would require a continuity strategy should a triggering event occur to set a cap on the charges that can be applied to members’ savings. Amendment 42 sets a similar requirement on an implementation strategy when a triggering event has occurred, and Amendments 28, 39 and 54 introduce an explicit provision that members’ funds cannot be used in whole or in part to pay for the costs of any wind-up of a failing master trust. That provision is to apply to the continuity strategy when a transfer-out and wind-up is triggered, and when an unauthorised master trust, on or after
The key function of the Bill in addressing weaknesses in the regulation of master trusts is to protect members from bearing increased—indeed, potentially unlimited—costs, so draining their savings pots when a master trust fails. The Bill introduces a prohibition provision, Clause 33, to protect members from funding increased costs in the event of a scheme failure. The prohibition is on both master trusts and the receiving scheme increasing charges, introducing new charges or charging a member for transfer during a specific period in which the scheme is at risk.
However, Clause 33 does not make it clear how and on what premise the charges it will be prohibited from exceeding will be set or determined in the first instance. To use my own simple language, members are protected by a prohibition from the imposition of additional charges above a charges baseline, either by the master trust or the receiving scheme on transfer in a triggering event, but it is not at all clear what that baseline is, how it is set or, indeed, if it is fair value. The amendments in this group seek a cap on the charges that can be applied to members’ savings should a scheme fail, underpinned by the provision that members’ funds cannot be used in whole or in part to pay for the costs of wind-up and transfer occurring as a result of a trust failing.
The parameters and restrictions on the use of members’ funds to meet the cost when a master trust fails need to be set out more clearly in the Bill. Such a restriction is too fundamental to leave to regulations and/or the Pensions Regulator’s discretion. To illustrate my point, the protection for members against meeting additional charges on wind-up and transfer in a triggering event are referenced in three main clauses. Clause 12 provides for a master trust continuity strategy, which is a requirement of authorisation, to set out how members’ interests will be protected if a triggering event occurs, including the level of charges that can apply. Clause 27 requires a master trust to submit an implementation strategy, which must set out how members’ interests will be protected when a trigger event actually occurs, including the levels of administration charges that will apply. Clause 33 sets out how the prohibition on increasing member administration charges will operate during the trigger event period, and provides that the Secretary of State may make regulations about,
“how levels of administration charges are to be calculated”,
“how to determine … the purposes for which charges are increased or imposed”.
There is plenty of process here but nothing in Clauses 12, 27 or 33 informs what the actual quantitative level of member protection will be against increased charges on scheme failure; nor does the Bill say whether members will be protected from bearing, or will have to bear, any wind-up or transfer costs. Indeed, the level of protection for the member against increased charges on scheme failure can be revisited on three important occasions under different provisions in the Bill relating to triggering events. What is the Government’s policy on the considerations that will be taken into account when the Pensions Regulator authorises the level of administrative charges to be borne by the member on scheme failure under Clauses 12 and 24 and Schedule 2? Are there any circumstances in which some of the administration charges or transfer costs arising as a result of a triggering event can be passed on to the member, and what will be the limit on the charges that can be passed on to them?
In the current drafting, there seems to be no join-up with the Occupational Pension Schemes (Charges and Governance) Regulations 2015, which incorporate the value-for-money assessment. There is nothing in the Bill to cover what happens if a scheme fails to comply with these regulations. Would it impact on the authorisation process or lead to the withdrawal of authorisation? It may be that these points will be covered off in new regulations, but it is unclear how regulations made under the powers in the Bill would knit together with the existing charges and governance regulations.
The regulations supporting Clause 12 on the continuity strategy, which sets out a requirement about the level of charges that will apply in a triggering event, are subject to the negative resolution procedure. I am conscious that we are bouncing this ball on negative and affirmative resolution procedure but, again, there is a prohibition on increasing charges and various incidents where the charges that cannot be exceeded are set out. Yet we have no sight of the draft regulations, so we do not know the Government’s thinking on this. Again, this is an appeal as to why, in the first instance, the regulations should not be subject to the affirmative procedure.
This is an important matter that is at the heart of the level of protection the Bill seeks to provide to members. It is one thing to say that there is a protection, but understanding what that protection is in quantitative and real terms is important. Because we have not seen the draft regulations and do not know the policy intention, that is difficult to assess. That is why Amendment 30 provides for the first regulations to be subject to the affirmative resolution procedure. Given the importance of this matter and the lack of detail before the Committee, why is it not appropriate to apply that procedure in the first instance?
“, beyond the normal capped pension scheme charges,”.
The point is really very simple: without this change, the opposition amendments would have the undesirable —and I think unintended—effect of hampering the orderly exit of the sponsor. I am sure that is not the intention behind them.
My Lords, Amendment 27 would require information on any charge cap to be included in a master trust’s continuity strategy. I am grateful to the noble Baroness, Lady Drake, for making it clear that this is a series of probing amendments. I think it makes sense for me to go through what the process is on the continuity strategy.
One of the criteria for a master trust to be authorised by the Pensions Regulator is that it must have an adequate continuity strategy. That strategy is then kept under review on an ongoing basis. A continuity strategy is a document that addresses how the interests of the scheme members will be protected if, in the future, the scheme experiences a triggering event—an event that could put the scheme at risk. The strategy must include a section on the scheme’s levels of administration charges in a manner that will be specified in regulations in due course, as well as any such other information as may be set out in those regulations. Our intention is that the regulations will set out the detail and manner of the information to be provided on the administration charges in the strategy. We want schemes to provide information such as the charge levels per arrangement or fund, any discounts they apply to charge levels and on what basis these discounts are made.
The need for this information to be in the continuity strategy is driven by the requirements that will apply to the scheme at any later point in time if it experiences a triggering event. Following a triggering event the scheme must submit an implementation strategy to the regulator that sets out how it will implement its continuity strategy. The scheme will also be subject to new charge restrictions, including that member charges must not be increased after a triggering event has occurred. The information to be provided in the continuity strategy is therefore closely related to information on administration charge levels to be included in the implementation strategy under Clause 27(3), which in turn becomes relevant to the prohibition on increases in charges during a triggering event period under Clause 33.
Amendment 27 would mean that, as well as setting out the levels of administration charges in the continuity strategy, the strategy would specifically need to include information on any cap on those charges. While I concur that it is important for it to be clear whether any charge cap applies, I am concerned that this amendment duplicates provision elsewhere and as such is unnecessary.
The cap is an annual one at 0.75% or an equivalent combination charge on the value of the member’s rights in the default arrangement. Let me confirm, just in case any question remains on this matter, that this charge cap applies to master trust schemes in the same way that it applies to other occupational pension schemes. In addition, the existing regulations also place requirements on trustees relating to the assessment and reporting of charge levels. The statement must be made available and can be requested by members. Taken together, these existing regulations specify the charge cap requirements and enable the reporting of information about charges.
The provision in the Bill at Clause 12 is different from the legislation providing for the cap and for the reporting of charges in the annual report—and it has different objectives. The requirement about charges in the continuity strategy is specifically focused on enabling the charges to be articulated in a manner and form which will work for the later requirements on master trusts that have experienced a triggering event. Stating the charge cap in Clause 12 would seem to be seeking to meet a different objective. It is the information on charges in the implementation strategy that is essential for the regulator. This information means that the regulator is able to check that members are not being charged more than they should be if the scheme enters a triggering-event period. Adding a requirement to state the charge cap would seem to be aiming at a different objective.
Amendment 28 would require a scheme’s continuity strategy to demonstrate that members’ funds in a scheme cannot be used in whole or part payment of the cost of winding up the scheme. Amendment 29, tabled by my noble friend Lord Flight, would seek to limit that amendment to members’ funds that were available through charges in excess of the existing legislative cap. The Government have sympathy with the noble Lords’ objectives; members’ funds should be protected, as far as possible, in the event that a scheme has to wind up. That is why we have made provision in the Bill to protect members from excessive charges when a triggering event happens. In summary, Clause 33 prohibits trustees imposing administration charges at levels above those set out in the implementation strategy during a triggering-event period.
In relation to how we see this prohibition under Clause 33 working with the existing legislative cap under the Occupational Pension Schemes (Charges and Governance) Regulations 2015, the situation is essentially the same. In relation to a default arrangement in an automatic enrolment master trust scheme, the normal charge levels would have to be at or under the cap of 0.75% and could not be increased during a triggering-event period. Once a triggering event happens, the prohibition under Clause 33 kicks in and effectively supersedes the requirement to stay at or under the cap during a triggering-event period. The levels of charges, whether a member is invested in the default arrangement or not, cannot be increased. For this reason, we consider that Clause 33 works to provide proportionate and effective protection.
As my noble friend said, Amendment 29 seeks to build on Amendment 27 by limiting it. We consider that the Bill, particularly Clause 33, already provides effective and proportionate protection for scheme members. Amendment 30 would require the first regulations to be made under Clause 12, on the continuity strategy, to be subject to the affirmative resolution procedure. As I have already said, we will go away and consider our strategy on putting out those regulations. Amendment 39 seeks to make an addition to what will be covered in the regulations that must be made under Clause 24 by requiring them to prohibit the use of member funds to pay for the costs of transferring the members out of the master trust and winding it up. Amendment 40, in the name of my noble friend Lord Flight, takes a similar position but makes an adjustment to that addition.
I turn to Amendment 37, in the names of the noble Lord, Lord McKenzie of Luton, and the noble Baroness, Lady Drake. Clause 24, and the regulations to be made under it, set out the detail of continuity option 1 and the requirements in relation to it. Continuity option 1 is where a master trust has to transfer its members out and wind up. To protect the rights that members have accrued in the scheme it is necessary that these rights are transferred to alternative schemes or pension arrangements. Clause 24 therefore requires the trustees of the scheme to identify a master trust to which members’ rights and benefits can be transferred. Our aim in Clause 24, and related clauses, is that members will continue to save in a pension, despite the master trust of which they are a member experiencing a triggering event which results in the scheme having to wind up. In this situation, the Bill requires that members are transferred out to an authorised master trust, and continue to save with as little disruption as possible. That is clearly important for their retirement.
Amendment 39 seeks to require the regulations that will be made under Clause 24 to include additional provision to prohibit the use of member funds to pay for the costs of transferring the members out of the master trust and winding it up. We have expressed sympathy with the aim of protecting members’ funds, so far as possible, in the event that members’ accrued rights and benefits are transferred out of the scheme. Indeed, to some extent, the Bill already makes provision for a prohibition to cover this. However, the mechanics of how this works are slightly different, so I will explain them.
When we discussed Clause 8 I explained how it provides that in order to be satisfied that a master trust is financially sustainable, the Pensions Regulator must be satisfied that the scheme has sufficient financial resources to meet the costs of complying with the duties in Clauses 20 to 33. That includes, among other things, the costs of transferring members’ rights and benefits out and winding up the scheme. Clause 33 already puts in place protection which has a similar objective to this amendment. Once a triggering event has happened, the trustees are prohibited from increasing charges above certain levels, and these will need to be set out in a section in the implementation strategy. As for what those levels are exactly, as I mentioned in relation to Clause 12, Clauses 27 and 33 enable the Secretary of State to make regulations in relation to these administration charges. Clause 27(4) allows regulations to set out the manner and a specific date for those levels. Clause 33(4)(a) allows regulations to set out how to calculate the administration charge levels for the purposes of the prohibition under Clause 33, including those levels set out in the implementation strategy.
We intend for these levels in the implementation strategy to be scheme-specific and calculated in relation to each investment arrangement in the scheme by looking back over a certain period of time and taking into account any discounts in each arrangement. The intention is that these levels will be set according to existing charge levels in the scheme before the triggering event happened and will be based on the charges that members were paying towards the normal running of their scheme in previous years. The levels will need to be calculated in a manner specified in the regulations. In this way, the existing levels in the scheme will effectively be fixed once a triggering event happens and cannot then be increased. The intention is that members will not pay any more than they did when the scheme was operating normally.
Under Clause 33(1)(c) there is a specific prohibition in relation to charges being imposed on or in respect of a member in consequence of leaving the scheme. That covers the members who are transferred by the trustees to the scheme that the trustees have identified under continuity option 1. It is worth noting also that these protections under Clause 33 are in place for the duration of the triggering event period—and so in the context of continuity option 1—until the scheme is wound up.
Amendment 40 seeks to make an adjustment to the additional prohibition. As described when I talked about Amendment 39, the intention is that members will not pay any more than they did when the scheme was operating normally so the amendment is not required.
Amendment 42 would require information on any charge cap to be included in a master trust’s implementation strategy. The implementation strategy must include a section on the scheme’s levels of administration charges in a manner that will be specified in regulations in due course, as well as any such other information as will be set out in regulations. Again, I shall not repeat how Clause 33 will work.
The amendment would mean that as well as setting out the levels of administration charges in the implementation strategy, the strategy would specifically need to include information on any cap on those charges. While it is important for it to be clear whether any charge cap applies, I am concerned that the amendment duplicates provision elsewhere and as such is unnecessary. Existing regulations specify the charge cap requirements and enable the reporting of information about charges.
Amendment 54 seeks to provide that, in certain circumstances, costs incurred by the scheme should not be borne by the members. These circumstances are where a master trust that has not been authorised by the Pensions Regulator experiences a triggering event and the trustees either decide to wind up the scheme or are required to do so. Paragraph 7 of Schedule 2 provides that in those circumstances, where no other party is liable for the costs that the scheme incurs during the triggering event period, which includes taking into account the prohibition under Clause 33, the scheme funder is liable. It is appropriate that the scheme funder is made liable for the costs that the scheme incurs during the triggering event period where no other party is liable, as they are the person liable to provide funds for the scheme and entitled to receive profits from it.
Once the new authorisation regime for master trusts comes into effect, in order to be authorised, schemes will need sufficient financial resources to be able to pay for the running of the scheme for at least six months and for the costs of winding up the scheme and associated costs. The intention is that the charge levels in the implementation strategy, the detail of which will be set out in regulations in due course, will look backwards over a period of time before the triggering event happened, as I have already described. We believe that by preventing an increase in charges if there is a triggering event, there will be effective and proportionate protection for scheme members.
If there are any points that I have not dealt with, I shall pick them up. On charges on Governments, the 2015 regulations set out a requirement on trustees to ensure that members are getting value for money on charges. With that, I think I have dealt with all the issues raised by the noble Baroness. I accept that that was a probing amendment and I am grateful for this opportunity for discussion. On that basis, I hope I have given noble Lords comfort and invite the noble Baroness to withdraw her amendment.
I thank the Minister for his detailed reply. I should be honest and say that I do not think that I have absorbed all the detail that he presented, and I will read the Hansard in detail to follow it through. In my defence, as one would expect in preparation for a Bill such as this, I spoke to pension lawyers, and there was a clear view that the parameters and restrictions on the use of members’ funds to meet the costs when a master trust fails were unclear and needed to be set out more clearly, so I am not alone in not understanding exactly how the prohibition clause works, and therefore what quality of protection is afforded. I simply say that others are unclear what the Bill provides.
I took one or two things from what the Minister said. The information charges provided on the implementation strategy are key. They are the driver against which it is assessed. It is on additional charges that one applies the prohibition; it identifies the charges in the implementation strategy which it is prohibited from exceeding. That needs some reflection.
I was a little confused by one point in the Minister’s response. He referred to default funds. Of course, the cap on default funds is 75 basis points, but the nature of his reply was that if the scheme was running a default fund on 50 basis points, one could rise to the cap to fund the administration charges. Reassurance on that point would be really helpful.
I hope that I made it absolutely clear that we will look back at what was actually being charged to ensure that it was an annual effective rate of 0.5%. There is no space to try to get the next 0.25% once a triggering event has happened. You are left at the level at which you have been charging historically, and there will be a way of assessing that rate, which means that both the original amendment and my noble friend’s amendment to it fall away, because there is another method of maintaining the level of charges.
I thank the Minister for that clarity; that is quite reassuring in respect of one point, but I think that my noble friend and I will probably want to reflect on the detail of the Minister’s statement. It is also helpful that he has confirmed that the implementation strategy information charges are key in deciding the charges and the prohibition that applies. We will reflect on what is in Hansard, but I beg leave to withdraw my amendment.
Amendment 27 withdrawn.
Amendment 28 not moved.
My Lords, I beg to move Amendment 32 and shall speak also to Amendments 33 and 34. I shall be brief. We have dealt earlier with amendments relating to communicating and engaging with members. These amendments deal specifically with the requirements to ensure that an annual statement must be submitted to the Pensions Regulator, together with the scheme accounts. The annual statement for these purposes is that required by the 2015 DC regulations, with particular reference to relevant multi-employer schemes.
The requirement to produce an annual statement—the chair’s annual statement—although supported by the trustee board, is part of the Pensions Regulator’s DC code. The clause is designed to ensure that the Pensions Regulator has sufficient information about the master trust scheme to know when a scheme should be required to submit a supervisory return. I beg to move.
My Lords, after some five hours of debate there is now a glimmer of hope for one of the amendments moved by the noble Lord, Lord McKenzie. Its intention appears to require the trustees of an authorised master trust scheme to submit the scheme’s annual governance statement to the Pensions Regulator each year.
The annual governance statement, sometimes known as the chairman’s statement, which trustees of most money-purchase occupational pension schemes are required to produce, provides information on the scheme’s compliance with governance measures such as the charge cap. It sets out, among other things, the level of charges in the scheme and the trustees’ assessment of the extent to which these represent good value for members.
I understand why this amendment may have been tabled, and I agree that it is important for schemes to operate transparently and demonstrate that they represent good value for money for members. This information would indeed be valuable to the regulator in its assessment of the master trust against the authorisation criteria. However, I have reservations about whether the approach, as drafted, represents the best way of achieving this. From a drafting perspective, there is a risk in making a provision of this kind in primary legislation which relies on a reference to a provision in regulations—in this case the Occupational Pension Schemes (Charges and Governance) Regulations 2015. Should those particular regulations be amended in the future—for example, so that the statement is no longer required under the same specific provision—there is a risk that this provision of the Bill would no longer have the desired effect.
A safer approach is to make use of the existing provision in the Bill, which enables regulations to specify that the regulator may require that further information is submitted to it. That provision is in Clause 15(2). I can confirm that it is intended that the provision of the annual governance statement to the regulator will be dealt with in these regulations by enabling the regulator to require the statement to be included in master trusts’ supervisory returns. We will of course consult on these regulations and we cannot confirm the final content until the consultation is concluded. I hope that I have explained to noble Lords that I resist the amendment not because I disagree with it but because there is a better way of getting there. The Bill already allows equivalent provision to be made in a manner more likely to secure the desired outcome in the long run. Against that background, I hope that the noble Lord will withdraw his amendment.
My Lords, I am grateful to the Minister for that response. I thought for a moment that the glimmer of hope was going to be completely snuffed out, but I am pleased to know that it has not been. I accept the point about drafting and will forward in due course to seeing this in the regulations. Having said that, I beg leave to withdraw the amendment.
Amendment 32 withdrawn.
Amendments 33 and 34 not moved.
Clause 14 agreed.
Clause 15 agreed.
Clause 16: Duty to notify Regulator of significant events
My Lords, I shall speak also against Clause 16 standing part of the Bill. The amendment is an alternative formulation that requires the affirmative procedure to operate for the regulations. We touched on this issue earlier this evening. The clause imposes a duty on a range of persons involved in running a master trust to give notice of the fact that a “significant event” has occurred. Civil penalties can be applied to anybody failing to comply. The only hint of what might constitute a significant event is what the Secretary of State sets out in regulations. No hint is given in the Explanatory Notes to the Bill. The information provided to the Delegated Powers Committee simply refers to a significant event being one that might affect the ability of the scheme to meet the authorisation criteria, such as a change of trustee or scheme administrator.
As the Delegated Powers and Regulatory Reform Committee pointed out, the delegated power confirmed by Clause 16(3) is a very wide one. It emphasised that the definition of what constitutes a significant event is fundamental to determining the duty imposed by Clause 16. It says that the width of the power appears to be needed because the Government have not yet decided on the policy or purposes for which the power is to be used. Its conclusion is that the power is inappropriate in the absence of any convincing reasons to justify its scope. We agree that as things stand the Government have more work to do to justify the change in the clause. I beg to move.
I will begin by explaining why it is important that the clause stands part of the Bill, and then I shall set out my thoughts on the proposed change in the parliamentary scrutiny procedure.
Clause 16 addresses one of the one of the requirements that will be placed on a master trust scheme once it has been authorised. One of the great strengths of the authorisation regime is that it is an ongoing system. This means that, in order to continue operating in the market, the Pensions Regulator must remain satisfied that the master trust continues to meet the authorisation criteria. This makes it particularly important for the Pensions Regulator to remain informed about the scheme. Indeed, I hark back to our discussion a little earlier about whether there should be someone to compensate as a last resort. It is really important that we make sure that the Pensions Regulator knows what is happening in schemes. That is one of the key ways in which to make that happen.
The regulator will collect information from authorised master trust schemes on a regular basis through a combination of existing requirements on occupational pension schemes and new requirements on authorised master trust schemes, introduced as part of the Bill. For example, all occupational pension schemes are already required to submit an annual scheme return to the Pensions Regulator and, under Clause 15, master trusts will be required to submit a supervisory return as well. In addition, Clause 14 introduces a requirement on the trustees of master trust schemes to submit the scheme’s annual accounts, and on the scheme funder to submit its accounts to the Pensions Regulator. These returns allow the Pensions Regulator to collect information from schemes on a regular basis in order to determine whether they still meet the authorisation criteria.
This clause provides that the Pensions Regulator must be notified in writing if significant events occur in relation to an authorised master trust scheme. The Secretary of State, following consultation with the industry, will set out in regulations what constitutes “significant events” for the purposes of this clause. These might include, for example, change of scheme trustee, change of scheme administrator, changes to the continuity strategy or changes to the business plan. The Government intend that the events which will be prescribed as significant events will be events of the type which the regulator would need to be made aware of promptly due to the potential impact on the scheme’s authorised status or because they are indicators that support or intervention may be required.
To be clear, the occurrence of a significant event in a master trust scheme will not necessarily affect the ability of the scheme to meet the authorisation criteria. It just may have such an effect or it may be a warning sign. For example, a scheme may have a change of trustee. As the fitness and propriety of a trustee is linked to the authorisation criteria, the Pensions Regulator must be informed of this change so that the new trustee may be assessed against the relevant standards. The new trustee may well meet the required standards, in which case the scheme’s authorisation status will not be affected—but there could be an impact. A civil penalty will apply to a person who fails to comply with this reporting requirement. For that reason, it is important to be as clear as possible about who will be subject to this requirement in the Bill. This clause therefore lists the persons subject to this requirement in subsection (2). Further persons may be listed in regulations.
There is a precedent for this requirement. Section 69 of the Pensions Act 2004 provides that key persons involved in the running of defined benefit occupational pension schemes must report the occurrence of certain events to the Pensions Regulator. That provision was made to warn the Pensions Regulator that such a scheme may require the support of the Pension Protection Fund. The provision in this Bill is made to warn the Pensions Regulator that an authorised master trust scheme may need support or intervention or be at risk of not meeting the authorisation criteria. This provision will protect scheme members and it will assist the Pensions Regulator to carry out its functions. That is why it is important that this clause stands part of the Bill.
Amendment 35 concerns the affirmative as opposed to the negative procedure. We have discussed that and we will also consider it in this context. On that basis, I hope that the noble Lord will see fit to withdraw both his opposition to the clause and his amendment. I hope that I have provided clarity on the wider purpose of Clause 16 and I commend it to the Committee.
I thank the Minister for that response. I think we understand what the intent of this provision is. Obviously, the persons to whom this obligation applies are listed in detail in the Bill. Why, therefore, is it not possible to list at least some examples in the Bill—for example, a change of scheme trustees—as one of the significant events which might require action? There is silence on that side of the equation. However, there is a list of persons who are subject to this provision.
I think the reason is that it is pretty odd to have a hybrid approach to a list of requirements some of which are in the Bill and some in regulations. We are looking to put them all together in a coherent way in regulations, which we will consider how best to introduce to the House.
My Lords, has any consideration been given to a right of appeal against a civil penalty of this kind, which looks like a substantial potential fine? Who is to judge this? For example, whose duty is it to say that the trustees have changed? It could be any of the other trustees and the administrative fine could be imposed on any one of them at random. There needs to be some kind of due process about substantial fees of this kind landing out of the blue on people who may not bear the main brunt of the significant event over which they are being arraigned.
My Lords, I think we need to read the record. In the meantime, I beg leave to withdraw the amendment.
Amendment 35 withdrawn.
Clause 16 agreed.
Clauses 17 to 21 agreed.
Clause 22: Notification requirements
Amendment 36 not moved.
Clause 22 agreed.
Clause 23 agreed.
Clause 24: Continuity option 1: transfer out and winding up
I shall speak also to Amendment 38. Amendment 37 seeks to probe an additional route to continuity. As the Bill stands, where trustees have chosen, or are required, to pursue continuity option 1, they must identify one or more master trust schemes to which members’ accrued rights and benefits are proposed to be transferred. Continuity option 2—an attempt to resolve the triggering event—is a route to be determined by the trustees, and not, seemingly, the Pensions Regulator. It is understood that in some circumstances a route to achieving continuity would be to change the scheme funder at the initiation of the Pensions Regulator as an alternative to transferring out or winding up a scheme. On the face of it, the regulation-making powers of Clause 24(3)(a) and (b) do not seem to cover the position, but perhaps the Minister will tell us how, or indeed whether, this outcome can be accomplished.
Transferring the responsibility for a master trust to a new scheme funder could provide a quick answer to a collapsing master trust and would fit in with what happens with standard occupational schemes where it is wished to avoid having to wind up the whole scheme if a scheme sponsor becomes insolvent. Changing the scheme funder could be an easier solution that costs less and helps members because it keeps the scheme intact and avoids unnecessary investment transition costs and expenses for the members. Does the Minister agree that this opportunity should be available and, if so, can he put on the record how it might be accomplished?
The purpose of Amendment 38 is to highlight circumstances under continuity option 1 which require a transfer out and winding up and for members’ accrued rights and benefits to be transferred. Notwithstanding regulations which might require transfers to alternative schemes or the right of employers or members to opt out of a proposed transfer, what is the position if the trustees simply cannot identify a transferee scheme? How is continuity option 1 to proceed? It is accepted that the focus of the Bill is just the money purchase component of a master trust but, if other benefits are provided, what is the position regarding these and how are they to be covered by other legislation and regulations? I beg to move.
My Lords, I want to raise an issue which is very relevant to this point. As the Bill will, rightly, require continuity strategies for the event of failing master trusts, I ask the Minister to consider introducing measures that will facilitate bulk defined contribution pension transfers. At the moment, the bulk transfers are governed in a way that would be suitable for defined benefit schemes rather than defined contribution schemes. It seems that we have an opportunity to disapply Regulation 12 of the 1991 preservation regulations and to introduce measures in this Bill to directly facilitate defined contribution pension transfers, which could also cut the costs of transferring across.
My Lords, I am grateful to the noble Lord, Lord McKenzie, for proposing his amendment. I am afraid that I am back in the default mode of resisting.
Before I address the amendments, I say to my noble friend Lady Altmann that I would like to reflect on what she said about the transferability of defined contribution pots and perhaps write to her, because I am not sure that it directly arises from the two amendments before us.
Clause 24, and the regulations to be made under it, sets out the detail of continuity option 1 and the requirements relating to it—where a master trust chooses or is required to transfer out its members and wind up. This option would be pursued where a master trust scheme could no longer satisfy the regulator that it met the authorisation criteria and had its authorisation withdrawn or refused, or where, for any other reason, it could no longer continue to operate and the trustees chose to pursue continuity option 1 rather than resolve the triggering event and keep the scheme running.
To protect the rights that members have accrued in the scheme, it is necessary that these rights be transferred to alternative schemes or pension arrangements. Clause 24 therefore requires that under option 1, the trustees of the scheme must identify a master trust to which members’ rights and benefits can be transferred. Then the trustees have to notify members and employers of the transfer, as well as of other information that will be set out in regulations.
The aim of Clause 24 and the related clauses is that members will continue to save in a pension despite the master trust of which they are a member experiencing a triggering event that results in the scheme having to wind up. In this situation members should be transferred out to an authorised master trust and continue to save with as little disruption as possible. We want to encourage and facilitate the continuity of pension saving. Therefore, when a master trust is going to close, the provisions in the Bill will mean that members have the reassurance that, if they do not make an active decision to go elsewhere, they will become a member of an alternative master trust that has been authorised by the Pensions Regulator.
Amendment 37 provides that where the trustees have the choice, and have decided to pursue continuity option 1, they can do so, except where the Pensions Regulator decides that continuity of saving for members would be best achieved by the substitution of a new scheme funder. I think that the noble Lord, Lord McKenzie, was seeking to give the regulator some sort of power to require the trustees to follow continuity option 2 instead of continuity option 1, where the trustees had chosen the latter. However, in effect the amendment would give the regulator the power to exempt a scheme from fulfilling the requirements under continuity option 1 where the trustees have decided or are required to pursue this option and where the regulator is satisfied that continuity is best achieved by the substitution of a new scheme funder. I see real difficulties in what the noble Lord has proposed.
Trustees are responsible for running and managing their scheme and making decisions in relation to it. They have a fiduciary duty to act in the best interests of the members of their scheme—a point that the noble Lord, Lord Kirkwood, made during our discussions. This amendment would effectively allow the regulator to second-guess and overrule trustees and to make a decision about a pension scheme. This would be a fundamental change to the principle that trustees have responsibility for managing their scheme. We do not think such an intervention by the regulator would be appropriate.
The option of finding a new scheme funder, as proposed by the noble Lord, is already open to trustees as a means of resolving the triggering event and continuing. Depending on what triggering event the scheme experienced, there could be a variety of ways of resolving it. We consider it important not to limit these, but to give trustees the freedom to resolve the event and the regulator the power to decide whether it is satisfied that the triggering event has been resolved. Where the sourcing of a new scheme funder is the most appropriate resolution of a triggering event, as suggested by the noble Lord, it should be up to the trustees to identify this funder. It should not be the Pensions Regulator’s responsibility to decide what the resolution method should be, that the method should be a new scheme funder or to source that funder. That is not the regulator’s role and it would be overruling the trustees, who rightly have ultimate responsibility for the scheme and its members.
We consider it important that any resolution of the triggering event and continuation of the scheme be subject to the full requirements of option 2. These requirements include the preparation of a comprehensive and detailed implementation strategy by the trustees, having certain safeguards in place for members and employers, additional support and assistance for them, and greater protection for members. Further, there is oversight of the adequacy of the strategy by the regulator.
We agree that where a master trust has experienced a triggering event, a new scheme funder could be identified and could be the most appropriate resolution of a triggering event. However, the Government believe that it is the trustees’ responsibility to make decisions for the scheme, and that if they want to resolve the triggering event by finding a new scheme funder, they should go down the route of continuity option 2.
Amendment 38 makes two additions to what will be covered by the regulations. The first part of the amendment would require the regulations made under this clause to set out what happens where the trustees have not been able to identify a master trust into which their members will be transferred. As the Bill makes clear, there will be a comprehensive set of regulations under Clause 24 that will cover many areas. These regulations will cover members’ right to transfer to a scheme of their own choosing, if they do not wish to transfer to the trustees’ choice of scheme. Members could also take up other pension options open to them, where relevant. Where a member is in receipt of a pension from the failing master trust, they will have the right to transfer their benefits to an alternative appropriate arrangement. For example, this could include a draw-down arrangement or the purchase of an annuity.
Where members do not exercise this right, employers can choose an alternative authorised master trust from that selected by scheme trustees for their current employees to be transferred to. It is intended that the regulations will impose a duty on employers and the trustees to inform members where employers select an alternative master trust. This will ensure that members are kept informed, know where their rights have been transferred and which scheme they will be saving in in the future. The regulations will also set out that if members and employers do not make alternative arrangements, members will be transferred to the master trust selected by the trustees.
From our engagement with the master trust market we are aware that a number of schemes will be interested in taking on the members of other master trusts that fail. Many master trusts operate on a model that is based on scale. In some cases this is to generate a level of income which makes them profitable. It means that where there are a number of members that the scheme has not actively had to source itself, schemes are particularly interested in taking them on. Also, from our discussions with master trusts, we are aware that they are keen to demonstrate the reliability of master trusts and for members to have confidence in them as a vehicle for pension saving. There may be other motivations as well which mean that master trusts are eager to take on other schemes’ members. While we cannot guarantee that several master trusts would be looking to take on the members of any particular trust that has failed or decided to exit the market, we are confident that there is adequate provision within the market overall.
We think it is essential that any members who are being transferred should go into a scheme that has been authorised by the regulator, and when the regulator comes to implement the authorisation regime it will be conscious of the need for there to be schemes available that have been authorised into which members can be transferred. We anticipate that master trusts believe that they will pass the authorisation requirements relatively easily and will want to apply for authorisation as soon as they are able. While I appreciate the concerns, our interaction with the master trust market leads us to believe that there will be suitable schemes available into which members can be transferred when their schemes fail.
The second part of Amendment 38 would require the regulations to set out what would happen to any non-money purchase benefits where a master trust which has mixed benefits is going to transfer the money purchase benefits out of the scheme and cease to operate in respect of those benefits. We have had some discussion relating to our approach in relation to non-money purchase benefits in master trusts, and there is already extensive legislation in relation to non-money purchase benefits covering areas such as scheme funding, transfer and wind-up. This legislation will continue to apply to non-money purchase benefits in master trusts. We do not want to duplicate or create complications in relation to that existing legislative framework. For that reason, we do not think it is appropriate that the continuity strategy should make provision about what is to happen to the non-money purchase benefits in the scheme.
Perhaps I may have another shot at responding to my noble friend Lady Altmann. There will be specific bulk transfer provision for master trusts that are following continuity option 1. That will be made by regulations under Clause 24. It will not have the normal requirements on defined benefit schemes, such as an employer link between the two schemes. I hope that is of some help to my noble friend, and that the noble Lord will consider withdrawing his amendment.
“dealing with benefits other than money purchase benefits”,
he said that there is legislation in place which in a sense covers those situations. Can we be clear—perhaps he would care to write to me and to my noble friend Lady Drake—that there is a perfect fit of that regulation in those circumstances where there is a master trust with money purchase benefits and other benefits, just to make sure that it fits those precise circumstances? I think that we remain to be convinced on that point.
On the point about continuity under option 1 or option 2 and who should initiate that, the amendment talks about the Pensions Regulator being,
“satisfied that continuity is best achieved by the substitution of a new funder”.
It does not itself say that the Pensions Regulator effectively has to initiate it. I am not sure if we are on the same page on that one, although perhaps there is more than a glimmer of light. But I think that there is an issue here. We understand what the Minister has said about the role of the trustees as opposed to the Pensions Regulator, but what we were seeking was that the Pensions Regulator could perhaps have some influence, or focus on nudging, to get people to accept a situation where there is a new funder rather than go through one of the other courses—we accept that, obviously, that would involve the trustees having to sign up at some stage, and this would not necessarily be something done over their heads. Again, we will read the record, but it is something to which we will return on Report, among some other things. In the meantime, I beg leave to withdraw the amendment.
Amendment 37 withdrawn.
Amendment 38 not moved.
Amendment 39 not moved.