Moved by Baroness Drake
8: Clause 14, page 9, line 9, at end insert—“(c) specifying requirements to be met by an employer using or intending to use a qualifying scheme under section 3(3) in respect of the costs under subsection (2) of this section.”Member’s explanatory statementThis amendment would give a power to the regulator to seek a contribution from an employer, using or intending to use a qualifying scheme, to the financial resources available to meet the costs of setting up and running the scheme or resolving a triggering event.
My Lords, I refer to my interests in the register. I move Amendment 8 in my name and that of my noble friend Lady Sherlock and the noble Baroness, Lady Bowles of Berkhamsted. Collective money purchase schemes—CMPs—seek to share risk collectively and more efficiently between their members. There is no employer promise under- pinning that risk. The Bill currently restricts CMP schemes to those set up by an employer or connected employers such as the Royal Mail. It would require the Secretary of State, exercising powers under Clause 47, to extend the qualifying definition to include CMP schemes that cover a lot of unconnected employers.
A function of the legislation is to understand the risks that members face in a CMP scheme, and to put in place appropriate measures to mitigate them. One of those risks is that a scheme becomes financially unsustainable and has insufficient resources to meet the costs of dealing with a triggering event where it occurs, and the cost of continuing to run on the scheme for a period while the problem is dealt with. These costs may include the cost of transferring members’ assets to another pension scheme and winding up.
Amendment 8 gives a power to the regulator to seek a contribution, from an employer using or intending to use a qualifying scheme, to the financial resources available to meet the costs of setting up the scheme or resolving a triggering event. A triggering event that would raise the alarm bells on financial sustainability could include the main employer becoming insolvent, declining in size or choosing to withdraw from the scheme—thereby cutting off the future supply of contributing members, which would undermine the collective risk-sharing approach—as well as a major administrative failure or governance failures that lead the regulator to rescind authorisation.
The resolution of these failures can incur significant costs. The risk of a scheme becoming financially unsustainable may be higher in a scheme that is used by only one employer or unconnected employers than in a scheme that has many unconnected employers participating. Where only one or connected employers are using the scheme, the actions or circumstances of that employer are much more likely to materially affect the financial sustainability of the scheme.
The financial sustainability requirement in Section 14 is intended to protect against that risk if a scheme experiences a triggering event. The Bill does provide restrictions on the imposition of member-borne charges during a triggering-event period, but my concerns remain that the Bill as drafted means that the only source of financial resource to deal with a triggering event could be restricted to the scheme’s fund.
My amendment does not seek to prescribe how exactly the pension regulator will implement the requirement that a scheme has sufficient financial resources to meet the financial sustainability requirement of meeting the costs of setting up a scheme or resolving a triggering event. What it does is to provide for the regulator to have the power to seek a contribution, from an employer using or intending to use a qualifying scheme, to the financial resources available to meet the costs of resolving a triggering event. Where, or whether, that power is used would be a matter for the regulator in the authorisation and supervision of each collective money-purchase scheme.
I have raised this issue on several occasions, which I am sure is a source of some frustration for the Minister and the department, but I have not received a clear answer. Can I ask the Minister to give clarity as to who can be required under the Bill to contribute to meeting the costs of resolving a triggering event? Clause 14(3) requires the regulator to satisfy itself that it has sufficient evidence that the financial sustainability criterion is being met and that members are protected. The Minister advised in Committee on
“evidence of any financial commitment by the establishing employer or connected employers ... that the scheme has access to the financial resources it needs, including in the event of employer insolvency.”—[
Although the evidence that the regulator will take into account is of interest, it does not give or specify that the pensions regulator will have the power to seek a contribution from an employer using or intending to use it as a qualifying scheme to the financial resources available to meet the costs of resolving a triggering event. That is the intent of my Amendment 8 and I beg to move.
My Lords, I have signed my name to both these amendments, which follow on from significant debate in Committee. I agree with what the noble Baroness, Lady Drake, said about how Amendment 8 bolsters the importance of ensuring adequate finance for the administration of a scheme in all circumstances. It is necessary to have certain requirements specified and agreed in advance rather than to rely on negotiation at what might be a difficult time or, indeed, where it might be impossible. I therefore wholeheartedly support Amendment 8.
Amendment 32 is important and reflects the matter of general fairness and, in particular—although it is not specified—intergenerational fairness, which was discussed in Committee. My noble friend Lord Sharkey will explain further, but I wish to make the point that we should remember that CDCs have shared risk, that their strength is that returns can be more predictable, and that there is intergenerational solidarity so that good times and bad are to some extent smoothed. That solidarity cannot be undermined by allowing market highs to be carried away by those who may chose to leave the scheme. It surely must be possible to devise mechanisms, whether by way of buffers, conservative valuations, a delayed retained part or something else, to prevent the problem that those wishing to transfer their pensions out essentially ruin what is left for everybody else. The point is that fairness has to extend over more than a snapshot in time. That is the only way that you will have fairness in the sense of shared risk to all the members.
My Lords, I wish to support Amendment 32, tabled by the noble Lord, Lord Sharkey, to which I have added my name. I should add that I also wholeheartedly support Amendment 8, but I will restrict my comments to Amendment 32.
While there seems to be general support for the introduction of this new type of pension—collective money purchase schemes, or CMPs; I am going to try very hard not to call them CDCs as we go through this—they are not without risk. As we discussed at some length in Committee, one of the greatest risks that is often raised in respect of CMPs relates to intergenerational fairness. Indeed, at the extreme, in a situation where no returns are being earned but pension levels are maintained for existing pensioners, the pensions being paid would be dependent on the funds being put by new joiners, as in a Ponzi scheme. That is very extreme, as I say, but it demonstrates that there is the possibility of one cohort being disadvantaged by the treatment of another cohort. If existing pensioners are paid too much, those currently paying in will suffer, and if the scheme is overcautious in what it pays out to pensioners, pensioners will suffer and current workers will gain.
This is not theoretical. We only need to look at what is happening in the Netherlands to see that the question of whether to cut benefits when returns are not as good as expected is a real and current issue. In a standard defined contribution scheme, the risk is not pooled, so the issue does not arise. In a defined benefit scheme, the matter is dealt with by the employer making up the difference. However, in a CMP, there is no possibility of that happening. If you want to maintain the level of pensions when returns are low, the future pensions of those still contributing will be impacted and vice versa, so the issue of intergenerational fairness is specific to CMP schemes.
It is also worth pointing out that CMPs have implications for not only intergenerational fairness but fairness more generally. For example, as the noble Baroness, Lady Bowles, pointed out, if someone wants to transfer their fund out of a scheme, how do you value their share? The benefits that arise from the scheme are uncertain, being targets only, so if you value a transfer based on the target benefits, which seems to be what is proposed, that will not take account of the risk that those benefits may not be achieved. In that situation, the person transferring out is getting a better deal than those staying, unless that risk is taken into account in the transfer valuation. The issue is complicated further because of the pooling of longevity risk in a CMP. For example, if someone has just a couple of years to live, there would be a strong incentive for them to take their money out to the detriment of those staying in.
Given that fairness is the single most commonly raised risk that relates to CMPs, it is curious that there is no explicit mechanism in the Bill to deal with it. In our previous discussions, we were pointed in the direction of Clause 18 to see how the matter is dealt with, but in fact that clause sets out only how benefits and so on will be calculated and says that regulations will be made in that respect; nowhere does it mention the critical question of fairness. I imagine that that is because it has been based on other pension legislation, which, as I said, does not suffer from this risk.
Amendment 32 introduces as very simple means by which to ensure that intergenerational fairness and fairness more generally must be assessed by the trustees. Given the importance of this issue, I urge the Minister to consider it really seriously.
My Lords, I have enormous sympathy with the aims of the two amendments in this group. Amendment 8, in the names of the noble Baronesses, Lady Drake, Lady Sherlock and Lady Bowles, was expertly moved by the noble Baroness, Lady Drake, and deals with situations where a pension scheme may not have enough money to meet its obligations and there is a risk that it will need to draw on the funds in the members’ pension pot rather than have money coming in from outside.
As I mentioned in debate on earlier stages of the Bill, I am particularly concerned about the situation where a scheme has had a triggering event or is winding up and may not have sufficient administrative budget to cope with, for example, a significant IT failure in which member records are lost or transposed from one to another so that it is an enormous job to unscramble each member’s entitlement. The costs of that work can be significant; if no reserves are in place to meet those costs and the employer is in financial difficulties, what will a CMP scheme be able to do to fund the costs of sorting out the records? It is true that the aims of the CMP scheme as set out in the Bill will be to have central estimated assumptions for guiding benefit adjustments to ensure that there is no difference of treatment between different members, but on the particular issue that I am referring to and that Amendment 8 refers to, the continuity strategy outlined in the Bill is supposed to have money to meet a triggering event, including its costs, but may not do so.
Therefore, as I understand it, the thrust of this amendment is to ensure that the Pensions Regulator requires a separate capital buffer, or that an insurance arrangement will cover the costs incurred in winding up, or that, in exceptional circumstances, the costs required to administer the scheme are met other than from members’ funds. When we set up this new regime, it is important that we make sure that we cater for eventualities that we do not expect to happen but which we know could in theory happen. Having seen with defined benefit schemes the devastating impact of scheme wind-up without sufficient resources and the amounts of money taken out of defined benefit schemes when an employer has failed or walked away from the scheme—those cases have reduced the amounts available for pensioners, in some cases to zero—there is a real need to look at some catastrophe insurance, disaster-type insurance or capital buffer of some kind to make sure that we have catered for that before it happens.
I think it would be wise for my noble friend to consider what else might be done over and above what is in the Bill. I also look forward to her answer to the specific question asked by noble Lords about what would happen in practice should a scheme require money that does not currently exist within the fund, other than in members’ entitlement pots, to cover the costs of wind-up. Of course CMP does not give each person an individual pot, but if the overall assets have to be raided to meet these costs, their pensions will be impacted.
That brings me to Amendment 32 in the names of the noble Lords, Lord Sharkey and Lord Vaux, and the noble Baroness, Lady Bowles. Again, I think it is true that the aim of the CMP system is to make sure that the benefit adjustments are fair to different cohorts of members. That is the crucial term—“cohorts of members”. My concern revolves around the position, as explained by the noble Lords, Lord Sharkey and Lord Vaux, of those who decide to become non-members. There is a real issue that trustees are required to assess that the scheme operates fairly but they also need to reduce the risk of a certain class of current members—in particular, those who decide that they wish no longer to be members—to select against those who remain members of the scheme. This selection can be either deliberate or inadvertent.
As the Institute and Faculty of Actuaries points out in its briefing, there are different ways to define fairness, but if we set up a system where either those members who are unwell, as the noble Lord, Lord Vaux, outlined, or those who decide that the markets are at record highs so they would like to cash in their pot right now and take the value as of today are able to select against the remaining members of the scheme, the principle of CMP is to some extent undermined. This type of scheme was originally proposed before the pension freedoms were introduced in the old environment, which it would have been much less likely for members to choose to transfer out of. In the current environment, many members may decide that they wish to transfer because of other benefits associated with pensions.
Therefore, whether or not the amendment is worded correctly—the concept of “fairness” is of course open to interpretation—we need to ensure that there is some kind of risk adjustment or long-term margin taken from those who wish to become non-members of a scheme, so that there is a buffer against future bad markets or unexpected changes in the parameters on which pension values are currently based for these schemes to become more sustainable in the long term. I look forward to my noble friend’s response and, possibly, reassurance.
My Lords, I will not detain the House for very long. I draw attention to the interchange and interface between the insolvency legislation that has now passed into law, on which I spoke a short time ago, and this Bill. The reason for that is that we are at a moment of the trigger events being more likely than in our recent history. The noble Baroness, Lady Altmann, referred to the pension freedoms. It struck me as I was listening to the debate today how relevant that is because five years ago the then Chancellor decided to provide a stimulus to the economy as PPI out-payments were drawing to a close, and he did so with an understanding that that would not destroy the pension entitlement or, as provided in Amendment 32, the balance of fairness between generations.
I am supporting both Amendment 8, moved extremely well by my noble friend Lady Drake, and Amendment 32. Anything that puts people and the wider scheme at risk, including these CMP schemes, is dangerous not only to the individuals concerned but in the dislocation of something broader—that is, the commitment that I commenced when my noble friend Lady Drake, along with John Hills and the chair of the commission back in 2005, Adair Turner—the noble Lord, Lord Turner—proposed auto-enrolment.
We are at a moment when, following the withdrawal of the furlough schemes, we face enormous unemployment, great insecurity and risk. At this moment we need to be able to secure not just the present but the future, and that future has to be about those young people contributing, as has already been said in relation to Amendment 32, and the danger that those who find themselves in temporary need of funding will withdraw funds at a moment that is deeply inappropriate for the viability of the programme as a whole. I hope that the Minister will respond positively and, if not, that we will press Amendment 32 to a vote.
My Lords, I support Amendment 8 but I will address my remarks to Amendment 32. The amendment seeks to ensure fairness for all members of CDC schemes, especially between different generations who may stand to gain or lose from future circumstances, as noble Lords have already referred to.
In Committee we debated this issue at length and a number of issues emerged. The Bill states that the scheme provides for intergenerational fairness among its members, specifically in connection with the amount of benefits paid to pensioners, proposed adjustments to annual benefits and cash-equivalent values provided to members wishing to transfer out of the scheme. A requirement of collective money purchase schemes requires outperformance or underperformance to be reflected in the benefits paid to all members. However, there is usually a reluctance to deliver pension cuts, as in the Netherlands example that the noble Lord, Lord Vaux, described in Committee: when the Government intervened temporarily to avoid a cut in pensions, younger members of the scheme lost out as pensions were kept higher than the scheme could afford.
CDC schemes are required to agree a pension target rather than a firm outcome, and the expectation of pensioners may be different in the event of the underperformance of investments over time. So unless pensions were to be cut, which is a decision that is largely avoided, younger members of the scheme could lose out in the interests of existing pensioners. In the instance of a large number of people choosing to cash in their pensions, as others have said, there is a risk to new and younger entrants to the scheme, particularly if the value of the scheme is significantly reduced.
Our Amendment 32 seeks to press the Government into being more explicit and much clearer in their commitment to fairness across the board to all members of the scheme by requiring the trustees to make an assessment of the fairness of the scheme. The amendment addresses the interests of transparency and fairness and the welfare of all members of the scheme, and I support them.
My Lords, I will restrict my remarks to Amendment 32, which is in my name and the names of the noble Lord, Lord Vaux of Harrowden, and my noble friend Lady Bowles. I thank them for their support. In Committee, we spent a long time discussing intergenerational fairness in CDC schemes. We did this partly because we knew from the Government’s excellent briefing note that concern about intergenerational fairness was raised by many respondents to the consultation and because it seemed clear that the risk to intergenerational fairness was an almost inevitable feature of such schemes.
We pressed the Government to legislate the requirement for intergenerational fairness into the schemes. We knew that the Government themselves were deeply concerned about the issue and seemed to be choosing mechanisms for intergenerational fairness over benefit stability; but as I remarked at the time, it was hard to tell how they might work, since the mechanisms for bringing this about were not yet explicit and no real assessment of effect was possible.
In her response, the Minister made it clear that she shared our commitment to ensuring intergenerational fairness and that the mechanisms for achieving it would be introduced, after extensive consultation, by regulations under Clause 18. This will be long after the Bill has become an Act, and leaves open the question of how we will assess the success or otherwise of these mechanisms. It also leaves open the question of how the assessment of any such mechanisms will be communicated to members and potential members of the scheme.
Our Amendment 32 proposes a way of addressing these issues. It provides that, whenever TPR issues a notice requiring a scheme to submit a supervisory return, the notice must include a requirement that the trustees
“make an assessment of the extent to which the scheme is operating in a manner fair to all members.”
The amendment speaks of fairness. Intergenerational fairness is a critical subset of fairness, but there are other kinds of fairness, too. For example, there is gender fairness, and single versus married status and the fairness implicit in that, or not. The amendment makes no attempt to define fairness; it relies on the trustees to do that, as they should in the normal operation of the scheme. Their definitions and assessments will help members of all classes, and potential members, understand the working of their scheme and the success of the trustees in operating it fairly in the interests of all members.
As I mentioned in Committee, AJ Bell noted that the DWP leaves little doubt that it will not allow schemes to be skewed in favour of one cohort of members over another. I am sure that is the intention, but AJ Bell also noted that fairness could make outcomes in CDCs less predictable and raises the spectre of pension cuts. It goes on to say:
“The DWP itself notes any reductions in benefits will not be well received, and so clear communication of this – not just upfront but on an ongoing basis – will be absolutely essential.”
Our amendment will bring some communication and transparency to the balancing required to produce, and to the consequences of producing, fairness across all member cohorts.
In Committee, the Minister explained how the proposed headroom mechanism for the Royal Mail scheme would be fairer than a capital buffer. All classes of members and potential members of the scheme need to know how well this headroom mechanism or other mechanisms generated by Clause 18 are working. Our amendment will require the trustees to explain these things and to assess their success in managing the scheme fairly for all members.
Given the acknowledged risks to fairness inherent in the scheme, and that Parliament’s opportunity to influence the mechanisms that might arise in regulation will be as small as usual, it is vital that scheme trustees are open and transparent about their success in producing fair outcomes for all members. That is what our amendment would help bring about, and I intend to test the opinion of the House.
My Lords, I say at the outset that Labour supports Part 1 of the Bill and the move to create CMP schemes, provided, of course, that they are not used as a means of downgrading good DB schemes. The two amendments in this group deal with different concerns that have been expressed about CMP schemes. Amendment 32 acknowledges that there may be a divergence of interests between different sets of members in a scheme of this kind. It does not prescribe any particular action but it does require trustees to surface the issue and to assess the extent to which the scheme is fair to all members.
Meanwhile, my noble friend Lady Drake has clearly explained the concern that lies behind Amendment 8, in our names. There are risks in this kind of scheme, and we are concerned about what happens if a CMP scheme becomes financially unsustainable and cannot meet the costs of dealing with a triggering event—for example, supporting the scheme while the problem is sorted or, if it cannot be sorted, covering the costs of wind-up or transferring members’ assets to another scheme. All Amendment 8 does is give an explicit power to the regulator to seek a contribution from an employer sponsoring a CMP scheme, so that money is there not just to meet the costs of setting up the scheme, but to resolve a triggering event, if it happens.
My noble friend Lord Blunkett was right to stress the dangers of our current economic state, and my noble friend Lady Drake gave various examples of the problems that could arise. A key risk is that the main employer goes bankrupt or downsizes significantly. Both risks, as my noble friend Lord Blunkett pointed out, are all the greater given the fallout from the Covid pandemic. Alternatively, the employer may want to withdraw from the scheme or there may be some failure of administration or governance, which would cause the scheme to lose authorisation. As was pointed out by the noble Baroness, Lady Altmann, dealing with the fallout of events such as that could be seriously expensive. If there are no other employers or only ones connected to the business, who picks up the tab? The scheme cannot raise members’ charges during a triggering event, which leaves us with a core question: if money is needed to cover essential costs, where else would it come from other than members’ funds?
This is not a prescriptive amendment at all. All it does is to make it clear that the regulator can seek a contribution from an employer to provide for the costs of resolving a triggering event. Whether that power is used would be a matter for the regulator in the authorisation and supervision of each scheme. That is our issue. Unless the Minister can demonstrate that my noble friend Lady Drake’s compelling case is wrong and there is some other way that those costs can be covered, there are only two ways the Minister can respond to this. The first is to say the regulator already has such a power, so the amendment is not needed; and the second is to say the regulator does not have the power and the Government do not want it to have it. I very much hope that the answer is the former, but I look forward to the Minister telling us which it is.
My Lords, I begin by addressing the amendment to Clause 14 tabled by the noble Baronesses, Lady Sherlock, Lady Bowles and Lady Drake. In doing so, I want to stress that ensuring members are treated fairly has been a central part of our work on CDC schemes since we began. As I explained in Committee, and in more detail in the letter sent to your Lordships on
I understand the intention behind this amendment but I do not consider it to be a necessary addition. For the financial sustainability requirement at Clause 14 to be met, the trustees must provide evidence that they can access sufficient financial resources to cover the costs associated with setting up and running the scheme, as well as those associated with dealing with triggering events. If the regulator is not satisfied about the security of these resources and that they can be accessed as needed, the requirement will not be met and the scheme will not be authorised. It may well be that, in the early days of a CDC scheme, initial funding comes from the employer, but our approach does not just rely on employer-provided financial support; it enables trustees to draw on other options, including funds held in escrow, insurance policies or contingent assets. These should be available to cover any costs arising from a triggering event.
The noble Baroness, Lady Drake, asked who can be required to meet the cost of triggering event. The regulator will work with the trustees, employees and others connected to the scheme to ensure that the scheme always has secure access to sufficient assets so that members’ funds are not affected. My noble friend Lady Altmann made the point that transfer values should be adjusted for future risk. Our legislation will require benefits and transfer values to be calculated based on long-term factors such as longevity, inflation and investment returns. This has the effect of smoothing outcomes and will mean that transfer values will not suddenly rise and fall, making cashing-in not as attractive as my noble friend suggests.
Once authorised, the scheme will need to continue to have access to sufficient financial resources so that it continues to meet the financial sustainability requirement. The regulator will monitor this through ongoing dialogue between the trustees, intelligence work and the significant events framework in Clause 28. This will ensure that it can intervene if it is concerned about a scheme’s financial sustainability and that, where necessary, a scheme could be de-authorised and wound up using the financial reserves. Our approach means that a CDC scheme must remain financially sustainable and able to deal with situations such as an employer withdrawing from the scheme or becoming insolvent.
As we set out in the letter that we sent to noble Lords, we are also taking additional steps to protect members. The CDC charge cap will help to protect members from excessive administration charges if the usual running costs of a scheme increase significantly for any reason. In addition, the continuity strategy at Clause 17, the implementation clause at Clause 39, and the prohibition on increasing charges during a triggering event at Clause 45 are all designed to protect members’ interests when things go wrong.
I now move on to address Amendment 32, tabled by the noble Lords, Lord Sharkey and Lord Vaux, and the noble Baroness, Lady Bowles, which is about intergenerational fairness—a matter raised by many noble Lords and the subject of extensive discussions. We have been mindful of the problems that other countries have experienced, for example in their approach to adjusting benefits. We have learned from these. That is why envisaged regulations under Clause 18 will mean that the CDC’s scheme rules must require that there is no difference in treatment between different cohorts or age groups of scheme members when calculating benefits and applying benefits adjustments.
The noble Baroness, Lady Janke, raised a point about issues experienced by CDC schemes in the Netherlands. We have been mindful of the problems that other countries have experienced. UK CDC schemes will not be required to have a buffer to smooth out fluctuations in the value of the benefits. Members’ benefits will be adjusted each year in light of the most recent actuarial valuation. This protects members from the need to fund a surplus and means that adjustments to benefits are provided for each year rather than hidden and stored up.
I welcome the sentiment behind the proposed amendment; it is something to which we want to give further consideration. We need to give careful thought to how such reporting might work in practice and would want to work with trustees, administrators and the regulator to ensure that any such requirement is proportionate, appropriate and clear. We would also want to consult on any such approach to make sure that it is effective. I reassure all noble Lords that we will give this matter careful consideration. Should we need to bring forward such a requirement in regulations, we already have sufficient powers in existing legislation to require schemes to report on fairness in CDC schemes if warranted. This includes powers under Section 113 of the Pension Schemes Act 1993 and Clause 46 in Part 1 of the Bill. There are also equivalent Northern Ireland provisions. For the reasons that I have set out, I ask the noble Baroness to withdraw the amendment.
My Lords, I support Amendment 32, but I shall direct my comments to the Minister’s response to Amendment 8. The Minister has been very courteous in the face of my persistence on this issue and I have listened carefully to what she has said. In listening, I noted four things: first, that the powers in the Bill mean that the regulator can require initial funding from employers in the setting up of a CMP scheme; secondly, that those funds can be used to buy an insurance policy or be put into an escrow account; thirdly, that they can be available to fund triggering-event costs; and fourthly, should a triggering event occur, the regulator will work with both the employer and the trustees to ensure that sufficient financial resources are available to meet the costs of a triggering event. That is my understanding of what the Minister has said; I would, of course, expect the final regulations presented to Parliament to reflect that. On that understanding, I shall not push Amendment 8 to a vote. I beg leave to withdraw it.
Amendment 8 withdrawn.