Clause 15 - Regulatory own fund schemes exempt from indexation

Pension Schemes Bill – in a Public Bill Committee at 2:15 pm on 28th October 2014.

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Question proposed, That the clause stand part of the Bill.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

With this it will be convenient to discuss clauses 16 and 17 stand part.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

Clauses 15 and 16 relate to indexation. Clause 17 is a somewhat different issue, which is a deregulatory measure relating to the register of independent trustees.

Clause 15 amends the provisions in the 1995 Pensions Act so that schemes set up as regulatory own funds, or ROFs, will be exempt from the requirement to index benefits. Specifically, clause 15(3) inserts a definition of a regulatory own fund that refers directly to article 17 of the relevant European Council directive, 2003/41, so as to link with the relevant legislative requirements. Clause 15(3) also inserts a regulation-making power to amend the reference to any provision of an EU instrument that may replace it. It is a simple power to allow the Government to amend this piece of UK legislation if any further EU legislation overrides the current definition.

The reason we have the concept here of a ROF is that many Dutch pension schemes are established as regulatory own funds that stand separately from an employer. It is quite an important concept in terms of delivering shared risk schemes. Regulatory own funds are an attractive option for an employer wanting to set up a scheme that offers the pension income builder-style benefit design  without putting a liability on their balance sheet. That concept means that slices of the pension get locked in over time. Employers might want to deliver that for their employees, but they do not want a volatile number on their balance sheets.

The regulatory own funds structure is arm’s length from the employer and underwrites its own promise by holding a higher level of technical provisions. We want to exempt schemes in the UK offering a promised benefit within a ROF from the requirement to index benefits. That does not mean that they could not do it but we would not require it.

In practice, a ROF will apply part of the member’s contributions towards the buffer fund to meet its funding requirement. As such, the members are effectively directly bearing the cost of funding the promise. Given the direct impact on member benefits, we do not think it is appropriate to constrain the benefit design in terms of what must be contained in the promise. If members only want to underwrite a nominal promise benefit, they should be allowed to do so.

In that sense, the benefits have some similarity with money-purchase benefits, where indexation is also not required by law. While ROFs are recognised in UK legislation, the Pensions Regulator has advised that currently it does not regulate any schemes as ROFs, so the amendments would not affect any existing rights to indexation. To be clear, we are not changing anyone’s existing rights.

Clause 16 provides a regulation-making power to create exemptions from the indexation provisions subject to limitations. Under clause 16 regulations can exclude pensions of prescribed description from the requirement to increase pensions in payment set out in the Pensions Act 1995. Regulations cannot be made in respect of a pension, or any part of a pension, that came into payment before the regulations came into force that is attributable to pensionable service before the day on which the regulations came into force or that is payable under a defined-benefit scheme.

That is a power to remove indexation requirements but not the DB benefits or for past service. Any regulations may not be made unless a draft has been laid before and approved by resolution of both Houses of Parliament, therefore subject to affirmative procedure.

We need to ensure that the statutory requirement to increase pensions in payment applies appropriately within the new scheme categories, especially for benefits in shared-risk schemes. Because this is a framework Bill that creates space for innovation, we hope to see a broad range of benefit designs emerge. Legislation already exists on indexation and currently works on the basis of a clear line between the traditional salary-related and money-purchase benefit split. That might not work so clearly for shared-risk schemes.

Clause 16 introduces a new power enabling regulations to be made to exclude a specified type of pension from the indexation requirements. That will allow the Government to consider whether further exclusions from the indexation provisions might be required as a result of the different type of pension arrangements made possible by the Bill. That comes back to my point on intervention to the hon. Gentleman. We are setting  out the framework we think is right for what we can envisage but, if new models come up, we will have to work out whether there should be any indexation requirements on them.

In particular, we will need to see what sort of benefit designs populate the shared-risk space before deciding whether they would be covered by the indexation requirements and whether it would be appropriate to change that. It is always a relief when I say what I think I have just said and then read a paragraph that reiterates what I have just said. That is always a bonus.

The power is restricted and makes it clear that the Government do not intend to interfere either with rights already accrued or with benefits under a defined-benefit scheme. To be clear we do not intend to use the regulation-making power to remove indexation requirements where they currently apply.

Those are clauses 15 and 16 on indexation. Clause 17 covers a different set of issues. The Government have a red tape challenge. We are constantly told there is too much red tape and bureaucracy in the world of pensions. I have mixed feelings when people say that; I ask them to name three and it goes a bit quiet. However, we recognise that unnecessary bureaucracy and red tape is a cost to scheme members. If we require schemes to do something pointless or that does not add value, a cost comes out somewhere, ultimately in reduced pensions for members.

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon 2:30 pm, 28th October 2014

I sympathise absolutely with the Minister. He and I have sat on at least one Cabinet Committee when we have struggled with this in the past. Might it not have been better to put the clause the other way round by doing away with section 7? The cost is going to come from having those flexible procurement panels. The Minister could have kept the independent register of trustees. That would have gone to some of the issues being raised at the evidence session last week. Did we think about doing this the other way around? I suspect that there would be an even greater saving to be had from getting rid of flexible procurement panels.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I am grateful and heartened that the hon. Gentleman is still with me at this point in the day. Section 7 of the 1995 Act allows the regulator to appoint trustees to replace a person who is found not to be fit and proper. We will discuss later the importance of good governance, and we want to retain the section 7 power for the regulator to appoint a fit and proper person if there is a problem. Clause 17 will simply remove the burdensome requirement to have a register of independent trustees. The Committee will recall that we took oral evidence from the interim chief executive and the chair of the Pensions Regulator, who said that they felt that there was no added value to that process. I will briefly explain why that is.

To rewind, the red tape challenge is an initiative that has taken place across Departments, in which the Government have invited those whom we regulate to identify regulations that do not deliver. As my hon. Friend mentioned, he and I have served on the Reducing Regulation Sub-Committee, a particularly gripping Cabinet Sub-Committee that tries to evaluate the cost to business of almost every regulation that we introduce. The Government initially had “one in, one out”, under  which for every £1 million of regulatory burden that I or another Minister put on business, we had to find £1 million to take off. As the Parliament progressed, it was felt that that was not ambitious enough, because it would simply leave the aggregate level of regulation where we started. We now have something called “one in, two out”, whereby for every £1 million of regulatory cost we want to impose on business, we have to find £2 million of regulatory savings. That has been quite an effective discipline on Departments such as my own. Of course, everybody thinks that the regulations that they want to introduce are good, but cumulatively they have a cost. The requirement to find ways to deregulate has become more pronounced as a result of the “one in, two out” process.

Clause 17 fulfils a red tape challenge commitment to remove the statutory requirement that regulations must provide for the Pensions Regulator to compile and maintain a register of independent trustees. As my hon. Friend has observed, the provision was originally included in the Pensions Act 1995, with the aim of having a register of independent trustees whom the regulator could place in schemes to ensure their effective running. As has been observed, the regulator already has a general power to appoint trustees to replace persons who are not fit and proper. The regulator appoints such trustees, as we have just heard, using flexible procurement panels. That process can cover the appointment of independent trustees as well, and it is less burdensome and costly for the regulator and trustees. We feel that the legislative requirement for a register of independent trustees is unnecessary.

Photo of Andrew Love Andrew Love Labour, Edmonton

I understand the need for “one in, two out” cost savings, but, as I understand it, appointment from the trustee register takes place where an employer has suffered an insolvency event. In those circumstances, trustees may require additional expertise and experience, and an element of speed of appointment may be necessary. Has the Minister assured himself that although we will save money in the short term, the policy will not cost us in the long term?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

We certainly want to make sure that trustees who are appointed in the event of insolvency have the expertise that they need to do their job effectively. The Pensions Regulator advises us that the process of flexible procurement panels finding such people works perfectly well. That process is already in place for other purposes, such as replacing someone who is no good. The regulator uses and is familiar with that process, and it can be used equally in the circumstances we are talking about to find an independent trustee. The regulator’s view is that it works already in parallel circumstances, so there will be no loss.

I stress this point about any extra costs. The Pensions Regulator’s costs do not come from the taxpayer, generally; they come from pension schemes. Pension schemes’ costs do not come, on the whole, from pension schemes; they come from members or employers, depending on the type of scheme, and they come out of people’s pensions. Therefore, anything that we can do to avoid unnecessary cost will simply lead to better pensions, as long as we are satisfied that the job can be done. In this case, we are satisfied.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Starting with clause 17, I would be interested in the Minister’s definition of a flexible procurement panel because I have no idea what it means. It sounds like jargon, which is often unavoidable in this space, but it would be useful for the Committee to have a definition of a flexible procurement panel. The Minister’s argument in favour of removing the register is that the flexible procurement panel is in place and that is the way in which the Pensions Regulator can and will exercise its obligations as they pertain to this clause. For us to judge that in Committee, knowing what a flexible procurement panel is would be useful.

On clauses 15 and 16, I thank the Minister for bringing the term “ROF” to our attention. More widely, indexation is a very thorny issue in pensions for obvious reasons. It is the way in which one’s pension retains its value relative to inflation. The Minister made it clear that the Government were reserving the right to change indexation requirements in the future, if there emerged forms of schemes which at the moment the Government were not anticipating. Could the Minister say a little more about the space in which that sort of reserved power is likely to function, not necessarily the Government’s view of what they would do, but what the options are around indexation requirements and the different sorts of schemes which might emerge through collective defined contribution? It is also worth having on the table something which we have not yet covered, which is that there are a number of different types of collective defined contribution.

First, then, what is a flexible procurement panel and why does it work better than an independent register? Secondly, it is worth pointing out that the Pensions Regulator is looking for new management. The search for a new chief executive has been going on for a considerable period. Is it possible that a new chief executive would have a different view from the current caretaker? Thirdly, could the Minister talk a little more widely about reserving the right to change indexation?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I am grateful to the hon. Gentleman for his questions. Let me explain as far as I am able what a flexible procurement panel is. I am very happy to ask the regulator to write to him with further details.

The basic idea, as I said to the hon. Member for Edmonton a moment ago, is this. The regulator sometimes finds himself in a position where a trustee has to be found, for example where someone is disqualified or, as in the case discussed, where there is an insolvency event and a trustee needs to be put in. We have to make sure that a scheme is still being well run. What the Pensions Regulator can do is get somebody in flexibly, without going through the processes that a scheme might go through. It is a more light-touch framework for putting trustees in place. Whereas a pension scheme will have a set of rules about how trustees can be appointed, for example, with rules on member-nominated trustees and so on, the regulator can be much more flexible because the priority is to get someone in who can do the job. That is what we mean by flexible, that they are not subject to rules in the same way that the scheme would have been. If that is something the hon. Gentleman is keen to hear more about, I am very happy to get the regulator to write to him with further details.

As the hon. Gentleman says, we have an interim chief executive at the Pensions Regulator. We had a change of chair earlier this year, and the new chair, Mark Boyle,  has made a very good start in his role. We took the view that we have to try and co-ordinate these things, and having the new chair oversee the recruitment process of the chief executive seemed a logical structure. I can tell the hon. Gentleman that the recruitment process is now at an advanced stage. I hope that we will be able to make a permanent appointment before too long. I have no reason to think that the new appointee, whoever that may be, and I do not know, will take a different view on these issues.

The hon. Gentleman asks about the power to amend indexation. I can give an interesting example, or as interesting as it gets. We had to decide whether cash balance schemes should have mandatory indexation. It could be argued that those schemes are really DC—they are like pots of money—and, therefore, why would there be mandatory indexation? Or it could be argued that they are salary related and, as in the supermarket example which I gave, the amount of cash which someone builds up in a cash balance scheme depends on their salary. It is a percentage of their salary. So which is it? Is it salary related and therefore indexed, or is it cash and therefore not indexed?

We took the view some years ago that we would not require indexation of cash balance benefits, because what most people were actually doing was taking the cash and buying an un-indexed annuity. It therefore seemed a bit odd to say that there had to be mandatory indexation of the benefits of cash balance schemes. When other people building up pots of money were buying un-indexed annuities and that was the norm or the default, why would we say that if someone has a cash balance scheme the only annuity which that could provide had to be an indexed one? That is an example where the case could be argued both ways. Should it be mandatory indexation, or should it not? We concluded by analogy that it should not but, as you can see, whether it looks more like it is salary-related and DB, or whether it does not, depends on whether you think indexation is appropriate for consistency.

That is really all that we mean by these powers. We have set out our general approach and we are not touching existing indexation or DB more generally. However, if in future a type of scheme comes up that is in a bit of a grey area, we would reserve the power to make a judgment on whether indexation applied.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions) 2:45 pm, 28th October 2014

I thank the Minister for those responses, which were illuminating. I look forward to hearing from the Pensions Regulator on the flexible procurement powers. There is a danger: the Government are clearly very keen to meet their obligations under their red tape challenge, but it seems that a lack of transparency is possible. Everyone can see who is on a register of trustees and who has been accredited, for want of a better word. It depends on what we find out about the flexible procurement panel, but there could be concerns about a lack of transparency of the procedure for appointing a trustee to do the job regarding insolvency.

Of course, time is often of the essence in these matters, and I am not insensitive to the importance of giving the regulator the power to act quickly and decisively in an insolvency event. However, some questions remain about this issue. I thought the Minister was going to  give me a tautological explanation of a flexible procurement panel when he described it as “flexible” but, to his credit, I must say that he did significantly better than that. However, further clarity on this issue would be welcome.

Question put and agreed to.

Clause 15accordingly ordered to stand part of the Bill.

Clauses 16 and 17 ordered to stand part of the Bill.