‘( ) In section 67 (the subsisting rights provisions)—
(a) in subsection (3), omit paragraph (b) and the “or” before it;
(b) after subsection (3) insert—
(3A) Regulations may provide for cases in which the subsisting rights provisions do not apply.””
I shall explain the purpose of clause 18 before explaining the changes we have made since Second Reading. We have gone through transfers, early leavers, indexation and trustees. We come now to the issue of how schemes are modified, and what the provisions are for the modification of pensions schemes.
First, let me explain what the clause does. Sections 67 to 67L of the Pensions Act 1995 contain provisions to protect members against modifications to what are called their subsisting rights. They protect members by placing restrictions on modifications to schemes, where the change would or might have an impact on the members’ subsisting rights. Some changes can be made only if the member agrees, and these are called protected modifications. Section 67A sets out the circumstances in which a modification to members’ rights is a protected modification.
Currently, section 67A states that
“a change must be considered as a ‘protected modification’ where money purchase benefits would replace non-money purchase benefits, or where the change would result in a reduction to a pension in payment. This clause amends section 67A to include a proposed modification where a right to benefits that include a pensions promise is to be replaced by a right to benefits where there is no pensions promise.”
This comes back to the question asked by my hon. Friend the Member for Amber Valley: where you have an existing right, can it be changed? Just to reassure him, we are extending earlier legislation to make sure that where a pension promise is replaced by a right to benefits where there is no pensions promise, that is regarded as a protected modification, in other words, one that requires member consent.
The definition is extended to take account of the changes in part 1. The pensions promise has the meaning given in clause 5 and it can be made only if the member consents. We have added another protected modification to ensure that there is a similar level of member protection as exists now.
The first part of amendment 13 adds another protected modification to section 67A. On reflection, we had some concerns that we had not gone quite far enough to reflect the breadth of shared risk schemes. Making modifications that take a benefit from a pensions promise to no pensions promise is clear cut, but there may be other benefits where the nature of the promise changes. So we have added another protected modification, which applies where the proposed modification would take accrued rights where there is a right to an income, subject to a pensions promise and change them to a non-income benefit. Amendments 16 and 17 add a definition of retirement income for this purpose by cross-referencing to clause 7. We have also made a technical amendment to facilitate the restructuring of the Bill.
The second part of amendments 13 and 14 import existing text from schedule 4. We will be discussing amendment 40 in due course which seeks to remove schedule 4 as part of a restructuring of the Bill. The second part of amendment 13 ensures that any modification that would or might result in a subsisting right of a member, or survivor of a member, being replaced with a right or entitlement to collective benefits is a protected modification. Amendment 14 ensures that collective benefits are carved out of the ambit of one of the existing protected modifications, which applies where the modification would or might result in the prevailing rate of pension in payment being reduced.
I am sure that everyone on the Committee will support efforts to ensure that there are proper rights and that they are protected. Can the Minister set out whether, if there is a change to collective benefits, any one member can veto those changes, or do a majority of people within the collective scheme have to support the change? If one member does not support the change, can they stop it going through?
I am grateful to my hon. Friend. To clarify, the types of changes we are talking about in section 18 relate to pensions promises, which get changed. In a collective scheme, there are no pensions promises, so we are talking about shared risk schemes, in particular. In answer to his general question—in a collective scheme, who gets to decide—there will be trustees or a governance committee. For shorthand, let us say trustees. They are there to represent the generality of the interests of the members as a whole. Therefore, there is a set of scheme rules, which govern how they have to act. They are put in place to act on behalf of scheme members. For example, where there is a shortfall, relative to a target, there will be scheme rules which indicate what should happen. Obviously, those scheme rules can be amended in certain circumstances and there will be rules about that. There will be a whole structure of governance, of people looking out for the generality of members across the board. Different members will have different interests, so there will be a conflict of interest. For example, if you are short of money, do you take money off the pensions or the workers? When the scheme is set up there will be a set of principles that govern what should happen in those circumstances. They are not set in stone; they can be changed. The manner in which they can be changed will differ from scheme to scheme. I hope that gives my hon. Friend some explanation.
If I may clarify what is in the clause, this idea of protected pension rights is down to a matter of individual consent. In the sorts of schemes I am talking about these changes are subject to the consent of the individual member.
Finally, we have also inserted a new regulation-making power to enable us to disapply the subsisting rights provisions where appropriate. We need to make sure that the subsisting rights provisions do not put obstacles in the way of collective benefits operating as we intended. There could be circumstances where it might be appropriate to disapply subsisting rights provisions in relation to collective benefits. That is not to say that protecting the rights of members with collective benefits is not important, but as we will discuss later, those benefits are different and the way we protect the interests of members is different —so we will be coming back to my hon. Friend’s point.
There is a regulation-making power in section 67(3)(a) of the Pensions Act 1995 to disapply the subsisting rights provisions in relation to the exercise of a power in a “prescribed manner”. We do not think that the wording of the existing regulation-making power is quite wide enough to let us do this. That is why this amendment replaces the existing power with a new, slightly wider power.
I hope that that explains what we are trying to achieve. Again, there is a set of rules already out there for the modification of schemes. We are saying, “What about shared risk schemes, for example, or schemes where there is a pension promise and a proposal to replace that with something else, whether that is a different promise or no promise at all?” In general terms, we are saying that that sort of situation would be covered by similar provisions. I commend amendment 12 to the Committee.
I have an observation to do with something that I think clause 18 eliminates and it applies to a number of other clauses as well. The Government lack a prescriptive definition of what constitutes a shared risk scheme, so they are having to try to cover a lot of ground in drafting these clauses. At the end of his explanation the Minister alluded to the breadth of shared risk schemes, and to the variety of promises therein that are possible under this legislation. Can the Minister elaborate a little on what he thinks that breadth amounts to? Where are different sorts of risk-sharing scheme likely to emerge? He mentioned no-promise, a bit of a promise and a significant promise. Can he elaborate on his sense of how the powers in the clause are likely to end up being applied to the various shared risk schemes?
A variety of shared-risk schemes is possible, some of which provide quite a high level of guarantee and some of which put a lot of risk on the individual, although with a limited underpin. There is a whole spectrum.
We envisage one model of shared risk that we call the pension income builder, whereby people lock in a bit of guaranteed pension for each year that they serve. That might be provided by an annuity provider, an insurance company or someone like that. Clearly, there is a cost. Therefore, with that scheme, if someone is the sort of person who wants some certainty on their retirement income, they might find, as they get through their working life and nearer to pension age, that they have been building up more and more certainty each year. That is a progressively harder pensions promise—those things cannot be ripped up.
I mentioned cash balance, where the promise is a pot of money but what someone gets for it depends on how life is at the time—inflation, interest rates, annuity rates and so on. Essentially, the nature of the promise could entail a pot of money but with some sort of guaranteed underpin and, therefore, a downside risk protection. Some schemes pool longevity risk, which look like an old-style DB scheme. For example, the Tesco shared-risk scheme—although I would not want any lawyer watching to say that I am decrying that scheme—is set up so that each year someone serves with Tesco, the age at which they draw their pension relates to any change in longevity since a year ago. If longevity is improved, the date at which they can draw the pension they have earned potentially goes up. That is risk sharing of a sort: it is still a final salary or salary-related pension, but there is some risk sharing on longevity.
Therefore, people will share risk in different ways: investment risk, inflation risk, longevity risk and so on. We do not know the combination, whether that risk sharing is between the employer and employee or with a third party, or whether it is a ROF. There will be all those different combinations, which is why we cannot be too prescriptive in the Bill about the rules that will apply. We have tried to set out general principles and give examples, but we cannot in primary legislation deliberately cover every eventuality, because we want to see creativity.
That is very interesting. The Minister mentioned Tesco and he is not an expert on Tesco’s scheme. He said that the risk sharing lay in the fact that, if longevity increased every year, the date on which someone could draw their pension would go up. Is that correct?
Rather than describe Tesco’s scheme, let us take a hypothetical scheme that looks like that. Let us say that the normal pension age was 65 before this process sets in. Longevity implies that 66 is the answer to the question. They would say that the person had acquired their sixtieth at the age of 66. We will then devalue it back to 65. It is not that someone has to wait until they are 66 to get it; it becomes available at 66. If someone still wants to draw it at 65, they will get a slightly reduced value equivalent. That is how it works. It is not that someone gets a little bit of their pension every year until they are 90. It can all be drawn on a given date, but it is all converted into a common numerator.
Because an awful lot of the final pension is still promised; it is still a sixtieth, or whatever, of the final salary and it still has statutory indexation. For example, if inflation went mad, there would still be statutory indexation, so the inflation risk is being borne by the scheme up to the statutory limits. If wage growth went crazy, the member would still get a pension as a percentage of their wage whatever it happened to be. If the stock market crashed, the scheme would have to fill the hole in the pension fund; the member would not have to do so. That is what we mean by shared risk. Future changes might mean that the pension scheme member gets something different from what they expected, but many other changes mean that the employer still bears the risk and has to deal with it.
I have a couple of other examples of a shared-risk scheme to offer the hon. Gentleman: hybrid schemes under which all members are entitled to both DB and money purchase benefits; and schemes that offer indexation additional to that required by statute but on a discretionary basis. A scheme could offer statutory indexation but say that, as long as things go well with the fund, it would meet inflation up to a higher figure. I hope that I have given a flavour of those different models. There are a lot of permutations and, no doubt, many we have not yet thought of. That is why we are keeping a degree of flexibility in the legislation.
Amendments made: 13, in clause 18, page 9, line 3, at end insert—
“(ab) on taking effect would or might result in any subsisting right of a member of the scheme which is a right to retirement income in respect of which there is a pensions promise becoming, or being replaced with, a right to benefits other than retirement income,
“(ac) on taking effect would or might result in any subsisting right of—
(i) a member of the scheme, or
(ii) a survivor of a member of the scheme,
being replaced with a right or entitlement to collective benefits under the scheme rules,”.”
The amendment relates to the subsisting rights provisions so that any proposal to modify a scheme which would or might replace a right to income with a right to a non-income benefit would be a protected modification. The text in (ab) is taken from paragraph 3(2) of Schedule 4 to the Bill, which is left out by amendment 40.
Amendment 14, in clause 18, page 9, line 3, at end insert—
‘( ) In subsection (3)(b) of that section, after “rules” insert “, other than a pension that is a collective benefit”.”
This is consequential on amendment 13.
Amendment 42, in clause 18, page 9, line 4, at end insert—
‘( ) In subsection (9)—
(a) in paragraph (a), after sub-paragraph (vii) insert—
“(viii) regulations made under Part 3 of the Pension Schemes Act 2014;”;
(b) in paragraph (b), after sub-paragraph (v) insert—
“(vi) regulations made under section (Regulations under Part 3: overriding requirements) of the Pension Schemes Act 2014.””
I will try not to delay the Committee for too long in what I hope will be a short stand part debate. In the light of the contribution that I am about to make, the Minister will recognise why I posed my earlier question. Public sector schemes fall into two basic categories: those provided principally to civil servants, and those provided to other public sector bodies such as the BBC, the Bank of England and Transport for London. I want to address that second group of schemes in my short contribution. It seems to me that this is an appropriate time to raise, using the example of TfL, some of the problems that those schemes have and to test the Minister on a couple of things.
The TfL scheme is a public sector scheme that is not specifically provided for in legislation, although a lot of public service pension schemes are provided for in legislation, and TfL makes the rules of the scheme. That is done in a similar way to many private sector organisations. The scheme was established under a trust arrangement with a corporate trustee, and it is governed by a trust deed and rules. For accounting purposes, however, the TfL scheme is treated as a local authority scheme. In addition to the members of the TfL public service pension scheme, a small number of TfL employees are still members of a local government scheme. The scheme must still follow all the usual HMRC rules.
Although there is a great deal of commonality between public sector pension schemes, not least because they have rightly been subject to generally applicable legislation, there are still significant differences between the governance and benefit arrangements of some schemes. Those arrangements have evolved over time, and if they cannot be changed as working practices change, the sustainability of the scheme may be undermined. Unusually, the TfL scheme is governed by a restrictive trust deed, and its requirements are not all reflected in other public sector schemes by any means. The TfL scheme is not the only such scheme; a small group of schemes are structured in a similar way. The TfL scheme, almost uniquely, allows any individual member to veto any rule that might change benefits in any way. Effectively, they can block changes of any sort to the scheme, even those that might allow the scheme to provide better benefits or to benefit from the Bill. Even if the trustees might find proposed changes in benefits agreeable, the trust deeds of the TfL scheme and several other public sector schemes allow one member to veto the whole thing.
The Bill does not quite catch those unique arrangements, and that has important consequences for the sustainability of some public service schemes. At least one of the schemes has considered closing to future accruals, which would be highly undesirable. There is potential, either in the Bill or afterwards, for the Government to look at a small, technical piece of legislation that will allow such schemes to bring their trust deed and governance into line with common practice in the public and private sector, which will allow scheme changes such that the scheme becomes sustainable on both a cost and benefit basis on the future.
I recognise that I am talking about a small and technical situation. The Minister may not necessarily want to address the TfL scheme individually, so he may find it difficult during the passage of the Bill to meet me and the commissioner for TfL, but I hope that he will agree after the Bill receives Royal Assent to meet the commissioner and me to discuss the problem that affects this group of schemes, and to discuss whether we might find a small piece of pretty minor secondary legislation to address that point. It is hugely important to people who have pensions with such organisations, because it affects their sustainability into the future.
I understand the Minister’s point about not making too many overall commitments in the Bill, but the situation is serious. I would be grateful for his recognition of that seriousness, and I hope that he will agree to meet me afterwards.
May I add to my hon. Friend’s points about Transport for London? Although it is not strictly part of the Bill, my memory of the TfL scheme is that it was paying out pensions to many people who were no longer alive. That is not unique, but a fairly frequent problem with large pension schemes. Given that the taxpayer in general is the person paying—
I am grateful to my hon. Friend the Member for Wimbledon for raising this issue. I appreciate that when pension schemes are governed by trust deeds or rules that are restrictive, it can be a challenge for them. The rules of the TfL scheme are that pensions must be uprated in line with the retail prices index, and the Government generally use the consumer prices index for indexation. When we made that change to the basis on which we stipulate the minimum indexation requirements, we did so allowing schemes whose own rules allow them to change to switch to CPI. We then had to make a decision on whether to override scheme rules to allow, in the circumstances that my hon. Friend described, schemes to say that, although their trust deeds say RPI, today’s Government say CPI and that dominates what the scheme rules say in the statutory override.
We consulted and thought long and hard about that and on balance—it was a balanced judgment after thinking about it for a long time—we decided not to have a statutory override. It was some years ago when we looked at this for the first time. The challenge is that schemes are set up on a particular basis for a particular reason. For example, it may be far-fetched, but RPI or high inflation protection might have been part of the deal, not with reference to a particular scheme but in general terms. When the rules are written, they often reflect a deal, a conversation or a bargaining process. For example, a scheme might have had hard-wired generous indexation in return for scheme members accepting something else that was less generous. If one bit of that deal is allowed to be unpicked some years later, there is a danger of creating unfairness.
Sponsoring employers often say to us—I appreciate that in this case the sponsoring employers want to make the change—that they make rules and Governments then come along and change them and that it is hard to plan and to have certainly about pensions if people change the rules and when they have decided a package and a future Government comes along and says they do not like one element of the package so they change it without looking at the issues in the round.
We looked hard at a statutory override. My hon. Friend the Member for Wimbledon said that this is a minor and technical matter but, sadly, I beg to differ. Our survey research shows that 47% of schemes have RPI indexation hard-wired and cannot change their rules. If changes were made that applied just to TfL, we would have a queue at the door and 47% of schemes would say, “What about us?” It would have a far-reaching impact.
I am following carefully what the Minister is saying. He will recognise that I did not actually talk about indexation. I made the point that this was not just about indexation, but about any change to the rules in these groups of scheme. The point is that any change to the rules can be vetoed. The essence of the Bill is to make changes so that we can create particular types of scheme that are sustainable in the future. I understand his point that indexation is not necessarily a minor technical matter, but allowing a change in the rules such that the trustees could vote for something would seem to be simply what the Bill is trying to achieve.
I am grateful to my hon. Friend; going forward, schemes can be set up on that basis. The challenge we face is that we are dealing with a set of promises that were agreed, in some cases decades ago, as part of a package. It may be that the participants were told, when the deal was offered, that the pension scheme would look like this and part of the reassurance when many people signed up to it was that there was no need to worry. There would have been a concern that a future employer could “renege”, though that is a value-laden term, or could have made a deal and then five years later would want to change that. If members did not have a right of veto, it could have been imposed on them. Coming back some decades later and saying, “Well, we can all see that it is reasonable that this should be allowed to be changed”, makes it much harder to agree these deals in the first place, because people are given reassurance that things will not change by the rules of the scheme. That is part of the basis on which they accept the rules of the scheme. I appreciate that this constrains trustees and schemes, but we did look very hard at this earlier in the Parliament in the particular case of indexation. We took the view that it was a significant change and we would not override what schemes themselves had decided.
It is worth adding that we came back for a second bite at this when we looked at the position of protected persons. Where people have worked in the nationalised industry in the past and they now work for a privatised company, part of that deal was, and I oversimplify, that their pension rights would be protected and a future Government would not come along and change those protected pension rights. There will be some long-serving TfL workers who are protected persons. When we considered the 2013 Act, we looked at whether we should have a statutory override for protected persons because their employers would not be able to recover the loss of the national insurance rebate through changes to the scheme. On balance, we decided not to override the pension promises given in the past. As my hon. Friend will know, having been a Minister in the Department for Transport, the promise was given in that case by Transport Ministers to scheme members that their scheme rights would not be overridden. I have to be honest, Governments do change pensions, and state pensions in particular, but I feel that there has to be a very high bar before Governments override scheme rules.
My hon. Friend makes an important and valid case. There has been correspondence between the Secretary of State in my Department and the Mayor of London on this issue. There has been correspondence at official level. I can assure him that we have tried to respond fully to the concerns that have been raised. We hope that the Bill will receive Royal Assent around March. In the event that I am still in post after that period, I will be very happy to meet him.