We have arrived at the sunlit uplands of part 3 of the Bill, which deals with collective benefits. We have dealt with scheme definitions: DB, DA or risk sharing, and DC. We are now talking about benefit-level definitions and the distinction between individual benefits and collective benefits, which is a relatively new concept in British pensions law. Clause 19 is introductory and sets out some definitions of collective benefits.
Why are we interested in that? If we look around the world at the most highly respected pension schemes—many are in Denmark, the Netherlands and Canada—very often, the schemes that are well regarded have collective elements to them. For example, in the Netherlands, around 350 collective schemes are operating. The Danish pensions scheme, which has collective elements in parts of it, was ranked No. 1 in the world in a survey for the integrity, adequacy and sustainability of its provision. In a sense, the question we asked ourselves in the UK is if these kinds of models can work well in other parts of the world, are they things that we could learn from, and is there something that we can do in this country? This part of the Bill—clause 19 begins that process—establishes the concept of collective pensions. It says what it is and what it is not, and enables us to have a discussion about this exciting new form of pension provision.
To be clear, as part of reinvigorating the private pensions landscape, we want to enable people to access a wide range of pensions. We are not saying that this is the right model for everybody, but we think it should be part of the mix, and as I have said, some of the best pension schemes in the world offer collective pensions. Although we tend to get fixated on the Netherlands, in Canada there are a number of very interesting—well, relatively interesting—new forms of pension provision that are of a collective nature. We take the view that we have a lot to learn from high-quality pension systems of the sort that are viewed as the best around the world.
One reason why we are keen to allow for this sort of provision is that collective benefits can potentially provide more stability in outcomes, compared with individual DC schemes. As a Government, we are not making grand claims that collective schemes will always be a vastly bigger. They may be, depending on the circumstances, but that is not the claim we are making. However, our modelling suggests pretty clearly that in general, they will provide more stability of outcome and our consumer research shows us that that is what consumers want.
The Bill will mean that collective benefits in the UK cannot attract a funding deficit for an employer, which will limit the employer’s liability and reduce risk. From an employer’s point of view, a nice thing about CDC is that it might offer greater stability than an individual DC scheme, but without all the risks associated with having a DB pension scheme on their balance sheet. There is also the potential in future to develop sector-wide schemes that provide collective benefits that could allow people to build a pension in one scheme over their whole career, even if they move employers. On one of my visits to the Netherlands, I recall being introduced to the Dutch tulip growers’ scheme; if someone spends their entire life growing tulips, even with a range of employers, they will remain a member of the tulip growers’ scheme. I do not know how many tulip growers there are in the Netherlands, but the principle is that for larger industries, that could deliver on a large scale that could further boost members’ pensions by enabling more efficient operation.
We have evidence of demand and interest from employers. As we heard in oral evidence, although it is difficult for employers who are interested to say so publicly, we know that there is interest—indeed, a witness said that one of his clients was looking at this model, and I think that as we get nearer to 2016, as we discussed this morning, the level of interest will grow. For example, the Ford Motor Company said in its response to our consultation that it thought that collective DC plans could provide a successful addition to current pension scheme models. As the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said this morning, the Institute for Public Policy Research conducted research with employers and consumers, finding that
“there would be strong public support for a collective pension…it appealed across different income levels, life-stages and ages.”,
“participants in our research preferred a Dutch-style collective scheme that shares the risk among all members and removes the need for an annuity, and that incorporates some form of smoothing into the accumulation phase.”
Given the attractiveness of the model, we think it is crucial that we have a fresh definition and separate provision for collective benefits, because they are different from the current pervading models. To reiterate, collective benefits and shared risk schemes have different identities. Part 1 of the Bill defines three categories of scheme. Part 3 introduces a new legal definition of “collective benefits” and contains powers to enable us to create a governance framework for schemes to the extent that they offer collective benefits.
Clause 19 defines a collective benefit as a benefit where, in all circumstances, the rate or amount payable depends entirely on the amount available to pay that member’s and other members’ benefits and the factors used to determine what proportion of that amount is available for the provision of a particular benefit. To state the blindingly obvious, it is not a collective benefit if it is a straight money purchase benefit, or of a description specified in regulations. We will be able, as new models emerge, to clarify what is and is not a collective benefit.
This is a building block. It provides for key legal requirements to be applied or disapplied, and that definition is used throughout part 3 for schemes to the extent that they provide collective benefits. They are distinct to the nature of collective benefits. That is why we have a distinct definition and why they are not merely defined at scheme level or synonymous with the shared risk scheme definition. The new benefit definition is also used in the context of existing legislative requirements so that certain elements of current requirements are applied or disapplied as appropriate.
We talked this morning about the concept of a pensions promise, but to be clear, collective benefits cannot contain a promise. Promised benefits are excluded by the definition of “collective benefits”, as such benefits will not depend entirely on the amount available to pay that member’s and other members’ benefits and the factors used to determine what proportion of that amount is available for the provision of a particular benefit. Collective benefits are provided on the basis of investing members’ assets on a pooled basis in a way that shares risk across the scheme’s membership.
There are a number of concepts that we will come to in this clause and the succeeding clauses. Clause 20 refers to targets, so I will say a word about those. There will always be a target attached to collective benefits. That target must be achievable within a specified probability range, in order to provide all scheme members with some confidence about the indication of what they might receive from the scheme, but it is not the same as promising members that they will receive a benefit at a specified level or amount. Collective benefits are not the same as the definition of a shared risk scheme. There could be collective benefits in a shared risk scheme if there is also another form of non-collective benefits that offer a promise, for example. Alternatively, there could be collective benefits in a DC scheme, either as the sole type of benefit or in conjunction with money purchase benefits.
Another attraction from an employer’s point of view is that there is no employer liability to stand behind or guarantee a target offered in relation to a collective benefit, because there can be no promise attached to a collective benefit. We have chosen the definition so that there can be no liability on an employer’s balance sheet, as well as to allow the scheme to pool the available assets and distribute them among members so as to provide the benefits on a collective basis.
To be clear, collective benefits and money purchase benefits are mutually exclusive, as is specifically mentioned in clause 19. That is due to the unique nature of collective benefits. They need a different set of governance requirements and involve a different approach to the distribution of assets among members compared with a money purchase scheme. The rights to a collective benefit are different from the rights in a money purchase scheme. For example, there can be redistribution of assets among members in respect of a collective benefit in a way that is not possible for a money purchase benefit. That feature is also reflected in the definition of a collective benefit in clause 19, such that in all circumstances, the rate or amount of benefit must depend on the amount available for the provision of benefits to or in respect of a member and one or more other members collectively.
Finally, regulations allow us to make exceptions from the definition to ensure that we can attach the right requirements to the right types of benefit. The power will be used in situations where it would be more appropriate for the provision of those benefits to be subject to a different regulatory regime. For example—I know that the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East likes to ask me for examples—the Government might wish to exclude certain with-profits pensions arrangements, which currently exist and are regulated by the Financial Conduct Authority, from the definition of collective benefits to ensure that they are not regulated twice: once by the Pensions Regulator and once by the FCA. The power to exclude benefits of a certain description from the definition of collective benefits is delegated to secondary legislation to allow the Department to react flexibly—there is that word again—and responsibly.