Clause 20 - Duty to set targets for collective benefits

Part of Pension Schemes Bill – in a Public Bill Committee at 11:45 am on 30th October 2014.

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Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 11:45 am, 30th October 2014

As has been our custom throughout, Mrs Riordan, I hope that you will allow me to explain the purpose of clause 20 and set out why we have chosen to amend it since the publication of the Bill. When my teenage children get a new book of fiction, they turn immediately to the final page to see whodunnit. So as not to keep the Committee unnecessarily in suspense, I will explain that the Bill specifies that we have to set a hard, single-figure probability for CDC, but the amendments will allow us to set a probability range. That is the dénouement of our exciting journey, but I hope that Members will stay with me throughout that journey.

In my explanation of clause 20, I will refer to clauses 26 and 28, because the other amendments in the group are consequential amendments to those clauses and have been grouped for rational reasons. Clause 20 talks about the targets and the probability of achieving them. Clause 26 talks about valuation reports to manage that process. Clause 28 is about what schemes must do when they underachieve or overachieve against those targets. The amendments will substitute probability ranges for probabilities in each clause.

Throughout the process, we have been keen to continue talking to potential providers, employers and members of schemes. Feedback on the Bill has indicated that to have a single probability—for example, to specify that there must be a 97.5% chance of funding a scheme up to the requisite level—is too rigid. These numbers are illustrative and picked at random, but if we said instead in regulations that a scheme could have a 90% to 95% chance, the managers of a scheme would have to take action only if the probability of reaching its targets fell below 90% or rose above 95%. Within that range, the scheme would have a margin of flexibility.

If schemes have annual valuations, we do not want, to use a technical term, to keep fiddling. If we go back to my 97.5% example, we would not want the managers of a scheme to discover in a valuation that the scheme was at 97.4% or 97.6% and to decide as a result to scrap indexation or to double pensions in payment. We do not want to keep mucking about with schemes. Having as the target a range of probabilities will allow a bit of ebb and flow between annual valuations. Scheme managers will monitor what is going on but will not be required to make a series of short-term changes.

It will become apparent that two things are going on here: a probability and a funding ratio. For example, a CDC scheme might have to have a 97.5% chance of reaching its target, but its funding level could be, say,  110% of the target benefit. We are talking about two different numbers: the probability of reaching the target, and the funding level. For the avoidance of doubt, the New Brunswick hospital scheme that I mentioned earlier has to meet both the probability level and the funding ratio in managing its plans.

Clause 20 provides that regulations may be made

“to require the trustees or managers of a pension scheme to set targets in relation to any collective benefits that may be provided by the scheme.”

The regulations may

“(a) impose requirements about the way that targets are expressed;

(b) impose requirements about the recording and publication of targets;

(c) require the trustees or managers to set initial targets at a level which ensures that the probability of meeting the targets is equal to or higher than a level of probability specified in the regulations”.

The regulations may specify that that must be certified by an actuary. As I said a moment ago, that target is unenforceable. That does not mean that it is unimportant or that there is no set of rules, regulations and expectations, but it is ultimately a target. No one can say at the end, “You told me this was what I would get. You haven’t delivered. I’m going to take you to court for not delivering the targets.” As long as the processes set out in the Bill have been followed, that is what the scheme has to do and a target cannot be enforced.

Targets are key for good governance. They ensure a meaningful relationship between the assets available for the provision of collective benefits and the target level of benefits that the scheme seeks to achieve. It is important to have a clear governance regime in place for collective benefits because there is not such a direct link between the contributions a member pays in and the benefits they may receive from the scheme as there is for money purchase benefits. In an ordinary individual money purchase DC pension, it is pretty obvious what has been put in. That money has been invested and charges have come out; it is that person’s pot. It is ring-fenced; it is theirs. In a collective scheme, however, a share of the assets is simply accrued according to the scheme rules. We definitely need good governance to make it absolutely clear what people can expect.

Targets are also essential for transparency for members. In relation to any collective benefits provided by a scheme, targets are necessary to ensure that members have sufficient clarity about what they might get. This is a statement of the blindingly obvious, but people want to know what they will get. It is not a promise or a certainty but a target. A target must apply to any collective benefits provided by the scheme. All the assets that relate to the provision of collective benefits must be allocated to member benefits transparently. We want members to be clear about the benefits being targeted for them by the scheme in all circumstances.

Subsection (2)(a) gives us the power to ensure that targets are expressed clearly and can be compared meaningfully. We state that we can

“impose requirements about the way that targets are expressed”.

That power may be used to ensure that schemes provide clear information about targets—for example, the benefits being targeted and the probability level. It also allows us to set appropriate regulations for different types of target. We could use the powers in subsection 2(a) and  (b) to ensure a meaningful comparison between the collective benefits offered by different schemes where that was offered as a commercial product. Under clause 34, we can require that information to be published. That is an important point. This is complicated stuff if we are not careful; being able to compare one CDC scheme with another would be helpful. We can try to ensure that that information is provided.

We will only require schemes to meet a probability in relation to the target, whereas the New Brunswick scheme has both funding and probability requirements. We are taking a different approach, and that is important. People sometimes say, “The Netherlands is different. Canada is different. Denmark is different. Will it work here?” We are not cutting and pasting those models into our system; we are coming up with our own version. We intend to consult on the detailed figures in relation to the probability requirement. The probability required by regulations will have to set at a level that takes into account a number of different matters.

Giving members some confidence about what they can expect to receive in retirement may encourage people to engage with pension saving, enable them to plan for retirement and promote confidence in the scheme. In setting the probability standard, we must balance the desire to provide confidence to members about what they might get with the desire to allow schemes to adopt a range of different investment strategies that seek to deliver a good return for members on their pension contributions. I can tell the Committee that I intend us to consult fully on the regulations made under the clause.

Targets are relevant to clauses 26 and 28 because, once the schemes are up and running, there will be a governance process to ensure that they remain able to pay out the targeted benefits to the required probability. That is set out at various points in part 3. Under clause 26, we can require the trustees or managers of schemes to obtain regular valuation reports from an actuary to assess the probability of being able to pay out the targeted benefits. That will provide clarity about how robust the targeted benefits are to future changes, and I will discuss that clause in more detail later.

Where a valuation report shows that a scheme is over or under the required probability—in other words, a surplus or deficit—regulations may require the trustees or managers to follow that policy to address the deviation from the required probability range. Similarly, clause 28 may require the trustees or managers of a pension scheme to set out a policy in advance about how they will react to a valuation report that shows the scheme is over or under the required probability. Again, that policy may have to deal with a surplus or deficit in the probability in one or more of a range of ways set out in regulations. Again, I will come back to that later.

Clauses 20, 26 and 28 as a package provide a mechanism for ensuring that trustees and managers will monitor the probability of meeting the targets and take appropriate action if necessary. In combination, the clauses will ensure that there is a tenable link between contributions paid into the scheme, the investments held by it and the target benefit to be provided to members.

Finally, to clarify the amendments, in Government amendment 43, we have made the judgment that a probability range would be more effective than a probability level. Setting a single probability level would have been effective in providing clarity for members, but if it were used to trigger action, it would have the effect of requiring trustees or managers to implement their deficit or surplus policies at almost every valuation. We want to require schemes that offer collective benefits to take prompt action to restore a deficit or surplus, but we also want them to have the flexibility to take longer-term decisions, so that they do not have to react every year to every deviation from a single probability level. The main amendment is Government amendment 43, and the consequential changes from a probability level to a probability range are covered in amendments 46, 51, 52 and 53.

Annotations

Jane Davies
Posted on 3 Nov 2014 10:21 pm (Report this annotation)

"There's no justification for paying some [expat pensioners] less than others", Lord Carswell 2005.
"Fairness is at the heart of everything we do" D Cameron, UK's PM May 2010.
“I’ve a passionate belief in equality for all” D Cameron, UK’s PM, 2012
“The principle of equality is the cornerstone of [UK] justice”, Justice McComb [the Gurkha findings]
“Britain is a wealthy country and the government has taken good care of our public finances” D Cameron UK’s PM, Feb 2014.

Any of these sound familiar Mr Webb? Indeed there are also many quotes on how unfair and illogical the frozen pension scandal is that can be attributed to you too. But you have included this injustice in the new pension bill. Clause 20 regulation 3. How does this square with all of these quotes? As for the abysmal performance by you and your fellow MP's when attempting to address this anomaly (your description of this outrageous theft) at the scrutiny committee stage, it was an appalling embarrassment you should be ashamed of.
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