Clause 28 - Policy for dealing with a deficit or surplus

Part of Pension Schemes Bill – in a Public Bill Committee at 2:00 pm on 30th October 2014.

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Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 2:00 pm, 30th October 2014

Good afternoon, Mrs Riordan. I was reflecting on whether you had done something wrong in a previous life to get a whole day of this, but we will give it a go.

I referred to clause 28 earlier on and so I will not go into it at great length. It provides that regulations may require trustees or managers of a pension scheme to set out a policy about how to deal with deficits or surpluses in the probability relating to the provision of collective benefits. Obviously it is essential that schemes offering collective benefits operate in a transparent and accountable manner, so the trustees or managers will be required to draw up a policy which sets out in advance how they will deal with any situation where the probability of the scheme meeting a target in relation to collective benefits is above or below the required range. We may also require the policy to be published.

The policy will set out what actions the trustees or managers will take in different situations. Those actions should be sufficient to restore the scheme’s ability to offer the targeted benefits to the required probability. Obviously we have a regulation-making power under subsection 3(b) to make provision about the content of a policy, but on the other hand, we do not intend to place any unnecessary restriction on the scheme’s ability to develop its own policy, particularly as there will be a range of different scheme designs and a range of possible circumstances.

Just to elaborate on what happens to those who are outside the probability range, we will not be overly prescriptive about what the policy should contain, because we want trustees and managers to have some flexibility as to how any deficit or surplus should be dealt with. The appropriate action might differ depending on the scheme design or the nature of an external event. This is why subsection (4)(b) contains a power to require the policy to contain provision for a deficit or surplus to be dealt with in one or more of a range of ways. Where there is a deficit the scheme could reduce the planned level of indexation. It could freeze indexation or it could cut targeted benefits for all members. Where there is a surplus it could reverse previous cuts to targeted benefits, restore loss indexation or introduce additional indexation or an increase in the target.

It is important to stress that the targets can themselves be adjusted. Trustees and managers will have to take action to achieve certain results within a prescribed period of time. Members will be consulted on the policy in certain circumstances and we will require schemes to have and to follow a policy which will help to protect the interests of members across the generations. That is a key concern. We would not want schemes to carry a large deficit below the required probability for a sustained period as this would carry a greater risk that members do not receive the benefits that have been targeted for them. In particular, a sustained deficit would increase the risk of the scheme having to make a larger correction later, at short notice, and could increase the risk of unfair transfers between generations. That is an issue that is raised in this context. I hope that that is helpful in fleshing out the purpose of clause 28, as amended. I commend it to the Committee.