Clause 29 - Deficits attributable to an offence or the imposition of a levy

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

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

Photo of Linda Riordan Linda Riordan Labour, Halifax

With this it will be convenient to consider clauses 30 and 31 stand part.

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

We cover a range of topics in clauses 29 to 31. Clause 29 continues with the issue of deficits and surpluses, and deals with one very specific issue. I want to read into the record a precise description of what the clause tries to achieve as there has been some uncertainty about what we are trying to do here. The clause enables regulations to be made to provide for an amount to be treated as a debt due from an employer to the trustees or managers of a pension scheme that provides collective benefits in cases where there is a deficit that is attributable to a specified offence or the imposition of a levy.

In general, the employer is not on the hook for a CDC scheme, but, in this one specific case, we may provide for an amount to be treated as a debt due from an employer. I will explain that situation.

The provisions under section 75 of the Pensions Act 2004, referred to as the employer debt provisions, are usually not relevant in the context of collective benefits, because a funding shortfall that has to be met by the employer cannot arise. For the same reason, money purchase schemes are also not usually subject to the employer debt provisions. However, there are some limited circumstances in which it is appropriate for an amount to be treated as a debt due from an employer to the trustees or managers of the scheme, both in the context of money purchase schemes and to the extent that a scheme provides collective benefits.

Our intention is that, in specific circumstances where money purchase schemes could be subject to the provisions of section 75, the same should apply to the extent that a scheme provides collective benefits. I stress, however, that we only intend to use such powers in specific circumstances.

Although subsection (2) provides that regulations may correspond to or resemble any provisions made by section 75 of the Pension Act 1995 that in turn resemble a provision in section 89(2) of that Act in relation to money purchase schemes, we do not intend for that power to be exercised in any circumstances other than those set out in subsection (1).

Our intention is that regulations made under clause 29 should capture the same situations as those set out in regulation 10 of the Occupational Pension Schemes (Employer Debt) Regulations 2005 to ensure consistency between the treatment of money purchase schemes and schemes to the extent that they provide collective benefits. I am sure that that is clear.

Clause 30 is on transfer values. We are creating this new collective benefit, but what value does someone get when they transfer their money out of a scheme containing collective benefits? The clause contains a power to require in regulations that trustees or managers of a scheme offering collective benefits have, and follow, a policy for the calculation and verification of cash equivalents for collective benefits. A cash equivalent means—not surprisingly—the cash equivalent calculated on a given date of any benefits that have accrued to or in respect of a member under the rules of the scheme.

Regulations can require trustees or managers to ensure that the policy is consistent with any requirements imposed by regulations under section 97 of the Pension Schemes Act 1993, which deals with the calculation of cash equivalents; make provision about the content of the policy; require trustees or managers to consult about the policy, and make provision about reviewing and revising the policy. There are similarities between the regulatory regime for collective benefits and other forms of provision, but there are also distinct characteristics. Collective benefits are different, so transfers have to be different.

There is a collective pool of assets. Members’ benefits are calculated from the assets available and risks are shared between members to try to achieve a smoother outcome. Therefore, we cannot deal with transfers in the same way as other benefits. Transfer values for money purchase benefits use the realisable value of the member’s share of the assets, and final salary schemes, for example, use a cash equivalent for the promised benefits. There will not be one model of collective benefit, so whatever we do needs to work across a range of models.

Transfer values for collective benefits will need to take account of the effect of pooling of assets and risk sharing at the time a transfer value is calculated to ensure that a given member does not get a disproportionately low or high figure. The process needs to be transparent, and the requirement for trustees or managers to have policies on transfer values will provide such transparency. I assure the Committee, however, that we will consult on any regulations made under the clause.

Clause 31 covers what happens when a scheme winds up. It enables the Government to make regulations to cater for the winding-up of schemes providing collective benefits. It provides for regulations to disapply or modify the application of sections 73, 73A, 73B and 74 of the Pensions Act 1995, which, as the Committee well knows, concern the winding-up of occupational pension schemes in relation to collective benefits. It also allows for provisions to be made on those matters in relation to collective benefits.

Section 73 of the 1995 Act provides for a priority order if a scheme winds up without enough assets; section 73A makes provisions for how a scheme should operate during wind-up; section 73B makes supplementary provisions, and section 74 deals with the discharge of liability on wind up. All that the clause does is ensure that we have equivalent provisions for the wind-up of schemes with collective benefits as we do for other forms of pension provision. The details of that will follow in regulations as we work through the Bill, but the basic point is that the clause is giving us primary power to introduce such regulations to work through the fine detail over the coming months.

I hope that is helpful. I have covered a range of topics and I commend clauses 29, 30 and 31 to the Committee.

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

I have a question about clause 29. The Minister referred to some concerns being expressed about the meaning of the clause and its potential consequences. Can he enlighten the Committee as to what those concerns were? Who was expressing them? How have the Government met them?

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

One of the attractions of CDC for employers is that there is not something on their balance sheet; there is not a number that goes up or down, a deficit or a surplus, which has been one of the problems with DB. The basic principle of CDC is that there are no hard promises, only targets. An employer cannot have a legal obligation to put money into the scheme to deal with, for example, a deficit or a surplus. In general, that is the principle. However, clause 29 allows for exceptional circumstances such as where an offence results in an imposition on the scheme that the employer would be expected to pay.

I deliberately read out some quite precise forms of words to reassure employers—it is employers and their organisations and pensions funds that raise those issues with us—to make clear that it is not a Trojan horse to suddenly risk employers being on the hook for deficits or surpluses in schemes with collective benefits. It is a very narrow, specific situation that can already arise in DB schemes and money purchase schemes. In a sense it is analogous to existing provision because with existing  money purchase benefits, an employer can be required to put money into a money purchase scheme in that kind of situation. We want to make it clear that we are not driving a coach and horses through the basic principle that an employer is not on the hook for benefits in a CDC scheme.

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

Can the Minister give an idea of what kind of offences one might be talking about? I am not trying to catch him out, but what kind of offences could take place that would put the employer, to use the Minister’s language, “on the hook”? Is it something that happens regularly or is it a rare occurrence? What are the circumstances?

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

We are talking about exceptional circumstances. For the offences that will be prescribed for the purposes of this section, we covered situations in which a pension corresponding or similar to any provision made by section 75 of the 1995 Act can be applied in the context of collective benefits talking about specific scenarios where an offence has taken place. An offence relates to the running of the scheme, so dishonesty or fraud would be an obvious example. I hope that is helpful.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.

Clauses 30 and 31 ordered to stand part of the Bill.