Financial sustainability requirement

Part of Pension Schemes Bill [Lords] – in a Public Bill Committee at 11:00 am on 7 February 2017.

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Photo of Richard Harrington Richard Harrington The Parliamentary Under-Secretary of State for Work and Pensions 11:00, 7 February 2017

The amendment proposes a change in the requirements for the financial sustainability of the master trust in clause 8. The clause, in conjunction with other provisions in the Bill, requires that the Pensions Regulator must be satisfied that the master trust has sufficient financial resources. The amendment proposes that it is the scheme or scheme funder that must have those resources, rather than the master trust. I absolutely sympathise with what I think is the intent behind the amendment—security for members—but I differ with the hon. Gentleman because I believe that the clause already achieves that end. The amendment is therefore unnecessary. I will explain why.

Clause 8 already sets out the two elements of the financial sustainability requirement: schemes must have a sound business strategy and sufficient financial resources to meet both their operating costs and costs following a triggering event, such as those of winding up in the event of scheme closure. The financial sustainability requirement is intended to mitigate the risk of a master trust being set up with inadequate planning and insufficient financial resources—that is its whole purpose. When the regulator assesses whether the scheme meets the requirement, it must take into account certain matters that will be specified in regulations, and our intention is that the regulations will include how the resources to cover the costs mentioned by the hon. Gentleman must be held. The scheme therefore includes a scheme funder.

We are considering options for the regulations and will consult on them. Among those we will want to explore are holding the resources in escrow or as a guarantee, or other robust financial commitments. What the regulator will expect will differ greatly depending on the size of the company, varying from a massive multinational undertaking to a comparatively small one. It might involve a solicitor’s client account or an escrow system. We want to consult on the options to get them absolutely right.

Also, we can use the regulations to specify whether the resources could be held either by the scheme or elsewhere, such as with the funder. However, if they are held elsewhere, our intention is that there must be clear commitment and availability of the funds in a range of circumstances. We would not want the money to be held by the funder rather than by the scheme if there were not sufficient protections or commitments in the event of the funder’s insolvency; the money must be readily available to do the job in whatever circumstances. There are different circumstances and that is the kind of item that regulators consider in other areas of financial regulation.

It is absolutely fair to say that the key risk for members is the financial sustainability of the scheme, so we have focused the requirement on the scheme, but the Bill and the regulation-making powers enable a variety of ways for the scheme to meet the requirements. That approach will allow us to take account of the variety of arrangements already in place in the market, and enable future innovation.

The key outcome we want to achieve, and therefore what we have reflected in the Bill, is that it is the scheme that must have the resources available to it. The scheme’s business plan and accounts and the scheme funder’s accounts will form the basis of the regulator’s assessment. The scheme funder’s accounts will provide the regulator with information about the funder’s solvency and the security of any commitment to provide funds to the scheme.

The clause also provides the Secretary of State with a power to prescribe matters that the regulator must take into account when assessing the scheme’s financial sustainability. Such matters may include, for example, the risk of the scheme funder’s insolvency; whether the scheme funder is subject to any prudential capital requirements imposed by a different regulator, which we have discussed for insurance companies and other types of company; and the terms and repayment periods of any loan funding relied on to meet the scheme’s running costs.

To conclude, clause 8 requires the regulator to be satisfied that the master trust has sufficient resources to meet the financial sustainability requirement. The scheme funder’s financial position and its financial arrangements with the master trust will form a key part of the regulator’s assessment. I therefore urge the hon. Gentleman to withdraw his amendment.