On Second Reading, the Secretary of State, in answer to Tom Tugendhat, nailed his colours to the mast on transparency and pension freedoms, not that we have seen much of the former displayed in recent days. He said:
“Transparency is a key area. Hidden costs and charges often erode savers’ pensions. We are committed to giving members sight of all the costs that affect their pension savings. He asks for more detail. We plan to consult later in the year on the publication and onward disclosure of information about costs and charges to members. In addition to the Bill, other things are clearly required to give greater confidence in the pensions system. Greater transparency is clearly one of the steps forward. I completely agree with him on that.”
I agree completely with the Secretary of State on that. He also said that he was determined
“to remove some of the barriers that might prevent people from accessing pension freedoms”.
“The Financial Conduct Authority and the Pensions Regulator indicate that significant numbers of people have pensions to which an early exit charge is applicable. The Bill amends the Pensions Act 2014 to allow us to make regulations to restrict charges or impose governance requirements on pension schemes. We intend to use that power alongside existing powers to make regulations to introduce a cap that will prevent early exit charges from creating a barrier for members of occupational pension schemes who are eligible to access their pension savings.”
We remain disappointed that this grand commitment to transparency has not yet found its way into the Bill but we are reassured that the Government seek to protect scheme members from prohibitive costs and exit charges.
The Secretary of State said that he had consulted the industry on the issue.
“The measures proposed in the Bill have been developed in constructive consultation with the industry and other stakeholders, so we have confidence that they are proportionate to the specific risks in master trusts and will provide that necessary protection.”—[Official Report,
In the light of that statement, we seek assurance from the Minister that legislation proposed in subsection (2) allowing breach of contract in that way will not leave the Government open to challenge from the industry, something that would cause unnecessary upheaval for both schemes and members. With that in mind, will the Government tell us what consultation took place with providers and advisers and confirm that they are content that this part of the Bill is not open to challenge? If a legal case is brought against a master trust for breach of contract, is the Minister satisfied that it will have a defence under the clause?
Finally, what consideration have the Government given to the interests of members who, in the event of a legal challenge, will be unable to draw down money from their pots?
As hon. Members will be aware, what we are now discussing is not restricted only to master trusts; the rest of our discussions today have been. It is a bit of a change. We are now talking about all occupational pension schemes.
The clause will cap exit charges and member-borne commission, which is the sort of thing we all want. Like most of the measures in the Bill, it relates to what we all accept is a problem; in this case it is exit charges—where they come from, who pays them, how they are calculated and so on. The hon. Gentleman refers to protecting members, which I perfectly understand, but that is the point of the legislation. I say that in case anybody reading about the Bill in Hansard or elsewhere thought that the Opposition were trying to protect members and the Government were not. The intention of the Bill is to protect members. I have laboured that point—I hope that the hon. Gentleman will excuse the pun on his party’s name—because it is fundamental.
The clause amends the existing legislation—the Pensions Act 2014—to allow regulations to be made that enable a term of a relevant contract on charges to be overridden if that contract conflicts with a provision in those regulations. I emphasise that the power will allow for a contract to be overridden only if it conflicts with a provision in the regulations, which will ensure that relevant contracts are consistent with regulations and will provide certainty to the parties involved.
At this point it might be helpful if I clarified that the clause is distinct from previous clauses in the Bill that refer to charges, which all relate to the proposed master trust authorisation scheme. The discussions on charges and capping before now were specific, whereas this discussion is general. We intend to use the clause alongside existing powers in the 2014 Act to make regulations clearly to cap or ban early exit charges. Those charges are any administration charges paid by a member for leaving their pension scheme early when they are eligible to access pension freedoms, which in the past they would not have faced at their normal retiring date.
I mentioned early exit charges before in a different context. Cynical commentators might say that providers impose those charges to take advantage of a situation—a kind of last hurrah—because they know they are going to lose the value of a pension. The industry’s converse argument, which I have some sympathy with, is that they calculate the value of a pension over a period of years, and early exit means that value may then be x years minus 10. That is not a ridiculous argument, but the Bill makes it clear that the Government do not have much sympathy for it.
As has been mentioned, the Financial Conduct Authority will make rules to ensure that the cap or ban on early exit charges in personal and workplace pension schemes, which they regulate, will comes into effect on
Our existing powers in schedule 18 to the Pensions Act 2014 enable us to make regulations that override any provision of a relevant scheme where it conflicts with a provision in those regulations. For example, we have used that power in relation to the appointment of service providers in the scheme administration regulations. The reason we are taking this new power is that the existing power does not extend to the contracts under which these charges arise. That is why clause 42 contains a power to allow the overriding of a term of a relevant contract that conflicts with a provision of the regulations under schedule 18. What is a relevant contract? It is defined as one between a trustee or a manager of a pension scheme and someone providing services to the scheme.
The regulations that we intend to make will apply to charges imposed from the date the regulations come into force, even where these arise under existing contracts. We expect the regulations to come into force in October this year, so it is not a long difference. It is a difference for legislation reasons, but on the scale of things it is not a lot.
If the hon. Gentleman would bear with me, I will answer the question asked by the hon. Member for Stockton North before giving way, unless it is really urgent.
My point is in relation to new clause 8, which I have tabled. I want to be clear that the Minister is saying that there will be no exit charges for anyone exiting a master trust, whether a new saver or someone who is currently in a master trust plan. If the answer is in the affirmative, I would be happy not to press new clause 8, because it would be superfluous.
I will come to that point in a minute, if I may first respond to the question from the hon. Member for Stockton North—I am not ignoring what the hon. Gentleman has just said, but I think that the answer will become apparent.
There was public consultation in 2015 that concluded in August. Since then we have had various discussions with providers and other industry bodies; we are really trying to get everyone involved. Again, we do not want to be unfair to one side or to create loopholes that should have been anticipated. I think that the hon. Member for Stockton North will accept that this area is complex.
I appreciate the Minister’s answer to my question. I also asked for the Government to confirm that the people they have consulted are content that this part of the Bill is not open to legal challenge.
It is very hard to talk about legal challenge because the legal profession in the United Kingdom has provided that itself in many cases where legal challenge was not intended by the Government. All that I can say is that we do not expect legal challenge on this issue.
Legislation introduced to challenge capping contract schemes has already been passed, so it is creating parity. I hope that I am not misleading anyone by saying that we do not expect that. We have done our due diligence and no one thinks that there will be a legal challenge, but I am afraid that I cannot give the hon. Gentleman a categorical assurance, because that is what the legal system exists for. I am sure that very clever counsel might read this one day and think, “Ah, ha! I’ve thought of something.” There is nothing that we know of.
With those considerable caveats, I assume the same applies to any legal case brought against a master trust for breach of contract and that they would have a defence under this clause.
If I may, I will answer the question from the hon. Member for Ross, Skye and Lochaber concerning new clause 8 and the point about no exit charges from a master trust. I confirm that when a master trust is closing the scheme cannot levy a charge for leaving. I believe that responds to his question, unless I misunderstood it.
When the master trust is closing it cannot levy a charge. That is as clear as I can be. Perhaps we can discuss the point in more detail. I am not trying to mislead the hon. Gentleman and he knows that, I hope.
The pensions market is continuously evolving and modernising and that extends to charging practices. It may be necessary to alter the charges requirements at pace to reflect any changes in the pensions market that may disadvantage members. I revert to the point I made to the hon. Member for Stockton North: that is the purpose of the whole exercise; we are doing it for that reason. That is why we intend to consult on the draft regulations later this year. I am aware that people outside the House, and sometimes hon. Members, groan when a further consultation is announced, as though the Government are doing it to kick the can down the road. I can assure them that that is not the case. We intend to get it right and public consultation is very important.
The regulations would also be subject to parliamentary scrutiny, as I have explained, through the negative procedure. The Delegated Powers and Regulatory Reform Committee was content with that approach because it would allow future legislation to be amended quickly to provide the member protection that the hon. Gentleman and I both want.
Before I conclude on this clause, I will address the point made by the hon. Member for Ross, Skye and Lochaber. I have learned the name of his constituency now and look forward to visiting. He was satisfied by my answer to his earlier question but he wants to know what happens if the master trust is not closing. In that case, the normal exit charge protections apply; there is no difference. I believe that is a clear answer to his question.
There is one area that the Minister has not addressed. As he said, we are all here to champion the member, but Opposition Members might just go a bit further in some of those protections. I did pose the question about elected members and what consideration the Government had given to the interests of members in the event of a legal challenge who would not be able to draw down their benefits.
I have already made it clear that the Government do not expect legal challenges. It is a bit of a circular argument but in the legislation the regulator exists to protect members, so I cannot accept his point on this matter.