Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014
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Lord Bates
That the Grand Committee do consider the Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014.
Relevant document: 3rd Report from the Joint Committee on Statutory Instruments
A further, and more detailed set of regulations, The Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014, deal with consequent changes to secondary legislation. These were laid before Parliament on 3 July 2014. Both sets of regulations will come into force at the same time as the clarified definition in Section 29 of the Pensions Act 2011.
The clarified definition of money purchase benefits will ensure that only benefits which cannot develop a deficit in funding can be money purchase benefits. Noble Lords may be familiar with the decision of the Supreme Court in 2011, in the case of Houldsworth and another v Bridge Trustees Ltd, that certain benefits which could develop funding deficits or surpluses could still fall within the definition of money purchase benefits.
While this decision concerned two specific types of benefit structure found in a particular scheme, it created widespread uncertainty in the pensions industry. That was because the decision could also be interpreted as covering other types of benefits and place these outside the protection of the regulatory framework for benefits that are not money purchase, even though they had the potential to develop funding deficits.
Section 29 of the Pension Act 2011, which has retrospective effect, and the supporting regulations remove that uncertainty. Where in the past decisions have been made by schemes that are in keeping with the clarified definition, the retrospective effect of Section 29 will ensure they remain valid, despite the fact that those decisions may be incompatible with the Supreme Court’s judgment. Where decisions have been made that are inconsistent with the clarified definition there is transitional provision in the regulations so that schemes will not need to unpick past decisions. Going forward, however, it is important that the trustees and managers of schemes know what action they need to take in respect of benefits they have previously treated as money purchase, but which do not meet the clarified definition. That will ensure that their members are protected.
In particular, these regulations amend Section 84 of the Pension Schemes Act 1993 to provide an alternative method for trustees or managers to revalue certain types of benefits known as cash balance benefits. The cash balance method allows the sum available for a cash balance benefit for a deferred member to be revalued by any method that is applied to the benefits of active members where it cannot be calculated by reference to the salary.
The regulations also include decisions made by the board of the Pension Protection Fund that relate to benefits affected by the clarified definition as matters that are reviewable under Schedule 9 to the Pensions Act 2004. That will ensure that during the transitional period, where the board has exercised discretion as to whether to treat benefits as money purchase benefits, that decision can be challenged and subject to a formal review process.
The Government have worked closely with the pensions industry to identify the type and number of schemes that will be affected by the clarified definition of money purchase benefits. The majority of schemes will be hybrid schemes—that is, they will contain a mixture of money purchase and non-money purchase benefits. Hybrid schemes make up about 2% of the estimated 40,000 private occupational schemes in the UK which include money purchase benefits—that is, approximately 800 schemes.
I commend the Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014 to the Grand Committee and ask its approval to implement them.
Lord Bates
My Lords, a number of questions have been asked. I have counted 19, which compares to the five that were asked when these regulations were scrutinised in the other place. I am sure that that is a reflection of the quality and expertise, if not the viewing habits, of the members of the respective committees. I confess that at one point last night I was not sure whether the scoreline reflected the football match I was watching or the judgment of the Supreme Court which happened to be open on my lap at the same time.
Lord Bates
At half time.
There are many questions and I want to try to address as many of them as possible to get the responses on the record for people to scrutinise. First, my noble friend Lord Kirkwood asked how many schemes were affected by the clarified money-purchased benefits definition. It has not been possible to quantify the exact number of the affected schemes as trustees and scheme managers are only required to make detailed reports to the pensions regulator on benefits that they consider to be non-money purchase. Schemes are not required to provide detailed reports of benefits that they consider to be money purchase, so any information held by the regulator here is self-reported by the scheme on a voluntary basis.
We consulted extensively on this point, and the regulator has also tried to secure additional data. However, stakeholders have been unable to share with us the detailed scheme-level data because that information is sensitive and restricted. A small number of consultation responses indicated the size of the scheme and the potential costs involved. However, the information is not representative of all the schemes affected, and cannot be reliably used to produce an aggregate estimate. The DWP continues to work with the regulator to identify and communicate with effective schemes to establish more comprehensive data on how many schemes are to be affected.
My noble friend Lord Kirkwood also asked whether with the new definition the Government are adding costs and increasing the administrative burden on the schemes. I can assure my noble friend that that is not the case. Although the clarified definition is retrospective to 1 January 1997, in most cases the regulations modify the retrospective application of regulatory legislation so that schemes will not need to look back at events where benefits could fall into a category affected by the Bridge judgment or the clarified definition in Section 29. The clarified definition will mean that the member benefits are protected. The transitional measures will bring schemes into compliance, are proportionate and bear in mind the risks and the burdens on members, schemes and employers. We believe that that is the sensible approach, precisely because the Government want to minimise the additional requirements on schemes without jeopardising the protection of the scheme’s members.
My noble friend also asked why the Government insisted on a change of definition, and asked whether the Supreme Court decision was wrong. The Supreme Court judgment concerned two specific scheme benefit types: benefits which provided a guaranteed pot, otherwise known as cash balance benefits, and pensions in payment from schemes derived from money purchase benefits, both of which the court decided could be money purchase. The decision meant that some guaranteed benefits from outside the regulatory regime conflicted with the Government’s view of what constituted a money purchase benefit.
Why are the regulations not together? The department’s advice was that both sets of regulations would be debated together subject to the affirmative procedure. However, following comment from the Joint Committee on Statutory Instruments, the department decided to split the regulations. However, we expect that because both sets are closely linked together, the discussion will encompass transitional arrangements for both regulations.
I have addressed the question of why there are two separate regulations, but I will add one additional point. It has been necessary to divide regulations in that way because the primary legislation under which the regulations have been made—Section 33 of the Pensions Act 2011—provides a different parliamentary procedure for regulations which amend primary legislation. I appreciate that that procedural requirement has not made discussion and debate in this area easier, but I am happy for this debate to encompass both sets of regulations, as it has already done. On why the clarified definition of money purchase benefits is retrospective to 1 January 1997, the Government have decided on retrospection to that date so that the effect of the clarified definition coincided with the inception of key pension protection legislation. Provisions of the Pensions Act 1995 largely came into force in April 1997, hence the chosen date, but retrospection was set up on 1 January 1997 as the financial assistance scheme eligibility began for schemes which started winding up from that date. However, since the Pensions Act 2011 was passed, we have no evidence that any of the schemes in this position would have been affected by the Bridge Trustees judgment or Section 29.
The noble Baroness, Lady Drake, asked whether there was a pre-existing requirement to have benefits valued consistently with legislative requirements in the past. Some schemes may have valued in a way that was not consistent with those requirements. Evidence from the consultations showed that members’ benefits which here are affected by Section 29 and the regulations might have been revalued by the application of notional interest or investment return. It is possible that this would have been less than revaluation in accordance with statutory requirements. However, we had to balance the protection of members against avoiding administrative complexity for schemes. Evidence suggested that the cost of applying revaluation arrangements would outweigh the benefit to members.
The noble Baroness, Lady Drake, also asked what the new cash balance method was. The new cash balance method is based on an existing flat rate method, which requires deferred members to receive any increases that they would have received if they had still been active members of the scheme. She also asked why there is no requirement to revisit the scheme if it is wound up. If the scheme is still being wound up at the time that the regulations come into force and is underfunded, trustees will be required to revisit an employer debt before the regulations come into force. If the scheme has completed winding up when the regulations come into force, there is no scheme in existence to unwind; all the assets of the scheme have been dispersed. The regulations therefore do not require a scheme that has completed winding up to be unpicked.
A question was asked about why schemes newly eligible for the Pension Protection Fund will not be treated as such until 1 April 2015. That date marks the beginning of the first full levy year after these regulations are planned to be in force. The delay will allow the schemes time to correctly determine whether they are eligible for the fund and to carry out the necessary valuations on which the first levy bill will be based. It also ensures that schemes will not be required to pay the levy in respect of past periods. It would not be fair to other levy payers to provide protection for an earlier period for a scheme that has not paid any levy.
The noble Baroness, Lady Drake, raised the question of flipping. The department’s consultation exercise did not identify any scheme that will become newly eligible for the Pension Protection Fund that has a sponsoring employer likely to become insolvent in that small window of time. If such an event does occur, the Government will give consideration to the most appropriate way of protecting scheme members. It would therefore not be fair to other pension protection levy payers to protect the members of a scheme in respect of a period of time when the scheme had not paid into any levy.
The noble Baroness, Lady Drake, asked whether once the regulations are in force it would still be possible to change the scheme benefits without member consent from one form of non-money purchase arrangement to another with a lesser benefit promise. A change of this nature—a detrimental modification under Section 67 of the Pensions Act 1995—would still be subject to a requirement that the value of the members’ rights or benefits was not less than before the change. If this requirement were not met, the change would be subject to being made void by the Pensions Regulator.
The noble Baroness also suggested that there were insufficient data for the Government to be able to conclude that there will be a negligible effect. Section 67 will continue to apply except in very limited circumstances where schemes have changed benefits from cash balance to money purchase. This circumstance is catered for in the negative set of regulations, which require the actuarial calculation between cash balance and benefits collected in the money purchase schemes to be maintained. In addition, the trustee approval and reporting requirements must have been satisfied.
The point was made that retrospection makes these regulations too complex. The clarified definition, when in force, will be retrospective to 1 January 1997. Retrospection to January 1997 is needed to protect the position of schemes that had taken decisions in accordance with the clarified definition in Section 29—that is, not in accordance with the Supreme Court’s judgment—but for schemes that have acted in accordance with the judgment, these regulations modify the application of regulatory legislation with retrospective effect and for the transitional period where necessary. The regulations cover the many different types of pension arrangements that currently exist and which could have been affected by the judgment of the Supreme Court in respect of Section 29.
Baroness Drake
My Lords, this may be an appropriate moment to intervene because I want to push the Minister on a couple of points. I have been trying to anticipate when he would be coming to the end of his remarks.
Perhaps I may go back to two points. First, Section 67 rights under the 1995 Act are pretty important rights that get people rather excited. The concern I was trying to express was that this seems to set the precedent that you can provide retrospective protection for schemes that have breached Section 67 rights and obligations. What level of assurance can the Minister give that this is not a precedent that could be used for undermining the strength of Section 67 in the future by giving retrospective protection?
Secondly, in terms of how this retrospective protection applies where schemes have breached Section 67, I should point out that the Government do not know which schemes have done this. They have just heard about this from the industry, so they are giving a sort of blanket assurance without knowing the number and type of breaches of Sections 67. If they do not meet the actuarial equivalence terms, it is not clear whether they will have to go back and redo it.
Thirdly, if they did it inadvertently, they probably did not do any actuarial equivalence exercise at the time. Is it therefore being said that they can do one with hindsight now, and can look back and say, “Had that been applied at the time”? It is quite important to get clarity on this Section 67 point, because there are lots of disputes and case law around it. It tends to get people who are interested in members’ benefits quite excited if there is an attempt to compromise it in some way.
On the flipping schemes, which are not protected in terms of access to the PPF until April 2015, I note that, as was said, if you have not paid the levy then the liability if your employer goes insolvent should not go to other levy payers. However, the issue is that it is a government responsibility, because the Government are obliged under the EU directive. I was looking for as firm an assurance as possible that, if an employer with a scheme that has to flip from DC to DB goes into insolvency before or up to April 2015, the Government will not walk away from giving some kind of protection to those schemes with DB benefits the members of which may now be caught outside the protection regime; hopefully there are none or, if there are, they are very tiny.
Lord Bates
I am grateful for those additional points. Let me try to answer them as best I can. It might be helpful if I wrote to the noble Baroness and shared those responses with the Committee. I realise that they are important issues.
To respond to the specific issue of Section 67 rights, the appropriate regulation is Regulation 8(3)(b). The Government believe that the protection is not undermined, because there must have been an actuarial equivalence. If they do not meet the actuarial equivalence requirements, they will have to go back and unpick them. In fact, the regulations introduce a new protection for members, which underpins the benefits. However, as I said, I shall seek further guidance on that and write to the noble Baroness and other Members of the Committee.
These draft regulations make modifications to existing primary legislation to provide supplementary and consequential measures to support the coming into force of the clarified definition of money purchase benefits in Section 29 of the Pensions Act 2011. I hope that I have set out for the Committee the rationale for these regulations and have responded to the matters raised. I commend these regulations to the Committee.