Local Audit (Public Access to Documents) Bill (First sitting)
Tuesday 7th February 2017
(7 years, 2 months ago)
Public Bill CommitteesRead Full debate Local Audit (Public Access to Documents) Act 2017 View all Local Audit (Public Access to Documents) Act 2017 Debates Read Hansard Text
The Chair
Welcome to this Public Bill Committee on the Local Audit (Public Access to Documents) Bill. I have a few preliminary announcements. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. No amendments have been tabled to the Bill, so we begin with a debate on clause 1, but I suggest that Committee members make any remarks about clause 2 during this debate. In other words, we will have a general debate about the contents of the Bill on the question that clause 1 stand part of the Bill. If the Committee is content with that suggestion, I will put the question that clause 2 stand part of the Bill formally once we have completed consideration of clause 1, on the basis that clause 2 will already have been debated. Is that agreeable? [Hon. Members: “Yes.”] Thank you.
Clause 1
Inspection of accounting records by journalists and citizen journalists
Question proposed, That the clause stand part of the Bill.
Wendy Morton (Aldridge-Brownhills) (Con)
It is a privilege to serve under your chairmanship, Ms Dorries, and to have the benefit of your expertise and good guidance. I thank hon. Friends and hon. Members for attending this sitting, and hope that they can continue to support this Bill on its passage through this House. I especially thank the Minister, for representing the Government today in lieu of his colleague, the Under-Secretary of State for Communities and Local Government, my hon. Friend the Member for Nuneaton (Mr Jones), who I believe is in another Committee. I believe that a number of years ago, before entering this place, my hon. Friend the Minister served as a councillor on Hull City Council, and I am sure that his experience will be of great use today and will serve us well.
We had a very good debate on the Bill on Second Reading, so I do not intend to take up too much of your time today, Ms Dorries. The Bill is short and sweet, with only two clauses in total. It seeks to give journalists and citizen journalists—that is, bloggers and others who scrutinise local authorities, but who may not be accredited members of the press—the same rights of inspection as interested persons under section 26(1) of the Local Audit and Accountability Act 2014. It will require relevant authorities—other than health service bodies—as defined in that Act to make available for inspection the accounting records and supporting documents for such an authority for the audit year.
The Bill’s purpose is simple: it seeks to enable such persons to access a wider range of accounting material, so that they can report and publish their findings, making them available to local electors, thus providing them with information enabling them better to hold their local council to account for their spending decisions, by either questioning the auditor or objecting to those accounts. Let me make it clear that the Bill will not enable journalists to question the auditor or object to those accounts, unless of course they are also a local government elector for the area.
I do not want to repeat all the points made on Second Reading, as the responses received then were comprehensive and covered all the issues raised. However, if anybody wishes to ask a question, I will be more than happy to answer it this morning. Besides, the Minister who has responsibility for local growth and the northern powerhouse, wishes to say a little about the Bill, and perhaps to touch on the consultation that has taken place since Second Reading.
The Parliamentary Under-Secretary of State for Communities and Local Government (Andrew Percy)
It is a pleasure to serve under your chairmanship, Ms Dorries, on my first—and possibly last, depending on how well this all works out—Bill Committee as a Minister. I apologise for the Under-Secretary of State for Communities and Local Government, my hon. Friend the Member for Nuneaton, who is on a Bill Committee just a couple of Committee Rooms away. It is a pleasure to respond to my hon. Friend the Member for Aldridge-Brownhills this morning. She has already done far more than I managed to do in my six and a half years as a Back Bencher in successfully—hopefully—getting a Bill though this House, and I congratulate her on that. She is right to say that I served as a local councillor; I was also a parish councillor for the village of Airmyn, so this is a matter in which I have some interest from my previous role.
I am delighted to support the Bill on behalf of the Government and congratulate my hon. Friend on steering the Bill successfully thus far. I am reminded of Margaret Thatcher, who in her maiden speech introduced the Public Bodies (Admission to Meetings) Act 1960, which was in a similar vein; it was about opening up local government to journalists and other interested parties. In that respect, my hon. Friend is very much channelling Margaret Thatcher with the Bill. Conservatives will be happy with that, but I am not sure whether the hon. Member for Dwyfor Meirionnydd is quite so pleased.
As my hon. Friend the Member for Aldridge-Brownhills said, this small amendment could increase town hall accountability and ensure that councillors are responsible for their spending decisions. As she also said, we held a consultation with a range of interested parties, including the Information Commissioner, the National Association of Local Councils, the Society of Local Council Clerks, the National Union of Journalists, the News Media Association, local authority treasurers’ societies, Public Sector Audit Appointments, and Smaller Authorities Audit Appointments. The majority of respondents were able to support the Bill’s intentions, but two key issues—whether the Bill’s provisions excluded the very smallest parish councils, and more generally whether the potential cost on local government was onerous—arose during the process that we have considered further, and I should like to put them on record.
As I have said, I served on a very small parish council with a very small budget. During the consultation, we engaged with stakeholders on whether the Bill would grant journalists inspection rights in respect of the very smallest parish councils, by which I mean those with annual turnover of £25,000 or less. Our conclusion is that journalists will have those rights through the Bill. The smallest parish councils are therefore included in the legislation rather than excluded, as we originally thought. That raises the question of whether that is onerous or burdensome for those small parish councils. We have concluded that amending the Bill to exclude those smaller authorities would likely have a limited impact, and is therefore unnecessary. In response to the consultation, the Society of Local Council Clerks stated that
“having a different range of people having inspection rights at bodies under £25,000 compared to those over £25,000 might create confusion, particularly for clerks who serve several councils of differing sizes”.
It is not unusual for a parish council clerk to be clerk to a number of different local parish councils of various sizes. Consequently, we are content that smaller parish councils will be within the scope of the Bill.
With regard to the potential cost of extending inspection rights to a large group of people with no local connection to the area, I can assure the Committee that we have investigated the extent to which current rights are exercised. In 2015-16, it would seem that local electors exercised their rights over a total of 11,000 bodies only around 65 times. Although those rights are to question and make objections to the auditor, rather than broader inspection rights offered to interested parties, it is clear that this set of public rights is not used to any great extent, so it is not particularly burdensome on authorities.
Furthermore, in its response to our informal exercise, the Society of Local Council Clerks, which represents around 5,000 parish clerks, reported that its members had not experienced a high level of interest in their accounting records. I can attest to that, because journalists from around the country did not swoop down on the accounting records of Airmyn parish council, important though it is to have the power to do so. Only around 5% of the 562 attendees at 10 SLCC regional events last year had ever had someone exercise their inspection rights. A significant proportion of those inspections—perhaps a third—were by former councillors. That would seem to bear out our view that the number of requests to inspect is relatively low.
The changes are therefore not burdensome. They are important, in terms of making good on the Government’s intention of increasing local transparency and accountability. This is an excellent Bill. I congratulate my hon. Friend on securing such support so far, and on her handling of the Bill at its various stages. I commend the Bill to the Committee.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clause 2 ordered to stand part of the Bill.
Bill to be reported, without amendment.
Local Government Finance Bill (Fifth sitting)
(7 years, 2 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text
Mr Gareth Thomas (Harrow West) (Lab/Co-op)
On a point of order, Mr Gapes. You will remember that last week the Minister helpfully promised us that he would ensure that the 400-plus submissions to the 2016 consultation document would be published soon. To date I have not seen anything on the Department’s website, but I wonder whether you have more information as to when they might be available, to make possible better scrutiny of the Bill.
The Chair
I do not have any information at all, but if anyone does perhaps they can inform us.
The Parliamentary Under-Secretary of State for Communities and Local Government (Mr Marcus Jones)
Further to that point of order, Mr Gapes. I have made it clear to the Committee, including when I gave evidence, that we will shortly bring forward a summary of the responses to the consultation. We will certainly do that.
Schedule 1
LOCAL RETENTION OF NON-DOMESTIC RATES
Mr Thomas
I beg to move amendment 24, in schedule 1, page 33, line 13, at end insert—
“(1D) The principles of allocation statement must be approved by a resolution of the House of Commons.
(1E) In the year prior to any reset of the Business Rate Retention Scheme a principles of allocation statement must be approved by a resolution of the House of Commons.”
This amendment, together with amendment 25, would require a principles of allocation statement to be approved by the House of Commons. Subsection (1E) would in particular require a principles of allocation statement to be approved by the House of Commons in the year before any reset of the Business Rate Retention Scheme.
The Chair
With this it will be convenient to discuss the following:
Amendment 25, in schedule 1, page 33, line 27, at end insert
“and that statement has been approved by resolution of the House of Commons.”
See explanatory statement for amendment 24.
Amendment 26, in schedule 1, page 34, line 42, leave out sub-paragraph (4) and insert—
“(4) In sub-paragraph (4), at end insert ‘, which must be approved by a resolution of the House of Commons.’”
This amendment would retain the requirement that an amending statement be laid before the House of Commons and additionally would require that the report be approved by a resolution of the House.
Mr Thomas
It feels a little like the morning after, and I cannot promise to wake up Members and act as caffeine, as I usually like to try to do after a late night. The amendments are about parliamentary scrutiny. In a sense, last week’s proceedings were an hors d’oeuvre to the main course: the case for ensuring that there is proper parliamentary scrutiny of local government finance.
Last week the hon. Member for North Swindon made an enlightening contribution to the Government’s case. It is a pity that the Minister could not achieve the same heights. Given that the hon. Gentleman for North Swindon works closely with the Whips, what he said was revealing, and this is why parliamentary scrutiny matters. He did not have much interest in the case for redistribution of local government finance, and foresaw a new Jerusalem as economic growth incentives kick in.
To be fair to the Minister, there was a small benefit in terms of parliamentary scrutiny when he revealed, after much mulling over, that any local authority that cut its multiplier in the future would not be entitled to any top-up under the new system. I suspect that that means that few local authorities will rush to cut business rates.
Those two small indications—the Government mindset, which the hon. Member for North Swindon helped us to understand a little better, and the Minister’s indication of how future arrangements underpinning the Bill will work—serve as a reminder of the importance of continuing parliamentary scrutiny, which is what the amendments would help to embed in the Bill.
It may be worth reminding the Committee how accountability to the House of Commons is envisaged under the Bill. Paragraph 7 of schedule 1 repeals the requirement to provide a local government finance report that must be approved by the House of Commons. Instead, under paragraph 12 the Secretary of State will be required to publish a principles of allocation statement, which will set out how the tariff and top-up levels have been calculated. Everyone expects that that will substitute for the local government finance settlement.
Under the Bill, the Secretary of State could publish a principles of allocation statement covering several years at once. Indeed, the requirement to publish a statement annually is abolished by the Bill. Paragraph 15 of schedule 1 provides that an amending statement may be made, and again that would not have to be put to the House of Commons for approval. That amending statement allows for tariffs and top-ups to be altered retrospectively up to a year after the financial statement, so presumably the tariff and top-up could in the most dramatic cases be axed completely. I grant that there has to be a consultation with local authorities, but in theory dramatic change to local councils’ spending power could be the result of such retrospective change.
The amendments stand in my name and that of my hon. Friend the Member for Oldham West and Royton. Amendments 24 and 25 would require the principles of allocation statement to be approved by Parliament in the same way as the existing local government finance report. Similarly, amendment 26 would require that any amending statement to the principles of allocation statement would need approval by the House of Commons.
Why on earth would Parliament want to ensure scrutiny for local government finance in future? There is a series of reasons, which I will take a little while to explore. A House of Commons occasion such as the local government finance settlement provides a moment for change whereby the Executive can be held to account for their performance, or lack thereof. That is crucial. For example, the issue of social care has been debated in many guises, both by this Committee and by the House, and last September’s local government finance statement provided an important opportunity to scrutinise the Department for Communities and Local Government on its handling of the social care crisis.
There is also the question of how local government finance should be scrutinised. Should it be done purely by Members of Parliament seeking to discuss their individual local authority’s situation through a Back-Bench debate? There is of course a case for that. I had the pleasure of taking part in a debate on the local government finance of midland authorities, including Birmingham. My hon. Friend the Member for Coventry South (Mr Cunningham) also took part in that debate.
The role of individual Back-Bench MPs in securing an Adjournment debate and fighting their local council’s corner will always be an important way of scrutinising local government finance. Before I returned to a Front-Bench post, I, too, sought to do that, on a number of occasions raising the difficult financial situation of Harrow Council. Before my hon. Friend the Member for Oldham West and Royton joined the Front-Bench team, I had the pleasure of hearing him fight the corner of his local authority of Oldham.
Under reforms to Parliament, Back-Bench MPs on both sides of the House now have the opportunity to work together to secure time—usually on a Thursday and sometimes in Westminster Hall—for a particular subject to be debated. I pay tribute to the hon. Member for Thirsk and Malton for his support in securing a Back-Bench debate on maternity discrimination. Perhaps it would also be legitimate for Back Benchers to work together to secure debates on issues relating to local government finance.
Her Majesty’s Opposition might want to use one of our Supply days to focus on local government finance. Indeed, in this session we have already used one of our Supply days to highlight the problems of social care. The Communities and Local Government Committee has done excellent work looking at local government finance. I will come back to that. Yes, there is a role for Back Benchers, for the Select Committee and for Opposition-led debates, but surely an annual debate on the state of local government should be timetabled in the House. Without our amendments, I fear that that opportunity will be lost.
Mr Thomas
I appreciate the fact that the Minister may have had too much caffeine in the wake of very few hours’ sleep, but I encourage him to be patient. I will come to the merit of the amendments and what they seek to achieve.
I would not have thought that the Minister was naturally frightened of appearing before the House, although he has a track record of getting things wrong. He was recently a member of the Standing Committee that considered the Housing and Planning Bill, which tried to introduce a pay-to-stay scheme. Our parliamentary scrutiny in that debate helped to begin the process of getting Ministers to cave in and to recognise that they were wrong. There is a strong case, not for less parliamentary scrutiny, as the Minister envisages with this Bill, but at least for maintaining, if not increasing, the scrutiny of local government on the Floor of the House.
Jim McMahon (Oldham West and Royton) (Lab)
Does my hon. Friend agree that it is difficult to give an adequate response when the Minister has not bothered to say why scrutiny has been taken away in the first place?
Mr Thomas
As my hon. Friend knows, one of the reasons that I tabled the amendments was to try to draw out from the Minister why he does not want sustained and effective scrutiny of local government finance.
There is a timing issue. You will remember, Mr Gapes, from our debates last week that under the Minister’s plans we can expect a series of new responsibilities to be devolved to local government as the quid pro quo for the extra £12.5 billion being handed down under the 100% business rates devolution. Surely there should be an opportunity, when we know what those new responsibilities are, to be able to debate how, in the context of local government finance, they are likely to be handled by local government up and down the country. Again, proper parliamentary scrutiny and a clear requirement for the House to approve the principles of allocation statement would provide an opportunity for a debate on how those new responsibilities will work in practice.
In addition, this is effectively a completely new system of finance. Sure, we have been working with 50% business rates devolution for three or four years now, but to have 100% of business rates devolved and the revenue support grant, along with a whole series of other Government grants, axed is a very different landscape for local government finance. Surely there should be a regular opportunity to test how that new system of finance for vital public services up and down England is working. It would be sensible to at least maintain the current level of parliamentary scrutiny as part of the new order.
There are also significant unknowns about the future pattern of local government finance. We do not know how the system of tariffs and top-ups will work in practice. We have had only mild illumination from the Minister. We know that people who reduce their business rates will not be entitled to a top-up, but we do not know any arrangements for tariffs. Last week I gave the example of Heathrow and the third runway. I will come back to that later, too, but what about tariffs that might or might not be imposed on Hillingdon and Maidenhead councils, both of which potentially stand to gain significantly from a third runway at Heathrow? Many local authorities want to know whether there will be an enhanced contribution from such local authorities to help with the redistribution process. Surely how little we know about how tariffs and top-ups will work in practice underlines the case for at least maintaining, if not enhancing, the level of parliamentary scrutiny.
I know that England matters hugely to you, Mr Gapes, with your ongoing interest in West Ham football club. In essence, the local government finance settlement is an opportunity for England to take centre stage in the House of Commons and in our political process. Conservative Members, however, seem determined to axe an opportunity for England to take centre stage. That, frankly, is something that we are profoundly disturbed about.
Lastly—well, not “lastly”, I would not want to create a false impression—under the Bill, a range of powers will be available to the Treasury, to the Department for Communities and Local Government and to the Minister to interfere in local government finance. Although the Minister likes to see himself as the Che Guevara of local government finance, ushering in a radical new process, in practice there will be plenty of scope for the nanny state in the form of the Department for Communities and Local Government to continue to meddle in local government finance up and down the country. Indeed, thanks to the House of Commons Library, we know that the Bill—should it go through unamended—contains at least 56 new opportunities for the Treasury, the Minister or other Communities and Local Government Ministers to meddle in how local government finance will operate. Surely that makes another aspect of the case for continued serious scrutiny by the House of Commons and the House of Lords.
The Treasury or the Department for Communities and Local Government may want to introduce new reliefs to help business in future. The official Opposition, as a pro-business party, want to help businesses—[Interruption.]
Rob Marris (Wolverhampton South West) (Lab)
On the question of debate and the lack of scrutiny of reliefs, is my hon. Friend aware—he has talked about the Government possibly introducing more reliefs—that a couple of years ago, the National Audit Office found that approximately 1,200 tax reliefs are in operation and that the Government keep track of the effectiveness of fewer than 300? Therefore, the debate sought by these amendments would be extremely helpful in respect of any reliefs relating to local government.
Mr Thomas
I was not aware of that work by the National Audit Office, or indeed that so many reliefs are not properly scrutinised. That merely underlines the case not only for the work the NAO does generally, but in particular for the work, perhaps by the NAO, relating to local government finance, as well as the more general case for at least maintaining the scope for effective scrutiny of local government finance.
Perhaps this is my last point on the case for scrutiny of the Department, before I seek to develop these arguments further. Given that an amendment to the principles of allocation statement can be laid at any time, albeit after consultation with local authorities, and given that it could have a significant impact on local government finances, surely there should be the opportunity to look at why those tariffs and top-ups have been amended and the impact on councils. Therefore, there are probably eight arguments for maintaining the level of scrutiny. I hope, Mr Gapes, with your permission, to develop the argument a little further to help Conservative Members, who are not always the quickest at getting the argument and the point I am seeking to make. They are a little slow, if I may say so, to react to the point.
Let us think of the series of ways in which local government finance is going to operate. We heard from the Minister last week that section 31 grants will still be able to be offered to local councils.
Mr Thomas
Entirely discretionary, as my hon. Friend says from a sedentary position. One thinks of a situation where perhaps there is a large influx of refugees. I can foresee, sadly, another situation of flooding—the Conservative party has failed to properly protect our country from the impact of climate change—or coastal erosion, which I know the hon. Member for Waveney is particularly interested in. There will potentially be scope for discretionary section 31 grants to local authorities. There will be an assessment of need. We have no idea yet what that assessment of need for each English local authority will look like. We do not even have any sense of when it will be published. All we know is, mañana—it will be published at some distant point in the future, when the Minister and his officials can get around to it. Bearing in mind that the Minister and his officials cannot get round even to publishing the 400 submissions to last year’s consultation on the Bill, we cannot have much confidence that that assessment of need will be brought forward any time soon.
We do know that the expectation is that, aside from business rates, local councils will have to depend even more not only on the fees and charges they can raise from different services they offer, but, crucially, on council tax. My hon. Friend the Member for Oldham West and Royton reminded the Committee of the Government’s own assessment that, over the lifetime of this Parliament, there will be a 25% increase in council tax. One wonders whether that is on the conservative side, bearing in mind what Surrey County Council has done with its planned referendum and the case that it is making for a 15% increase in council tax, such is the terrible state of social care funding for that authority. We have not yet heard from the Minister how he is going to recommend the citizens of Surrey and Members of Parliament who represent Surrey should vote in that referendum. I look forward to hearing from him on that subject.
We know from the way in which Conservative Chancellors have sought to meddle with local government finance that additional reliefs will probably be announced at different times. Local government will get its finance in a series of ways in the new system. Surely there should be an opportunity to debate the way in which those different sources of finance dovetail with each other, so that we can see how individual local authorities throughout England, our great nation, are able to provide—or are not able to provide, as I fear will be the case—the public services that the citizens of England expect.
Bear in mind that Opposition Members, over the last six years or so, have been able to highlight just how much funding local government has lost over the terrible years since 2010, when the Conservative party came to power. By 2020, many councils will have lost more than 60% of their income. Arguably, an annual debate—or at least a regular debate—on local government finance will be all the more important in the first years after the introduction of the system.
It would be helpful to hear from the Minister why he thinks the requirement for a local government finance settlement report should be axed now. Why should there not be a 2018 local government finance settlement report, given that the new system will not be in force? Why should there not be one in 2019? We will hopefully have a little more information than we have now. We hope that, by 2019, the Minister may finally have got around to publishing the 400 submissions that have been put in as a result of the 2016 consultation paper. I hope, perhaps, that the Select Committee on Communities and Local Government might have had the chance to wade through those reports to give us its considered take on the concerns, or not, about the future of local government finance. Specifically, it would be interesting to hear from the Minister not only why he thinks parliamentary scrutiny of local government finance should be reduced in the way that the Bill proposes, but why it should be reduced before the new system has been introduced in its entirety.
We are the most centralised country in the western world. Almost 90% of local government finance is delivered by central Government—all the more reason for scrutiny of local government finance in the way we at least have at the moment. I suggest that it should be enhanced, not reduced in the way the Minister envisages. Our political system is weighted overwhelmingly to the power of the Executive in Whitehall. Notwithstanding the excellent contribution that the judiciary occasionally make to keep the Government honest on issues such as exiting the European Union—at this point, one should surely pay tribute to Gina Miller and her advocacy for scrutiny by Parliament—
The Chair
Order. I am sure that there will be lots of opportunities in the Committee that is considering the European Union (Notification of Withdrawal) Bill to raise those points. I would be grateful if they are not raised in this Committee; we have other matters on the amendment paper.
Mr Thomas
I am very glad to hear that.
My point simply is this: there are few safeguards on the Executive’s power, and one of those is the transparency, openness and scrutiny that Ministers and their officials are subject to through the work of this great House. I struggle to understand why Ministers propose to abolish any scope for further debate about local government finance. They almost want to rush things out quietly. The principles of allocation statement will no doubt come out on the last Friday before the summer or just before Christmas so there is not even a great opportunity for proper media scrutiny of local government finance.
I had the privilege of serving as a Minister, and I have felt the fear of sitting where the Minister sits. I understand that Opposition Members often take delight in trying to catch Ministers who perhaps have not done the work off-guard. Fortunately, I was never caught off-guard or exposed for lack of information in the way that the Minister has been already during the passage of this Bill and his boss was over pay to stay during scrutiny of the Housing and Planning Bill.
As a Minister, I recognised the benefit of parliamentary scrutiny. If a Minister knows that there are difficult, dedicated, serious Back Benchers like my hon. Friend the Member for Wolverhampton South West—I remember a case when he almost caught me off-guard with one of his questions—on a Committee, that keeps them honest in terms of the work that they have to do to prepare for debates. It makes them go through legislation with a fine-toothed comb and work hard late into the night trying to think of all the difficult questions they might be asked. In so doing, they ask their officials similarly difficult questions to try to move things forward if there is a concern that things are not moving forward in the right way, or to understand why things might have gone wrong.
The leverage of a Minister having to stand in the Chamber and answer questions about local government finance up and down the land is hugely important in its own right and may help to ensure high-quality decision making. I fear that will be lost if the current opportunities for parliamentary scrutiny of the local government finance settlement are, if not abolished, swept under the carpet, as the Minister seeks to do by sweeping away the principle of accountability to the House of Commons for local government finance decisions.
It is surely important to air the big issues that affect local government. Social care is a classic example. When the local government finance settlement statement was made in December, Ministers knew that they would face sustained media scrutiny and, crucially, parliamentary scrutiny of their performance on local government finance, particularly in so far as it related to social care, not least because a disagreement between the Prime Minister and the Chancellor of the Exchequer had meant that that issue was not addressed in the autumn statement. Even though the Secretary of State brought forward a dismal package, one has to acknowledge that there was at least an attempt to begin to answer the question that council leaders, the Association of Directors of Adult Social Services and social care professionals up and down the land were asking about how we would continue to finance the system. The local government finance settlement statement forced Ministers to know that they were going to have to come up with at least some semblance of an answer to that big question. Sadly, the response was dismal, and the Secretary of State has continued to be chided by Conservative council leaders, Labour council leaders and many Conservative Members of Parliament—one thinks of the contribution of the Chair of the Health Committee.
Peter Aldous (Waveney) (Con)
I am grateful for the hon. Gentleman’s care and attention to my constituency. Does he agree that business rates retention needs to go hand in hand with a review of core spending and the needs assessment? The Minister has already provided that assurance.
Mr Thomas
Of course it needs to go hand in hand with the needs assessment. Not only that, it needs to go hand in hand with the fair funding review. It would be lovely to know what the needs assessment will be for each council and what the fair funding review will mean for each council, but the brutal truth is that we do not know. I suggest the hon. Gentleman looks at one of the last amendments on the amendment paper to be considered on Tuesday 21 February, which deals with commencement of the Bill. We should wait for the full picture before we allow the Bill to come into force.
We do not know what that needs assessment will be or what that fair funding review will look like for Waveney. We would know more if the Minister and his officials had got around to publishing the 400-plus responses to last year’s consultation document, which may include a contribution from Waveney District Council. However, he has not published the responses, so we do not know what the council thinks of it. All we know from the papers we have seen from Waveney District Council is that it is extremely concerned about the financial position it faces. In its report on the budget and council tax for 2016-17 on 24 February 2016—it was looking ahead—it said there is
“potential to create an extremely serious financial position for the Council, with genuine issues regarding the Council’s financial viability and ability to set a balanced budget”.
The council is worried about its very serious financial position, its financial viability and its ability to set a balanced budget as early as 2018-19. It said that reductions to revenue support grant
“are now much larger and faster than previously forecast”.
Revealingly, it added that
“the Council is not well placed to generate additional localised funding from council tax and business rates–there is very limited potential for growth in the medium term to offset these huge reductions”
in revenue support grant and new homes bonus.
In the new Jerusalem of the hon. Member for North Swindon, everything will be all right in his constituency, but we know from those at the sharp end in Waveney that the situation will be much tougher. The hon. Member for Waveney does a very good job fighting for his constituents—not that a Labour Member of Parliament would not do it ever better, but in the meantime he does a good job. I gently suggest that he might relish the ongoing opportunity to question Ministers on the Floor of the House, either on the fact that a local government finance settlement and report is still to be approved by the House of Commons, or that a principles of allocation statement—the device that Ministers want in the new world—is yet to be approved by the House. He can challenge the Minister or the Secretary of State to think about the problem facing his constituents.
Peter Aldous
I thank the hon. Gentleman for his caring contribution. He very much supports the need for a radical reform of the fair funding formula to address the concerns of councils such as Waveney.
Mr Thomas
I am always up for things that are radical and transformative, but I like to see the detail before I decide whether they are radical or transformative in a positive way. The hon. Member for Thirsk and Malton, of whom I am very fond—I am always keen to promote him to his Whips—made a series of interventions about the case for rural authorities in north Yorkshire. I gently suggest that his contributions were, sadly, slightly less impressive than those of the hon. Member for Waveney. The hon. Member for Thirsk and Malton sought to bash London at every opportunity, which I would gently suggest is par for the course for him.
Kevin Hollinrake (Thirsk and Malton) (Con)
Will the hon. Gentleman give way?
Mr Thomas
I will give way in just a second to the hon. Gentleman. In his contributions to date—he might be about to recover the situation—he failed to mention any assessment of need in London, or indeed in any authority outside the particular ones in north Yorkshire that I suspect he cares about.
Kevin Hollinrake
I am grateful for the hon. Gentleman’s kind comments, which of course are reciprocated.
The hon. Gentleman misquoted me. In my remarks to him, I talked about the differential between Harrow and North Yorkshire—it is £80 more spending per person, per year, despite the income and age demographics. He has a younger and richer population in Harrow. I am not saying that those are the only demographics and the only cost drivers that we need to look at, but the key is fairness. Would he support a system that is fairer and that truly reflects the cost drivers in Waveney, North Yorkshire and Harrow, even if that disadvantages his local area?
Mr Thomas
Of course I would support a fairer system. I think of the ways in which the system is not fair in relation Harrow council’s finances—£80 million plus of cuts in the last four years. I wonder how that is fair.
The exchange that the hon. Gentleman and I have had about fairness is an entirely reasonable debate. I simply think it should be had on the Floor of the House on an annual basis on the local government finance settlement.
Mr Thomas
I will give way to the Minister. I have not forgotten him. I am trying to but not succeeding.
We should have that debate on fairness in local government finance, and on how spending power is allocated across local authority areas, on a regular basis, and ideally on an annual basis, when we debate the local government finance settlement. I cannot understand why it should be abolished before the new system comes in. When there is a principles of allocation statement or an amending statement, surely that should provide the hook for a debate on the Floor of the House of Commons about fairness and a series of other issues related to local government finance.
I will give way to the Minister before I come back to Suffolk, which I know will be of interest to the hon. Member for Waveney.
Mr Jones
With his usual charm and wit, the hon. Gentleman decided to go off on a tangent and talk about coffee rather than answer my earlier question. He still seems to want to back two horses. Does he want an annual vote, or does he want a vote to set the principles at the start? His amendment says one thing, but he seems to be speaking another language at the same time. What does he actually want?
Mr Thomas
Given the sorry state of local government finance, I would be up for a debate every three months if it was going to lead to action on social care.
The point of the amendments, a couple of which are probing amendments, is to explore the issue of scrutiny by the House of Commons. The Minister—let me be generous to him for a second—in responding to an intervention by the Chair of the Communities and Local Government Committee on Second Reading appeared to hint that he might be willing to look at this question. I gently encourage him to do so.
There is a long tradition of Members of Parliament raising the concerns of their local authorities, be they North Yorkshire, Thurrock, Torbay or wherever, on the Floor of the House when we debate the local government finance settlement. I hope the Minister has some respect for local authorities and for the role that this great House plays in helping local government to ensure that there is a regular opportunity for scrutiny of local government finance.
I was dwelling on the authorities of the hon. Member for Waveney as part of the case for such ongoing scrutiny. If the situation in Waveney is bad—this time last year, Waveney was extremely worried about its ability to survive and prosper—the situation for Suffolk is surely as dramatic. The local government finance settlement for Suffolk suggested that it was set to lose more than £73 million in revenue support grant between 2015-16 and 2019-20, and that it was gaining only just over £9.3 million under the system of 50% devolution of business rates.
Suffolk County Council will clearly recognise that more responsibilities are coming its way in the brave new world of 100% business rates devolution. I suspect it will be sceptical that it, like Waveney, can generate significant additional business rates income. If it is getting only £9.3 million under 50% business rates devolution, it seems unlikely that it will be able to get anywhere close to the £73 million in revenue support grant that it has lost or is going to lose by the end of this Parliament.
Let us take an extract from the January 2017 cabinet meeting of Suffolk County Council on 24 January, where that Conservative council says:
“The Council should be under no illusion that the future financial outlook continues to be extremely challenging and deep ‘cuts’ to services will be required to remain viable even with a future general council tax increase.”
Among its proposals were cuts to libraries and archive services; culture, heritage and sport facilities in Suffolk; children and young people’s services; the travel support budget for children and young people; help for local schools with their budgets; public health; and housing. That is the scale of financial difficulty Suffolk County Council faces.
I have a suggestion for the hon. Member for Waveney, who I know will be as concerned about the financial situation facing Suffolk County Council as he is about the one facing Waveney District Council. His leverage as a Member of Parliament will be weakened if Parliament does not have to approve the principles of allocation statement. If there is not an opportunity on the Floor of the House of Commons for a debate, he might be able to persuade Mr Speaker to grant a Back-Bench debate on the finances for Waveney or Suffolk councils or both. He might be able to persuade Opposition Members to come together to look at the local government finances facing the east of England for a Back-Bench debate. He might even be able, if he whispers in my ear, to persuade the Opposition on occasion to use one of our Supply days for a debate on local government finance. Those are all good things in their own right. However, his leverage as a Member of Parliament for his two authorities will be weakened by the provisions in the Bill and the loss of parliamentary accountability envisaged in it. I gently suggest to him that that is surely negative and that he might want to use his considerable influence and charm on the Secretary of State to persuade him to think again.
I want to dwell briefly on another issue linked to parliamentary scrutiny—the mandate for the changes. There was no indication in the Conservative party manifesto. I hope the hon. Member for Torbay has learned the lesson of his experiences of intervening in debates so far—one should read what one’s opponents say before challenging them. I have read the Conservative manifesto—and what a dismal read it was. That is a part of my life that I will not get back. [Interruption.]
Mr Thomas
I am grateful to you, Mr Gapes, for getting Conservative Members under control again.
I return to the essential point: there was no mandate for what the Minister and the Secretary of State propose. There was no mention of a shift to 100% business rate retention in the 2015 Conservative party manifesto. There has been no Green Paper and no White Paper about the changes. There has, of course, been a great session of the Select Committee on Communities and Local Government, of which the hon. Member for Thirsk and Malton is an excellent member, but the only commitment I could see in the manifesto was to a pilot scheme for allowing councils to keep a higher proportion of business rates in Cambridgeshire, Greater Manchester and Cheshire.
Kevin Hollinrake
Is the hon. Gentleman in favour of 100% business rates retention or not?
Mr Thomas
The hon. Gentleman is in danger of suffering from the same disease as the hon. Member for Torbay, and of repeating his question. Of course I am in favour of the principle of 100% business rate devolution. Indeed, we had it in our manifesto as part of a much bigger package of devolution than anything envisaged by the Conservative party. Perhaps the hon. Member for Thirsk and Malton, who has a reputation for hard work, would like to dig out a copy of the Labour party manifesto, where he can check the section on local government. I will happily pay for him to have a cup of tea with the hon. Member for Torbay so he can point out to him the passage about the increased spending power that councils would have had if Labour had been in charge.
Mr Jones
It is good to be back on the Committee with the hon. Gentleman. I have looked at the Labour party manifesto: there was a significant commitment to devolve additional responsibilities for additional funding, but did the former shadow Chancellor, who lost his seat at the general election, say there would not be a penny piece more for local government if the Labour party were elected?
Mr Thomas
I am struggling. I thought that I had helped the hon. Member for Torbay not to make that mistake. Hearing the Minister make the same mistake as a Back-Bench Member is too much. A £30 billion increase in revenue spending power for councils was the centrepiece of our manifesto for local authorities, together with an English devolution Bill.
Kevin Hollinrake
Page 13 of the Conservative party manifesto clearly states that
“we will pilot allowing local councils to retain 100 per cent of growth in business rates”.
Was not the direction of travel clearly expressed in the manifesto?
The Chair
Order. Mr Marris, perhaps you could keep the noise down. I cannot hear what Mr Thomas is saying.
Jim McMahon
I am intrigued that Conservative Members have to check Google to find out what their manifesto commitments were. We are very clear what ours were, and we are very clear that a number of them have been taken on in the Housing and Planning Act 2016 and the Bill. Does my hon. Friend agree that the Labour party’s manifesto commitment was very clear: the local government and health budgets would be brought together, with local government in the driving seat making efficiencies in health to help properly fund adult social care?
Mr Thomas
My hon. Friend is absolutely right, and not only that but we committed to the fair funding, which the hon. Member for Thirsk and Malton wanted to see. I was trying to move on, before being interrupted by interventions from Conservative Members, to explore one of the other concerns about the way in which business rates retention has worked to date and how it might work over the rest of this Parliament. We would not be able to explore that if the local government finance settlement report did not have to be voted on by the House of Commons.
It has been gently pointed out to me that there is a surplus on the main non-domestic rate account. As we all know, in 2013, the Government changed the system, allowing councils to keep 50% of business rates, with the remaining 50%—crucially—paid into a central Government account: the main non-domestic rate account. Councils then still needed £15 billion in funding from central Government on top of the 50% of business rates that were kept. That was called the revenue support grant. In the first two years of that 50% business rates devolution scheme, the Government’s share of business rates was less than the amount they paid out to councils in revenue support grant. However, in 2015-16, the account moved into surplus.
That growing surplus releases resources for the Treasury to use for other purposes such as reducing corporation tax for Sports Direct or banks, reducing capital gains tax, increasing inheritance tax allowance or other things. In 2015-16, this so-called surplus from the central share alone was some £1.9 billion, rising to £4.2 billion this year as revenue support grant continues to be cut further. Crucially, the surplus will reach more than £10 billion in 2019-20. Here is a major source of income for local authorities that is, in effect, being top-sliced by the Government for a whole series of other purposes when it could be used to fund the spending pressures facing local councils.
According to published accounts, in 2015-16, the Secretary of State debited the account by £12.89 billion but only £9.34 billion of that was used to pay revenue support grant to local councils, leaving a surplus of some £3.5 billion. That surplus will grow by at least £2.4 billion in 2016 and at least a further £2.4 billion in the coming financial year. No decision has yet been made about what that £2.4 billion growth in 2017-18 will be spent on. There is an opportunity for the income generated by business rates to be spent on tackling the biggest crisis facing local government spending at the moment: social care. We will have fewer opportunities to debate that if the Minister has his way and parliamentary scrutiny is dramatically rejected.
If that were not reason enough for Conservative Members to be further convinced of the case for change, it is worth pointing out that in the autumn statement and spending review in 2015 the then Chancellor of the Exchequer, before he was sacked for incompetence by the current Prime Minister, cut the funding for local government from central Government for a further five years. He also introduced a series of new reliefs. There was no consultation with local government on the cut in revenue support grant or on the impact on business rates income of introducing those new reliefs, even though both would have a significant impact. We had an opportunity to debate those measures, and seized that opportunity, in terms of the local government finance settlement at the time, but they indicate the way in which the Treasury and the Executive more generally can interfere with local government finance—sometimes for the best of reasons, but nevertheless with a significant impact on local government finance. Surely there is, therefore, a need for ongoing scrutiny.
Kevin Foster
The hilarity that the hon. Gentleman has been causing has certainly kept me awake all the way through the last hour and 10 minutes. To help my hon. Friend the Member for Thirsk and Malton, I point out that he can find the Labour party manifesto in the fiction section of the House of Commons Library. The point that I wished to intervene on is this. The hon. Member for Harrow West has just criticised the previous Chancellor’s decision on business rate reliefs. He said that that was not consulted on. Will he tell me which one of those reliefs he opposed the introduction of?
Mr Thomas
My point was not about whether one opposes particular reliefs, but about the impact on local government finance. There is a consequential impact for local government, which we are debating today—a consequential impact on the finances of the hon. Gentleman’s local authority, my local authority and, indeed, the local authorities of all members of the Committee—and surely those consequential changes need to be considered. My point is that, under the Minister’s proposals, which I suspect the hon. Gentleman has been told he has to support, come what may—that is the reason he has the privilege of serving on the Committee and being mentored by Opposition Members—parliamentary scrutiny is being weakened in relation to local government finance. There may well be further justification for further reliefs to business, or for further public services to benefit from reliefs. We will seek to explore that later. However, there should be an ongoing opportunity to explore the consequential impacts of decisions that the Chancellor or other parts of the Executive might make on local councils’ finances.
Rob Marris
Does my hon. Friend agree that it is right, as the Bill provides, that before making a principles of allocation statement, the Secretary of State will have to consult representatives of local government? That is good, but the Secretary of State will not have to consult or be answerable or accountable to Members of Parliament on the principles of allocation statement, so one thing is being done right and the other is being done completely wrong. The amendments would rectify that imbalance.
Mr Thomas
My hon. Friend makes a very good point and one that I realise I have not dwelled on until now. Of course he is right to say that local government leaders and their councils should be properly consulted, but one suspects from the contributions that we sometimes see in private from Conservative-led local authorities that they sometimes look to the Opposition to make their case more vigorously in public than they feel they can make it to their own Ministers, and that opportunity will be reduced if there is not similarly a requirement to be answerable to Members of Parliament.
I will offer up to the Committee one further example of a very significant change to local government finance. If something like this were done in the future, we might not have the opportunity fully to explore the consequences. I am referring to the decision by the then Chancellor to switch the indicator, in terms of business rates going up or not, from the retail prices index to the consumer prices index. That is likely to have a significant impact on local government finance. In the 2016 Budget, Ministers suggested that it would reduce business rates income by £370 million in 2020-21. In 2020-21, under the Minister’s plans, there will not necessarily be an opportunity for a debate on the Floor of the House on the principles of allocation statement or the local government finance settlement report, to see what the consequences of that change are in that year for local government finance.
And that is just one year. Each year, that reduction in income generated by business rates for local authorities will continue. Over a decade, it is estimated that councils will lose over £3 billion. That is a £3 billion benefit to business, and there is a debate to be had outside this Committee on whether that is the right support to give to business. In the context of this debate, there must be an issue as to whether it is the right choice for local government finance and the public services such as social care that are being provided.
How will Nuneaton, Warwickshire, Waveney, Suffolk, Torbay or North Yorkshire be able to provide public services if they are seeing their authorities hit by their share of that £3 billion cut in capital funding? Sadly, there was no consultation with local authorities about that switch from RPI to CPI. I want to dwell on that issue a little more as part of the clause 5 stand part debate, which I hope we will get on to soon.
Mr Thomas
Shortly. But it is another example of the way in which the Executive can make significant changes that may have substantial merit in their own right in terms of the support they give to business—one could think of other such examples—but which nevertheless have a significant impact on local government finance. Surely it is the responsibility of this House to think about local government finance in detail and about all the complexities that are envisaged, and to worry about what those might mean in future. Amendments 24, 25 and 26 stand in my name. Two of those are, I suspect, amendments that we will continue to regard as probing amendments, but the principle of scrutiny by the House of Commons is something that we on the Labour Benches take extremely seriously.
It was remiss of me not to provide members of the Committee with the opportunity to reflect a little further on one of my favourite areas of the country: Allerdale in the Lake district and the local authority there. After the post-tariff top-up was introduced, it benefited from just £3.64 million in 2013-14 under business rate retention. That went up slightly to £4.91 million in 2014-15. Then it went down to £4.63 million in 2015-16 and by 2016 it had gone up slightly again, to £4.7 million. That is not very much business rates income under the 50% scheme. One assumes that it will get a little more income under 100% business rates retention.
The council is surrounded by agricultural land, which is not rated in business rate terms, and has significant natural barriers to further economic growth—I am thinking of the wonderful lakes of Derwentwater, for example, and the wonderful mountains of Skiddaw. The council faces natural barriers to economic growth, with which the hon. Member for Waveney will sympathise. Surely we have a responsibility—even though we represent other authorities as individual Members of Parliament—to think about the impact on authorities such as Allerdale, whose financial means might otherwise be forgotten if there is not the ongoing opportunity for parliamentary scrutiny.
Mr Jones
I thank the hon. Gentleman for his generosity in giving way. He seems to be criticising my hon. Friend the Member for Harrow East (Bob Blackman). Does he not know that during the settlement process this year, my hon. Friend brought in a finance officer from Harrow Council to discuss its settlement with me? I have not seen any evidence of the hon. Gentleman doing that.
Mr Thomas
I was not going to criticise the hon. Member for Harrow East (Bob Blackman), although the Minister almost provokes me to do so; I was merely suggesting that he might not want to criticise Harrow Council quite so much. I welcome the fact that he brought in the finance officer from Harrow Council. Indeed, I knew about that, and suggested that if I came along too I might upset the Minister inadvertently, so it was probably best for the finance officer to go in with just the hon. Gentleman. I deliberately stood back so as to try to ensure—[Interruption.]
The Chair
Order. I know we have all had relatively little sleep after a late night. Nevertheless, I would be grateful if we could calm down. It will not be long before we adjourn the sitting, but I would like to make a little bit of progress. Mr Thomas, are you coming to the end of your remarks?
Mr Thomas
I am getting closer, Mr Gapes. I thought the Minister’s intervention did not do him justice. I fight for my local authority and I respect the contribution of the hon. Member for Harrow East, although I try to guide him to make better defences of the local authority. I hope that the Minister listened carefully and will act on what the finance officer from Harrow Council said.
Sadly, one thing we have not touched on thus far is bus services—a small issue in the context of the state of local government finance, but it matters—and there will be even less scope to debate it if our amendments are not accepted. You may not know this, Mr Gapes, as, like me, you are a London Member of Parliament—we are lucky to be north London Members of Parliament in particular—but around the country, local authorities that have direct responsibility for bus services say that those services face substantial cuts. That is a concern. There is obviously scope for that to be debated in part at Department for Transport questions, but given that those services are financed by local government, surely that should be part of the issues relating to local government finance considered by the House regularly.
The Campaign for Better Transport says that reductions in local authority funding have already resulted in thousands of bus services being reduced or cancelled in recent years. According to its research, people in Lincolnshire, Derbyshire, Leicestershire, Somerset, Dorset, West Berkshire, Wiltshire, Oxfordshire, Hertfordshire, North Yorkshire and Lancashire will be among the worst affected by the cuts in funding to local authorities—cuts that they will have to pass on to bus services. Surely that is an issue that Members of Parliament want to debate. Certainly, Opposition Members regularly seek to raise it through Adjournment debates or in questions, but it is surely part of the broader picture of local government finance and should be considered properly.
Kevin Hollinrake
The hon. Gentleman said earlier that I was trying to stand up for rural areas as against urban areas, but that is not the case. The biggest disparity is between London and the rest of the country. He talks about transport in London, but we need only walk outside to see buses, trains and trams galore. The top 10 authorities for spending power per head—including Camden, Kensington and Chelsea, Islington, Hackney, Tower Hamlets, Southwark, Hammersmith and Fulham, and Lambeth—all have about £400 more per person per year than North Yorkshire and many other places. The lowest-spending authority in the country is York, an urban area. The disparity is between London’s spending power and that of the rest of the country. That is what needs to be dealt with, and that will also be reflected in our ability to provide decent bus services in rural areas.
Mr Thomas
Over the course of our proceedings, I have been gently suggesting to the hon. Gentleman the need for a proper fair funding review—I strongly support that—but he is a little misguided in his assessment of the level of need in London. It is not an issue of rural and urban outside London against London—that would be a huge mistake to make—but an issue of the quantum of local government finance, and spending power being savagely reduced by the party of which he is a member, in the misguided belief that that will somehow lead to a substantial reduction in the national debt. We know how that played out: the previous Chancellor of the Exchequer got sacked.
I therefore gently suggest to the hon. Member for Thirsk and Malton that if he has been unable to support any amendment of mine up to now, and cannot be tempted—although I hope he will be—to put pressure on the Minister to give way on the issue of ongoing levels of parliamentary scrutiny, he might want to consider the matter of when the Bill should come into law. Should it do so when we know the details of the fair funding review and of the regulations, and when the Minister finally gets around to publishing the 400-plus responses to the consultation document? Should the Bill not take effect at that point, instead of in this financial year?
Kevin Hollinrake
The hon. Gentleman’s point about the distribution is absolutely right. I support a review of the funding formulae that will be introduced before the Bill takes effect in 2020. His point about quantum was interesting, but to increase quantum he has to do one of two things: take spending power from elsewhere in the economy, from other Departments; or raise taxes. Which one would it be? Will he specify which one of those two things he would do, or which Departments he would remove funding from?
Mr Thomas
The hon. Gentleman, in his usually charming way, is tempting me down a path that will get me into a lot of trouble with the shadow Chancellor. [Interruption.] “Be brave!” say Conservative Members, and I am, but nevertheless I will not use the Committee to announce future Labour party policy. It would feel like a missed opportunity if only a few party members were present to hear about the new direction that Labour will take when it returns to government.
Jim McMahon
I find it ridiculous of Conservative Members to suggest that a tax bombshell is waiting, when we know that the only one being suggested is the council tax bombshell—a 25% increase throughout the country. That is the only tax bombshell being discussed, although not at anywhere near the level of detail that is justified. Does my hon. Friend agree that we need to see the funding formula in the round before making a decision on the Bill?
Mr Thomas
I do agree. I have described the changes as a triptych. One normally thinks of triptychs in connection with great works of art, and I suppose the hon. Member for Thirsk and Malton, who believes that the Bill will be a radical transformation of local government, might be tempted to see it as one, but we know that that is a long way from the truth. The Bill is only one relatively small part of the package; the needs assessment and the fair funding review will have to be done before we truly know the impact of 100% business rates retention and whether it is in the interest of all local authorities, as Conservative Members claim.
On the quantum of local government finance, I gently point out to the hon. Gentleman that Unison research shows that there is a surplus in the main non-domestic account for business rates that could be used to fund an increase in social care, if Ministers so chose. If my amendments are not agreed to, we risk having fewer opportunities to debate the quantum of local government finance, the question of how it is allocated and the consequences for the public services that local authorities throughout England are allowed to offer.
I am beginning to contemplate the conclusion of my remarks, but let me first dwell on delayed transfers of care. If my amendments are not agreed to, there will be fewer opportunities for the House of Commons to consider those, too. I have some sympathy—not a lot, but some—with the Prime Minister’s point that the speed and quality of transfers of people from hospital back to a social care setting varies among local authorities and clinical commissioning groups. I do not want to explore that issue in detail, because that would be outwith the purview of the debate, but when Hampshire County Council, a Conservative-led local authority, is responsible for the highest number of delayed transfers of care—more than 8,000 in November alone—I have to wonder whether there is a problem with its funding. I do not represent Hampshire, but I recognise that as Members of Parliament we have a responsibility to think about the fortunes of people in England, not just in our areas but in others, and I worry about what that statistic says about the state of local government finance in Hampshire. Whenever there is a change in local government finance, there should be a regular opportunity for Members of Parliament to explore the situation, not just for each of our authorities, but for others throughout the land.
If Hampshire does not inspire concern among Conservative Members, what about Essex County Council, which had 5,684 delayed transfers of care in last November alone? In Northamptonshire, which at least one hon. Member may have some interest in, there were more than 5,400 delayed transfers of care in November; again, that suggests some difficulties with the authority’s social care funding. Surely it is our responsibility as Members of Parliament not just to focus on the authorities that we represent—on Harrow or Oldham—but to think about the citizens of Northamptonshire, and to worry and ask questions about what their local authorities’ finances look like.
In Kent, there were 4,884 delayed transfers of care—the sixth highest number in the country—in November alone. What does that say about the state of Kent County Council’s finances? Much of that wonderful county is taken up with agricultural land, so in the brave new world of 100% business rates retention, there are likely to be fewer opportunities for business rates growth there than in other areas. Again, those of us who can think strategically should be worried about the situation that Kent County Council faces. I offer those four examples of delayed transfers of care as a reason for concern, and I look forward to the Minister’s explanation of why local government finances should not be debated regularly on the Floor of the House and why the Secretary of State should not have to answer for what he plans to do.
Mr Jones
The Bill will provide the framework for a series of reforms to help local government boost local economies and become more self-sufficient and less dependent on Whitehall. This is a move away from a centralised state. The Bill will provide a clear framework in law for multi-year settlements, which will increase funding certainty and ensure that accountability for funding local services with local resources sits with local councils.
These radical changes require a new mindset. Under 100% business rates retention, there will no longer be a local government finance settlement to distribute central grants to support local services; local authorities will become more financially self-sufficient and will fund local services from local resources.
Mr Jones
The hon. Gentleman raises an interesting issue. If the country had the misfortune of another Labour Government—perhaps a discredited Labour Government, such as the one in the 1970s that went with a begging bowl to the International Monetary Fund—and inflation was soaring beyond belief, the Secretary of State might need to make some sort of amending statement to deal with the inflation and allow local authorities additional funding to deal with the mess that the Labour Government had again made. However, we are speculating, because I suspect it may be a little while before the Labour party is once again in a position to form the next Government.
Jim McMahon
Perhaps we can give the Minister a few seconds to capture his thoughts and reflect on the question. Does he envisage, then, that this power would be used only every 30 to 40 years?
Mr Jones
It is not for me to speculate on how often there will be a Labour Government. I do not think that I want to get into that this morning; I want to come back to the amendments and the Bill.
The amendments shift the focus back to Whitehall and Parliament by introducing a need for a resolution in the House of Commons, thereby jeopardising the move to more local accountability. The Government will be required to consult with local government on the principles for allocating funding over a period of years, and we envisage that whenever there is a reset of the business rates system, further consideration will be given to the allocation principles, in consultation with local government. Above all, it is important to provide as much certainty through this consultation as possible.
I am confused about the proposals, because on several occasions the hon. Member for Harrow West on the Opposition Front Bench has talked about a system of an annual vote, and about a vote at the start of the process to set the principles. He cannot have both things, but he seems to want to have his cake and eat it. I am worried that he is trying to undermine the principles of what the Government are trying to achieve.
Rob Marris
The Minister, who I believe is moving towards suggesting that the amendment should not be accepted, just prayed in aid the consultation with local government representatives. On page 33 of the Bill, proposed new sub-paragraph (2) in schedule 1(12)(4) says:
“Before making a principles of allocation statement, the Secretary of State must consult such representatives of local government as the Secretary of State thinks fit about the general nature of the principles of allocation.”
The Secretary of State could deem two local government representatives fit under that provision. Can the Minister say a little more about how wide the consultation would be? Would it be wider than my extreme example of two, which the Bill would allow?
Mr Jones
The point I was making to the hon. Gentleman is that I am rather confused about what he is looking for here. He has argued against the proposal he makes here and in favour of an annual vote in Parliament on this. There is very little clarity in his argument and, therefore, in what he is seeking to achieve by tabling this amendment, which seeks to undermine the principles of the Bill.
Mr Thomas
I hope in my closing remarks to deal with the fog of confusion that surrounds the Minister. It is the job of Opposition Members to ask questions of Ministers about the Bills they are bringing forward. The Minister needs to give us a justification for why the principles of allocation statement should not be approved by the House of Commons.
Mr Jones
I have spent some time in my contribution explaining that. It is always good to hear the hon. Gentleman speak from a sedentary position, like the archetypal school bully, but I will not take that to heart. I would never think he would do anything other than try to improve the discourse in the Committee.
Mr Jones
The hon. Gentleman mentions from a sedentary position tough love. With regard to his proposals, his version of tough love seems to be very confused. The point I am making, and the reason I urge him not to press the amendments, is that there needs to be far more clarity about what he is looking to achieve. What he suggests at the moment, particularly on having an annual vote—or not, as the case may be—seems to very much undermine the principles behind the amendments, so I ask him not to press them.
Jim McMahon
It is a pleasure to serve under your chairmanship, Mr Gapes. I will be quite brief, as I recognise that we are pushed for time in the morning sitting and that a vote will take place.
My hon. Friend the shadow Minister will want to reply to that very brief response from the Minister, which I struggled with. My hon. Friend explained at length the concerns we have and probed in great detail about where we are trying to get to, but the Minister could do nothing more than read out a pre-prepared statement from his folder in response. That really lacks respect for this Committee and for the amount of work and dedication that has gone into probing these provisions. I ask the Minister to reflect, before this afternoon, on whether he is happy with his performance this morning and to think about the great deal of weight and responsibility that his post carries.
It is not good enough just to dismiss the legitimate concerns raised here and bat them away as if they are not important. We are talking about the future financing of vital public services that our communities rely on. The amendments have not been tabled for the sake of it or to cause trouble and make waves; they are here because we are seeking certainty about the future sustainability of public services. For the Minister’s response to be five minutes—certainly less than 10 minutes—is quite disrespectful, and not only to us. He can be disrespectful to the Opposition—that is part of the Punch and Judy of politics—but to be disrespectful to the millions of people who live in this country and rely on those services is quite unforgiveable.
I would like a bit more clarity on what this provision means. We heard from the Minister in the evidence session that an additional £12.5 billion will be provided through business rates to local authority services, but no detail was provided on what grants would be taken away in lieu of that or what additional responsibilities will be pushed down. We still do not have clarity on whether mandatory relief and small business rate relief will be net of that figure. The Minister was at best confused and vague in his evidence.
Let me run through the numbers to clarify how big the gap could be depending on the financial review that is carried out. We know from the evidence session and the paper that the fantastic team at the Library have produced that the Government will release £12.5 billion, but they have not said whether the revenue support grant, the rural services delivery grant, the public health grant, the improved better care fund, the independent living fund or the early years grant will be included. They have excluded the Greater London Authority transport grant from those numbers. If we were to roll up those grants and expect them to be covered by the £4.5 million, we would have a gap, because their total cost is £14.7 billion. Can we have clarity on whether the £12.5 billion is new money? Is money going to be taken away that is provided to local authorities through grant support at the moment?
The Chair
Order. I am conscious that we are in danger of going wider than the specific amendments under consideration. I would be grateful if the hon. Gentleman would bear that in mind. As he said, we have limited time.
Jim McMahon
I take that on board completely, Mr Gapes, but this is absolutely relevant to the amendments.
The Chair
Order. It is not a matter for argument with me. It is a matter for sticking to the terms of the amendment that we are considering at this moment. There will be other opportunities to make those points.
Jim McMahon
Okay. My contribution is about parliamentary scrutiny and the role of MPs, both Opposition and Conservative Back Benchers, representing their local areas in Parliament. The reason the annual statement has to come to Parliament is so that we can ask these probing questions. However, before we get there, a decision will be made on which of these grants will or will not be included. As far as I can see, there is potential for there to be a very significant funding gap. More than that, we know that the adult social care gap is £3.5 billion. We also know that, despite a 25% increase profiled for council tax, that will generate only £1.8 billion.
There is concern about the grants that have been provided and whether the £12.5 billion will be enough. There is also concern about the £3.5 billion social care funding gap and the £1.8 billion profiled council tax increase. Those questions, which I accept are detailed, are critical and the reason these amendments are so important. For a Back Bencher, this is their only opportunity to have the debate and, more important, to have a vote on the day. The vote says to their constituents that they have represented their interests in Parliament. If the amendment is not accepted, that ability will be taken away from MPs.
Mr Jones
Again, the hon. Gentleman is seeking an annual vote of the House. Does he not think that an annual vote would completely undermine the principles of what we are trying to achieve here, which is certainty for local government over a longer period? This is something that local government itself has wanted for some time and something that 97% of local authorities have signed up to during this spending review period.
Jim McMahon
I thank the Minister for his intervention and for showing that in some ways he may have a slightly better grasp of his brief than I thought. However, 97% of local authorities have submitted their multi-year financial settlement. The Minister has still not confirmed how many of those local authorities have identified a funding deficit. It is all very well saying that local authorities have submitted the plan. What we have not had is the detail of how many are in deficit and will not be able to fund statutory services over the life of that multi-year settlement. That is why the annual scrutiny of public finances in local government is really important.
We do not yet know what the safety net arrangements will be. If there is an in-year shock to the business rate base, how will we know that that will be rectified in the formula that is being assessed? How will we know that any new formula will take into account the very different geographies and demographics in our areas? It may need to be rectified mid-year. That would be picked up in an annual review.
Mr Thomas
I accept the Minister’s point that the question of a vote on an annual basis may raise some uncertainty for local government, but it has coped with that for decades. Is there not an issue about the uncertainty for local government from new decisions that the Treasury may make on, say, small business rate relief? I think of the Budget measure that the previous Chancellor introduced to extend business rate relief to smaller businesses and shops, which took £7 billion out of the total business rate taken in. Arguably, that had more impact on local government finances than any tiny uncertainty about a vote in the House of Commons.
Jim McMahon
That is absolutely right and I fully concur with it. I intend to wrap up now so the shadow Minister can respond more fully and we can hopefully move to a vote.
Think about where politics is not just in this country but in the world. People are fed up of having things done to them and being told that their lot is what it is, and that they have no voice. Parliament’s very important function is to give people a voice. When people talked about getting back control, they did not mean taking power from Brussels and giving it to junior Ministers; they meant that their elected representatives should have a voice in Parliament and real power. For the Minister and the Government to introduce 56 new powers on top of local government and take away the role of Parliament is absolutely unacceptable in today’s political climate.
Mr Thomas
It is a pleasure to have the chance to summarise the debate so far. I indicated in the middle of my remarks that at least a couple of these amendments are probing amendments. At this stage, I do not intend to press amendments 24 and 25 to a vote. I will come to amendment 26 in a second.
I gently suggest that the Minister needs to reflect a little more on this debate and the question of the accountability of the House of Commons. In his response, he did not justify taking away the requirement for the House of Commons to approve the principles of allocation statement and the amending statement, although he made a perfectly fair debating point about whether it should take place annually.
The broad thrust of my remarks was to challenge the notion that Parliament should not have to approve the principles of allocation statement and any amending statement. We will want to return to that on Report. The Minister hinted on Second Reading that he might take seriously the concern of the Chair of the Communities and Local Government Committee about the reduction in scrutiny of local government finance. When the Minister’s feeling that he has been subjected to tough love on this Committee has subsided, I hope he will reflect more positively on the case for parliamentary scrutiny. He may not be able to see it at the moment, riding high as he is in the Department for Communities and Local Government, but things do come around and Governments do change colour. Perhaps he will still be a Member of Parliament in those circumstances, and perhaps the people of Nuneaton and Warwickshire will wonder why he is not doing more to raise questions about the financing of their local public services on the Floor of the House of Commons. The measure that he is locking into the Bill risks denying him an opportunity to give his constituents satisfaction in future.
I take the point that an annual vote on local government might inject an element of uncertainty into the proceedings, but the brutal truth is that parliamentary arithmetic normally allows the Government to get their way, so that element of uncertainty is rather overstated. In that context, I gently say to the Committee that, at a suitable time, I intend to press amendment 26 to a vote, because parliamentary scrutiny is so important. I hope the Minister reflects further on the fact that Conservative Members will table amendments on Report. The issue of parliamentary scrutiny no longer seeks to divide Members on both sides of the House, committed as we all are to the principles of the Bill. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Local Government Finance Bill (Sixth sitting)
(7 years, 2 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
Mr Gareth Thomas (Harrow West) (Lab/Co-op)
I beg to move amendment 31, in schedule 1, page 33, line 31, at end insert—
“(3B) After sub-paragraph (2) insert—
(2A) As soon as is reasonably practicable after calculating the payments to be made or received under sub-paragraph (2), the Secretary of State must assess whether each local authority has sufficient resources to provide all statutory services in its area for the relevant year.
(2B) The assessment under subsection (2A) must be published in a report and the Secretary of State must lay it before Parliament.”
This amendment would require the Secretary of State to assess whether each local authority has sufficient resources to provide all statutory services in its area.
It is genuinely lovely to have you in the Chair, Sir David. This is no shame on Mr Gapes, but his presence in the Chair sadly did not inspire a series of helpful statements from the Minister. You missed three speeches from Conservative Members, including an excellent speech from the hon. Member for North Swindon, who gave away far more detail about the ideology behind the Bill than the Minister was willing to give. There were some very interesting interventions by the hon. Member for Thirsk and Malton, who will be very interested in hearing the case for amendment 31, which I am about to set out.
The Chair
Order. It is very kind for the hon. Gentleman to give me a resume of what happened this morning, but it is not necessary, so I ask him please to speak to the amendment.
Mr Thomas
I am always grateful for your guidance, Sir David, but you intervened on me just as I had finished giving a very helpful resume of this morning’s debate.
I am delighted to have the opportunity to speak to amendment 31, which is in my name and that of my hon. Friend the Member for Oldham West and Royton. It would require the Secretary of State to assess whether each local authority has sufficient resources to provide all statutory services in its area. The explanatory notes state:
“These reforms to the local government finance system will move local authorities away from dependency on central government grant and towards greater self-sufficiency.”
Which side of the divide one sits depends on the extent to which one believes that statement.
A local authority may be able to reduce its business rates multiplier to encourage economic growth, or it may be incentivised to permit new business development, but there is no direct relationship between that and the number of people who need social care or who have been made homeless. A unitary authority at least has responsibility for both local taxation collection and service delivery, but the situation is more complex in areas with two tiers of local government, where one authority collects taxes and another provides some statutory services. I am sure we will return to the mechanism for enabling a billing authority and a presenting authority to consult as we debate the Bill. I want to concentrate on funding for statutory services and whether there is a full and proper assessment of the case for statutory provision at a local level.
We will reach 100% business rates retention in, I understand, April 2019, the revenue support grant and other grants will be phased out and additional responsibilities will be passed down to local government. The Minister tells us that the change will be fiscally neutral. What Ministers have not yet told us is what they envisage happening if local authority revenues diverge significantly from the funding needed to provide statutory services. As the hon. Member for Thirsk and Malton pointed out a number of times—or it might have been the hon. Member for coastal erosion or Waveney—the Government are conducting a fair funding review, but will set the needs baseline only at the point of transition from the current business rates system to the new 100% retention system. One might ask what happens if the overall funding in the system fails to keep pace with the cost of providing services.
It is worth paying close attention to the Government’s record on that point. The cross-party Local Government Association has calculated that local government faces a £5.8 billion funding gap by 2020. Local authorities have statutory obligations to provide several services. As we have said several times, we support the principle of 100% business rates retention, but we want an honest assessment of the implications for councils’ finances and their ability to continue to deliver the services they are obliged to provide.
I stress again that there is no inherent or causal link between a council’s ability to encourage local growth and boost its business rates revenue, and local demand for key services. The hon. Member for North Swindon said that the economic incentives in the Bill would cause a huge surge in business rates income. People who are perhaps more expert than him—there are clearly not that many—worry about whether his optimism is as justified as he might hope.
We heard before lunch that Ministers in Whitehall will retain huge power over the resources available to local authorities but are determined to face less scrutiny in Parliament. There are some 56 new powers in the Bill for the Secretary of State, the Treasury or some other bit of Whitehall to interfere with local government finances. Amendment 31 would place just one additional duty on the Secretary of State—a duty to assess whether each local authority has sufficient resources to provide all statutory services. You are a diligent Member of the House, Sir David, so you will be well aware of the crisis in adult social care, which is perhaps the most visible example of the funding pressures facing local authorities and, in terms of statutory services, the most pressing justification for amendment 31.
Just this weekend, Councillor David Coppinger, who is the cabinet member for adult services and health in the Prime Minister’s local authority, the Royal Borough of Windsor and Maidenhead, and Councillor Simon Dudley, the leader of that council, added their voices to the clamour for a solution to the adult social care crisis. Perhaps they were encouraged to speak out by my amendment 31. Councillor Dudley told The Observer:
“The burden is increasing disproportionately over time against a backdrop of more required efficiencies from local authorities. You see that with situations like Surrey”.
I remind hon. Members that Surrey wants to put up its council tax by 15% purely to pay for social care. [Hon. Members: “No it doesn’t!”] Well, it certainly did last week. Councillor Dudley went on to say that Surrey
“simply can’t achieve that, and there will be others. I have absolutely no doubts at all. Other local authorities will find themselves in the same situation as Surrey over the coming years.”
Jim McMahon (Oldham West and Royton) (Lab)
The situation as of today is that Surrey will not have a referendum on a 15% council tax increase. I understand that that is not because it assesses the need as any less but for other reasons. However, my hon. Friend’s fundamental point about social care funding is absolutely critical and needs addressing.
Mr Thomas
I am grateful to my hon. Friend for making that clear. It will be interesting to see what pressure was applied to the leader of Surrey County Council. He obviously has a close relationship with the Chancellor of the Exchequer, who is one of his Members of Parliament, and it will be interesting to see whether that had anything to do with that volte-face. My hon. Friend may not know this, but Surrey has the great advantage of having one Labour councillor. There is only one at the moment, but I am sure that will change after the elections. His name is Robert Evans. He is a former Member of the European Parliament and was leading the campaign, on behalf of those in Surrey who were only just about managing their finances, against the 15% increase in council tax. I am sure he will be feeling very proud today of the success that he has had in persuading Surrey County Council not to increase council tax and hit those in Surrey who are not so well off.
I will return to Councillor Coppinger of the Royal Borough of Windsor and Maidenhead. He believes that the current funding model for social care is sustainable for only two more years. It is worth remembering that the Prime Minister’s local social care authority is one of the few that has been able to increase spending on social care since 2010 by 5.7% in real terms.
To take another example, Liverpool has been able to increase spending by 6.7% in real terms over the same period. However, the situation there is even worse. Liverpool’s adult social care director, Samih Kalakeche, has tendered his resignation. He said that, as things stand, councils such as his will probably soon be unable to meet their statutory requirements:
“Frankly I can’t see social services surviving after two years. That’s the absolute maximum. If we don’t do something within the next six months, I believe social services will not exist by 2018-19. This isn’t scaremongering, this isn’t me asking you to feel sad for me—whoever is making decisions out there has looked at social care as the Cinderella of the service, which means more and more people are staying at home with high needs because of the removal of the prevention agenda. People are struggling, people are suffering, and we’re really only seeing the tip of the iceberg”.
The Minister may not be sympathetic to the former director of adult social care in Liverpool, but he might be more sympathetic when he considers that the Local Government Association shares similar concerns. He will probably be aware of what Councillor Izzi Seccombe said last month. She is Conservative leader of Warwickshire County Council—I am sure she is well known to the Minister. She is also chair of the LGA community wellbeing board. She said that
“the intentions and the spirit of the 2014 Care Act that aims to help people to live well and independently are in grave danger of falling apart and failing, unless new funding is announced by government for adult social care”.
The leader of the Minister’s own council has set out how grave is the funding for one key statutory service, which is all the more reason to tempt you, Sir David, to agree with the case for amendment 31, albeit you cannot do so given your position.
As far back as 2015, local authority representatives told the King’s Fund that they were struggling to meet their obligations under the Care Act 2014. Just 8% of council directors of adult social care say they are confident they can fulfil their duties under the Act in 2017-18, which is a pretty difficult situation. The LGA is not the sort to scaremonger, but it has been calling for urgent measures to plug a funding gap in social care. It says that £1.3 billion is needed, with the funding gap expected to rise to £2.6 billion by 2020 if nothing changes at all.
A new story seems to emerge every day to illustrate the crisis in social care and to underline the need for the assessment that is at the heart of amendment 31. Yesterday, we learned of the case of Iris Sibley, who was stuck in a hospital ward for six months as a suitable nursing home place could not be found. Mrs Sibley’s son has described how her mental and physical health deteriorated as she was stuck on the ward, well enough to be discharged but with nowhere suitable to go.
One wonders what it would take for Ministers to act. Perhaps amendment 31 might prompt more action, more quickly from Ministers.
Kevin Foster
The shadow Minister is his usual generous self, and I thank him for giving way. I can only say that I can guess who my hon. Friend the Member for Shipley (Philip Davies) looks to for inspiration in terms of brevity in making speeches on Fridays. The hon. Gentleman has been referring to social care. Torbay has one of the lowest levels of delayed discharge, despite its demographics. Does he agree that setting up a good quality integrated care organisation is the actual solution, rather than his amendment?
Mr Thomas
To my great surprise, I am almost in agreement with the hon. Gentleman—there has clearly been a huge improvement as a result of our collective mentoring of him—but I add one reservation to my encouragement. What he suggests makes some sense going forward, but amendment 31 would be a useful addition that would give us the opportunity to understand whether Ministers have properly grasped the social care funding situation for each local authority, whether that is joint or not joint with others.
In making the case for amendment 31, let us move into an area that is particularly topical in the light of the housing White Paper: homelessness services. Clearly, those are key statutory services that local authorities offer. Local authorities have already faced a substantial number of legal challenges on their statutory duties to support the most vulnerable people who are at risk of homelessness. In September last year, 74,630 households were in temporary accommodation, including those in bed and breakfasts. That was the 21st consecutive quarter in which the number of homeless households in temporary accommodation increased. If we factor in the 40% increase over the past four years in the cost of providing temporary accommodation, the LGA—not a body to sound the alarm unnecessarily—estimates that the funding gap for homelessness services will be £192 million by 2020.
I was not able, because I was preparing for this debate, to be in the Chamber to hear the Secretary of State speak, but just from looking briefly at the social media reaction, I did not get the sense that he announced an additional £192 million for homelessness services by 2020. That is a further reason to encourage action after the new system comes in by accepting amendment 31.
Sunderland City Council has already announced that because of the very difficult financial situation it is in, it may have to cut its entire housing support budget, which is used to pay for vital services, such as hostel beds, refuges and supported housing. Services for those who are most at risk of homelessness, including ex-offenders, people with mental health conditions and those with learning difficulties, are also being cut. When we bear in mind that the life expectancy of those sleeping rough is just 47, according to charities in Birmingham, one fears that vulnerable people will die as a direct result of the proposed cuts to housing support services in Birmingham of some £10 million over the next two years. That is an indication of the financial crisis affecting another local authority.
The new duties to be introduced under the Homelessness Reduction Bill, which the Minister prayed in aid last week, are welcomed, but many of us remain sceptical that councils are being adequately funded to fulfil them. On Second Reading, as I recollect from glancing at the debate, quite a few of the interventions raised directly with the Minister concern about the availability of funding. Were amendment 31 on the statute book, Ministers would have less chance of inadvertently not understanding or not recognising financial needs in that area.
There is great concern about the insufficiency of the £48 million of funding that the Minister announced to expand necessary homelessness provision for single men and women. The Association of Housing Advice Services, which is a non-profit organisation, estimates that London’s 32 boroughs alone will face a combined bill of £161 million to implement the new duties.
The full scale of the housing crisis is clearly beyond the scope of the amendment, but I am sure that in our advice surgeries we have all come across incidences of families struggling to find affordable accommodation near their workplaces or children’s schools. It is clear that the funding for the vital role that local authorities play in protecting the most vulnerable and in finding that most basic need, a home, is under severe pressure.
Another key statutory service that should surely be recognised by inclusion of amendment 31 in the Bill is children’s services. Looking after children is one of the most important statutory duties of councils, with a total of £11.1 billion a year spent on un-ring-fenced funding on children’s social care and education services. Again there has been an increase—60% since 2008—in the number of children requiring children protection plans. That is at a time when, from 2010 in the previous Parliament, councils lost 40% of their funding from central Government. The LGA estimated a £1.9 billion funding gap for those vital services by 2020.
For many councils, the pressure on children’s services is even more acute than that on adult social care. Three hundred and seventy-seven Sure Start centres have closed since 2010, with only eight opening in that time. That is the result, I suggest, of a spending cut on the centres of 47% in real terms. Sure Start centres have been crucial in supporting children from disadvantaged backgrounds during the vital early years before they reach school age, but again service cuts are diminishing such children’s prospects. Were amendment 31 on the statute book, Ministers might feel a little more reluctant to push such savage cuts through.
In the context of education and education services, will the Minister explain why the Government still intend to go through with the planned cut to the education services grant? It is entirely appropriate to ask that question in the context of amendment 31—let me explain why. The Education Secretary was correct in deciding not to proceed with the forced academisation programme of her predecessor. Under the proposed education-for- all Bill that would have delivered that programme, it would seem sensible for councils to lose their funding for their school improvement responsibilities—given that all schools would become academies. Forced academisation having been scrapped, however, we are left with a situation in which councils keep their school improvement responsibilities, although the funding is still being cut.
Rob Marris (Wolverhampton South West) (Lab)
May I caution my hon. Friend not to be too hard on the Minister because it is Ministers from the Department for Education who demonstrate time after time on the Floor of the House that they do not understand the difference between early years education and childcare? They constantly elide the two. It is not the Department for Communities and Local Government that makes that mistake, although it may, but the Department for Education and its ignorance is shocking.
The Chair
Order. Before the hon. Member for Harrow West responds to that intervention, may I say that I have been listening carefully? It is certainly within Erskine May, but if we continue to go through the statutory regulations in minute detail we will have an all-night sitting. Will the hon. Gentleman draw his remarks more closely to amendment 31 before we start going on about early years learning?
Mr Thomas
I am grateful for your guidance, Sir David. I will leap forward and give one specific, tangible example of the concern that motivated me to table amendment 31. In 2015, Lancashire County Council commissioned a report by PricewaterhouseCoopers to look at the level of resources it needs to provide statutory services going forward. That report makes sobering reading. It forecast that even if the council achieved everything in its saving plans, it would have an in-year deficit of £148 million in 2020-21 and a cumulative deficit of £398 million.
The report identified several areas in which planned savings were at risk of slipping and not delivering the full range of savings, meaning that the forecast budget gap would be even greater. That example of Lancashire County Council and the independent work by PricewaterhouseCoopers on whether it could continue to fund its statutory services in the future surely cuts to the very heart of the case for amendment 31.
Given the scale of spending cuts that councils have experienced and the sheer number of councils in all parts of the country and of all colours that have outlined their views, councils are under huge pressure. I gently suggest that Ministers cannot continue to press ahead without a significant change in direction and recognition that a central part of the new 100% business rates retention scheme should surely involve putting local councils on a sustainable financial footing. That is the context in which I make the case for amendment 31.
If Ministers are not convinced by the example of Lancashire County Council, let me give the example of Nottingham City Council. Councillor Jon Collins gave evidence to the Committee and made clear the scale of the cost pressures affecting the council—£11.2 million of cost pressures, wage demographics, additional inflation and charges from providers. He talked about the extra funding and pressure on his budget and raised a comparison with a nearby local authority—Rutland. He noted that the spending challenges facing his authority in Nottingham were substantially less than those facing nearby Rutland.
Clearly, amendment 31 might help to persuade Ministers to iron out such difficulties if there was a proper assessment of need. That is the spirit in which I tabled amendment 31. I hope the Minister might now be willing to be more careful with the future of local authority finances. Amendment 31 would be a sensible additional safeguard.
The Parliamentary Under-Secretary of State for Communities and Local Government (Mr Marcus Jones)
It is a pleasure to serve under your chairmanship, Sir David. I thank Opposition Members for the amendment, which provides an opportunity to set out the Government’s position on the future sustainability of local government. Before turning to the amendment, I would like to take the opportunity to clarify that medium-term fiscal policy decisions in the United Kingdom are managed, as the hon. Gentleman knows, through spending reviews. The spending review in 2015, for example, set local government expenditure limits to 2019-20. The Government will continue to assess the funding of local government after the introduction of 100% retained business rates through spending reviews.
Mr Thomas
Given the concern about how tariffs and top-ups and distribution of resources will take place between local authorities, will the Minister give a bit more clarity on the criteria for the distribution of that homelessness funding? Will it be guided by the index of multiple deprivation? How will Ministers be guided in terms of the distribution of that finance?
Mr Jones
The hon. Gentleman raises a good question. As was made clear in Committee and, if I recall correctly, on Report of the Homelessness Reduction Bill, a clear commitment has been given by the Government to work with the local government sector, particularly the LGA, on how that funding will be distributed to reflect need. As the hon. Gentleman will know, the spending review process and a number of different processes will follow from the Bill. The Government also take the position that they will work with local authorities and their representative bodies to come to conclusions, particularly on the quantum of funding required and how it is distributed.
Amendment 31 would require the Secretary of State to assess whether each local authority has sufficient resources to provide statutory services in its area. Our concern with the amendment is that it replicates what is rightfully a matter for the Government to consider through a spending review. Furthermore—the hon. Gentleman alluded to this point—the fair funding review will consider the suitable distribution of funding across local government.
I hope I have reassured hon. Members that the Government will continue to consider the level of funding for local government. I therefore ask the hon. Gentleman to withdraw the amendment.
Mr Thomas
I listened carefully to the Minister and take his point about the fair funding review. I would gently suggest to him that that is discretionary, although it is a pivotal element to this particular measure and is one of the parts that will come sometime in the long-distant future to inform us how 100% business rates devolution will work in practice. What we do not know is whether there will be a fair funding review in future if there were to be another Conservative Government. We do not know whether there would be a spending review in future —they are entirely at the discretion of the Government.
Amendment 31 would lock into law the requirement to produce that assessment. In the context of such a radical transformation, to use the Minister’s words, of local government finance, the additional duty on the Secretary of State seems like a sensible precaution to put in place. Much as I would like to accept the assurances from the Minister, I fear that I cannot, and I intend to put amendment 31 to the vote.
Question put, That the amendment be made.
Jim McMahon
I beg to move amendment 27, in schedule 1, page 35, line 32, leave out sub-paragraph (1).
This amendment would retain levy accounts.
It is a pleasure to serve under your chairmanship, Sir David. You have not had the pleasure of attending many of the debates we have had and I will refrain from repeating them, although they were fascinating in many ways. They were a source of great training and education from my hon. Friend the shadow Minister. I would hope that, on reflection, the Minister picks up some of the points about attention to detail, really understanding the brief and assessing the impact of decisions made in Parliament.
I have the honour of explaining some of the more technocratic parts of this Bill. If you are interested, Sir David, in what a levy account is, and that mysterious way of working and why it is there, this is the amendment for you. Amendment 27, which is in my name and that of my hon. Friend the shadow Minister, is in many ways technical, but it is also very important—I will explain why in my short summary of support for it. I say at the outset that it is a probing amendment because I want the Minister to pay attention to my contribution and to address the issues I raise.
The last levy account, covering 2015-16, was presented to Parliament under the requirements of the Local Government Finance Act 1988. If the Minister wants to look it up, it is dealt with in paragraph 19 of schedule 7B. The business rates retention scheme introduced on 1 April 2013 allowed local authorities to retain 50% of rates collected in their area. Cash flows in respect of that scheme are reported in two White Paper accounts: the main non-domestic rating account and the levy account. The amendment refers to the latter.
In simple terms, the levy account provides transparency of cash flows between local authorities and the Government in respect of the 2013 scheme. A reasonable response would be: “We’re moving away from the 2013 scheme, which provided 50% of rate retention, to 100% rate retention,” but, critically, the levy is basically just a mechanism for bringing money in from areas that pay a tariff, and sending it back out to areas that have depressed business rate bases—it effectively provides the accounting mechanism to allow those payments to take place. If we had 100% retention but also intended to create a safety net to support local authorities that have experienced unforeseen impacts on their business rates bases, the levy account could perform that function, regardless of how much was retained and redistributed locally, which is important if we consider that 326 billing authorities in the country may well have a claim on the levy account. Some will use it only temporarily. For instance, there is a facility for mid-year payments to be made from the levy account and, when the accounts are made up at the end of the financial year, if a local authority has been overpaid, the amount will be recouped and paid back into the levy account.
The levy account has an interesting history, some of which is contentious, if I am honest, to local government friends. Several years ago, a top-slice was taken from the revenue support grant. That meant that less money was distributed to councils in the first place, but at least it provided a safety net. For instance, last year £50 million of additional money from the RSG was sent into the levy account to support councils that had had an unforeseen depression in their tax base.
That raises an important question about where the Bill is going. We have talked about support in principle for rate retention, and for a system of tariffs and top-ups whereby areas that could not retain the money they needed locally would have sufficient money to pay for public services in their area. We have talked about what formula could be used, rural areas and urban deprivation—we have talked about a range of issues. In some ways, that is not for this amendment, which is solely about the mechanism by which safety net payments are provided.
It is fair to say that, during our debates on the Bill, no information has been provided about what mechanism will replace the levy account, which raises a question: if there is a desire for some kind of safety net to support councils that fall on difficult times, how will it be provided if the mechanism is deleted?
Jim McMahon
This has been a theme throughout the Committee’s sittings. We are having a debate in almost complete isolation, without knowing where the Government intend to go on the fair funding formula—as has been discussed, that is absolutely critical and underpins the Bill—and without understanding the sector’s views. We debate issues and make laws to which other people have to adhere, and they have real-life consequences. The local authorities that have to live with the consequences, and that know the impact on the frontline, have responded to that consultation, but we are discussing the Bill without sight of their responses. I am not sure whether that is due to a Trump-esque view—if something does not support someone’s view of the world, it is dismissed as fake polling data or fake news. Is it possible that those consultation returns are being screened for “fake” consultation responses? How long does it take to compile the information submitted by the sector and send it out in a report? Even the raw data—a copy and paste of what had been provided—rather than a summary would at least mean we could scrutinise it and undertake the questioning and answering that should take place.
Mr Thomas
I thank my hon. Friend for his support for my request for at least a summary of the responses on the levy when the Minister replies. Does my hon. Friend not share my view that it would be particularly interesting to hear what contribution the Prime Minister’s authority made, not least as it is one of the local authorities that stands to benefit, in business rate terms, when a third runway is built at Heathrow?
Jim McMahon
I absolutely agree with that point. It has been made a number of times, but the Minister has consistently failed to address it. The Minister may well have been passed the answer by one of his advisers; perhaps he can share that knowledge with us in his response—that would be very helpful.
The important thing about the levy account is that it is not just about the mechanism; it is also about how much money is put in the pot that can be used to support councils with a depressed local business rate base. Critically, that relies on a vote of Parliament. We talked about parliamentary scrutiny of the annual financial settlement that will support local government, and about the referendum limits and how that would be subject to a parliamentary vote. The Government seem determined to make sure that Parliament does not have a role in how local government is funded. This is another example of Back Benchers not having a say on how much money is provided for any kind of safety net.
I am not sure what confidence we are meant to have in the system, when we do not know what local government has said as we are debating and scrutinising the Bill, what the method of redistribution will be, or how much will be provided by way of a safety net—or even whether that mechanism will be inside or outside Government, because in the consultation, there has been a nod to a semi-independent body potentially being established. However, we are of course framing our own view and interpreting the Minister’s limited responses in these debates, rather than seeing that set down on paper.
The scale of the payments from the levy account are quite important. These are not small payments—well, sometimes they are, but the scale of the call on that budget is significant. For 2015-16, the Secretary of State approved payments of £112 million to support local council services. Imagine what £112 million could pay for—how many day care and youth centres that would fund, and how many older people could be looked after in their own home with that. If that money was not there, what would be the human cost of councils being told to sink or swim without having that safety net in place? Some clarity on that from the Minister would be greatly appreciated.
In all this, we are trying to understand what the end will look like. We are aware of what is being taken away, and of how the Secretary of State, and the Minister in this Committee, are reducing the role of Parliament and parliamentary scrutiny; we are less clear on what the end will be. All of us in politics accept that to make good legislation and good decisions, we have to make difficult decisions at times, but we should never go forward with a bad decision based on a lack of information and half-reports. Please say what mechanism will be there to support the levy account. We can then hopefully have a meaningful debate on what the safety net and mechanism will be, and can test whether it is fit for purpose.
Mr Thomas
I rise in support of amendment 27. It is worth touching on a couple of the ways in which the levy rate works. Tariff authorities may be subject to a further levy on growth in business rates income. Each such authority was set a levy rate of between 0% and 50% at the outset of the 50% business rates retention scheme in 2013-14. An authority with a 0% levy rate will keep all its growth in revenue. An authority with a positive rate—over 0%—must pay that percentage of its growth in revenue to the Government. The purpose of the levy is to ensure that authorities with very high business rates tax bases relative to their assessed needs do not benefit disproportionately from the system. As my hon. Friend so eloquently set out, the Bill will remove the Secretary of State’s power to set such a levy. Clearly, our amendment would retain that power.
I have already mentioned the example of Maidenhead’s council, the Royal Borough of Windsor and Maidenhead, which has a 50% rate—the highest rate that it can have. Presumably, this is because the council already benefits from its proximity to Heathrow, and from all the businesses that want to be close to Heathrow to export their goods to markets around the world. We commend Maidenhead on its good fortune, but surely as it benefits from a major piece of infrastructure—Britain’s most crucial hub airport—it has not had to do huge amounts to encourage that growth in business rates income, although I am sure that the council’s leader would point to one or two things it has done to encourage business. However, even Maidenhead would struggle to claim that it has not benefited from being so close to a major airport. I cannot see anyone in this room who is an opponent to a third runway at Heathrow.
Mr Thomas
I apologise to my hon. Friend. As ever, he helpfully corrects me, but the majority of Committee members support a third runway. With a third runway, Maidenhead’s council will presumably benefit from being even more attractive to businesses that want to get their goods out to export markets. It will have done nothing to put in place new conditions for economic growth; it will simply have benefited from a major strategic decision taken by this great House. The irony is that Maidenhead opposes a third runway at Heathrow.
The Chair
Order. I am listening very carefully to the hon. Gentleman, but it is not appropriate for him to continue on the point about Heathrow airport. Will he return precisely to amendment 27, which we are debating?
Mr Thomas
Thank you, Sir David. Hillingdon has a 50% levy rate at the moment. The worry is that in future, it may not have to pay quite so much back into the national pool for redistribution to other local authorities, such as North Yorkshire. We have heard regular and understandable pleas for additional finance from the hon. Member for Thirsk and Malton. One would have thought that he would want Maidenhead’s council to benefit from a third runway, so that some of its growth in business rates revenue could be redistributed to North Yorkshire.
Kevin Hollinrake
It is a pleasure to serve under your chairmanship, Sir David. The hon. Gentleman makes a very good point, but some of that revenue will presumably be redistributed at reset periods, so North Yorkshire would benefit from increased business rates there. The principle behind the measure, and the scrapping of the levy, is to increase the incentive for local authorities to grow their business rates; levies decrease that incentive. Does he welcome the fact that there will be a greater economic imperative without the levies in the system?
Mr Thomas
At the heart of the debate is the question of whether there will be quite the economic imperative that the hon. Gentleman and the hon. Member for North Swindon suggest. I hope that there will be such an imperative, but the evidence from the witnesses was not hugely encouraging on that point, as I set out when I referred to the contribution of the chair of the Federation of Small Businesses.
The hon. Member for Thirsk and Malton made a point about resets, but we do not know how often they will take place. I gently suggest to him that it might be better to think about retaining the levy arrangement, so that his authority and mine can benefit from some of that income a little more quickly. Perhaps he does not know that North Yorkshire has a 0% levy, so it is one of the authorities that does not have to contribute to London authorities such as mine, Wolverhampton or anywhere else. I am sure he is pleased to hear that.
Rob Marris
Is my hon. Friend aware that under the system that the amendment seeks to retain but that the Bill will remove, over the past four years there have been 52 winners—if I may put it that way—and 119 losers, according to the Institute for Fiscal Studies? Surprise, surprise: most of the winners are district councils, and most of the losers are larger councils, including many metropolitan borough councils and unitary authorities.
Mr Thomas
My hon. Friend is right. As he knows, I have expressed concern about the distribution between tiers of authorities and how redistribution mechanisms would work in practice without a levy, but we are none the wiser about redistribution in practice, because the Minister has not been able to tell us about it. Perhaps you, Sir David, can use your influence with him to elicit the summary that has been promised for some time in the future, we know not exactly when. We are told it will be soon-ish, but how long that is, we do not yet know. Perhaps some of the 400-plus responses to the consultation document that the Department produced last year will give us some sense of how the levy will work.
Kevin Hollinrake
The hon. Gentleman made a remark about North Yorkshire not contributing to his local authority, but that is quite right, because his local authority already has greater spending power, so why should it? He also made mention of my hon. Friend the Member for North Swindon and me; we are in concert on economic opportunity, but so is the Select Committee on Communities and Local Government, which heard from many witnesses and took much evidence. The Committee concluded that the business rates reforms
“are, nevertheless, transformative and create a real opportunity for local government; in retaining 100 per cent of business rate revenue, councils will have a direct and strong incentive to promote local growth and economic development.”
Does the hon. Gentleman not agree with the Select Committee and its Chair, his colleague the hon. Member for Sheffield South East (Mr Betts)?
Mr Thomas
I bow to no one in my admiration of the Chair of the Communities and Local Government Committee. I am glad that the hon. Member for Thirsk and Malton mentioned the Select Committee report, because it said some interesting things about the potential volatility of the business rates income and the need for an effective safety net. One wonders how that will work in practice without the levy arrangement that we are discussing. My hon. Friend the Member for Oldham West and Royton is itching to get into the debate on the safety net, and I will not stand in his way when we come to it, but I hope to catch your eye after he has spoken, Sir David, to explore the concerns of the Select Committee a little more.
To return briefly to the levy, Maidenhead pays 50% of its future business rates growth into the levy, but frankly does not have to do much to benefit from economic growth because of its location. If Maidenhead does not serve as a warning to Conservative Members, perhaps the London Borough of Hillingdon will. It, too, will benefit hugely from the construction of a third runway, and will not have to do much to promote economic growth—it will not need to, because of the strategic decision that we have taken. Hillingdon’s council has a levy rate of 50%.
The hon. Member for Thirsk and Malton has used almost all of his interventions in Committee so far to bash London authorities and demand that spending power be redistributed away from London to North Yorkshire. I do not get the sense that he cares about anybody else’s local authority—not even those of Members on his side. One would have thought that he might therefore be sympathetic to our concern that on the face of it, Hillingdon’s council will no longer have to make a significant contribution to the redistribution to others.
Kevin Hollinrake
The hon. Gentleman says that I do not care about other local authorities, yet earlier I quoted York, which has one of the lowest amounts of spending power per head. Windsor and Maidenhead has the lowest, and Trafford the third lowest. There is also Leicestershire, Staffordshire, Northampton, Kirklees, Swindon, Warrington and Medway. I speak on behalf of all these authorities that have approximately 50% of the spending power of the London councils I mentioned. Does he agree that that cannot be right?
Mr Thomas
As you can see, Sir David, the hon. Gentleman is a passionate advocate for redistribution away from London. We have tried to convince him to get underneath the detail of the scale of need in London, but clearly we have been unsuccessful today. A little progress is needed. I have made the point that I wanted to make. I look forward to the Minister’s answer, and the response of my hon. Friend the Member for Oldham West and Royton.
Mr Jones
I thank the hon. Members for Harrow West and for Oldham West and Royton for the amendment, and for the opportunity to set out why we want to remove levy payments. As the hon. Members have explained, the amendment would retain the Government’s ability to make regulations requiring a levy. As we set out when we announced our intention to move to 100% rates retention, we do not believe that imposing a levy on growth is desirable; nor is it necessary for the purposes of funding the safety net. Through rates retention, we want to encourage and incentivise authorities to work with their businesses and communities to deliver economic growth. We want them to use their powers, through the planning system and more widely, to support development and create the conditions in which business can thrive. Where they do so, we want to allow authorities the benefit of all the growth in their business rates that will follow.
Rob Marris
We heard from my hon. Friend the Member for Harrow West that Maidenhead is paying a 50% levy. That suggests that it has done well in growing its business rates—good for it. Can the Minister tell us what places such as Maidenhead have done to grow their business rates base, so that other councils, such as mine, could learn lessons from Maidenhead?
Mr Jones
Certainly. There is good practice happening in local authorities, and I would always recommend the hon. Gentleman’s local authority taking a leaf out of the book of a good Conservative authority that is doing the right thing on growth.
The levy works as a tax on growth, taking up to 50% of any benefit that authorities may have seen. This certainly acts as a disincentive and, for that reason, we have said clearly that we want to remove the Government’s ability to set a levy. Nor do we believe that that the levy is necessary as a way of funding the safety net. To come back to the comments of the hon. Member for Oldham West and Royton, there are other, fairer ways of dealing with the safety net, the most obvious being to take a top-slice at the point at which we set up the scheme and use that to fund any safety net payments needed.
If there is no need for the levy, there is no need for the levy account. Indeed, if such an account was prepared, there would be nothing to report in it. In that sense, this matter is quite simple: we will abolish the levy, and therefore there is no need for the levy account. I hope that the hon. Gentleman will withdraw his amendment.
Jim McMahon
I thank Members who have contributed to the debate. I am left slightly worried that the Minister does not understand the levy mechanism and the function of local government group accounting.
The Department is required to produce group accounts for local government that show the balance of transfers between local authorities and the Department. Whatever mechanism is in place to provide payments to and fro requires an account to be set up, because if an account does not exist, it will not be included in the group accounts and will be off the books, which makes no sense. We could call it a different name, but the function of an account is that it sits somewhere and annually feeds into the group accounts, which give the Chancellor an overview of departmental spend, and that is fundamental to how we account for public money. We could call it a levy account or even the Jones account, for all local authorities care, provided there is an account to be drawn upon.
At the moment, the top-slice is funded by revenue support grant. It was £120 million; it went down to £50 million in 2015-16. The Minister did not say this, but I take it that if the money does not come from a top-slice of revenue support grant, it will come from the £12.5 billion of additional money through 100% business rates retention.
Jim McMahon
I find that contradictory. Either the burden will be on central Government, which means there will be a requirement to find the money from elsewhere in Government, or the money will come from existing budgets within local government, which means local government will take the burden.
Jim McMahon
I accept the point, but the Minister must accept that over the past two financial years, £170 million has been taken from revenue support grant top-slice. That money will need to be provided from somewhere, because at the moment there is a deficit in the levy account of something like £14 million. That shows more money is being drawn down from the account than is being added on top through revenue support grant top-slice or business rate levies from authorities that are exceeding their profiled business rates increases.
The Government cannot have it both ways. The money is either already within local government and is just being re-profiled, or it is coming from elsewhere within Government, in which case it will be a burden on other departmental budgets. We will come on to safety net payments later; this is simply the mechanism by which we make those payments. Either way, we will need group accounts. We have to account for the transfer of funds from one departmental account to local government. I do not intend to press the amendment to a vote; it was a probing one.
Rob Marris
The Minister’s response is disappointing. The amendment would retain the levy. He urges the Committee to reject the amendment and to abolish the levy because, according to him, it is acting as a disincentive to growth. When I asked him for evidence of that at the evidence session, he could not produce any.
I am open to persuasion, but—call me old-fashioned—I like a bit of evidence. When I asked the Minister today what Maidenhead has done well to be in a position where it pays a 50% levy, he could produce no evidence. Since Monday last week, he has had his officials available to produce some evidence. However, he has produced no evidence for his assertion that a measure such as the abolition of the levy will incentivise councils more than they are incentivised already to grow the businesses in their areas, thereby increasing business rates revenue.
Therefore, I am driven to the conclusion—I hope the Minister can dissuade me of this—that his arguments are totally hollow and mere assertions backed up not with evidence, but merely with a hope that the changes promulgated by the Bill, including the abolition of the levy, will produce the intended effects. In the absence of evidence, I find that singularly unconvincing.
Jim McMahon
I agree with my hon. Friend that the evidence base was not provided in our evidence session. We have asked for written evidence, but it has not been forthcoming. It is difficult to scrutinise, given the throwaway comments that have been made.
Kevin Hollinrake
During the opportunities to challenge and ask questions of the witnesses, did any Opposition Member ask that question of them?
Jim McMahon
I thank the hon. Gentleman for that intervention. He was at the hearing when that question was asked. The answer was less than forthcoming, but there was an answer of sorts. The question from my hon. Friend Member for Wolverhampton South West is in Hansard. It is on the record, as a matter of fact. It is also a matter of fact that the answer has not been provided.
Mr Thomas
My hon. Friend’s point is about the lack of evidence for the great assertions by the hon. Members for Thirsk and Malton and for North Swindon, never mind the Minister, that economic incentives will flow afresh. One would have thought that Ministers would have had some sort of economic impact analysis to offer, but there is no Green Paper, no White Paper and no sign of any evidence that this will be the new Jerusalem we have been promised.
Jim McMahon
Sir David, you have been very patient in this debate. To be fair, we had the exchange in our evidence session and we have had a protracted debate during our last couple of sittings. In some ways, we are going around in circles. We have repeatedly asked for the evidence base. We have asked what end we are working towards and what evidence base underpins that approach. Consistently, that has not been forthcoming. It is right, therefore, that Members continue to press the matter, but we need to make progress. We need to be slightly mindful of the time we have already taken and the number of amendments that we need to get through.
Even if the ambition is for 100% business rates retention and there is a view—the evidence base does not support this—that having any kind of clawback facility would inhibit growth, actually, the legislation provides for the levy account to remain in place and to be zeroed. If at some point it required a top-up, because there was not enough money in the levy account to provide the safety net payment, the Minister, without going through the rigmarole of Bill Committee sittings and all the other things we do here, would be able to change that through negotiation and consultation with local government. It strikes me as a complete dereliction. There is not just a lack of evidence—the provision is quite reckless.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Jim McMahon
I beg to move amendment 32, in schedule 1, page 36, line 2, at end insert—
‘(1A) In sub-paragraph (1)(a), after “year,” insert “on the basis of a safety net payment threshold that is not less than 95% of the authority’s baseline funding level for the relevant year’.
This amendment, together with amendments 33 and 34, would ensure that the threshold at which an authority receives safety funds is a fall in income of not more than 5 per cent.
The Chair
With this it will be convenient to discuss the following:
Amendment 33, in schedule 1, page 36, line 7, at end insert—
‘20A (1) Paragraph 26 (calculation of safety net payments) is amended as follows.
(2) In sub-paragraph (1)(a), after “year,” insert “on the basis of a safety net payment threshold that is not less than 95% of the authority’s baseline funding level for the relevant year,’.
See explanatory statement for amendment 32.
Amendment 34, in schedule 1, page 36, line 8, leave out from start to “omit”.
See explanatory statement for amendment 33.
Jim McMahon
There is a theme running through this group of amendments, as there has been previously. We have talked about the mechanism by which we account for the money coming in being paid out to local authorities. We have talked about the principle of having the levy account in place. The amendment is about the purpose of the safety net payments to local authorities.
The principle of the safety net is fairly clear-cut: it provides an element of protection that is completely in line with the concerns raised by the Select Committee inquiry. That was not a press release or report from nowhere; it was the result of a number of thoughtful, well researched hearings, where the evidence base was scrutinised. The headline was that it is absolutely right, and to be welcomed, that we move towards 100% retention, but serious questions remained about how we redistribute within the system and about what safety net mechanism would be in place to ensure that if a local authority had a shock to its business rate base there would be sufficient funds somewhere for it to draw on.
It is fair to say that, although the Select Committee showed support for the first element, the safety net issue has not been resolved satisfactorily. We have not had details about what system might be in place. We have not been told how much will be provided in the safety net pot to ensure that it is sufficient to provide for the different types of shocks. We have not been told, for instance, by what percentage a business rate base would have to fall before a local authority was eligible for a safety net payment. All those points, which are fundamental to understanding whether a safety net is a true safety net or whether it has gaping holes in it, are critical to the debate. That is why we tabled these amendments.
Mr Thomas
My hon. Friend will remember the intervention from the hon. Member for Thirsk and Malton, in which he prayed in aid the Communities and Local Government Committee report in defence of his case. Has my hon. Friend noted at paragraph 56 of that report the concern of Sharon Gregory, who said that Cambridgeshire and Northamptonshire county councils
“have some very big businesses that represent a large proportion of the business rates base, and there are significant risks around those businesses leaving or failing”?
Surely that underlines his concern on the safety net.
Jim McMahon
I absolutely agree with that point and on the thrust of the challenge to come. I hope that in response the Minister will address that issue and those raised by the Select Committee and the LGA, and in the lesser-spotted consultation response, which hopefully we will get a flavour of later.
When the safety net system was set up, the statement of intent—this was in 2012—was clear in its aims. It said:
“The Rates Retention Scheme will include a safety net to protect local authorities from significant negative shocks to their income by guaranteeing that no authority will see its income from business rates fall beyond a set percentage of its spending baseline.”
That essentially means that central Government accept that there is an inherent cost in providing public services at a local level across the range of 700 or so council services, and local authorities and communities should not be put at risk to such a degree. Let us say that a local supermarket decides to close. In many areas that could be a £1 million a year business rate base taken away from a town. That would have a significant impact on local public services, and the local authorities could call on the safety net.
There was always a facility to say, “A business might leave today, but tomorrow you might attract further investment, and that could make up the difference.” There is a facility in the system to recoup any overpayments above the baseline. The safety net is there for the right reasons and the principles are sound. They are supported by the LGA and, I assume, by the Select Committee. They are supported by individual local authorities, which call on that fund because it absolutely makes sense. Their youth centres, day care centres or support for older people in the community should not be vulnerable to Tesco or Sainsbury’s deciding to up and leave town. That would instinctively be the wrong way to run a fair and balanced community. As I have said, the payments that have been made from that account are not insignificant. In 2015-16, the Secretary of State paid £112 million to local authorities. I will not repeat the point about the types of services that can be provided for that kind of money, but we can imagine that, across a range of 326 local authorities, that would have a significant impact on their business rates.
If I think of my own local authority of Oldham, I consider it to be a double cruelty that the Government are closing central Government departments in my town, such as the HMRC offices and jobcentre offices. The county court is closing soon, the magistrates court has already closed, and the number of police stations has reduced to a third of the number before. The local authority has closed day care centres and youth centres and a range of public buildings just to try to balance the books. Is it not cruel that because of that its business rate base will be affected? Not only has it reduced the number of public services because its revenue support grant has been taken away, but it is potentially having the safety net snatched away that would have protected it from the loss of business rates in those areas.
It is beyond negligent; it is almost vindictive now. The Government are kicking local authorities when they are down and some local authorities are absolutely down on their knees. We have heard about the issues in North Yorkshire. It is right that Members are here to represent their constituents.
Mr Thomas
On that point, does my hon. Friend want to try to stimulate the interest of the hon. Member for Thirsk and Malton in Stockton-on-Tees Borough Council and its concerns about the safety net? He was on the Select Committee when it gave evidence. It said:
“The safety net is set too low with local authorities being required to accommodate very significant reductions in income before triggering it. Based on the current system, Stockton would need to lose approximately £5 million in one year before it is activated”.
Does that not underline my hon. Friend’s concern?
Jim McMahon
It does underline the concern. In the last financial year £112 million was drawn down from the scheme. That was in the context of local authorities still receiving revenue support grant on top of their council tax and business rate income. As we move towards the brave new world—there is a fine line between bravery and stupidity, but let us call it brave for now—whereby councils will be funded solely by council tax and the business rate base that they can generate, councils are even more vulnerable to shocks in the system where business leave and they are forced to deal with the consequences of that loss of income. Without the safety net system in place—
Mr Jones
The whole thrust of the hon. Gentleman’s argument is that the Government are going to get rid of safety net payments. Where has he got that idea from? Does he not think that the business rate retention pilots that are taking place in a number of areas are a good thing for the Government to work out that they have struck a balance to ensure that, when we roll out the full system, it is as right as it can be?
Jim McMahon
I take the Minister’s point entirely. It would be easier if we had a scheme that we could review and scrutinise and ask questions about, based on the scheme that was presented. In the absence of that, we are relying on the Minister sharing every now and again the fount of wisdom from the notes that are passed to him by his advisers, which is one way of doing government, I suppose. Another way of doing government is to consult, to speak to the sector and to understand what is coming back. We know a consultation has been conducted and we look forward to the results of that, but a consultation was also undertaken when the scheme was introduced in 2012. At that time, the Government reviewed the type of safety net that would be needed for it to be fair and balanced. At the time, the percentages that were considered were 7.5% to 10%. In the end, the Government erred on the side of caution and went for the 7.5% level. That was the result of that consultation. It was the result of an assessment of what type of safety net would be robust and provide certainty. So we have been there; we have done that. We have been through that process.
Mr Thomas
It is interesting that the Minister should stand up and pray in his defence the pilot authorities and the way in which they are implementing the safety net scheme, if indeed they are doing so. We could have used that information to inform our contributions, but sadly the Minister is not intending to publish any details of how those pilot authority schemes are going to work until after this Committee has concluded its deliberations.
Jim McMahon
I am going to be charitable. Perhaps I am too soft for my own good. I feel a slight degree of charity towards the Minister given the fairly rough ride that he has had—a rough ride of his own making. I will not prolong that. Labour Members question whether the knowledge is there, even, for the Minister to understand the Bill, whether the diligence has been there to assess the impact that that has had, and whether the capacity is there to bring forward the type of information that would lead to a meaningful debate. I would be far more generous than that and say that perhaps today is just not the Minister’s day. However, we will be here again and we can review the information when it comes. I hope that we will have a better session, the Minister will feel far more empowered, better informed and on the front foot, and we as an Opposition will feel that we are able to hold the Government to account, which is why we are here. We are not here to have circular discussions that take hours and hours of parliamentary time. We are here to get to the root of what the Bill is intended to do and the impact of the Bill. By doing that, we make good laws—we know the impact and we know, collectively, that we are making the right decision, not a bad decision in the absence of that information.
We have heard that there will be some kind of safety net, although we do not know what the criteria or threshold will be. We are discussing the pilots that are taking place, but a number of pilot authorities have not been told what the safety net will be. We are expected, outside of those pilot authorities, to make an assessment—a leap of faith almost—that those pilot authorities will deliver the evidence base required, when they themselves do not know what the new settlement will be, and they are waiting for the Secretary of State to confirm that to them.
A lot of people in this place and in local government are waiting for some clarity. I am pleased that, during the exchanges, we have at least agreed a principle that a safety net is required. However, the real test is not words. The real test is the application of the legislation going through.
I hope that the Minister will answer this. The threshold is 7.5% below the base. Members will know from our amendments that we are suggesting a more favourable rate of 5%. The reason is that, as revenue support grant is being taken away, local authorities are more vulnerable to business rates and it feels as if that is the right balance to strike. I ask for a quick response from the Minister: what will the percentage be?
Mr Jones
It is a pleasure to follow the hon. Gentleman, who is giving me something of an education, or thinks he is giving me something of an education, on this issue, such a placid fellow that he is. I thank him for tabling this amendment and for giving me the opportunity to set out the Government’s approach to the safety net. He seemed to ignore most of the information that had come forward and was almost saying that the Government were not going to put in place a safety net. I agree with him that a safety net is an important element of the system and will certainly become more so—again, agreeing with his analysis—once we are relying on business rates for a larger proportion of councils’ income. Where I must disagree with him is that these amendments are the best way of ensuring that we have the most appropriate safety net in place for the new 100% system. These amendments would hardwire the current arrangements into the system by requiring the safety net to be measured against baseline funding levels. However, that is only one way in which we could construct the safety net under the legislation as drafted. There are others—using different baselines, for example, or providing for different percentage losses for different types of property. Until we have finished our work with the local government sector and put in place all the scheme’s design elements, it is too early to say what form the safety net should take.
Mr Thomas
That is the first bit of clarity about how the pilots are working—I was going to ask what the safety net was in context. I simply praise the Minister for giving just a tiny fraction of information about how the pilots are going to work. It would be nice to have the rest of the information before the end of the Committee.
Mr Jones
Such are his high standards, indeed.
Getting back to the real world, I add that amendment 34, by reversing the Bill’s removal of sub-paragraphs 25(2) and (5) of schedule 7B to the Local Government Finance Act 1988, would make it impossible to deliver changes for which local government has asked. The changes we want to make through the Bill mean that, in future, safety net payments need not be made at the end of a financial year. Instead, as with other payments under the scheme, they can be made at the beginning of the year, based on the estimates, and then reconciled at the end of the year once outturn figures are available.
Authorities asked us to make that change as soon as a legislative opportunity arose. The changes made by the Bill have no material effect on what authorities will receive in safety net payments; they simply change the way in which we account for them. I hope that resolves some of the concern of the hon. Member for Oldham West and Royton.
In conclusion, the amendments, if allowed to stand, would remove the flexibility that we and the local government sector need to design a safety net regime that is fit for the needs of 100% business rate retention. They would reverse a change that local government welcomes and for which it has long called. I hope that, with that explanation, the hon. Gentleman withdraws amendment 32 and does not move amendments 33 and 34.
Rob Marris
I know it is sometimes difficult for Chairs and I wanted to hear what the Minister said to know whether I wanted to speak.
The very helpful Library brief says on page 19:
“It is not yet clear what form, if any, the safety net would take under 100% retention of business rates.”
That was published almost three weeks ago on 19 January. It is singularly disappointing when the Minister comes before a Public Bill Committee of the House of Commons and says, “Oh, I cannot give you any information because the Government want the flexibility.” I understand why Governments want flexibility. When my party was in office, it always wanted flexibility. I kept saying, “I do not think you should have that flexibility in lots of cases.” To use the vernacular, the Minister and his Government ought to show a little more ankle. Otherwise, they are asking us to buy a pig in a poke, which I think is unacceptable in a parliamentary democracy.
We ought to have the information. What is the big rush? This is so that the Government can get the Bill through, with all its flexibility. The amendments would lessen that flexibility, which is why they are good amendments. The Minister has nothing to counterpose that with, except to say, “We’re talking about 97%, but we want the flexibility.” I am sure he wants the flexibility, but that kind of flexibility is not good for councils—not only Wolverhampton City Council, but councils around England—because of the uncertainty.
Rob Marris
In that case, the Minister should not have introduced the Bill at this stage or until he has got his ducks lined up.
Jim McMahon
You have been extremely patient with us, Sir David. We have got to a position where there is agreement, in principle, on a safety net.
We have a sense of what the pilots would bring in terms of 95% baseline protection. However, I challenge the idea of pointing to any pilot and giving the impression it could be rolled out as a national scheme. We know that any pilot can be made to work with the right energy and finance behind it, but having a safety net of that order without new money in place would be very difficult. I would like to see the figures on that, to test what it would mean in practice. When the last review took place and we were looking at a 7.5% threshold, it was very difficult to make a national scheme stand up in a way that encouraged growth and allowed areas to keep an element of what they were developing through their efforts, and that brought money back into a central pot.
We still unfortunately do not have sight of what the finances mean overall, but we have a flavour of what the pilots mean. We have been told that the measure will not be a new burden, but will be accommodated for within local government spend. We know that the only real room is in either the grants given to local authorities or the business rates and the £12.5 billion that has been referred to.
As we have heard, there is a great call on what feels like an ever diminishing resource. We talked about the £7.4 billion revenue support grant that will need to be accommodated. We talked about the £65 million rural services delivery grant, the £3 billion public health grant, the £105 million improved better care fund, the £177 million independent living fund and the £3.4 billion early years grant that will need to be accommodated—not to mention the £3.2 billion of business rates relief payments currently within the system. We still have not had clarity.
Excluding the relief payments, just those grant payments, which could well be deleted as part of full business rates retention, are £14.7 billion. Only £12.5 billion is going back into the pot. If there is going to be a safety net, where will the money come from? A bit more information on that would be extremely useful for us to give proper scrutiny and hold the Government to account. These were probing amendments. We made a bit of progress, although not as much as we would have liked. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Jim McMahon
I beg to move amendment 47, in schedule 1, page 37, line 5, leave out sub-paragraph (3).
This amendment would remove the proposed power of the Secretary of State to force an authority to join a pool. It would retain the current position where every authority covered by a designation must agree to it; and that the designation can be revoked only in limited circumstances, including a request from an authority covered by the designation.
The Chair
With this it will be convenient to discuss amendment 28, in schedule 1, page 37, line 7, at end insert
“only if—
(a) an order to that effect has been made in the form of a statutory instrument and has been approved by a resolution of each House of Parliament, and
(b) the relevant Select Committee has been consulted.”
This amendment would ensure that any revocation of a designated authority must first be approved in the form of a statutory instrument and consulted upon with the relevant Select Committee.
Jim McMahon
We are moving naturally through the principles of a levy account system being maintained, a safety net being provided and, as the Minister referred to, the business rate pooling arrangements that are being piloted in a number of areas.
The principle of pooling is sound. It is one that local government has asked for and one I personally support. We recognise that the development of a business base is not necessarily predicated on local authority boundaries. We have heard the example of Heathrow and the impact there. The same is true in Greater Manchester, where we see the economic area and the businesses developing in that city region acting separately from the local authority boundaries because they are acting as one economic unit. I fully understand the principle behind that and why we would want, on that basis, to have a single budget or business rate pooling across that area.
Where pooling works—this is true of the pilot—it is because, first, there is an understanding of the financial relationship. Sir David, I do not know whether you have taken the opportunity, as I have during one of my nights of insomnia, to go on the DCLG website. People can type in the details of their local authority into the website and assess whether business rate pooling would leave them in a better or worse net position. The idea of that is to give agency to local authorities to determine for themselves what is right for them before they even enter into negotiations with central Government. That is an empowering way of doing that.
Local authorities then speak to areas within a natural pool. Where they have a logical economic centre and want to come together, they can assess what that new settlement would be, and whether they would be in a better or worse position as a result. They will get together; discuss with their neighbouring authorities what works in their locality; agree which local authority will be the lead local authority; and, on that basis, make a bid to the Government to be a pilot authority. In the spirit of localism, that is the right way of doing it. We are allowing a grassroots organisation to take place, where people come together, have the information to hand to make an informed decision, and come to the Government and say, “We think this is the best deal for our community.”
That is inspiring, but unfortunately, the Bill is an absolute shift in the culture and balance of that relationship. Rather than local authorities being able to come together and co-produce, and rather than it being a relationship of equals in which local authorities choose other authorities to join and then present to the Government, the Secretary of State can mandate local authorities to come together, potentially against their wishes, and can mandate who the lead authority will be. The direction of travel is very unsettling.
In any relationship of equals at a local level, coming together to create a business rate pool is usually only one element of a complex relationship of working together in the interests of a locality. I worry that, by imposing one lead authority, potentially against the wishes of other neighbouring authorities, the Government will fundamentally change the balance of trust and the relationship within that locality. That could impact not just the business rate pool and support for it, but other joint work that will be critical for the successful delivery of public services and economic growth in our areas. When the Minister responds, it would be helpful to get a flavour of where he, on behalf of the Secretary of the State, believes that the power could be implemented in future.
Jim McMahon
It is. I worry about scale. The 18 business rate pools reported to have come forward so far have a collective rate base of £159 million above their baseline, so they are net beneficiaries. We can see why they would want to adopt that position and make that application. However, some areas could be disadvantaged as a result of being in a business rate pooling arrangement. Those areas may not want to be part of a business rate pooling arrangement that is forced on them.
We have heard about the 56 additional powers that the Secretary of State is introducing for himself. We are meant to be about localism, and about giving power back to communities and to their directly elected local authorities. That is not the flavour of the Bill—the opposite runs right through the core of every element in it. The Bill is about an empowered Secretary of State, and a complete lack of parliamentary scrutiny, oversight, challenge and a democratic vote.
The Bill is also not even about Government doing deals with local authorities in smoke-filled rooms, which has been the nature of devolution discussions so far, when areas are picked off against each other. That at least required local authorities to consent. Even though it lacked transparency, and even though it lacked a national framework so people knew what they were bidding for at a local level, it at least required that they were consenting parties to that relationship. That will not be the case. Unless the amendments are accepted, the Secretary of State will have absolute power to impose his will on local authorities whether they like it or not, and whether or not it is in their interests and right for their communities, and to hell with consequences for the local relationships that could be affected.
The amendment is fundamental to what we believe devolution and localism to be. I intend to press amendment 47 to a vote, because we feel so strongly about giving our councils agency and independence and a genuine relationship of equals with the Government. If the Government do not accept the amendment, it will be a message not only to the Opposition but to every local authority in the country. The Government will be saying, “What you want is not as important. It’s not for you to determine what’s right for your local area. If we want to do it and feel like doing it, we can impose our will whether you like it or not.” That is a very slippery slope.
Mr Jones
I thank the hon. Gentleman for tabling these amendments on the creation and revocation of a business rate pool.
The intention of the amendments seems twofold: to retain the requirement that each relevant authority must agree before the Secretary of State can designate a pool, and to require that a decision to revoke a pool should be approved by Parliament and subject to consultation with the relevant Select Committee. I will deal with each of those in turn.
As a principle, the Government believe that local authorities can achieve greater impact when working together, and that pools of authorities can benefit from working over wider areas to achieve economic growth. That is why we want to continue pooling arrangements under the new business rates retention system. Business rate pools enable the local authorities within them to be treated as a single entity for the purposes of the system, allowing them to co-ordinate their work and take a coherent set of decisions to help secure economic growth over a wider area. Paragraphs 26 and 27 of schedule 1 provide that the discretion to create, vary and revoke pools lies with the Secretary of State, with a new requirement for a statutory consultation with relevant local authorities on the creation and variation of a pool.
We are introducing those changes because, in the Government’s view, pooling has not worked under the current arrangements as well as it could. The current voluntary approach to pools can incentivise the wrong behaviours, leading to examples where pools across functional economic areas have excluded a single authority due to them being perceived as high risk. That undermines the objectives of pooling and potentially reduces the ability of pooling to secure co-operation and coherent decision making across a sensible economic area.
Amendment 47 would remove the provision enabling the Secretary of State to designate a pool at his discretion. That would, in effect, preserve the current arrangements whereby a pool can be designated only if every authority in the pool area has agreed to it. The risk of a single authority being excluded from sensible pooling arrangements would remain. Removing the requirement that all authorities must agree to being designated as a pool will enable the Secretary of State to ensure that pools are created across functional economic areas that maximise opportunities for growth.
We recognise the ongoing need to work with local authorities on sensible pooling arrangements and have introduced a statutory duty to consult with areas on their pooling arrangements. As I said at the outset, the ultimate decision will rest with the Secretary of State, helping to ensure that all authorities in a functional economic area will engage fully in those discussions.
Rob Marris
The Minister is saying in terms that the Government are going to introduce a centralising measure because sensible pooling has not always worked to date. I understand that concept. He knows what I am going to say. Could he produce some evidence that pooling arrangements hitherto have not worked properly in some areas? I know he is not saying that that is the case everywhere, but can he give us one example to elucidate why the Government think these centralising powers are necessary in what purports to be a localising Bill?
Mr Jones
I will in a moment.
Throughout our deliberations on the Bill, it is apparent that local authorities have asked for fairness within the system. The challenge is whether that fairness is apparent if a local authority is excluded from a pooling arrangement because surrounding local authorities do not want to include it. Clause 3, which the Committee will consider later, provides an additional tool to strengthen the role of pools to help secure economic growth, with rewards being shared across the pool.
Amendment 28 aims to ensure that Parliament has a role in revoking a business rates pool—paragraph 26 of schedule 1 enables the Secretary of State to revoke the designation of a business rates pool. Revoking a business rates pool is a technical matter, working with the authorities involved to consider how each one operates independently. The Government are concerned that requiring every decision about revocation of the business rates pool be taken through each House and made subject to consultation with the Communities and Local Government Committee would take up valuable parliamentary time. The current process for revoking a business rate pool does not require parliamentary approval or consultation with the Select Committee. The Government do not believe that change is needed.
David Mackintosh (Northampton South) (Con)
When I was a council leader, we changed our pooling arrangements. I can testify—and I am sure the Minister will agree—that that is very disruptive for local authorities, particularly when they are trying to plan. It is also disruptive for businesses.
Mr Jones
My hon. Friend makes the exact point I am trying to make—local authorities require certainty. The measures we have put in place over the last year or two on having a longer-term view of council budgets has helped. Within this system, we want multi-year arrangements for local authorities so they know where they are heading. In having more settled business rate pools that make sense in terms of functioning economic areas, we will seek to deliver that certainty and security for local authorities. By definition of what the hon. Member for Oldham West and Royton has said, local authorities need more security and certainty in the new system. Local authorities take on a greater risk challenge if funding is distributed by central Government to them, rather basing local government on locally collected taxes.
Overall, the changes to pooling arrangements will ensure effective business rate pools, with other tools to help drive economic growth. I therefore ask the hon. Member for Oldham West and Royton to withdraw his amendments and commend paragraphs 25 to 31 of schedule 1.
Jim McMahon
As I said earlier, we feel strongly about amendment 47. The Bill would fundamentally change the relationship between local government and the Secretary of State, which we do not believe is in the interests of democracy or localism.
I have the Minister’s response. There is some merit in having a system in place that provides a degree of certainty, but that could be provided, for instance, by a longer notice period—local authorities wishing to leave a pool could give two years’ notice rather than 12 months’ notice if required—which would at least give the degree of planning certainty required. It could well be tied to economic deals done through negotiations with the Government. For instance, if an economic deal lasted five or 10 years, there would be some sense in saying that, during that period, it should be tied to the business rate pool.
However, that is not on offer. What is on offer is: “Take or leave it. The Secretary of State knows best.” Areas will be forced to join the pool. The example given is of a local authority that wants to join a pool but is told that it cannot for whatever reason. I suspect that the number of such examples is very low. It is more likely that, when a local authority does not want to join for whatever reason is right for its community, the Secretary of State will force it to do so to make a wider pool balance out without having a requirement for central Government funds. I suspect that that is more what the measure is about. I am concerned that the balance of power is changing between national level and local level. Further powers are being given to the Secretary of State, and further mandating can be required, but there is less parliamentary scrutiny.
There is also an unhealthy rebalancing of relationships in some local areas. We talk about the Greater Manchester business rate pool as being one to look at, as a pilot—we are doing so very carefully. However, it would allow the Cheshire authorities to obtain 50% of growth before they returned to the pool. As I have said before, there might be an argument for that, given that it sits outside the city deal that has been agreed as part of the devolution deal, but it beggars belief that two authorities within Greater Manchester—Trafford and Stockport—have negotiated as part of that business rate pooling an agreement to keep a third of growth to themselves before it goes into the pool.
We believe that at a national level, we should agree a way of redistributing that it is the same for everybody, but instead there are deals within deals. Those who write the cheques always have the upper hand, and not those who are potentially the receivers. I do not believe that that is in the interests of the communities we are here to serve. I certainly do not believe that it is in the interests of an equal, balanced relationship at a local level. Although amendment 47 is not quite in the spirit of previous amendments we have voted on, I ask the Minister to support amendment 47 to maintain the balance of a healthy relationship.
Question put, That the amendment be made.
Mr Jones
We have spoken at length on proposed amendments to schedule 1. I do not want to take too much of the Committee’s time, but I would like to say a few words about specific parts of the schedule.
Schedule 1 amends section 7B of the Local Government Finance Act 1998. Those amendments are necessary to move from the current 50% business rates retention scheme to a system where local government retains 100% of business rates raised locally. I will take each section in turn.
Paragraphs 2 to 6 of schedule 1 make provision for central Government accounting for non-domestic rating income. Those paragraphs amend the Local Government Finance Act 1988 to update and simplify the central Government accounting requirements for the move to 100% business rates retention.
Rob Marris
I want to ask the Minister about one issue. Under paragraph 33(3) of schedule 1, the words
“calculations following local government finance report”
are substituted by
“determination of payments for a relevant year”.
I hope the Minister can reassure me, because that change rings a certain alarm bell. It removes the word “calculations”, which implies to me the use of evidence—a formula and so on—and substitutes the word “determination”, which I infer could be a somewhat opaque and non-transparent decision on financing, thereby moving us further away from an evidence-based, transparent system to a more flexible and less transparent system. I wonder whether the Minister could elucidate—if not today, at some later point.
Mr Jones
Thank you, Sir David, for allowing me to respond to the hon. Gentleman. As I mentioned in my quite lengthy speech, local government itself does not believe that the measures being introduced here will reduce transparency. That is certainly not our intention in making the change. I hope the hon. Gentleman is reassured by that.
Question put and agreed to.
Schedule 1 accordingly agreed to.
Clause 2
Loss payments
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 5—Appeals by public bodies—
‘Where public bodies appeal against the ratings value, no external agency may represent or make a financial gain from the appeal.’
This new clause would prevent money being taken away from the public purse through rating appeals.
New clause 6—Backdating of Appeals—
‘Any premises with a rateable value of £500,000 or more will be limited to 6 months backdating following any revaluation arising from an appeal.’
This would limit the duration of backdating in the event of revaluation following an appeal for premises with a value of £500,000 or more to six months.
Jim McMahon
These two probing new clauses are designed to test the appetite of the Government for a look at how the business rate appeals system operates in practice and who it is there to support.
I tabled new clause 5 because I am deeply concerned about the fact that at the moment more than 100 NHS trusts are appealing their business rate liability to their local authority. I know from my own local authority that that means many millions of pounds being put in reserves pending the appeal, just in case it is successful and the trust is entitled to backdate it.
We all accept that when a public sector business rate payer pays business rates, it is effectively money moving around the public sector and transferring from one public sector agency to another. There is no loss or gain to the public sector; it is just churn through the system. What is different is that when an NHS trust appeals its business rate base where an external agent is employed, the external agent will be charging a percentage fee for the successful appeal, and that could add up to many, many millions of pounds. It is very difficult to understand exactly how much it is, but I know from my own local authority that the rating appeal could be about £5 million —that is just for one local authority. There are 100 NHS trusts with appeals in across the country. Even a 5% fee on that could lead to many tens of millions of pounds being taken away from the public sector as a fee to the private agent representing the NHS trust. That is a net loss to the taxpayer.
New clause 5 tests the appetite of the Government for a new approach. We have framed it so as to restrict private agents from acting on behalf of public bodies—I think that has merit and is worthy of discussion—but it could well be that a public arbitration system could deal with the appeal more quickly and remove the uncertainty from the system, and that that would also remove the requirement for a private sector agent to act on behalf of the public sector body. To be clear, this is not about bashing the private sector or the agents who act on behalf of public sector bodies; it is just a pragmatic reflection. If a percentage fee is being taken out of the system, that is a net loss to public services in this country. The Government should step up and provide some level of certainty.
New clause 6 is intended to probe the appetite of the Government for a differential appeal system, depending on the rateable value of the property involved. We know from many local small businesses that the business rate bill is a significant part of their outgoings. Business rates generally come soon after rent and staffing costs. They are significant. If a small business has been assessed at the wrong value and it is successful at appeal, the value of that appeal backdated could be the difference between whether they survive or go to the wall, because their finances are so restricted.
We ought to debate and discuss whether we should differentiate between the small, local business trying to make its way in the world and the big square-footage ratepayers, such as Tesco and other supermarkets, B&Q and the big sheds, where rateable values can easily be more than £500,000 a year—in many areas £1 million a year. When they lodge a national appeal, that can send a shockwave through the whole business rates system across the country.
New clause 6 is a probing amendment to test the Government’s appetite for reducing the backdating period to six months if the rateable value is over £500,000 a year. Local authorities would not have to hold as much in reserves as they do at the moment. It would reduce the risk to council budgets and of course reduce, the amount of money the Government have to put in their levy pot to cover any potential loss of income. More important, it would also—I hope—provide more of a level playing field, where small and medium-sized independent businesses are given a fighting chance, and we do not have one system that disproportionately benefits large supermarkets and warehouses.
That is the essence of the two new clauses. New clause 5 tests the appetite for a different way of assessing public sector appeals. New clause 6 tests the appetite for a system that protects local authorities from large ratepayers, potentially reducing backdating to six months. I recognise that we are pushed for time but I welcome the Minister’s hopefully constructive approach to the consideration of those options.
Peter Aldous (Waveney) (Con)
I was not intending to speak on these measures, but as an ex-chartered surveyor I will say a few words. I commend the hon. Gentleman for the spirit in which he presented the new clauses.
Rating is very complicated for a chartered surveyor to carry out. In many ways, it is abstract from the real world. I concede that there appears to be two types of surveyor who get involved in ratings appeals: there are people who have enormous expertise in these fields, but there are also, I dare say, ambulance chasers chasing opportunities and abusing the good will of businesses. I am uncomfortable with new clause 5 because it would bar public sector organisations from getting the highest quality expertise from those expert surveyors. The way forward would probably be to look to the Royal Institution of Chartered Surveyors to set down a scale fee that fairly reflects the work the surveyors do on a job.
Mr Jones
I am grateful that the new clauses were tabled, as it gives us an opportunity to consider the appeals system and the implications for local government. There is widespread agreement—this comes back to what my hon. Friend the Member for Waveney was just saying—that the current business rates appeals system needs reform. Too many appeals are held up for too long, and that means costs, delays and uncertainty for ratepayers and local authorities. That is why we have brought forward proposals to reform the system of appeals for ratepayers and local government from 1 April 2017.
From 1 April, the new “Check, challenge, appeal” system will reform the appeals process for ratepayers. The new three-stage process will be easier to navigate and will put the emphasis on early engagement and resolution by all parties. Under the new system, businesses will be more confident that their valuations are correct and that they are paying the right amount of business rates. That in turn will support local government by giving authorities greater certainty over their rates income.
We will ensure that local authorities have a role in the “Check, challenge, appeal” process by giving them the statutory right to provide evidence to the valuation officer. We also recognise, however, that we need to go further in respect of the financial implications of appeals for local government. That is why clause 2 creates a power to make loss payments to local authorities. That will allow us to move towards a system under which the risk of appeals is managed more centrally and shared across the sector. We will then be able to reimburse authorities when they suffer appeal losses due to revaluation errors. That reform has been requested by local government.
Nevertheless, we still have to strike a balance between the interests of local government and the need to maintain fairness for ratepayers. I do not believe the new clauses would correctly strike that balance. New clause 5 would prevent public bodies from using agents or representatives in their appeals. Public bodies are subject to the same rules on business rates as any other ratepayers, and I think it is right that, just as with any other ratepayer, they should have access to professional and expert advice. I think that was the point that my hon. Friend the Member for Waveney was making as a chartered surveyor with significant experience. However, I would expect any public body to be using only qualified and professional representatives, such as members of the Royal Institution of Chartered Surveyors or the Institute of Revenues Rating and Valuation. Members of those bodies must comply with a code of practice for their consultancy and ensure that proper standards are met.
New clause 6 would stop appeals having a retrospective effect of more than six months for large properties. That would clearly be unfair. Ratepayers whose appeals have taken longer to resolve—perhaps for reasons entirely outside of their control—would be penalised by the new clause. I assure the hon. Member for Oldham West and Royton that we do act to limit backdating in the system, where it is fair to do so. In 2016, we acted to stop new appeals being backdated to before 1 April 2015. From 1 April 2017, ratepayers will no longer be able to lodge appeals on the current rating list in most circumstances.
I assure hon. Members that, although we do not believe the new clauses are acceptable, we are taking steps to tackle problems with business rate appeals for both ratepayers and local authorities. I therefore ask the hon. Gentleman not to press the new clauses.
Rob Marris
Looking again at the helpful Library brief, it appears that the Government are dragging their feet again. As the hon. Member for Thirsk and Malton no doubt remembers, the Communities and Local Government Committee reported on this issue in June 2016 and found—I have to say I found this figure staggering—that 33% of the rateable value in Sheffield, 40% in the City of London and 34% in Westminster is under appeal. That is a huge amount. For 33% of the rateable value of the city of Sheffield, which I think is the fourth largest city in England, to be under appeal is extraordinary.
On 19 December last year, the Minister in the House of Lords said that the Government are looking at this again, but, as the Library brief pointed out on 19 January, although the Government are looking at the appeal system, it is not yet known how that it going to be done. Here we are seven months after a Select Committee report that highlighted that this is a big problem, and the Government are still faffing around and cannot make up their mind about what they are going to do and what they are going to propose.
I hope that the Minister will stand up and say that I have misunderstood and say, “There is clarity. We know where we are going and what regulations we are going to propose, so we are going to do what lots of Ministers do and publish draft statutory instruments before the conclusion of Committee stage so Members can see where we are going.” But I fear, going by the Minister’s past performance in this Committee, that he is not going to stand up and say that, and that we are going to have continued procrastination and a lack of clarity from the Government about where they want to go in the light of having their much-vaunted flexibility, which I think does a disservice to the Committee.
Jim McMahon
I thank the Minister for his response. I hope we can have a mature, cross-party conversation about the fact that there is a need to modernise the system to take out some of the quirks and unfairnesses within it. If we can do that in a mature way, I am sure there is a will to work in the interests of local government.
On the matter of appeals by public bodies, this is not about taking away chartered surveyors’ power to do the job they are employed to do. It is more about the fact that a number of the appeals are not about the individual circumstances of a particular premise in a particular location, but are more about the principle of whether certain premises should be on the ratings list or attract mandatory relief in the first place. For instance, we talk about having a level playing field for everybody, but schools that are not run by a local authority are automatically entitled to 80% mandatory rate relief, while local authority schools are not. A number of the appeals are going through on that basis.
It is the same with healthcare providers. Healthcare providers outside Government attract 80% mandatory relief, but Government departments, such as hospitals, pay full rates. The appeals that are going through at the moment for NHS trusts are not about individual local circumstances, but about the principle of whether those providers should attract the 80% relief. I should confirm the figure—80 NHS trusts are currently appealing through a private agent. It would make more sense for the Government, rather than allowing that churn through the system, to decide whether or not that is in line with non-Government uses in, for example, health and education; this relates to an amendment that we will discuss later. If they did that, they would take out a significant number of public buildings that are currently clogging up the appeals system, which is already under a lot of pressure. We would save public money and keep money in the public sector. That seems to me, in a time of austerity, to be an efficient use of public service support and public money. Hopefully, we can have a proper conversation about that. In that sense, new clause 5 is a productive and constructive new clause.
I accept that new clause 6, on the backdating of appeals and the rateable value, would create a two-tier system. We would have a system whereby those with rateable values of less than £500,000 would have a more generous backdating provision than those with rateable values above £500,000. Nevertheless, we need to look at what that means in terms of the reserves that local authorities have to put in place.
The number of premises with a rateable value above £500,000 that are currently going through the process equates to £2.7 billion worth of appeals. In respect of appeals, a local authority has to take account of the fact that appeals may be successful, and because those businesses are such large ratepayers the authority cannot take the risk that it could with, say, a corner shop, where it could take up that slack within existing budgets. If a supermarket that pays £1 million a year could have its business rate bill halved through appeal, local authorities must accommodate that money within their reserves, to ensure that there is not an impact on public services.
As I say, £2.7 billion is caught up in that system for properties with a rateable value above £500,000, and that money should be spent on frontline services, and not held in ring-fenced reserve accounts by local authorities. Again, if there is a mature, constructive conversation to be had about how we could release some of that money back to the frontline in a different way, we have a responsibility, on behalf of the people who use public services, to have that conversation.
We have had a good debate and on that basis I will be happy not to press the two new clauses.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Clause 3
Designation of areas by pools of authorities
Jim McMahon
I beg to move amendment 3, in clause 3, page 3, leave out lines 31 to 45 and insert—
“(a) designate one or more areas (a ‘designated area’) in the pool area (see sub-paragraph (2));
(b) calculate, for each year for which the designation has effect, the non-domestic rating income for the designated area (see sub-paragraph (3));
(c) calculate a proportion of the non-domestic rating income for the designated area;
(d) provide for the non-domestic rating income for the designated area, or that proportion of it, to be disregarded for the purposes of calculations under any of the following provisions—”
This amendment, together with amendments 4 to 18 would remove the role of the Secretary of State in enabling two or more authorities that have been designated as a “pool” under paragraph 45 of Schedule 7B, to designate an area, or areas.
The Chair
With this, it will be convenient to discuss the following:
Amendment 4, in clause 3, page 4, line 16, leave out “The regulations may” and insert
“The pool of authorities may”.
See explanatory statement for amendment 3.
Amendment 5, in clause 3, page 4, line 18, leave out from “adjusted” to end of line 21.
See explanatory statement for amendment 3.
Amendment 6, in clause 3, page 4, line 22, leave out “The regulations” and insert “The pool of authorities”.
See explanatory statement for amendment 3.
Amendment 7, in clause 3, page 4, line 24, leave out “regulations” and insert “provisions”.
See explanatory statement for amendment 3.
Amendment 8, in clause 3, page 4, line 26, leave out “The regulations” and insert “The pool of authorities”.
See explanatory statement for amendment 3.
Amendment 9, in clause 3, page 4, line 26, leave out “make provision”.
See explanatory statement for amendment 3.
Amendment 10, in clause 3, page 4, leave out lines 27 to 30.
See explanatory statement for amendment 3.
Amendment 11, in clause 3, page 4, line 31, at beginning insert “determine”.
See explanatory statement for amendment 3.
Amendment 12, in clause 3, page 4, line 35, leave out “about” and insert “determine”.
See explanatory statement for amendment 3.
Amendment 13, in clause 3, page 4, leave out line 37.
See explanatory statement for amendment 3.
Amendment 14, clause 3, page 4, line 42, leave out lines 41 to 45 and insert—
“(e) revoke any designation made by it and set any conditions that must be met before a designation is revoked;”
See explanatory statement for amendment 3.
Amendment 15, in clause 3, page 4, leave out lines 46 to 50.
See explanatory statement for amendment 3.
Amendment 16, in clause 3, page 5, line 1, leave out lines 1 to 3.
See explanatory statement for amendment 3.
Amendment 17, in clause 3, page 5, line 17, leave out “under the regulations”.
See explanatory statement for amendment 3.
Amendment 18, in clause 3, page 5, leave out lines 31 to 40.
See explanatory statement for amendment 3.
Jim McMahon
I will be quite brief on these amendments, because we have discussed these matters. Even for a local government geek such as myself, it has got to the point where it is a slight endurance trial.
However, we need to reiterate points about the balance of power and control, the relationship between central and local government, and the direction of travel from this Government. I will use this opportunity not to express my own views but to reflect back the views that were shared in our evidence sessions and that were expressed through evidence submitted later.
The London Councils group of local authorities has expressed concerned about the level of control the Secretary of State will have to revoke designations by removing the requirement that all local authorities in the pool agree to the revocation. The chief executive of the District Councils’ Network gave evidence. In its written submission, it said that it believes, as we do, that business rates pools should be determined locally and not by central Government.
This is not just about the Opposition making a point and taking a stand. We are doing that, of course, and we have had that conversation. We have had a vote on that basis. This is really to appeal to the Minister to listen to the concerns of London Councils, the LGA, the District Councils’ Network and many, many local authorities across the country that have expressed concern about the centralising nature of that designation provision and asked that it be reviewed.
Mr Jones
I am grateful for the opportunity to discuss the Government’s proposals to allow for local growth zones. The Government support the introduction of clause 3, which would insert into part 9 of schedule 7B to the Local Government Finance Act 1988 a power for the Secretary of State to allow local authorities within pools to designate an area or areas. Within these areas, local authorities will be able to retain a proportion of business rates income outside the rates retention system for a specified number of years.
The effect of local growth zones will be similar to that of enterprise zones, providing local areas with an additional tool that can be used to help to drive local growth. The difference here is that regulations made under new paragraph 38A, which will be inserted into the 1988 Act by clause 3, gives the responsibility to local authorities to set up and define the local growth zone, within the parameters agreed with the Secretary of State. The Government consider that pools of authorities are best placed to use the power by taking a shared view across a larger functional economic area about the best way to achieve growth for the benefit of all the authorities in the pool.
Jim McMahon
We have not settled the balance of the relationship between central Government and local authorities that may or may not want to form a business rate pooling arrangement. The Minister’s response was not satisfactory from our point of view. It is not satisfactory for local government either. I do not intend to press the amendment to a Division, but the Secretary of State will have to convince local government that devolution, economic growth, the reform of public services and business rate pooling are genuinely about the community coming together and determining for itself what its future will be. At the moment, the jury is out. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 3 ordered to stand part of the Bill.
Clause 4
Determination of principles for determining whether council tax excessive
Mr Thomas
I beg to move amendment 20, in clause 4, page 6, line 41, at end insert—
“(c) must include conclusions from the assessment of needs that has been carried out in respect of the local authority area; and
(d) must include details of efficiency savings made by the local authority.”
This amendment would require the report published by the Secretary of State on the set of principles to include conclusions from an assessment of needs carried out for the local authority area and details of efficiency savings undertaken by the local authority.
It is a great pleasure to move this probing amendment. It is inspired in part by the example of Surrey County Council and, perhaps surprisingly, some words of wisdom from the previous Prime Minister, who famously described local government as
“officially the most efficient part of the public sector.”
That is one of the few things he said as leader of the Conservative party that I am tempted to agree with. The Conservative party has a tendency—Ministers have been doing it again today in the run-up to the housing White Paper—to blame all the ills of the world on local councils.
Amendment 20 is merely an attempt to make clear, not only to Ministers but to those who watch and read our proceedings, that there is a more complex picture about the scale of the challenges facing local government that should be taken into account, whereby those residents make an assessment as to whether the council tax ask they are expected to pay—if, indeed, it goes above the threshold—is excessive or not.
Surely there is a case for recognition of some assessment of need. Surely there is also for recognition of the scale of efficiency savings that councils have sought down the years—they ought to be taken into account. My council, Harrow, has led the way in seeking to become a commercial council. It has worked with organisations such as IBM on new social care apps that have dramatically improved the quality of the marketplace, to use the language of Conservative Members, for private social care providers at a local level. They are commercialising the app that they have developed and generating significant revenues for the local authority. The product they have offered is innovative, increases efficiency and leads to a better quality of service. Sadly, we do not hear enough examples like that. It is in that spirit that I move amendment 20. Much has been made of the £5.8 billion funding gap that the LGA says will be present by 2020. Again, that is a further demonstration of the need for and demand on local authority services. Surely that should be taken into account.
If there ever was a decision by a county council that was well-timed, it is surely the decision of Surrey County Council today not to go ahead with its 15% referendum. The council leader apparently reported to his fellow councillors that he has had lengthy conversations with the Government and has received various reassurances—he would not say what those were, funnily enough. As a result, he has recommended to his council that the referendum should not go ahead, which it has accepted. I suspect that the tireless campaigning of my friend Robert Evans, the one Labour councillor in Surrey, has intimidated the Conservative leader into backing down. If that is not the case, one has to praise the political skill of the leader of Surrey County Council—if the cheque is in the post to him, as it sounds as though it is—for his act of brinkmanship.
What Conservative councils will take from Surrey’s experience, if indeed the cheque does eventually arrive, is that all they need to do is threaten big council tax increases and the Government will bend to their will. If at some future point my friend Robert Evans were to become the leader of Surrey County Council—I suspect that prospect is not too far off—and propose a 15% council tax referendum, it would be seized on by the Minister, and various nonsense about the profligacy of Labour councils would be repeated ad infinitum on the Floor of the House and in Committees left, right and centre.
Surrey County Council has exposed the weakness of Ministers’ arguments around the threshold. Nevertheless, it will perhaps be interesting to hear the Minister take this opportunity to acknowledge the scale of the funding gap that the LGA has identified and praise local authorities such as Harrow Council for the work it has done to offer more efficient services.
Rob Marris
I wish my hon. Friend good luck with this amendment. Essentially, amendment 20 asks the Government to collate evidence and act upon it. Given what we have heard in the Committee so far, I will be suitably and happily astounded if the Government accept the amendment and the concept that evidence is important.
Mr Jones
I thank the hon. Member for Harrow West for his explanation of the intention and effect of amendment 20, which would require a referendum principles report made by the Secretary of State to include conclusions from an assessment of needs as well as details of efficiency savings for local authority areas.
I appreciate the intention behind the amendment, but I do not agree that it would be appropriate to include the suggested information in a principles report. Council tax referendum principles exist for a very specific purpose: to protect council tax payers by defining an excessive increase, so that they can make a final direct decision. It is open to authorities to set large increases and put them to a local referendum if they feel they are necessary to support local services.
Jim McMahon
I wonder whether, in the spirit of an equal, balanced relationship, the Secretary of State would be inclined to grant a national referendum on the projected 25% council tax increase.
Mr Jones
As I have said many times in this Committee, in real terms council tax is currently 9% lower than it was in 2010. I do not intend to take any lectures from the hon. Gentleman, bearing in mind that council tax doubled between 1997 and 2010 when his party were in power. I am not too sure that I will be blown off course by that advice.
The referendum principles report is not intended to provide an analysis of local authority need, its success in achieving efficiencies or an account of any other matter. It is a technical instrument to set the parameters by which a referendum might be triggered. As Members will be aware, the Bill creates a new requirement to consult representatives of local government before principles are set. That will allow the sector to make representations about their circumstances and needs before the Secretary of State makes his or her final decisions, whatever the future holds. That will be more useful to local authorities than prescribing the content of a referendum principles report.
Mr Thomas
I made clear that this was a probing amendment. The Minister could have given some sense to local government that he understood the scale of funding difficulties it faces by 2020. He chose not to. He could have praised councils such as Harrow that have led the way in terms of a more efficient offer, but he chose not to. I do not intend to make a thing of it. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr Thomas
I beg to move amendment 21, in clause 4, page 6, line 45, at end insert—
“(1C) A report under this section must be approved by a resolution of the House of Commons.”
This amendment would require any report on the principles relating to the tax excessive threshold, and therefore principles around circumstances in which a referendum must be held, to be approved by the House of Commons.
The Chair
With this it will be convenient to discuss amendment 22, in clause 4, page 7, line 45, at end insert—
“(3ZA) A report made under this section in relation to any authority must be approved by a resolution of the House of Commons.”
This amendment would require the House of Commons to approve any report relating to alternative notional amounts for tax excessive thresholds made by the Secretary of State in relation to any authority.
Mr Thomas
Let me be brief, because we have had quite a trip around the issue of scrutiny of local government finance. Amendments 21 and 22 simply provide the House of Commons with the opportunity to scrutinise local authority finance. The Minister, as we know, does not want the scrutiny of a local government finance settlement, so perhaps he and Government Members might be willing to support the idea that new council tax excessive thresholds should have to be approved by the House of Commons. That is the spirit of the amendments.
Mr Jones
The amendments would require council tax referendum principles and alternative notional amount reports made by the Secretary of State to be approved by the House of Commons. I appreciate the hon. Gentleman’s wish to retain the current practice of requiring the reports to be laid for approval. However, I believe that it is not necessary in a new era where we seek to offer certainty and where there will no longer be a local government finance settlement handing out resources following the approval of the House.
Mr Thomas
I did not suggest that I might withdraw the amendment, although I sought to be brief, as we have already had a trip around the issues. The Minister’s further reassurance that he will consult local authorities is welcome, but he should have to consult the House of Commons as well. In that spirit, I intend to ask the Committee to divide on the amendment.
Question put, That the amendment be made.
Mr Jones
The clause aligns the process for setting council tax referendum principles with reforms to the wider local government finance system under schedule 1 to the Bill. It will enable the Government to offer local authorities far more certainty about their future financial position by setting referendum principles for multiple years.
Chapter 4ZA of the Local Government Finance Act 1992 allows the Secretary of State to determine a set of principles for each financial year, which local authorities in England must use to determine whether their council tax increase is excessive. Under existing legislation, the principles must be set out in a report and approved by the House of Commons by the time that it approves the annual local government finance report. Where no principles are set, the Secretary of State must lay a report before the House explaining why.
The Government defining an “excessive increase” has been part of the council tax system for decades. As I said to the hon. Member for Oldham West and Royton, council tax in real terms has been 9% lower than it was in 2010-11; it will still be lower in real terms in 2019-20, but only if Government continue to work with local authorities and maintain a referendum threshold, as we promised in our 2015 manifesto.
Local authorities must determine each year whether they have set an excessive increase as soon as reasonably practical after the principles have been approved. Where an authority’s functions or structure have changed, the Secretary of State may set an alternative notional amount to enable a like-for-like comparison to be made with the council tax set in the previous financial year. That must also be set out in a report and be approved by the House of Commons.
The clause amends sections 52ZB to 52ZE of the 1992 Act. The provisions introduced by clause 4(2) mean that when setting council tax for the first year to which the principles report applies, local authorities must determine whether it is excessive as soon as reasonably practicable after the report is made. In other years, they must make the determination as soon as reasonably practicable after they have made their council tax calculations.
Subsection (3) changes the processes of determining council tax referendum principles and alternative notional amounts. In particular, it allows the Secretary of State to set the principles over multiple years, providing councils, police and crime commissioners, fire authorities and the Greater London Authority with welcome clarity about their council tax income.
The Secretary of State is required by subsection (6) to finalise the principles before the beginning of the first financial year to which they apply. The provisions introduced by subsection (8) mean that he must also send a copy of that report to each billing and major precepting authority, and publish it in an appropriate format, to bring it to the attention of other authorities that may be affected. Separate reports may be made for different categories of authority for the same year.
Mr Thomas
Has the Minister been privy to any conversations within the Department for Communities and Local Government, or across Whitehall more generally, about Surrey County Council’s proposed 15% referendum, and what the Government might have said to the leader of Surrey County Council to persuade him not to go ahead with that referendum?
Mr Jones
That probably takes me slightly wider than the scope of the Bill. I think that the hon. Gentleman is presupposing the discussions that happened and the outcome of the situation. It is more likely that Mr Robert Evans had more of an effect, as he said was the case; perhaps he will be the next leader of Surrey County Council, although that is about as likely as the right hon. Member for Islington North (Jeremy Corbyn) becoming the next Prime Minister, which many of us believe is not very likely.
Moving on, clause 4(8) also allows referendum principles to be amended by making a further report to replace a previous one. That must be done prior to the start of the first financial year to which the new principles apply. Finally, subsection (13) means that authorities subject to a proposed alternative notional amount must be consulted and receive a copy of the final report, which must be made prior to the start of the financial year in which it will have effect.
In conclusion, this measure will enable Government to provide local authorities with greater certainty about their future council tax income, and complements other provisions in this Bill.
Question put and agreed to.
Clause 4 accordingly ordered to stand part of the Bill.
Clause 5
Power to specify indexation rate for non-domestic rating multipliers
Question proposed, That the clause stand part of the Bill.
Mr Thomas
In passing, I thank the Minister for his praise for the campaigning efforts of Robert Evans, and his support for Mr Evans’s re-election campaign.
I do not intend to encourage the Committee to object to the clause standing part of the Bill, but I want to mention some of the unintended consequences of the former Chancellor’s suggestion that in 2021, the retail prices index be replaced by the consumer prices index when it comes to uprating business rates. As we have said in earlier debates, that will potentially cost local councils some £370 million in 2020-21 alone. Ministers have given no indication of the cost in future years, but those outside Whitehall and this place who know their local authority finances have calculated that over 10 years, as a result of the decision, there could be a £3.3 billion windfall for the business community and a £3.3 billion loss to the people of England who want good services to be provided.
Kevin Hollinrake
I refer the Committee to my entry in the Register of Members’ Financial Interests. Do not the people of England rely on the success of businesses to pay taxes and to fund local and central Government? Anything that can reduce the burden on business should be welcomed.
Mr Thomas
I am all for reducing the burden on business, but one does like to think that the benefit will be used for investment in future economic growth, not used to pay the rest of the tax bill or squirrelled away through some tax avoidance scheme. My purpose in speaking in the clause 5 stand part debate is to encourage the hon. Gentleman, among others, to consider the perhaps unintended consequence of the former Chancellor’s decision, which is the impact it would have on services for North Yorkshire residents and—since I appreciate that he cares a little for those in other areas—on public services throughout England.
As I said, £3.3 billion could be lost over 10 years. The hon. Members for Thirsk and Malton, and for Northampton South, will have paid much attention to the evidence that Guy Ware, director of finance at London Councils, gave to the Communities and Local Government Committee. He suggested that over 20 years, the cumulative loss to local government finance—in other words, the cumulative gain to businesses that pay business rates—would be £78 billion. The Library suggests a degree of caution about using such figures so far in advance, but the point is that while businesses will benefit, which is clearly a good thing, local authority finances will take a further hit. The effect of that on the provision of public services in Harrow, North Yorkshire, Oldham or Nuneaton is surely a concern that this great House should reflect on a little further.
I asked the Local Government Association what local authority services £370 million might buy. The association suggested that I look at the universal infant free schools meals grant to local authorities, which is some £334 million. Councils are planning to spend some £550 million on Sure Start children’s centres, and they are spending £376 million on mental health support for over-65s. That gives some indication of the public services funding that may be lost as a result of what I suspect are the unintended, un-thought-through consequences of the former Chancellor’s decision. I say gently that it makes even more of a case for some sort of regular opportunity to scrutinise local government finance on the Floor of the House, so that measures that may be good for one part of the country do not have serious unintended consequences for other parts. It is in that spirit that I took this opportunity to raise concerns about clause 5.
Rob Marris
I echo my hon. Friend’s concerns. It is simplistic to suggest that business rates are merely a burden on business; they are also a benefit. They help. I say that as someone who has been a partner in a business that had 1,000 people in it. Not having potholes, and having street lighting, less litter and free wi-fi in town centres all help businesses, but they are paid for by local authorities, who will have less money.
Mr Jones
The Government have committed to changing the indexation measure used in the calculation of business rates—currently the retail prices index—to bring it into line with the main measure of inflation, which is currently the consumer prices index. The clause therefore amends schedule 7 to the Local Government Finance Act 1988 and introduces a new power for the Treasury to alter through regulations the inflation measure used in the calculation of non-domestic rating multipliers. The measure was part of the £6.7 billion rates reduction package announced in the 2016 Budget. It represents a rate cut every year from 2020. It will be worth £370 million in 2020-21 alone, and the benefit will grow significantly thereafter. Those savings would help businesses to grow and support local economies.
To pick up on the point made by the hon. Member for Wolverhampton South West, the clause provides the flexibility to set the appropriate measure of inflation through regulations. However, any changes would be subject to House of Commons approval; I hope that gives him some reassurance. We are working with local authorities on the reforms to business rates to allow the sector to keep 100% of their rates. We will also consider how future changes to the indexation rate impact on the reforms, and we will respond to ensure that the financial sustainability of local government is not adversely affected.
Mr Jones
As I said to the Committee, we are certainly considering how future changes to the indexation rate will impact on the reforms that we are making. We have been clear that we will respond to ensure that the financial sustainability of local government is not adversely affected as a result of the change to the indexation rate on the business rate multiplier. I hope that the clause stands part of the Bill.
Question put and agreed to.
Clause 5 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Jackie Doyle-Price.)
Pension Schemes Bill [ Lords ] (First sitting)
(7 years, 2 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Chair
Before we begin line-by-line consideration, I have a few preliminary announcements. First, please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Today, we will first consider the programme motion on the amendment paper; we will then consider a motion to enable the reporting of written evidence for publication. In view of the time available, I hope we can take these matters formally, without debate. I call the Minister to move the programme motion standing in his name.
Ordered,
That—
(1) the Committee shall (in addition to its first meeting at 9.25am on Tuesday 7 February meet—
(a) at 2.00pm on Tuesday 7 February;
(b) at 11.30am and 2.00pm on Thursday 9 February;
(c) at 9.25am and 2.00pm on Tuesday 21 February;
(2) the proceedings shall be taken in the following order: Clauses 1 to 32; Schedule 1; Clauses 33 to 38; Schedule 2; Clause 39; Schedule 3; Clauses 40 to 46; new Clauses; new Schedules; remaining proceedings on the Bill;
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00pm on Tuesday 21 February.—(Richard Harrington.)
Resolved,
That, subject to the decision of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Richard Harrington.)
The Chair
We now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and on the website, showing how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or a similar issue. A Member who has put their name to the leading amendment in the group is called first; other Members are then free to catch my eye to speak on all or any of the amendments within that group. A Member may speak more than once in a single debate.
At the end of a debate on a group of amendments I shall call the Member who moved the leading amendment once again. Before they sit down, they will need to indicate whether they wish to withdraw the amendment or to seek a decision. If any Member wishes to press any other amendments or a new clause in a group to a vote, they need to let me know. I shall work on the assumption that the Minister wishes the Committee to reach a decision on all Government amendments if they are tabled.
Please note that decisions on amendments do not take place in the order they are debated, but in the order they appear on the amendment paper. In other words, debate occurs according to the selection and grouping lists; decisions are taken when we come to the clause that the amendment affects. I shall use my discretion to decide whether to allow a separate stand part debate on individual clauses and schedules following the debates on the relevant amendments. I hope that explanation is helpful.
Clause 1
Master Trust schemes: definition
Alex Cunningham (Stockton North) (Lab)
I beg to move amendment 22, in clause 1, page 1, line 9, leave out paragraphs (b) and (c).
To include in the scope of schemes included under the definition of Master Trust single employer trusts and those with connected employers.
The Chair
With this it will be convenient to discuss the following:
Amendment 32, in clause 1, page 1, line 12, at end insert—
‘(1A) The definition of a Master Trust Scheme shall include such schemes that provide benefits to members who are self-employed in addition to those who are employed by others.”
This amendment will ensure that master trust schemes that also allow self-employed members to join are within cover by the regulation introduced by this Bill.
Amendment 23, in clause 1, page 1, line 13, leave out subsection (2).
To clarify the protection provided under this Bill for non-money purchase benefits.
Alex Cunningham
It is a pleasure to serve under your chairmanship, Mr Rosindell, and I am sure it will continue to be so throughout this Committee stage.
Before I get into detail of Labour’s first tabled amendments, 22 and 23, it might be helpful if I set out how we plan to approach Committee stage. As I said on Second Reading, we broadly support what the Bill seeks to do, but we have serious concerns about what the Bill does not seek to do, the issues in the pensions landscape that it fails to address, and the significant sections of policy detail pushed into secondary legislation.
I note that my new clause 5, which is designed to introduce pension credit for women born in the 1950s and whose retirement age has been accelerated, has not been selected. I say only that it is lamentable that the Bill is not broader. I am also concerned about the dependency on secondary legislation because the Government are not yet in a position to share the detail of their intentions. I know that not everything can be in the Bill, but the Constitution Committee wrote to the Government expressing strong concern about the lack of information provided in primary legislation. I hope that the Government will take the Select Committee’s caution seriously and that we can ensure that in this case the primary legislation properly sets out the Government’s intentions.
Amendment 22 raises the question why single-employer occupational schemes are excluded from the scope of the Bill and why connected employers are therefore effectively treated as a separate entity. As it stands, the Bill’s provisions regulate neither single nor connected employer arrangements. We appreciate that a line must be drawn somewhere in attempting to develop a suitable regulatory framework in the face of a wide array of occupational pension arrangements. The amendment offers the Government the opportunity to clarify the bounds of their new regulatory environment and to justify their decision to draw the boundaries where they lie in the Bill. We want the parameters of the regulatory framework to be clear.
We accept that the master trust regime is focused on schemes with particular risks, but does there not have to be consistency across the piece? The definition of a master trust covers an array of different arrangements and there is nothing simple about it—getting my head around it has taken me some time. It can cover schemes set up by unregulated businesses as well as those set up by regulated businesses, such as insurance companies or investment managers. It can also cover what are described as “white label” master trusts, which are set up by a pension providers, with commercial or non-commercial partners being allowed to brand their sections of the trust. Others may have partnering arrangements with large employers whereby each employer gets its own section of the master trust but does not make any profit from it. Schemes that are included can be industrywide, can include two or more unassociated companies, and can be in the university, charitable and religious sectors. Given the broad range of different situations, on what basis do the Government believe that it is appropriate to draw the line to exclude single unconnected employer arrangements?
The probing amendment would also delete from the definition of a master trust the exclusion of those schemes that are to be used only by connected employers. In the debate in the other place, I believe the Minister clarified that when a single group employer takes on a non-associated one and it is intended that all will participate in the scheme, the scheme will then fall under the regime. Will the Government confirm that that remains the case?
It would also be good to have further clarification of what the position would be when a joint venture has run its course and the scheme reverts to being used only by connected employers. In that instance, how do the Government justify the juxtaposition of a connected group of employers being outside the scope of the Bill whereas another connected group of similar size but with just one small associated employer would presumably be inside it? The distinguishing line is very thin.
Do the Government envisage circumstances in which clause 41 would be used to bring within the scope of the Bill a single employer occupational pension scheme? Clearly, the Bill provides that power to the Secretary of State. In fact, the power set out in the Bill is very broad, so I look forward to the Minister’s response on those issues.
I note that in amendment 32, the hon. Member for Amber Valley has sought to address the lack of access for self-employed people. I picked up that theme in new clause 4, which addresses both that and other groups currently excluded from master trust scheme membership. I look forward to the hon. Gentleman’s speech.
Amendment 23 is a probing amendment to elicit clarification regarding what happens to non-money purchase benefits in master trusts. Clause 1(1)(a), taken together with other clauses, means that the Bill applies only to money purchase benefits provided through a master trust and excludes non-money purchase benefits. As I am sure the Minister is aware, the exclusion of non-money purchase benefits would mean that members’ benefits provided by those schemes, including retirement products, are excluded from key protections in the Bill. That does not seem fair or sensible, given the Bill’s intention to provide stronger protection for scheme members.
Master trusts currently provide a range of services both to employers under auto-enrolment and to individuals exercising pension freedoms. Those can include annuities, guaranteed drawdown and investment products, which include some form of guaranteed rate of return. One example could be when annuity payments are paid to the member while the annuity supporting those payments may be held as an asset of the scheme, rather than in the name of the member. Pension freedoms are beginning to transform the market radically for guaranteed income products, but pension savers will still have an appetite for some form of guaranteed product. The Bill will not apply to non-money purchase benefits, so it is unclear what happens to those benefits and, importantly, the assets backing them when a master trust fails.
In the other place, my noble Friend Baroness Drake raised an example of a trust that allows members to add in other savings and assets such as ISAs and property used for funding retirement. Everybody I meet acknowledges Baroness Drake to be a pensions expert in every sense. She believes that of the approximately 100 master trusts, only 59 are being used for auto-enrolment, with others having developed out of the pension freedom reforms.
Regulation should anticipate that master trusts will expand further into the decumulation market of retirement products. With that in mind, the exclusion of non-money purchase benefits from the primary legislation raises a number of questions. It is not clear what happens to the treatment of all non-money purchase benefits and the assets backing them in the event of a wind-up or other triggering event occurring. Will those members’ benefits be protected against funding the costs of a triggering event? How and where will they be transferred on exit?
In the other place, the Minister suggested that there is already extensive regulation to ensure that members’ non-money purchase benefits are protected. He called further regulation in this regard “unnecessary and disproportionate”. It seems odd that in this instance the Minister seems intent on minimising duplication, yet the Government continue to require duplication of regulation in some cases around the separate legal entity. The boundary line of the legislation appears a little murkier.
We note that in Government amendment 20, Ministers have acknowledged the lack of clarity around money purchase benefits and non-money purchase benefits raised by my noble Friend Baroness Drake, but we are a little disappointed that the amendment does not seek to provide greater protection to non-money purchase benefits under mixed schemes. Instead, it merely clarifies that the Bill protects only money purchase benefits within a mixed scheme. That is deeply disappointing for us for the reasons I have just outlined. I therefore request that the Government confirm absolutely that members of master trusts providing them with non-money purchase benefits face no additional risk as a result of that gap.
Will all retirement products with an element of guarantee be covered by the Pension Protection Fund regime? Master trusts are not regulated by the Financial Conduct Authority, so where does the saver look for protection? Secondly, the continuity strategy required under clause 13 in the event of a wind-up will have to set out how the interests of members of a scheme in receipt of money purchase benefits are to be protected in a triggering event. Currently, it will not have to set out how members in receipt of non-money purchase benefits will be protected. Such a requirement would at least clarify what range of member benefits were in the master trust.
Will the master trust be required to set out how members with non-money purchase benefits will also be protected if a triggering event occurs? I am sure that the Minister will recognise these very genuine concerns and I look forward to his response.
Nigel Mills (Amber Valley) (Con)
It is a pleasure to serve under your chairmanship, Mr Rosindell, and to follow the shadow Minister. My remarks will be in a similar spirit to his, trying to probe the Government on how exactly they see master trusts being used, how they see the pensions landscape and how the two will mesh.
Amendment 32, which stands in my name, relates to how we deal with self-employed people who may end up in a master trust. That starts out as a technical question—as the Minister may know, I like to ask technical questions of legislation to see whether he has read it all and can trace it all through, because these things can be chased around. Under the definition in the Bill, a master trust must be an occupational pension scheme, which takes us back to the Pension Schemes Act 1993. An occupational pension scheme has to provide benefits in respect of earners with a qualifying service in an employment—such schemes do not provide benefits to earners who are self-employed in that situation. Therefore, on a high-level reading, if a scheme is providing benefits for people who are self-employed, technically it should not be an occupational pension scheme.
I assume that the answer to that particularly technical point will be that if in a master trust there are 5 million people who are employed and there are 10,000 who are self-employed, it does not get suddenly blasted out of being an occupational pension scheme and out of the regulations and drop back into the personal pension scheme regulations. I assume that the National Employment Savings Trust, which I think already markets itself to the self-employed, will not somehow have a change in its regulatory position by serving a few self-employed people.
It is not hard to foresee that the landscape might change, and it is pretty clear that we would quite like the landscape to change quite dramatically. We have a big problem with the lack of pension provision among people who are self-employed and, sadly, that problem is going the wrong way. Auto-enrolment has enrolled millions more employed people than ever before in a pension, but over the course of this century the number of people who are self-employed and actively in a pension scheme has decreased from about 1.2 million in 2002-03 to 380,000—and that is as the number of people who are self-employed has risen to more than 3.5 million. That is going completely the wrong way. Far more people are self-employed, yet far fewer of them are saving in a pension. That is not a healthy situation for them and their prospects in retirement, and it is not a particularly healthy position for us, considering how people will be able to look after themselves when they reach that age.
It is pretty clear that we need to find solutions that encourage more self-employed people to save into a pension and to take the various tax advantages that that provides. Hopefully, when the Government conduct their auto-enrolment review later in the year, one issue they will look at is whether we can extend, tweak or amend auto-enrolment to get to those many millions of people who are self-employed. Let us be honest: probably quite a large number of them would like to be employed or think they are employed—or perhaps we think they are legally, in substance, employed, yet their non-employer is somehow tweaking the rules to treat them as self-employed. How do we get those people to realise that pension savings is important to them? How do we get them into a simple scheme that is easy to administer?
It looks like auto-enrolment master trusts are the obvious vehicle that could cope with the scale of several million more people, who are probably generally on relatively low earnings, joining a pension scheme. They have the infrastructure and it is not hard to see how self-employed people could self-manage such schemes via online portals. It looks like, as a matter of policy, we would quite like to encourage all the big master trusts out there to start taking people who are self-employed. I suspect we would like to find a way.
Ian Blackford (Ross, Skye and Lochaber) (SNP)
The hon. Gentleman is making some important points that I fully subscribe to. As much as I welcome the Bill and its overall thrust, is this not perhaps a little bit of a missed opportunity? We could have made sure that the review of auto-enrolment came alongside it, which would have informed our present debate on how we deal with self-employed people, and indeed those under the earnings threshold. We want people to be investing in pensions for the long term.
Nigel Mills
I am grateful to the hon. Gentleman, and I can see the attraction of that. Given that we have effectively auto-enrolled millions of people into master trusts, I am not sure I would support a delay in the regulations coming into effect. We need the powers in the Bill available to ensure that the people we have strongly encouraged into the schemes have all the protections we think they ought to have. I suspect that the review of auto-enrolment will be long, and in some ways it will probably be difficult to work out the right balance to strike in increasing the level of savings without encouraging people to leave the schemes completely. I am not sure that waiting for a resolution of that issue would be a sensible idea.
May I raise another technical point about when a master trust scheme ends up with a large proportion of self-employed members, up to 10%, 20% or whatever percentage of the scheme? Will it have to change its regulatory position and move from being an occupational pension scheme to a personal pension scheme or some other sort? I accept that there is a lot of regulation of such schemes, which may not be the end of the world, but perhaps the Minister will set out how the Government are tackling the big self-employed pension gap, where many fewer people save much smaller amounts and end up with much smaller pension pots as they approach retirement. As our employment markets change, that will be a significant challenge for us as we try to make pensions effective for everyone in the country. I look forward to the Minister’s remarks.
The Parliamentary Under-Secretary of State for Pensions (Richard Harrington)
It is a pleasure to serve under your chairmanship, Mr Rosindell. I thank you for the clarification of the rules concerning hot beverages, with which I am happy to comply.
The attitude that the Opposition, the Scottish National party and all of us have taken towards the Bill is to discuss it widely among ourselves and to agree as much as we can, which is positive. Our disagreements are honourable, and no one is playing politics or at opposition for the sake of it. I wanted to make that clear, Mr Rosindell, because I have served on Bill Committees, as I am sure you have, where that has not been the case.
The Opposition amendments and those of my hon. Friend the Member for Amber Valley were tabled in the correct spirit. We had considered all the points in advance of the Bill being introduced and therefore in advance of the House of Lords proceedings and Second Reading in the Commons. Master trusts have been around for a long time, but they have grown exponentially in number over the past two years. The legislation is therefore a response not to a fundamental problem with master trusts, but to their exponential growth, pushed by auto-enrolment, and the industry seeing them as an area with a less stringent regulatory regime than other parts of the pension system. For example, insurance companies and personal pensions are regulated by the FCA under long-standing rules, and the non-master trust system is very different, because those trusts have one clear sponsoring employer and there are lots of rules and regulations under the Pensions Regulator.
The legislation is therefore meant to fill a gap. We are not filling the gap because of a disaster or problems that have arisen; we are trying to see what problems might arise. That has been the scope of discussions between the Government, Opposition and individuals, which has included some positive opposition in the other place. I hope that that will be true for most of our proceedings.
Opposition amendments 22 and 23 and the amendment of my hon. Friend the Member for Amber Valley seek to change the Bill’s definition of a master trust. Amendment 22 would extend the definition to all schemes that offer money purchase benefits, which would include schemes used only by a single employer or by employers connected to each other. The proposal would extend the scope of the definition significantly and, therefore, of the authorisation regime disproportionately.
As the debate in the other place indicated, there is general acknowledgment that further regulation of master trusts is desirable and necessary. As I explained in my opening remarks, master trusts have developed into structures that are often very different from traditional occupational pension schemes offered by single employers or the more traditional group of connected corporate employers. They offer compelling benefits to employers and members. They spur competition in the market and allow for economies of scale, providing value for money. They are also an efficient solution for smaller employers for whom setting up an individual pension scheme for employees would be difficult, onerous, impractical and expensive.
We accept, however, that those qualities also bring about new risks. As I explained, those risks are less likely to be present in single employer or connected corporate defined contribution schemes. The authorisation regime is intended to address those risks. For example, in a single employer scheme—a traditional trust scheme—the employer is usually closely involved in the running of the scheme and has an active relationship with the trustees. In a master trust, the employer’s participation is often largely limited to paying the employer contribution, which is probably the most important part. I do not take that lightly, but the responsibility for the running and administration of the trust is clearly different from a single trust for a single employer. Additionally, in a single employer scheme, the employers determine the terms of the scheme, whereas in a master trust it is done for them, with the person or organisation setting up the scheme doing it.
Those differences highlight why the purpose of the Bill is to require authorisation and provide member protection in respect of master trusts. The risks are specific to this kind of scheme and it is therefore important that the definition reflects such schemes and does not extend beyond them. The clause establishes the proper scope of the Bill and ensures that its regulation is proportionate to the issues arising.
Amendment 23 was clearly explained by the hon. Member for Stockton North. It would amend clause 1(2), which provides that the Bill’s provisions apply to a master trust scheme only in so far as it provides money purchase benefits. That would mean that the provisions of the Bill would apply in relation to the scheme as a whole, and not just in relation to the parts of it that apply to money purchase benefits. Most master trusts will only provide money purchase benefits—that is the purpose of the vast majority of them—but it is fair to say that a number will provide money purchase and non-money purchase benefits. I agree with him that master trusts can do that legally and properly. It is not the norm but some do.
As I have already set out, the authorisation regime is intended specifically to address certain risks that apply to members in master trusts that relate to the structure and funding of such schemes. In particular, the Bill is focused on the risk around money purchase benefits, and we have been open about that. In answer to the hon. Gentleman, the Bill is focused in that way because there is already extensive regulation in relation to occupational pension schemes providing non-money purchase benefits—regulation already exists. Applying the authorisation regime to them would create duplication of regulation. He warned us about duplication, but the amendment would create duplication of regulation and add unnecessary costs and burdens to the running of those schemes, with little purpose in terms of protecting members, so far as we can see.
In addition, authorisation requirements are intentionally targeted at the risks relating to money purchase benefits. Conflict and confusion might arise if those requirements are applied across the board. For example, the provisions requiring the transfer of member benefits and wind-up of a scheme might have a detrimental impact on members if applied in relation to non-money purchase benefits. It is important that the members of schemes with mixed benefits have the same standard of protection as members of schemes that only have money purchase benefits. That is why the authorisation regime applies to the money purchase aspect of such schemes. Extending authorisation to types of benefits for which it is not designed and where the risks do not arise in the same way would not be appropriate.
To answer a question asked by the hon. Member for Stockton North, I can confirm that the Government intend to include decumulation schemes—the decumulation products that he mentioned in his speech—in clause 41.
Alex Cunningham
I am particularly keen to understand further what the Minister means by the same protections being in place for non-money purchase benefits as for money purchase benefits.
Richard Harrington
As I explained before, the two are covered by separate regulation and separate rules. I do not see how combining the two together under the same regime would help to give protection.
Julian Knight (Solihull) (Con)
Is not the truth that the two types of regulation will slot alongside each other? There will be a symbiotic relationship between money purchase and defined benefit.
Richard Harrington
My hon. Friend makes a good point. That is very common in other systems of regulation, sometimes to the chagrin of employers and people involved, but for many companies in other financial fields there are different systems of regulation for the different products they offer. That is not uncommon. As to what we must avoid, the hon. Member for Stockton North will accept that Governments must try to think how things work in practice, which is not to say that he has not considered it. However, we must have workshops of interested parties and consult widely. How things work in practice is important.
The end product for all hon. Members is predominantly consumer protection—the Bill is a consumer protection Bill. We have different views, but we are discussing the extent of consumer protection provided. I and my officials have considered Opposition amendments respectfully. They are not spurious and have been thought through. In fact, many were quite properly put to us—it is a democratic system—by groups such as the Association of British Insurers. They are not created out of thin air. However, we have had to think about whether in practice they will add to consumer protection. That is the test. Alternatively, will they just increase the regulatory burden? We have also been lobbied about that—again, quite legitimately—by those concerned. It is the Government’s job to try to come up with something in the middle.
My hon. Friend the Member for Amber Valley, who tabled amendment 32, discussed self-employed people, and attempted to ensure that I have in fact read the Bill. I do not think I should have the arrogance to stand here if I had not, but it is perfectly proper that he should ask. I certainly accept that my hon. Friend, given his years of experience and attention to detail, has read it. I shall try to answer his general and specific points.
On the question of the role of self-employed people, not just in the master trust schemes but generally, my hon. Friend is correct to identify that the number of self-employed people has grown exponentially in the past 10 to 20 years, even more than in the days of the Turner commission, of which Baroness Drake was a member. She has been most helpful with the Bill. I acknowledge her role and that of Lord McKenzie in helping both the Opposition and the Government very constructively.
The commission perceived self-employed people as those with their own business, who, by implication, would have an accountant or, at least, an adviser or someone similar. My hon. Friend was saying that, with the big growth in self-employment over the period, the people in question are typically not very high earners. Like him, I make no comment as to whether they should be self-employed—the fact is that legally they are. They do not have an accountant and the things necessary for someone who is running a business and employing people despite being self-employed. They are at the moment outwith the auto-enrolment scheme. I know we are here to discuss that from a regulatory point of view but, as politicians, we also want those people to have pensions, because the House agrees that that is a good thing.
I want to answer the hon. Member, who is going to be cross with me again, for Loch—
Richard Harrington
Have a little patience—I was going to say the hon. Member for Ross, Skye and Lochaber. Watford is much easier to pronounce, but I accept that he has a wonderful constituency that is very lucky to have him representing it. I have got it now.
The hon. Gentleman’s point was about why the review is different in timing and scope to the Bill. The main reason is statutory. We were obliged by statute to have the review in 2017, which means it cannot report until the end of 2017. In fact, 2017 is too early because we do not have enough figures to see people’s behaviour or habits since auto-enrolment came in. We are doing the review—it is being announced and will report—but we could not consider holding up this regulation until it came out.
Alex Cunningham
I share the Minister’s sentiment on our approach to this Bill and welcome the discussions we have had offline. Our main arguments about pensions are on other areas of policy, and certainly not this one.
I will briefly comment on the speech by the hon. Member for Amber Valley. There are ways to address the issues of auto-enrolment for the self-employed. Many people in the industry have shown me models, most of which Her Majesty’s Revenue and Customs would have a role in delivering. The Minister accepted that the hon. Gentleman’s amendment was not spurious; when we get to new clause 4, he and his colleagues might see the need to support it and bring it into the Bill to avoid any further delay in addressing the needs of such groups.
The Minister has addressed the points thoroughly, but anomalies remain. I referred to one group of connected employers outside the scope of the Bill, yet a similar group with just one associated employer would be included. We need more consideration from the Government on that. I am also concerned about the protection for members in single employer schemes. All the responsibility seems to lie with the employer. Where is the protection for the member? I have already alluded to the reliance on secondary legislation. I am concerned that there has to be secondary legislation.
Richard Harrington
I forgot to mention the hon. Gentleman’s point about secondary legislation; if I may, I would like to use this opportunity to do so. I apologise for forgetting it; it was in my head, but other things were as well. There is a lot of secondary legislation in the Bill, because we want two things. First, we want to consult extensively with the industry, following publication of the Bill, on certain technical matters to do with how things will work. Secondly—this is very relevant—we have seen how things have changed in the past couple of years; master trusts have basically morphed from one thing to another. I am not saying that there is anything wrong with that; that is how industries develop, particularly in the area of financial services, which is very fast-moving. We want to retain the flexibility to change nuanced things as the industry changes, so that we are not finding further loopholes that we have to wait years for primary legislation to address. As hon. Members will be aware, the protections built into the regulations include the fact that in the first instance they will be affirmative, so there will be plenty of time for them to be discussed properly and correctly.
Alex Cunningham
I accept that explanation from the Minister. There are other areas destined for secondary legislation that we will seek to put into primary legislation and that it is probably more important to press him on. He has a tough job—the money purchase benefits and non-money purchase benefits in particular need further consideration—but I accept where he is coming from. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Richard Harrington
I beg to move amendment 1, in clause 1, page 1, line 17, leave out “and” and insert “to”.
This amendment is consequential on amendment 20.
Richard Harrington
Amendments 1 and 20 will prevent what would have been an unintended effect of the Bill, for which I apologise. I am grateful to the other place for its scrutiny of the Bill, and particularly to Lord McKenzie—I have complimented him so many times in this sitting that I shall take my gratitude to him as read for the rest of our proceedings, but I really must thank him for bringing this matter to our attention. The amendments, which we indicated in the other place that we would table, will fix the issue that he pointed out. Without them, where a scheme has a mix of money purchase benefits and non-money purchase benefits, a funder would not be able to conduct activities in relation to the non-money purchase benefits. That was clearly not our intention, but it was the effect of the interaction of clauses 1(2) and 11. Amendments 1 and 20 will amend clauses 1 and 40 respectively to fix that.
Clause 1(2) provides that where a master trust scheme provides both money purchase benefits and non-money purchase benefits, the Bill’s provisions will apply only to the money purchase benefits. Clause 11 requires the scheme funder to be set up as a separate legal entity that is defined, broadly, as a legal person whose only activities are in relation to the master trust. As a result of clause 1(2), for a scheme with mixed benefits, the reference to the master trust in clause 11 would cover only the money purchase elements, which could mean that schemes or scheme funders would have to be restructured for reasons that we did not intend.
Amendment 20 will therefore add a further exception to the principle that the provisions of the Bill apply only to money purchase benefits, in addition to those already provided by clause 40, which we will consider later. The reference in clause 11(3) to the master trust will relate to the scheme as a whole, not just to the money purchase benefits. That will ensure that the scheme funder can engage in activities in relation to any part of the scheme.
Amendment 1 will make a minor consequential amendment to clause 1(2) to reflect the amendment to clause 40. The combined effect of the amendments will be to ensure that clause 11(3) works as intended for mixed benefits schemes.
Alex Cunningham
I inadvertently addressed the amendment in my first speech. We accept and welcome Government amendment 20, but we have not forgotten the issues that I raised earlier.
Amendment 1 agreed to.
Clause 1, as amended, ordered to stand part of the Bill.
Clause 2
Relevant public service pension schemes
Question proposed, That the clause stand part of the Bill.
Richard Harrington
Clause 2 defines a relevant public service pension scheme for the purpose of clause 1, which excludes relevant public service pension schemes from the definition of master trust. Clause 2 flows from clause 1.
The reasons that we require an authorisation regime in respect of master trusts include: the risks stemming from remoteness from the employer, which is one of the points I mentioned about the difference between an ordinary single employer trust and a master trust; potential for conflicts of interest; and the ease of set-up. The type of public service pension schemes that fall within that definition already have specific requirements and arrangements that mitigate those risks. For that reason, they are not included within the scope of the master trust authorisation regime.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Clause 3
Prohibition on operating a scheme unless authorised
Question proposed, That the clause stand part of the Bill.
Richard Harrington
The success of auto-enrolment, which various Government and Opposition Members have already discussed, means that more people are saving into a private pension, and as I have explained, many of those are saving into master trust pension schemes. Master trust schemes are regulated by the Pensions Regulator and occupational pensions legislation. However, as I explained, that legislation was developed mainly with single employer pension schemes in mind. Master trust schemes have different structures and dynamics, so the Bill introduces a new authorisation regime for them. The market has grown very quickly, and we now have to respond to ensure that that part of the pension market develops in the right way.
The authorisation regime has been designed to address the specific risks that arise in master trust structures. The criteria for becoming authorised were developed in discussion with the industry, and the risks that they address include the kinds of risks that the FCA regulation addresses with regard to group personal pension schemes, which I mentioned before. At the moment, master trusts are outwith that kind of regulation, but master trust schemes have some similarities with those schemes.
The requirement to become authorised creates a barrier to entry to the master trust market, so rather than us waiting for things to go wrong, the interests of scheme members will be protected in a proactive manner, because new master trust schemes will be prohibited from taking on members until they have satisfied the regulator that they meet essential quality standards. Existing schemes will have to become authorised to continue operating in the market. New schemes will have to be newly authorised.
Introducing a requirement for authorisation is a proportionate response to the rapid development of master trusts, given the types of risks inherent in the structure of the schemes. Clause 3 prohibits a person—a “person” being an entity—from operating a master trust scheme, unless that scheme is authorised by the regulator, and so is the core and foundation of the whole authorisation regime.
The clause also sets out the consequences of breaking the prohibition. It is important that those consequences are clear and firm. If the regulator becomes aware that a scheme is operating without authorisation, clause 3 requires it to issue a notice to the trustees of that scheme, explaining that the scheme is not authorised. Such a notification—I am sure we will discuss the effects of this later—is a triggering event that requires the scheme’s trustees to transfer the scheme’s members out and wind up the scheme. The risk of being shut down by the regulator is a strong deterrent that will ensure that the authorisation regime is taken seriously. The clause also gives the regulator the power to issue a civil penalty if the prohibition has been broken. This will act as an additional deterrent to anyone who may seek to operate a master trust scheme without authorisation.
Alex Cunningham
I beg to move amendment 24, in clause 4, page 3, line 14, at end insert—
“() the scheme’s policies relating to systems and processes requirements as set out in regulations under section 12”.
The application to the Pensions Regulator must include a member engagement strategy.
The Chair
With this it will be convenient to discuss amendment 25, in clause 4, page 3, line 15, at end insert—
“() the scheme’s member engagement strategy.”
The application to the Pensions Regulator must include a member engagement strategy.
Alex Cunningham
The mantra for this Bill should be: “Members at the centre of everything we do.” Communication and engagement is vital for trust in the system. It is good for business and good for members. Effective communication and engagement is an essential component in helping to implement improvement. Across all industries, transparency has never been more important to a successful business model, regardless of size. When it comes to employee engagement, this particular business practice is proven to be essential on a global scale, and what is seen as an essential tool for all manner of other business and industry areas, I see as equally essential for the pensions industry.
My noble Friend Lord McKenzie of Luton in the other House put the case very clearly and compellingly for master trusts to be required to have a full and effective member engagement strategy as part of the qualifying requirements for authorisation by the Pensions Regulator to operate as a master trust. In response to my noble Friend on Report, Lord Young of Cookham, replying on behalf of the Government, said:
“I can also confirm that the Government would intend—subject, of course, to consultation—to use the regulations under Clause 11 to ensure that the regulator specifically considers a scheme’s systems and processes in relation to these important communication matters when deciding whether the scheme is run effectively.”—[Official Report, House of Lords, 19 December 2016; Vol. 777, c. 1487.]
He went on to speak of wider communications, including how the review of auto-enrolment would include the engagement of individuals with workplace pension savings.
In an earlier written statement to the Commons, the Minister said that the review would include
“how engagement with individuals can be improved so that savers have a stronger sense of personal ownership and are better enabled to maximise savings.”—[Official Report, 12 December 2016; Vol. 618, c. 38WS.]
That is all very grand, but there were no new clauses or amendments addressing the issue specifically when the Bill left the Lords, nor since. We could save time and add value to the communications process by requiring a member engagement strategy in the Bill.
Some will say that most people have no real interest in pensions, and that we could be placing all manner of costs on the industry for the few who do take pensions seriously. We should never discount the few who may be interested. Recent research by the accounting firm Price Bailey has revealed some interesting statistics in its 2016 report on public interest and awareness of workplace pension scheme arrangements and retirement options. A sample of 2,000 stakeholders were interviewed across the English regions, with a good split between male and female respondents, white-collar and blue-collar occupations and income bands. Nearly 75% of those interviewed had a total household income, before taxes, of £55,000 a year or less. I wish the people in my constituency had an average income of £55,000 a year. It is encouraging to note that only one person in nine—11%—said that they were not interested in pensions. That seems to lay the lie.
It is also encouraging that more than half—55%— of pension scheme members said that they take an active, regular interest in their pension savings and retirement planning, and I do not think we will be very surprised that within the 55 to 65 age bracket the proportion rises to about two thirds, with some 66% of people taking a real interest in their pension—I wonder why. The highest levels of engagement were among males, those with higher incomes—more than £55,000 a year—those in white-collar occupations and active scheme members.
Labour Members believe that the role of trustees is crucial in providing retirement education and helping to raise levels of member engagement. Regular communication, whether written, online or in person, is key to achieving that, with different techniques for different audiences. It is important that employers consider that when communicating with current and potential scheme members. We urge master trust employers and trustees to consider carefully their strategy for scheme member engagement. It should be made a legal requirement for them to produce and execute such a strategy. Putting some thought and effort into that now will undoubtedly prove beneficial to scheme members in the long run, and it need not be a tremendous financial burden on the industry, given that we are in a digital age. Nowadays, there is no excuse for failing to communicate effectively. Using social media to communicate means expanding a multi-channel communication strategy to encompass new channels. It used to be the counter, the telephone and, later, the website, but now we have the Twitter hashtag and the Facebook page—just some of the channels open for communication today.
Real engagement, however, is something else. It is about figuring out where people are already having conversations about which an organisation needs to be aware. It is about bringing information and dialogue to places where people want that dialogue to happen—their Facebook groups, their Twitter streams and the master trust intranet networks. Good communication and engagement over members’ money and pension drawdown are prerequisites for a successful master trust.
Our amendments seek to ensure that as part of the defined-contribution code of practice, there is a requirement for the authorisation process principally to ensure that the application to the Pensions Regulator includes a member engagement strategy and a communication strategy. The Pensions Regulator’s code of practice for DC pension schemes, published in July 2016, sets out the standards that pension trustees need to meet to comply with legislation. The code, which applies to all schemes offering money purchase benefits, is supported by a series of “how to” guides that provide more detail about how trustees can meet the standards in practice.
The Pensions Regulator has also produced a tool to help trustees to assess their scheme against the standards in the code so that they can identify areas requiring improvement. The DC code sets out a number of areas in which an understanding of members is key, particularly those of gauging members’ views to inform the design of investment strategies and the assessment of value for members. The regulator suggests:
“Member nominated trustees in particular may be able to provide feedback, as might union representatives, other employee representatives or existing staff forums.”
It is because of the valuable role that scheme members can play that we have tabled the amendments on scheme member trustees. We need to improve the Bill to make it more scheme member-friendly. The members are, after all, our main concern. I will return to member trustees later. It seems only sensible to require the master trust to demonstrate its engagement and communication strategies to the Pensions Regulator, who has an obligation to ensure that the trust complies with the DC code of conduct.
The Bill sets out a requirement for the latest accounts, business plan and continuity strategy, yet it has nothing on issues that would ensure that the scheme met the required standards on member engagement and communication. There is no point authorising a master trust if it has poor communication and engagement with its members. The chances of members engaging with the issues that affect them can be greatly improved by communicating with them in the most effective way. That is the thrust of our amendments. We need to see members at the very heart of the process.
Master trusts will grow over time to cover millions of members and billions of pounds of assets under management. They will underpin the very success of the auto-enrolment policy and rebuild a long-term pension-saving system. The principle of an obligation on master trusts to have a clear strategy for engaging with scheme members should not be left to ministerial discretion or future consultation. We want to ensure that master trusts are at the leading edge of communication and engagement, and hope that the Minister will not just remain open to the idea, but will do something about it in this Bill. I look forward to his comments.
Ian Blackford
It is a pleasure to serve under your chairmanship, Mr Rosindell. I will be brief. Those of us who want to encourage pension saving, as we all do in this room, should encourage as much member engagement as is possible. That is the right thing to do to ensure that we have as much transparency as possible. It is perhaps relevant not just to this amendment, but to others, that the issue of members being trustees is important. We must recognise that we are talking about assets belonging to the plan holders and take into account the fact that a number of master trusts are also profit making. It is important that that process of transparency is open to members of the scheme and that there is full engagement by members, with members being part of the board of trustees and having effective training. We happily support that.
Craig Mackinlay (South Thanet) (Con)
I am delighted to serve under your chairmanship, Mr Rosindell. I will probably say something more about my opposition to member trustees, which would be a step very much in the wrong direction, and I fear that the amendment tabled by the hon. Member for Stockton North would do that, but in a different way.
I agree entirely that the regulations under clause 12 will be subject to the Secretary of State’s involvement in laying out those regulations in due course, and under clause 13 the continuity strategy—what that might mean and what regulations we may expect are fairly well laid out—but I am afraid that, to my mind, “member engagement strategy” is wording that is rather too loose. If we encouraged such a strategy, I would like to see in any amendment what that might involve and an expectation of what we may see in regulations from the Secretary of State. I would not want a perfectly good scheme to fail because of an interpretation that might mean lots of different things to different people. My member engagement strategy might be rather different from that of the hon. Gentleman, so I will not support the amendment.
Richard Harrington
I would like to make a general point, which the hon. Member for Ross, Skye and Lochaber also made and which was agreed by everyone: we are all in favour of more people getting involved in their pension scheme. For many years, it became clear, particularly under defined-benefit schemes, that people had other things to think about for most of their life and that they thought their employer would take care of their pension, whether in the public sector or in a defined-benefit scheme. It was not that they could not care less, but they thought that as long as they paid their bit they did not have much to worry about.
The general point—it is not specifically a regulatory point for the Bill—is that the general policy of this Government, the previous one and, I am sure, all future Governments will be to make people far more aware of their pensions because they are predominantly defined- contribution schemes. People must know and be able to calculate their pension, but perhaps the old boring statement sent out every so often is not the way to do that. We hope that apps and other systems will mean people are a lot more aware of it.
The general point of people being a lot more knowledgeable about their pension arrangements is taken as read and my responsibility and role is to help to promote that through communications, advertising, technological changes and so on. However, that is separate from the regulatory point. It underlines what everyone in this room really wants.
On the regulatory point in the amendments tabled by the hon. Member for Stockton North, I share his view of the theoretical constituents in the Price Bailey report. I do not think many of my constituents have £55,000 a year either, but the report makes some good points. We are here to discuss the amendments specifically. You are being patient, Mr Rosindell, but I wanted to make that more general point.
Julian Knight
I am in clear agreement here: although the engagement strategy sounds worthy and laudable in many respects, that phrase is open to interpretation. All I can see it doing is creating a whole new industry—extra costs—and opening up the potential for legal challenges down the line, in a way similar to what happened with Equitable Life. As the Minister will remember, the Government issued certain brochures through the Financial Services Authority that became the basis of action further down the line.
Richard Harrington
My hon. Friend makes a good point and I agree with him. It is important, though, that the regulator has enough information to be able to assess whether schemes have adequate systems and processes. The regulator can require the information; it needs to make the assessment. It is in the interests of any applicant to give the regulator the information it requires to make the assessment. The regulator is very active in this: it is two way, not just one way. The regulator may require different things from very big schemes that are well established than from small, newer schemes. That is what regulators do, and they have to have that discretion.
It should also be noted that clause 4 contains a regulation-making power to allow the Secretary of State—that is, the Government—to set out further information that is to be included in an application. That is why we gave a specific commitment to use the regulations under clause 12 to ensure that those matters are taken into account when considering a system’s application for authorisation. If you will allow, Mr Rosindell, I would like to repeat that commitment. The Bill allows the regulator to take into account the systems and processes relating to communications and engagement when assessing the adequacy of a scheme’s systems and processes more broadly.
Alex Cunningham
I am concerned that auto-enrolled into pension schemes are millions of people who have no communications whatever from the organisations handling their money. What is the Minister saying the regulations cover that will ensure those people are communicated with?
Richard Harrington
That is up to the regulator. If the hon. Gentleman bears with me, I will get to that particular point. If he is not then satisfied, I will willingly give way.
Member engagement is a challenge in pensions both legally—that is, what should people know?—and in terms of getting them engaged in a general sense. It would be unacceptable to have a hugely expensive exercise writing tens of thousands of letters that may or may not be read, but which would confuse people. However, we accept that it is important that the members get the right communications.
A situation such as the hon. Gentleman mentioned, in which members get absolutely nothing, which the regulator would find unacceptable, would not be at all acceptable for two reasons. The first is the general point that I mentioned about getting people engaged and understanding their pension and everything that goes with it. We have all received these communications. Probably, the hon. Member for Ross, Skye and Lochaber will have always looked at his pension statements, but a lot of us have received them—very comprehensive ones, in many cases—and just put them at the bottom of the desk drawer, in the hope of reading them sometime. I hope that the hon. Gentleman is not offended by that comment; it was meant to be complimentary.
Ian Blackford
I shudder to think that the Minister would ever offend me, at least willingly. The regulator has a very important role to play—I think we all understand that—but there is also the fact that the trustees are responsible to the scheme members, and it is important that we ensure that trustees recognise the responsibilities they have. No one is talking about bringing in a cumbersome system that will be costly. This is about ensuring that the members have that relationship with the trustees. It is important that the trustees are answerable to the scheme members, not least because of the profit-making capability that some trusts have.
Richard Harrington
The hon. Gentleman is right, and this is not just a question of communication as in a formality—communication if there is a problem. We will be speaking to those points later. This is a point about communication and making sure that people know what they have, in the same way as a bank communicates, now mainly by the internet, so that people—
Richard Harrington
I will finish answering the previous intervention and then of course I will happily give way. The two points about communications are correct, and after the hon. Lady has intervened, I will do my best to go into the other point.
Carolyn Harris
The Minister, in a private conversation, said that I would find it difficult to mention this subject, but he has kindly given me an opening. We have to learn lessons from the experience of the WASPI women—the Women Against State Pension Inequality Campaign—and we cannot go forward and experience the same inability to engage as we are experiencing now, so this scheme must ensure that communication is sufficient to attract all people.
Richard Harrington
I smile, but not out of disrespect for the hon. Lady—quite the contrary. I knew that she would manage to bring in her favourite subject and I am grateful for the indulgence of the Chair in not declaring it out of scope, because she makes a relevant point. I nearly said “you”, Mr Rosindell. You would probably make it as well, if you were invited to speak on the subject.
The communication point that the hon. Lady raises has to do with the state pension. Generally, things have moved on dramatically—not just from a regulatory point of view, but with communication generally. We just have to look at the state pension side—before you rule us out of scope, Mr Rosindell. Millions of people look on the internet every year to see what the position is with their state pension. The same will apply—to bring us within scope—to private pensions. The younger generation of people do not just wait for something to come. They are aware the whole time; they see the information on their pay packet. My younger son started work after graduation in September. They sign up for the pension, it is explained and they are interested. They think it is years away, obviously, but they are interested. That is why I do not take the communication point lightly, and I will do my best now to talk in more detail about it.
We have mentioned the automatic enrolment review. That is critical—this is not just a way of sidetracking the point—because it will consider how individuals engage with their workplace pension scheme and how that can be developed so that members are better able to understand and maximise their savings. That is probably the most relevant change that we have to try to bring about—we as a Government are going to do this, but I am sure that any Government would—to get people really involved. We have appointed an external advisory board, including members that represent consumer interests as well as pension provider representation. We will lay a report before Parliament before the end of 2017. The relevant point, to bring us back to the Bill—you have been very patient, Mr Rosindell—is that it will take into account these findings. We will take them into account when considering the regulations under clause 12—that is the relevant clause—which I referred to a moment ago.
Nigel Mills
I did try to warn the Minister about this sort of question. The very first line of this clause says:
“The trustees of a Master Trust scheme may apply to the Pensions Regulator for authorisation.”
Will he explain why that does not say “must apply”? We do not envisage any master trusts that are not obliged to register. Is it because they can form themselves, and before they start operating they have to apply, or does he expect them to be formed only after they have been authorised?
Richard Harrington
Master trusts may apply. Exactly. My hon. Friend’s point is correct, but if they wish to be in a master trust in the market, they must apply. If they do not, they may say, “We’ve looked at this regulation, we call ourselves a master trust now, which we are, but the regulatory hurdles are not for us so we’ll leave the market.” We had to leave the flexibility in, and maybe many will. I do not know. Maybe entities will say, “It’s not for us, we are going to do it another way,” given the regulations, an extra burden of regulation or a different type of regulation, but if they are to be a master trust—if they are to continue as one—the “may” effectively becomes a “must”, because they have to apply and regulate. We had to leave the possibility in. It may not happen, but I think some of the smaller ones will find that it is not for them. I hope I have answered that question satisfactorily. I hope, too, that I have said enough to reassure the Committee. The Government sympathise with the intention of the amendment. We take member engagement seriously. There is no simple answer.
The Bill is about protecting those people saving in master trust schemes by addressing the key risks that arise in this type of scheme. While member engagement is important, I do not believe that the Opposition have made an effective case that these issues constitute a key risk that needs to be addressed through setting out explicit requirements in primary legislation. That is the critical point. We will consider the area further as we go through the AE review, and we will develop and consult on the regulations under clause 12. As I have explained generally on the regulations, there will be time for both Houses to go through them. On that basis, I kindly invite the hon. Member for Stockton North to withdraw his amendment.
Alex Cunningham
First, I congratulate my hon. Friend the Member for Swansea East on her particular skill in introducing the word “WASPI” to each and every debate that I have ever been involved in. I pay tribute to her for the tremendous work that she does. She chairs the WASPI all-party parliamentary group. I know that it is at the centre of her heart, and the Minister was probably just waiting for the word to come up today. I congratulate her on all the work that she does.
It is the members’ money, and they should be told what is happening with it and how it is being invested. They should also have an opportunity, as the Minister says, for two-way communication, and be able to influence that as well. The hon. Members for South Thanet and for Solihull agree that we should have good communication. They talked about loose wording, but communication is central to everything that we do in society these days. We have seen how failure to communicate has perhaps resulted in some of the things that have happened in recent times, such as the decision for us to leave the EU. Did we actually communicate the real messages, the proper messages? It is important in relation to pensions that we communicate the full message to the people whose money we are dealing with.
We will debate trustees later in our consideration of the Bill, but my attitude is, why should there not be member trustees when it is the members who bear all the risk when it comes to these investments?
The Minister talked of the various regulations that could be put in place and used the phrase, “That is up to the regulator.” It is not good enough to leave those matters to the regulator. We need to provide guidance for the regulator.
The Minister is fond of his secondary legislation. I suggest that within that secondary legislation he could lay down some guidance, which the regulator could then use on the issue. The Opposition feel strongly about communications. For that reason, I will press amendment 24 to a vote.
Richard Harrington
The clause allows the trustees of a master trust scheme to apply to the Pensions Regulator for authorisation and sets out details about the content of applications and the application process. The clause provides that an application must include certain key information: the scheme’s latest accounts, the latest accounts of each scheme funder, the scheme’s business plan and the scheme’s continuity strategy. That information must be provided so that the regulator can assess whether it is satisfied that the scheme meets the authorisation criteria, which we will discuss when we deal with later clauses. The clause also allows the regulator to take any other information into account when considering an application.
As I have said, the master trusts market is still developing and we believe that it will develop further as it responds to the new requirements in the Bill, so the clause allows the Secretary of State to make regulations setting out further information that must be included in an application so that changes can be accounted for and the application process remains robust. The Government also intend to charge schemes a one-off application fee, which will be payable to the regulator at the point of application. It might be necessary to vary that fee, depending on factors such as the number of schemes that apply for authorisation and the resources required to process applications, so the clause allows the Secretary of State to retain flexibility by specifying that detail in regulations.
There must be a clause to allow applications for authorisation to be made, so I ask the Committee to support the clause.
Question put and agreed to.
Clause 4 accordingly ordered to stand part of the Bill.
Clause 5
Decision on application
Question proposed, That the clause stand part of the Bill.
Richard Harrington
The clause sets out the procedure that the regulator must follow when it receives an application for authorisation from a master trust scheme. I draw the Committee’s attention to the precise wording of subsection (1), which states that the regulator
“must decide whether it is satisfied that the scheme meets the authorisation criteria.”
That is important, because it places the emphasis on the scheme seeking authorisation to demonstrate that it meets the required standards. If the regulator is not satisfied that it does, it will not grant authorisation.
It is important to ensure that a well run, high-quality scheme is not unduly held up by the requirement to become authorised, so the clause requires the regulator to make a decision on an application within six months of receiving it. That is important in other areas of regulation; I know from my constituency work that many other industries complain that regulators take too long and hold them up when they want to comply. The six months is therefore a very good thing.
The clause is vital because it introduces the authorisation criteria. They are: first, that the persons involved in the scheme are fit and proper persons; secondly, that the scheme is financially sustainable; thirdly, that each scheme funder meets certain requirements; fourthly, that the systems and processes used in running the scheme are sufficient to ensure it is run effectively; and finally, that the scheme has an adequate continuity strategy. As I said previously, the criteria were designed to address the key risks for these types of scheme. They relate to the risks that members of other types of pension scheme are already protected from. The criteria are set out in further detail later in the Bill, and I am happy to discuss them when we come to those clauses.
Question put and agreed to.
Clause 5 accordingly ordered to stand part of the Bill.
Clause 6
Referral to Tribunal of refusal to grant authorisation
Question proposed, That the clause stand part of the Bill.
Richard Harrington
The clause provides for the appeal rights if the Pensions Regulator refuses to grant authorisation, which I mentioned in the context of the previous clause, to a master trust scheme. The decision to refuse an application for authorisation, and thus to prevent a master trust scheme from operating in the market, is clearly a decision that the regulator cannot take lightly. It is right that the people who are directly affected by such a decision have recourse to appeal against it, should they wish to do so.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7
Fit and proper persons requirement
Question proposed, That the clause stand part of the Bill.
Richard Harrington
The clause introduces the first of the five authorisation criteria that I mentioned previously. It means that, when authorising a master trust scheme, the Pensions Regulator must be satisfied that those involved in the scheme are fit and proper persons. The structure of the master trust scheme means that it is no longer the members’ employers who set up the scheme or appoint the trustees. That changes the key relationship and the influences on the running of the scheme. Some master trusts are set up as a commercial enterprise and resemble something more akin to a conventional financial services product, but without being subject to the same regulatory requirements. It is therefore only right that we introduce the requirement of being fit and proper—fitness and propriety—in respect of those setting up and running master trusts.
The clause lists the key people whom the regulator must assess as fit and proper to act in their capacity in relation to the scheme. They include the trustees, the scheme funder and the scheme strategist. That list can be extended under regulations. Again, we do not want a situation in which an entity can create another entity without our being able to opine on whether they are fit and proper people to do it.
The clause also gives the regulator the power to assess a person who promotes or markets the scheme. Regulations can specify further individuals acting in a particular capacity whom the regulator may assess to determine whether they are fit and proper for that role.
Craig Mackinlay
On the point about the person who promotes or markets the scheme, a lone employer or an employer thinking about his options, whether it be the National Employers Saving Trust or another master trust, may ask his independent financial adviser to consider which scheme is suitable for his business. How would the Pensions Regulator get involved with subsection(3)(a)—
“a person who promotes or markets the scheme”?
The subsection includes the word “may”. I am concerned that we may be putting regulatory requirements on IFAs who are already duly authorised under the FCA and may be caught under this clause. Was that the Minister’s intention?
Richard Harrington
No, I confirm that that was not the Minister’s intention at all. As we get through the regulations for this Bill, it is precisely that kind of case that we need to take into consideration, and there may be others. An IFA, of course, would be regulated and deemed to be a fit and proper person by the FCA. I am not very familiar with those rules, because they are outside my area of responsibility, but I think that they are pretty stringent and that they might be directly comparable to those under the Pensions Regulator. However, it is a fair point. In fact, most companies in the position to which my hon. Friend refers usually have to go to a professional adviser to be able to make that decision, because they have neither the time nor the experience to make the decision themselves, unless they are a very large company with suitable employees.
The regulation-making powers are needed to respond to developments in the market where the structures of master trusts might evolve to include other functions. There is a regulation-making power that enables regulations to specify matters that the regulator must take into account when assessing whether someone is a fit and proper person. As with other provisions in the Bill, we intend to work closely with industry, regulators and Her Majesty’s Revenue and Customs in developing these regulations, as well as conducting formal consultation.
The clause also gives the regulator a discretion to take into account other matters as it considers appropriate when carrying out the fit and proper person test, including matters related to a person connected to the person being assessed. That will give the regulator the flexibility to ensure that it can be fully satisfied that the criteria for a fit and proper person have been met and not avoided on technicalities.
The fit and proper person criteria are a key part of the new regime for master trusts. They relate to the competence and propriety of those responsible for the pension savings of thousands workers.
Nigel Mills
Will the Minister confirm that he expects this to be a high bar; that he wants people to be able to show that they are knowledgeable, competent and have the training to be a trustee and run a pension scheme, and not just that they can pass a check that they have no criminal convictions for fraud? They have to show positively that they can run these pension schemes well, not just that there is no historical evidence that they cannot.
Richard Harrington
I can absolutely confirm that for my hon. Friend. I hope that he will agree that the fit and proper person test is quite well established across different regulatory regimes. By definition, it has to allow a certain subjectivity, because otherwise it becomes the low-level box-ticking that he fears. Having discussed this with the Pensions Regulator—both the chief executive and other people—I know that this would never happen under its regime. I hope that most people would not regard the fit and proper person test as the kind of thing to which my hon. Friend refers, but he makes a sensible point.
Question put and agreed to.
Clause 7 accordingly ordered to stand part of the Bill.
Clause 8
Financial sustainability requirement
Ian Blackford
I beg to move amendment 33, in clause 8, page 5, line 39, after “scheme” insert “or scheme funder”.
The financial sustainability of the scheme funder must be taken into account when assessing a Master Trust scheme’s financial sustainability.
Amendment 33, which stands in my name and that of my hon. Friend the Member for Paisley and Renfrewshire South, seeks to ensure that the financial stability of the scheme fund is taken into account when the regulator is assessing the financial stability of the scheme funder. A number of insurance companies have told us that they already hold a very significant amount of capital under the European regulatory framework for insurance solvency. In this case, it seems unnecessary for insurers to be required to hold separate or additional capital on top of this in order to meet their new obligations as master trust providers under the Bill.
It would be helpful to know more from the Government on the restrictions on the use of member funds to meet costs, which need to be more clearly defined. We have also heard from the Association of Pension Lawyers, which has called for clarity on the policy intentions behind the clause and for the detail to be fleshed out. It would be appropriate for the Government to take the opportunity to do that today.
Richard Harrington
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.
Ian Blackford
I will not detain the Committee longer than absolutely necessary. I am relatively satisfied with the Minister’s response, particularly in the light of ongoing consultation, and on that basis I will not press the amendment to a vote just now. However, there are obviously some remaining concerns about insurance companies, particularly under the obligations, and I would like those to be highlighted today. We will move on for now. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 8 ordered to stand part of the Bill.
Clause 9
Scheme funder of last resort
Question proposed, That the clause stand part of the Bill.
Richard Harrington
The clause was introduced by the Opposition in the other place. It is intended to require the Government to make provision for a scheme funder of last resort, which would take effect if a master trust had insufficient resources to meet the costs of complying with duties arising from a triggering event and the costs of continuing to run the scheme for a further prescribed period.
Since the clause’s introduction, I have reflected a lot on how it would work. I have had formal and informal discussions with Members of the other place and have met officials, in the presence of the Opposition spokesman, the hon. Member for Stockton North, to discuss this subject. I have concluded that it is unnecessary to place such an additional requirement on the Government, and I will do my best to persuade the Committee of that view.
I think that we all agree that the Bill’s primary purpose is, quite simply, to bring in safeguards and controls for employers and employees who have opted to save through a master trust pension scheme. The Bill includes new powers for the Pensions Regulator, which will be responsible for the effective operation of a new authorisation and monitoring regime for master trusts. Schemes that do not meet or maintain the specified standards simply will not be allowed to operate. We have just discussed two of the authorisation criteria; as I explained, clause 7 sets out the requirements that those involved in a scheme must meet to be considered fit and proper persons, and clause 8 describes the financial sustainability requirements that will apply to master trusts. The remaining criteria—the business plan requirement, the scheme funder requirements, the systems and processes requirements and the continuity strategy requirement—are dealt with by clauses 10 to 13.
The Bill’s later clauses define the events that, when experienced by a scheme, will trigger a series of specified actions and additional requirements that must be undertaken by the scheme and the regulator. The nature of such events may mean that a scheme is operating under increased risk. Those additional requirements will ensure that increased scrutiny and controls are put in place until the new risk has been dealt with and nullified, or the scheme is wound up in an orderly manner and the interests of employers and members are successfully transferred out to a new scheme.
In addition to the new regulatory framework, the regulator is working closely with individual master trust schemes. That work provides us with insight into the scale of current risk, which the clause has been designed to guard against, and may be followed by the publication of new supporting data by the regulator. In addition, the indications are that market forces are operating effectively prior to the new regulatory regime coming into force. For example, some master trusts have left the market and transferred their members without issue.
As I have explained in previous debates, it is very attractive for existing successful master trusts—the vast majority of them—to take on members from smaller master trusts that might appear to be failing in their administration, since that allows them to add members without adding very much to their costs. I realise that is commercial rather than structural, but I believe that will happen, as it has in other regulated areas of financial services. New, larger schemes are also now entering the market. Such schemes are on a sound financial footing and will actively seek to increase their market share. All that further supports our belief that the risk of scheme members being left stranded is absolutely minimal.
Hon. Members might continue to be concerned that, were a master trust to fail, the members of that scheme might be left stranded. I perfectly understand their thinking, but we consider the risk to be negligible. However, we recognise that we cannot completely rule it out, which is also recognised by the pensions industry. We are currently working with the Pensions and Lifetime Savings Association, which is exploring establishing a panel of “white knights.” That panel would aim to guarantee that, if a master trust was required by the regulator to leave the market, the affected master trust scheme members would be transferred to a new scheme. That happens all the time in other regulated fields of the financial services market.
I believe, after consideration, that as drafted clause 9 does not work as intended. If I may expand on that, a couple of illustrations might help. The clause does not contain a power, such as a regulation-making power, enabling the Secretary of State to make further provisions relating to the scheme. That would include provisions relating to the scheme’s procedure and operations. The clause provides that the Secretary of State should consider only the resources held by a master trust and not the scheme funder.
Given the imprecise nature of the clause, I am concerned that it could lead to perverse behaviour, with schemes shifting funds about, knowing that the taxpayer will pick up the bill. We are also concerned that, given the clause’s lack of clarity regarding funding of a Government-backed scheme of last resort, stable master trust schemes might be concerned that they are at risk of paying for failing master trusts and, as a result, opt to leave the market. For the reasons outlined, I call for the clause not to stand part of the Bill.
Alex Cunningham
I had hoped that I would not need to prepare a speech on this matter, other than to welcome clause 9, but I am disappointed that we find ourselves defending a new clause added to the Bill by our colleagues in the other place, particularly as the Minister has opted to take it out altogether, with limited alternative provision to protect the members of master trusts who are failed by their trustees.
I am grateful to the Minister for the time he has taken to discuss these matters one to one with me and with colleagues in the other place. There remains tremendous uncertainty about exactly what happens if the worst comes to the worst and there is no organisation to pick up the pieces, whether that be a small trust that fails to make the grade under the legislation, or a large trust that could fail in years to come.
The Minister referred to his panel of “white knights.” I was trying to envisage a group of white knights on large chargers heading through the City to help people out.
Richard Harrington
I should reiterate that it is not my panel of white knights; it is that of the Pensions and Lifetime Savings Association, which is a large and well respected trade body, as the hon. Gentleman certainly knows.
Alex Cunningham
I accept that correction. I am sure the Minister would look grand dressed as a white knight. The fact is that no white knight actually exists.
The clause has a key purpose to protect the pensions pots of ordinary people from being raided in the event of a master trust failing. That is something that would certainly not be the fault of the workers up and down the country who are faithfully paying into a pot; a pot that, although welcome at retirement, is likely to be relatively small. If the Government succeed in removing the clause from the Bill, they will be responsible for not providing a safety net if a master trust fails and workers end up losing their hard-earned cash.
It is not enough for the Government to argue that a failing scheme will always be successfully transferred. They instead must ensure that a funder of last resort is identified in the Bill. The Government argue that there is no need for a funder of last resort because the procedures laid out in the Bill will prevent it from reaching that far. Industry experts across the board insist that a funder of last resort or equivalent is needed. The chair of the Standard Life master trust has called for the Government to be the funder of last resort
“because it’s their policy foul-ups that have allowed the proliferation of unsustainable master trusts”.
I do not know if there has been a foul-up or not. I believe that the growth in master trusts and in auto-enrolment is actually a very positive thing. The chair also commented that Government funding was unlikely and that a levy on the employers should be imposed instead, as it is the employers who have chosen the master trust and therefore they should bear more risk. That could make them think twice about getting involved with less than honourable trusts.
Julian Knight
The hon. Gentleman is making some interesting points. Surely the point of the legislation is to ensure that, on start-up and on an ongoing basis, the fund and the pension scheme are sustainable. That is the job of the Pensions Regulator. He also mentioned the return of the entire capital. Even in the Pension Protection Fund, it is still only 90% return on capital.
Alex Cunningham
Yes, it is the responsibility of the regulator to ensure that whatever trusts are set up are stable and ready to go. My point is that, as we have seen, whether we are talking about defined-benefit schemes just looking at the failure of the banks in recent years, there is always an opportunity for catastrophic failure in our master trusts, with perhaps 1 million or 2 million members. I am not convinced that there is provision to protect their interests. Lord Freud referred to this clause as a sledgehammer to crack a nut, considering all the mitigations against the risk that are already in the Bill, but what if those mitigations are not enough?
Again, will the Minister provide the Committee, and people all over this country, with a 100% assurance that the Bill without this clause is enough to protect members? Will he guarantee that no master trust will be in a situation whereby it has failed and has insufficient resources to meet costs? I believe—he has already said it, and I have said it as well—that he cannot guarantee that 100%, which is why the clause needs to stand part of the Bill. By seeking to remove it, the Government continue to go back to the argument that there are enough conditions in the Bill without the clause, such as the Pensions Regulator needing to be satisfied that the master trust has sufficient financial resources to comply with its continuity strategy. There are too many unknown factors out there in master trust world for us to know that for certain.
How can we encourage ordinary, hard-working people to save for retirement and put their trust in a scheme that their company bosses have picked for them when the Government are consciously acting against the clause that could be the safety net? We have seen all manner of pension schemes get into trouble and pensioners have been the losers, so we need systems to be much more robust. Workers need to be confident and assured that the money they have faithfully put aside is given the greatest possible protection.
Another mitigation in the Bill that the Government use to support their argument that the clause is not needed is the regulation of our record management, which will be regularly monitored.
Yvonne Fovargue (Makerfield) (Lab)
If the clause is not needed, why not put it in to give people that extra confidence? People have an historically low opinion of financial institutions, trusts and banks, so surely any extra insurance that will encourage people to have confidence is worth putting in.
Alex Cunningham
My hon. Friend is correct. People want to know that everything is 100% safe. I know that the Minister said that we can never guarantee 100% safety, but we are talking about some of our society’s most financially vulnerable people who are investing relatively small amounts of money in their master trust. They are not going to get a tremendous pension—nothing like what a Member of Parliament receives—but they want to know that their small pot will actually mean something for them. That is why we must have those protections.
We were talking about regularly monitored business. How regular—every three months, every two years, every five years?—and what type of monitoring? Can the Government say for certain that, by the time the regulator has identified a problem with record management, it will still be within the timeframe to resolve the issue without a funder of last resort?
The Government argue that the Bill already achieves what clause 9 is trying to achieve, but I must question the real reason why they do not want it in the Bill. If they support the idea of master trusts having regulations in place to avoid a disastrous situation if one failed, why will they not just support the clause? If they are so sure that it would never reach the stage of needing a funder of last resort, what is their opposition to including the clause just to ensure that, in a worst-case scenario when things do not go to plan, there is extra protection in place? Unless, of course, they are ideologically opposed to the concept of a funder of last resort. It would be a safety net; a guarantee from the Government that they will need to do everything in their power to protect workers’ retirement funds. If that is the case, I am disappointed that the Government do not believe that it is their duty to step in when business fails and that they would leave innocent people paying the price.
One argument that the Government Lords kept repeating was that, in the event of regulatory failure and a trust not having the means to finance a wind-up, it will not be members that will have to pay the price, but the Government have yet to tell us who it will be. When a number of master trusts and pension experts are calling for there to be a funder of last resort, why are the Government not listening? We have heard a lot of words in the other place and here today, but we have seen not action. Verbal assurance is not good enough when we are talking about people’s livelihoods in older age. We need action and robust legislation to ensure that we take every precaution. In the absence of greater clarity about the Government’s insistence that the Bill already addresses areas raised in this debate, it is vital that clause 9 is not removed. We should be covering every base in order to say confidently that we have taken every possible measure to protect members’ money 100%.
Ian Blackford
I think we all understand that the pension pots themselves are not at risk from the mechanisms we are talking about; it is about the funding of the master trusts. My appeal to the Government is that we have to find a solution to this that will give trust to those who are investing, so that they know that the master trusts themselves will be secure, whether that is from the definition of a funder of last resort, or from particular powers that the regulator has to make sure that, in the event of a trust failure, those assets can be managed in the interests of the fund holder. There is an element of risk—albeit a relatively small one—and we have to try to see whether we can close that down. In the absence of another solution, the Government should think about this clause remaining part of the Bill for now.
Pension Schemes Bill [ Lords ] (Second sitting)
(7 years, 2 months ago)
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The Committee divided: - Ayes: 4 / Noes: 9 - Question accordingly negatived.
The Parliamentary Under-Secretary of State for Pensions (Richard Harrington)
It is a pleasure to serve under your chairmanship today, Ms Buck. This morning seems a long time ago, but when we adjourned I had just risen to confirm to the hon. Member for Ross, Skye and Lochaber that members’ savings are not at risk. The hon. Member for Stockton North might have given the impression of mixing up members’ savings and the funders of the scheme. Though I am sure he knows this, I want to be clear. There are various protections around the savings invested—in trust law, in occupational pensions law and through the regulation of investment managers.
Ian Blackford (Ross, Skye and Lochaber) (SNP)
It is a pleasure to serve under your chairmanship, Ms Buck. When the Minister rose at the end of this morning’s sitting, I had actually concluded, so I will now resume my seat.
Richard Harrington
The hon. Member for Stockton North made various points, and I would like to briefly rebut them. I have already made my first point, in response to the hon. Member for Ross, Skye and Lochaber. The Bill adds to the protections by prohibiting increased or additional charges that could be levied on members for the cost of winding up or transfer during a triggering event period, so members’ savings are safe. As was discussed extensively in the other place, the clause addresses the situation where the scheme does not have sufficient funds to pay for the transfer of accrued rights or the wind-up of the scheme during a triggering event period. The Bill provides that a master trust scheme must have resources available to pay for those costs.
The hon. Member for Stockton North asked me a clear question: how frequently will the Pensions Regulator monitor this? To be clear, the supervisory measures allowed for in clauses 14 to 20 state clearly that the regulator is under a duty to authorise these schemes. That is a new approach for the regulator, which will be working with all the master trusts, both before and after authorisation. The regulatory regime is therefore an active process, which rightly focuses the most attention on the highest risk schemes, while maintaining regular contact with all master trusts in the market. It is based on a case management approach, which is not random or ad hoc because it is underpinned by the existing reporting and regulatory framework and activities. Those in turn are strengthened by the new supervisory return and significant events negotiation requirements, which the hon. Gentleman will be familiar with.
The hon. Gentleman seemed to imply that the Government have not made any provision to pick up the pieces if a scheme fails. I maintain that that is not the case. The triggering event regime outlined in the Bill means that the regulator will be closely involved with how the scheme proceeds to resolve its difficulty or close—it has to do one of the two. The regulator already has powers that can be used to support a failing scheme. A good example is the power to appoint a trustee to get into a scheme and act as a trustee—so it can impose a trustee on a scheme and help to sort it out.
The hon. Gentleman also suggested that if the risk is so minimal, the clause does no harm as a back-up measure. He used the sledgehammer and nut analogy, which I think Lord Freud used in the House of Lords, so it is a cross-party analogy. If it is a nut, it might be a small nut, but what is going to happen to the nut? That is not said in a very Hansard-like way, but I think we know what it means. I would say that that underestimates the impact of having an unspecified government intervention of this nature.
Alex Cunningham (Stockton North) (Lab)
I accept the point the Minister is outlining, but the possibility remains. We know what our financial industries are like. We have seen failure after failure in pension schemes, in the markets and the banks. What happens in the event of a major fraud in a master trust and there is nobody left to pick up the pieces?
Richard Harrington
I will deal with that point a little later. First, let me explain why having unspecified Government intervention is not good.
First, such intervention gives rise to moral hazard. Elsewhere in pensions and regulatory regimes where lifeboats exist, there are measures against moral hazard. We do not want a situation where people can be reckless because they know they can rely on the Government, and setting up ways to get out of their obligations because they know that the Government will pick up the pieces.
Alex Cunningham
The Minister has used the word “unspecified” several times, but he has the opportunity in regulations to consult the industry on how it would set up a funder of last resort. That is what we want. We do not expect him to say, “Right, the Government will underwrite this.” We are saying that there should be a consultation exercise to ensure that a funder of last resort can be put in place so that this very small nut that needs to be cracked can be dealt with.
Richard Harrington
I apologise if I put words into the hon. Gentleman’s mouth. It is currently unspecified; I agree it could be specified with compensation. The core point and, excuse the pun, the kernel of the nut is that it would still be a Government scheme, with moral hazard.
Secondly, the hon. Gentleman has probably heard significant players in the master trust industry voice serious concerns to us about clause 9. They believe that it could give rise to a rush to exit the market by otherwise successful schemes thinking, for example, that, not unusually in this field, they would have to pay a significant levy over not very much. The hon. Gentleman’s points are all valid in their way but Government have to make a judgment. That is why there is a respectable disagreement over clause 9. We have all thought about it carefully.
I believe the Bill strikes a delicate balance between prevention and self-regulation and Government intervention —something that is very hard to do. The clause would disrupt that balance and confuse the regulatory approach. I do not believe that it is a harmless catch-all. I accept the point, as shown by the banking crisis, Equitable Life and other incidents, that such things happen—I would not say it was because it was a Labour Government during the banking crisis or another Government with Equitable Life that those issues arose. It is not possible to give absolute guarantees, but we can reduce risk to the lowest possible level and that is what the Bill aims to do.
In our view, the risk level is already very low for this type of master trust scheme. That is backed up by the Pensions Regulator’s current information about the very small number of schemes that are in trouble. That will be published but is not quite ready. To create a Government-backed scheme would perversely create a moral hazard, as I have explained.
Ian Blackford
I am trying to find a helpful way out of this because I can understand why there is a disagreement. We can all accept that the risk we are talking about is to the master trust itself, not to the underlying assets; that is understood. I can understand the Government’s position on giving a commitment to this, but might there not be another approach? The Pensions Regulator would take the responsibility after a triggering event and it would have the power to step in. We have the power for the regulator to appoint a trustee; perhaps the regulator might have powers in extreme cases to intervene in the short term to ensure that there is a smooth transition. I know that is not directly within the clause but there might be another way to effect this where we can give guarantees.
Richard Harrington
I thank the hon. Gentleman for his positive intervention. The regulator has a huge number of powers, and the Bill gives a lot of powers that I think would prevent the problem he is talking about.
The hon. Member for Stockton North is forgetting— I understand why—the general rule that the fraud compensation scheme, which applies in many fields, does and will apply to master trusts. I therefore reject his point about fraud. I am not saying fraud could not happen, but there is already a mechanism in place to deal with that.
In our view, therefore, the risk level is already very low. We are against creating a Government-backed scheme because we think it would create a moral hazard. Schemes are currently working to ensure their systems are robust and we do not want them to feel comfortable that there is an entity that will always bail them out. That would not give comfort to scheme members. Indeed, for the Government to say we feel the risk is large enough to warrant a funder of last resort would create uncertainty—in effect, creating the very problem that the Opposition honourably are saying they are trying to avoid.
Question put, That the clause stand part of the Bill.
Richard Harrington
Clause 10 requires the scheme strategist of a master trust to prepare and maintain a scheme business plan as part of the financial sustainability criterion that I mentioned. Through the business plan, the regulator will be able to monitor the adequacy of the financial resources available to the scheme. The plan is submitted to the Pensions Regulator with the application for authorisation, and is thereafter reviewed and, if appropriate, revised annually and following any significant change, in agreement with the key parties involved in operating the scheme. The clause also contains a power that enables the Secretary of State to prescribe further detailed requirements in regulations.
The scheme strategist is the person responsible for making business decisions relating to the commercial activities of the scheme and is therefore best placed, we believe, to prepare and maintain the business plan. In some cases, they may also be the scheme funder or a trustee. The scheme’s future viability may depend on its success in competing with other providers. In the early days, as with the setting up of a business, it is likely to pay out more in expenses than it generates in income, so it needs to plan how it will meet those costs and satisfy the regulator.
The business plan will mitigate the risk of a master trust failing because of inadequate financing or planning. It will be one of the main sources of information on which the regulator will base its assessment of the scheme’s financial sustainability. For instance, it will provide key information on the reasonableness of the assumptions underpinning the scheme’s business strategy; the adequacy of the financial resources available; and the adequacy and security of the financial resources required to cover the costs that would arise in the event of scheme failure, such as winding-up costs and the cost of securing the transfer of members to another scheme without increasing the administration charge to members.
The detailed requirements will be set out in secondary legislation. That will enable the Secretary of State to consult the regulator and other key stakeholders to ensure that the business plan contains relevant information and also builds on best practice. The plan and any supporting information or documents must be submitted by the scheme strategists together with the application for authorisation and, thereafter, within three months of any revisions or changes and at the regulator’s request. Many master trusts have business plans in place to provide that kind of information. They are intended to support risk-focused financial supervision, so that the regulator can identify and intervene in schemes that are at risk as a result of inadequate financial planning. I urge that clause 10 should stand part of the Bill.
Question put and agreed to.
Clause 10 accordingly ordered to stand part of the Bill.
Clause 11
Scheme funder requirements
Richard Harrington
I beg to move amendment 3, in clause 11, page 7, line 7, leave out subsections (2) and (3) and insert—
“(2) The first requirement is that the scheme funder is a body corporate or a partnership that is a legal person under the law by which it governed.
(3) The second requirement is that the scheme funder only carries out activities that relate directly to Master Trust schemes in relation to which it is a scheme funder or prospective scheme funder.
(3A) The Secretary of State may make regulations providing for exceptions from the second requirement.
(3B) The regulations may include provision excepting a scheme funder from the second requirement—
(a) where the scheme funder meets additional requirements specified in the regulations (such as requirements relating to a scheme funder’s financial position, its financial arrangements with the Master Trust scheme in question or its business activities);
(b) where the scheme funder applies to the Regulator and provides the Regulator with information specified in the regulations, or such other information as the Regulator may require in order to satisfy the Regulator that the Master Trust scheme is financially sustainable.”.
This amendment gives a power to the Secretary of State to make regulations providing for exceptions to the requirement that a scheme funder must only carry out activities directly relating to the Master Trust scheme (or schemes) for which it is a scheme funder.
The Chair
With this it will be convenient to discuss the following:
Amendment 26, in clause 11, page 7, line 7, at end insert—
“(i) This should not apply to insurance companies regulated by the Financial Conduct Authority”.
This amendment would not require Master Trusts to be separate legal entities from any business where that business is regulation by the Financial Conduct Authority.
Amendment 34, in clause 11, page 7, line 11, leave out subsection (b) and insert—
“(b) either the only activities carried out by the body corporate or partnership are activities that relate directly to the Master Trust scheme, or if the body corporate or partnership carries out activities other than those defined as “restricted activities”.”
This amendment allows for exceptions to the requirement that a scheme funder must only carry out activities directly relating to the Master Trust Scheme for which it is a Scheme Funder.
Government amendment 4.
Amendment 35, in clause 11, page 7, line 21, at end insert—
“(7) The Secretary of State may by regulation define “restricted activities”, these regulations must set out activities that a scheme funder cannot engage in to minimise risk of losses or liabilities which might deplete or divert its financial resources.”
This amendment makes provision for the Secretary of State to define “restricted activities” by regulation, including a list of specific activities restricted, in order minimise risk of loss by Master Trust Scheme Funders.
Richard Harrington
Clause 11 requires a scheme funder to be a legal person who carries out only activities that directly relate to the master trust. The policy intention is to ensure that the financial position of scheme funders, and their financial arrangements with master trusts, are transparent and clear to the regulator. That will enable the regulator to make an assessment of the scheme’s financial sustainability when deciding whether to authorise the master trust, and will support the regulator’s ongoing financial supervision of the scheme, post-authorisation.
In debate in the other place, and in representations received from stakeholders, the concern was raised that the scheme funder requirements would lead to costly corporate restructuring and so might undermine the supporting of master trusts through the other lines of business that some master trust providers carry out. The Government amendments would make two changes to the scheme funder requirements in clause 11 that we believe address this issue. The first would allow an entity to be a scheme funder and, therefore, carry out activities in relation to more than one master trust, and also carry out activities, such as due diligence, where it is considering becoming the scheme funder of a new master trust scheme. The second would provide a power for the Secretary of State to create exceptions to the requirement for the scheme funder’s activities to be limited to the master trust. Scheme funders who meet the requirements that are to be prescribed in regulations will be able to carry out activities unrelated to master trusts—for example, providing shared services to other schemes.
We hope that this easement will minimise disruption to existing corporate structures and shared service arrangements. In addition, enabling scheme funders to carry out activities in relation to more than one master trust may facilitate consolidation in the market by making it easier for a scheme funder to rescue a failing master trust.
The first regulations made under the power under clause 11(3A) are to be subject to the affirmative procedure; subsequent regulations will be subject to the negative procedure. That is obviously to provide the necessary scrutiny in the first instance after the consultation. Given the importance of scheme funders to the financial sustainability of master trusts, and the potential impact on scheme funders of the requirements in clause 11, we recognise that the regulations first exercising the power to set out exceptions to the requirement should be subject to parliamentary scrutiny and debate.
Alex Cunningham
I am delighted to serve under your chairmanship, Ms Buck, albeit with a frog in my throat. Our concern with this clause regards the strict nature of requiring a master trust to be a separate legal entity, which could have numerous consequences across the board. Since the contents of the Bill have become known, I have tried to meet as many parties and groups as possible that have an interest in the Bill, to hear their perspectives, thoughts and concerns. This clause came up often. I note that the Minister has tabled amendments to it, which I welcome as a first step towards recognising that the original clause was not fit for purpose.
Amendment 3 widens the definition of the two legal characteristics that a scheme funder must meet in order for a master trust to be authorised by the Pensions Regulator. It gives the Secretary of State greater discretion in exempting a scheme from the second requirement. However, the amendment does not make clear what policy considerations will apply to how that discretion is applied. Will the Minister confirm that insurance companies regulated by the Financial Conduct Authority with master trusts will be exempt from the second requirement, giving members access to the full resources of the insurance company, which will carry full liability for costs in the event of a master trust scheme failure? Our amendment 26 seeks to clarify just that—namely, that if an organisation is already regulated by the Financial Conduct Authority, which is incredibly thorough with its regulation, it does not need to register as a separate legal entity as well.
As the Minister said, my colleagues in the Lords raised concerns about the clause, proposing instead that the scheme funder be approved by the Pensions Regulator, but that was rejected with the argument that it would be more difficult for the regulator to obtain transparency on the financial position of the funder and its financial arrangements with the master trust. Instead, colleagues tabled a motion requiring the scheme funder to be constituted and to carry out its activities in a manner that enables its financial position, and the financial arrangements between it and the master trust, to be transparent to the regulator. However, that was withdrawn on the assurance that the Government would be considering that later in the legislative stages.
So here we are, with an amendment from both the Opposition and the Government on how to ensure that we are not unnecessarily enforcing regulation on companies that are already bound by strict regulation elsewhere. The difference here is that the Government’s amendment is on the vague side. The second requirement for the scheme funder that the Government have proposed is that it carries out only activities that relate directly to master trust schemes of which it is a scheme funder or prospective scheme funder. The line in amendment 3 following on from the second requirement gives the Secretary of State the power to
“make regulations providing for exceptions from the second requirement.”
That needs more detail and clarity. What possible exceptions do the Government have in mind? Has the Minister yet considered what these exceptions may be?
We need stability, and to provide stability for the numerous businesses and companies that rely on us to provide effective laws governing their livelihoods and, particularly in relation to master trusts, the livelihoods of millions of people in this country. This is not largely a matter that we disagree on—I think we share the same aims—but I want to be able to provide more assurance to the companies watching today that we will not seek to bear down on them with extra costs and paperwork when they are already abiding by regulation from the Financial Conduct Authority.
Although the Government’s amendment does not give me enough specifics about the type of exceptions that they would give the Secretary of State the power to decide, I welcome their approach and their acknowledgement that it is counterproductive to place extra requirements on companies that already follow the rules diligently. We had a particular concern that forcing a restructuring on master trust schemes could weaken the position of the funder, which is especially important when one considers the debate on the issue of the funder of last resort. We need larger companies to be in a position to pick up failing master trusts, and should ensure that they are well equipped to do that.
I welcome the amendment from the Scottish National party Members, which would also allow exceptions to the requirement that a scheme funder carries out only activities directly relating to the scheme for which it is a funder. I am optimistic that we will leave here today having made positive progress on this matter, as we largely seem to agree on the principle of exceptions.
Amendment 26 would except insurers that operate under stringent Financial Conduct Authority regulation. Where insurers with master trusts operate under both sets of regulation, it must be ensured that unnecessary duplication or overlapping of the requirements is avoided. In particular, insurers should not have to reserve even more additional funds to meet the requirements set out for master trusts, as they already hold the resources needed for this purpose under other regulatory regimes. Members of master trust schemes used for automatic enrolment should meet high solvency and reporting standards, but these organisations have already met standards set under other frameworks, such as that of the FCA. We believe that it is not necessary to expect large companies with significant capital to be required to hold additional capital on top of that in order to meet the new obligations in the Bill.
Can the Minister provide assurance right now that insurance companies that are already under strict regulation by the Financial Conduct Authority will be exempt from the separate legal entity clause, and will he provide clarity on when we can expect to see the Secretary of State’s regulations? The scheme funder requirements in the Bill will bring no additional benefit to the many people in master trust schemes operated by insurers, which are already well protected. Additional requirements on FCA-regulated insurance companies will lead to significant additional costs. I hope that the Government can address my concerns, and that they will outline exactly what regulations the Secretary of State will look to implement.
Ian Blackford
The Minister’s amendment of 31 January —Government amendment 3—gives the Secretary of State power to make regulations providing for exceptions to the requirement that a scheme funder must carry out only activities directly relating to the master trust. We do not know what conditions will attach to the exceptions, or even if the Secretary of State will exercise that power. An indication of the Government’s intentions would be helpful. However, the indication that there will be some discretion is positive. I would welcome clarification from the Government on how and when the regulatory powers outlined in the amendment will apply, and in what circumstances they might be used.
Will the Government confirm whether they plan to consult with the insurance industry before defining “information” and “additional requirements”? Zurich has said that the approach taken by the shadow Pensions Minister in amendment 26 and the SNP’s amendment give greater certainty, which would be preferable. As far as Labour’s amendment 26 is concerned, we share the concerns about the unnecessary duplication of requirements for insurers, which already operate under stringent regulatory standards. Our amendments 34 and 35 would have a similar effect to amendment 26, as they state that the requirement need not apply to firms whose activities are already restricted by virtue of existing regulation.
The Prudential Regulation Authority’s rules mean that insurers’ activities are restricted. This will mean that the activities of the scheme funder not directly related to the master trust are transparent and do not threaten the solvency and sustainability of the master trust. Amendment 35 makes provision for the Secretary of State to define “restricted activities” in regulations, including through a list of specific activities restricted in order to minimise risk of loss by master trust scheme funders.
Richard Harrington
This is a very good and laudable example of Government and Opposition Members trying to achieve the same objective. I have already heard many of the arguments used today by the Opposition; the Association of British Insurers and others have made similar arguments. As I have often said before, this is not black and white. It is not as though one argument makes absolute sense and the other is absolutely stupid; that is not the case at all. The argument is legitimate. We have had to think about this following representations, and following the Lords debate. However, I do not think that the amendments would achieve the level of transparency needed for the regulator’s financial assessment of the scheme.
Amendment 26 would disapply the requirement on an FCA-regulated insurance company that is also a scheme funder of the trust to set up a legal entity. The amendment would hamper the regulator’s assessment of the final sustainability of the scheme. The matters overseen by the FCA in relation to the prudential and financial conduct of the insurance provider are not the only aim behind the clause; they are aims, but not the only aims, and are not the only aspect that the regulator needs to take into account in the assessment.
The hon. Member for Stockton North asked me to clarify quite a few points. He asked whether the FCA-regulated companies will be exempt. They will be exempt if they meet the prescribed requirements in the regulations. He asked how we will get to the regulations. We will consult on them; we are not simply going to make them up. They are not something that the Secretary of State will dream up in his office. I promise that they will be comprehensive. The intent is to ensure that there is no duplication of regulation; that is why we have created the extra flexibility of the Secretary of State’s discretion.
The Chair
Will the Opposition confirm whether they wish to press their amendments to a vote?
Alex Cunningham
It is amazing the amount of consensus that we are managing to achieve today, but I still return to duplication. The Minister is saying that measures will be in place through regulation to ensure that we do not have the duplication I am concerned about. It all boils down to these invisible regulations.
I am grateful to the Minister for providing clarity on the areas that will be covered by the consultation on the future regulations. The industry is concerned that they are a considerable time off. He said it is not long until 2018, but the cliché is that a week is a long time in politics. It is important to send clear signals to the industry, particularly to those who are likely to be or could have been compelled to have the additional administrative burden on them, to make it clear to them that this will not be required because they should be able to read much of that in the document that goes out for consultation.
Amendment 3 agreed to.
Amendment made: 4, in clause 11, page 7, line 20, leave out subsection (6) and insert—
‘( ) The first regulations that are made under subsection (3A) are subject to affirmative resolution procedure.
( ) Any subsequent regulations under subsection (3A), and regulations under subsection (4), are subject to negative resolution procedure.”.—(Richard Harrington.)
This amendment makes provision about the Parliamentary procedure for the new regulation-making power provided for in amendment 3. The power will be subject to the affirmative procedure when first exercised, and to the negative procedure on any subsequent exercise.
Clause 11, as amended, ordered to stand part of the Bill.
Clause 12
Systems and processes requirements
Alex Cunningham
I beg to move amendment 27, in clause 12, page 7, line 43, at end insert—
“() A minimum requirement of annual reporting of administration, fund management costs and transaction costs for each asset class, drawdown product and for active and passive asset management strategies.”.
This amendment would introduce annual reporting requirements for Master Trusts.
In his speech to the TUC last week, the Minister spoke about the consensus there may be in Parliament about pensions policy. In some areas, he is right, but he and I know that we are in very different positions on matters such as the future of the state pension and how it can be applied to different people in different circumstances—the Women Against State Pension Inequality Campaign has been mentioned in that context. One area where the Minister and I agree and which affects the Bill and clause 12 is the need for maximum transparency in the pensions market, revealing to members of pension schemes, including master trusts, exactly what fees they are being charged and for what. In his speech to the TUC, the Minister said:
“We have to get transparency. It’s not an option to do nothing. I’d like to thank the many people in this room that have worked for it.”
The amendment would give the Minister and his Government the opportunity to demonstrate that consensus does exist, to prove their credentials on transparency and to ensure that members of master trusts have access to an annual report of administration, fund management costs and transaction costs, so that they can see exactly how the fees are broken down and what they are actually paying for. It would also help to satisfy the Financial Conduct Authority’s desire to reveal all costs, which it believes will result in competition and potentially better performance for members.
No Member of this House would go into a marketplace to buy anything without seeing the cost clearly displayed, whether that be a large white goods item or just a new shirt or blouse. Similarly, we must ensure that each member who is auto-enrolled into a master trust can establish what each investment choice and drawdown product costs. Anything short of that betrays millions of citizens. We have a duty to ensure that a reporting line is opened between the master trust and its members if we are to achieve what Opposition Members and, I believe, the Minister want to achieve.
I know there may be some resistance from those in the industry to some of those ideas, even though most have tried to convince me over the past few months that I have been shadow Pensions Minister that they are open to greater transparency, are trying to deliver on it and will do so much better in the coming months. However, I think we need to help them by laying down a marker in the Bill that will set a standard of the Government’s expectation.
In the upper Chamber debate, Lord Freud said
“We clearly need to ensure that trustees of occupational schemes and the independent governance committees of workplace personal pension providers have complete, consistent and standardised cost and charges information before they can report it to members; at this point, they do not… We want pension scheme members to have sight of all ?costs and charges, regardless of how they are incurred, and to give members the confidence that there are no other hidden costs and charges.”—[Official Report, House of Lords, 19 December 2016; Vol. 777, c. 1527.]
There is that consensus again. I could not have put it better myself, although the noble Lord could have done more to make it a reality in the Bill.
Rather than wait for the final outcome of the consultation exercise on pension fund cost collection promised by the Secretary of State, the amendment would being master trusts into line with those in the Netherlands, where there is a statutory requirement for trustees to report to their members on three cost headings: administration, investment management and transactions. We need data that enable clear analysis of costs incurred and can be applied ex post to the gross returns delivered by workplace pensions. Then we can get to the real gross return that has been generated on the assets and assess how much of that real gross return has slipped from the saver to the financial services sector. By understanding that slippage in its entirety, we can begin to understand what money has been paid for whatever value has been generated.
Some good things are already happening in the pensions world, but much more needs to be done to progress the transparency agenda. The only area of asset management that is ready to be analysed is the funds used by the local government pension scheme. They are about to be analysed by the scheme advisory board, to ensure they are delivering best value for sponsors and members alike. The architecture to get the data, analyse it and present it is being discussed with a view to being built, and will form a platform from which other projects, including the value-for-money analysis needed for all workplace pensions, can be delivered.
I believe the Minister is a fan of this work too, so I hope that he and his Government recognise that the easiest and most efficient way to ensure that data for master trusts are collected is to adopt the LGPS cost template. After all, it has been sanctioned by the Department for Communities and Local Government and the data points agreed with Investment Association members, who in the main will be the same suppliers of asset management to the LGPS.
What an opportunity we have before us to herald the day that every person auto-enrolled into a master trust is given the opportunity to understand what pension system they are going into, how much it costs and how much they will get—even if in a defined-contribution scheme that is more estimation than fact. To do otherwise than give them that advantage is a clear breach of fiduciary duty owed to scheme members. We are all aware that the average size of a pot for a person in a master trust is very small, but the principle of driving best value is probably all the more important.
I asked for a simple example of what changes in costs could mean for a member of a pension scheme, and the Unison guide—perhaps I should declare that I am a member of Unison—to defined-contribution costs provided the following example. A total annual contribution of £10,000 might be made up of £4,000 of personal contribution, £4,000 of matched contribution by the corporate sponsor and £2,000 of tax top-up. If we make that level of contribution constant over 40 years, use a 5% gross performance figure, which is the market rate of return over the longer term, and vary the costs of the industry from 0% to 2%, then at nil percentage cost the final size of the pension pot is £1,268,000. At 0.75% costs, the final size of the pension pot is £1,051,000. At 2% costs, the final size of the pension pot is £777,000. That is a huge difference.
The FCA’s “Asset Management Market Study Interim Report” said:
“The evidence suggests there is weak price competition in a number of areas of the asset management industry. This has a material impact on the investment returns of investors through their payments for asset management services.”
The example I just gave probably demonstrates that. One of the FCA’s conclusions was that there should be a requirement for increased transparency and standardisation of costs and charges information for institutional investors. The Minister’s affirmative one-word answer to my question on the Floor of the House about whether the Government had agreed to implement the FCA’s recommendations in full was very welcome. Today, we have the opportunity to deliver in part some of what is desired through the Bill.
It is a fundamental market failure that no pension fund can currently understand its cost basis. It follows that if there is no understanding of costs, the investment strategy cannot be fully evaluated. Members cannot make the accurate choices needed to improve their investment performance without that knowledge. If a member is incurring costs above 0.75%, we know that will have a considerable impact on the value of pension pots both in accumulation and in decumulation. That is why we must ensure that reporting to members includes the accumulation and drawdown phases.
Since the Government introduced the drawdown option in their new pension freedoms, all the attention has been on whether members will be wise with their money. No real attention has been paid to the costs associated with the option, and probably even less attention to the potential long-term effects of a decision to access a lump sum at a much earlier stage in a person’s life. The aim is to keep options open and increase income through investment growth, but if investments do not go the way the member would hope, or if their pension pot is depleted by opaque charges, the income will be reduced all the more in the longer term. The risk and the responsibility rest with the member. Charges for ongoing administration and investment management will be deducted from their account, which is all the more reason transparency and low charges are important. Members of this House should therefore see that the efficient management of members’ funds is critical in ensuring that we do not create a pension crisis that our citizens are forced to endure in their retirement.
I will turn to the FCA’s excellent interim report in a bit more detail. The UK’s asset management industry is massive: it manages £6.9 trillion of assets. I am not sure whether a trillion is a billion billions? I think it is a billion billions.
Richard Harrington
I am not an expert, but I think it is different in the United States from here—like most things.
Alex Cunningham
The Minister tempts me, but I will move on. The UK’s asset management industry manages more than £1 trillion for individual investors in the UK and £3 trillion on behalf of UK pension funds and other institutional investors that is invested by that management industry. The service offered to investors comprises a search for return, risk management and administration, although it is the investor who bears virtually all the risk.
More than three quarters of UK households with occupational or personal pensions use such services, including the more than 10.2 million people saving for their retirement through pension schemes. Very few of us are not touched by this sector, although most people have probably never heard of it; more important, they will have little idea how much of their hard-earned cash goes into the industry. The FCA’s report confirms that asset management firms
“have consistently earned substantial profits…with an average profit of 36%. These margins are even higher if the profit sharing element of staff remuneration is included.”
Ian Blackford
On a point of order, Ms Buck. We are all keen to get through the Bill. I am sitting here listening to the hon. Gentleman and wondering what relevance what he says has to the amendment. Quite frankly, it seems to have very little relevance.
Alex Cunningham
I am disappointed that the hon. Gentleman is not following my argument, but perhaps he will as I move to my conclusion.
As I was saying, charges for active investments have remained stable, unlike charges for passive investments, which have been falling. The FCA suggests that that reflects competitive pressures and the unwillingness of funds in the active fund market to undercut each other, and it says that weak pressure on prices can lead to weak cost control. The FCA report is particularly scathing about the role of investment consultants: with 60% of that market controlled by three firms, the FCA is considering a market investigation reference to the Competition and Markets Authority. The report concludes with a number of very welcome interim proposals on remedies, not least on transparency and all-in fees, but this is a hugely powerful and profitable sector and it will be lobbying hard to water down any action.
The Secretary of State confirmed that the Government will consult on hidden costs and charges later this year. On Second Reading, 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… 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.”—[Official Report, 30 January 2017; Vol. 620, c. 756.]
I asked in that same debate why it is necessary to start consulting people when we should simply be saying that we want to know what all the costs are in the entire investment chain. I said that, yes, I agree with consultation—but surely we are getting to the end of the tunnel on that.
The FCA is currently holding two separate consultations on cost transparency. The first is in response to the watchdog’s interim report on its asset management market study and calls for an all-in fee approach to quoting charges. The second, which closed to responses on 4 January, could require asset managers to disclose aggregate costs and then provide a further breakdown on request. That is good news and surely statutory bodies such as independent governance committees, the Local Government Pension Scheme advisory board and the Pensions Regulator are quite capable of making sure that whatever comes out of the FCA’s consultations is enforced. The only beneficiaries of further consultations are the asset managers, who will have won yet more years of grace in which they can operate under the radar.
The Investment Association has questioned the data and metrics the FCA used to come to its conclusions that active funds do not on average provide better value than passive funds. I am concerned that, despite making all the right noises and promising full transparency, the Investment Association has set out to kick the consultation process down the long road by persuading the Department for Work and Pensions that it needs to discover exactly what the FCA has spent the past two years discovering.
If we are to have another consultation, it will be in the teeth of all the evidence gathered so far, at enormous expense to Government and to the private sector, and will serve employers and workers very badly. Perhaps it is time for the DWP to stop consulting and start turning the current consultations into enforceable legislation. It should learn from its colleagues at DCLG, who, as I said earlier, have endorsed the work of the LGPS advisory board. DCLG’s own programme of fund consolidation included advice that the newly forming asset pools should prove to them that active fund management should be no more expensive than passive.
Craig Mackinlay (South Thanet) (Con)
I do not want to stop the hon. Gentleman when he is in full flow—we are very much enjoying his oration about the effects of compounding and charges. Surely, as we have more master trusts and the auto-enrolment market gets bigger and bigger, it will be a natural feature of that market that people will be more interested and aware of the charging structure. My personal view is that the concerns that the hon. Gentleman raises will come out as the market expands and evolves, and more and more of these trusts come forward. Much as I have enjoyed what he has to say, I have a feeling that that will be the natural progression of things in the market.
Alex Cunningham
Although I am grateful to the hon. Gentleman for his intervention, it is perhaps a typical response from a Conservative politician: just leave everything to the market. In my opinion, we should not leave everything to the market.
When offering investment funds to employers and members, master trusts need to prove the value of the investment post-charges and that active strategies are no more costly than passive. They should remember that the transaction cost issue, badly delivered in 2013, is up for review in 2017 and forms part of the auto-enrolment review.
The People’s Pension, the not-for-profit master trust launched by construction sector financial provider, B&CE, with 1.7 million members, is NEST’s closest private sector rival.
Ian Blackford
Could the hon. Gentleman recap and clarify what he just said—that active fund management is no more expensive than passive fund management?
Alex Cunningham
That is exactly what I said earlier in my speech. Some of the people who have briefed me have said that that is very much the case.
NOW: Pensions, the master trust backed by Denmark’s ATP, also introduced employer charges at the beginning of 2016, alongside a 0.3% management fee and a £1.50 administration fee. Morten Nilsson, the scheme’s chief executive, argued that the cost was a necessity if NOW: wished to continue serving as a scheme of last resort for any employer.
We all agree about the issues. Everyone now acknowledges that something must be done, and done with urgency, and the Secretary of State appears to be on board. The auto-enrolment process must not be jeopardised by hidden cost scandals that emerge down the line, when it is revealed that valuable small pots could have been so much more valuable. Our aim is to ensure that master trusts are obliged to report to members. We should set that out for employers that are considering using a master trust. That is the underlying reason for the amendment, which I commend to the Committee.
The Chair
Before I call any other Members or the Minister, let me say that I am minded not to have a broad debate on stand part, because we have already covered a lot of the ground. Perhaps the Minister in particular will reflect on that before he speaks.
Ian Blackford
I will be brief. I want to pick up that issue of active versus passive fund management, because if anyone thinks that an active fund manager will not have higher costs than a passive fund manager, I am afraid that they have betrayed that they know nothing about the fund management industry. Put simply, anyone engaged in active fund management will have to deploy research and fund management skills; someone investing as a passive fund manager is exactly that, a passive fund manager.
Richard Harrington
Itching though I am to rebut some of the general points on transparency, I will do my best to stick to the amendment. As a point of clarification, however, the bit of the FCA review that the hon. Members for Stockton North and for Ross, Skye and Lochaber mentioned in fact makes the point not that active fund managers have more costs, but that over a period of time there is not much difference in returns. That is a totally different matter, but I think that was the point intended—I, too, read the report.
A final matter, given your instructions, Ms Buck, is to point out to the Committee that 1 trillion is 1 million million. A keen if somewhat nerdish Government Member—I am not sure who—came up with that information, of which I was not aware. I hope that the Opposition spokesperson will at least look at Hansard to see what 1 trillion is, since he missed all that.
I will not rebut the general transparency point, although I am itching to do so. However, I confirm to the Committee that I do in fact read The Guardian. That was the allegation made by the hon. Member for Stockton North. I will, however, refer only to the transparency bit of the amendment.
The amendment would insert a new subsection making it clear that regulations about the processes used to run the scheme may include a provision regarding a minimum requirement of annual reporting of administration, fund management and transaction costs. On the face of it, that takes into consideration a lot of the transparency points made by the Investment Association one way and the various lobby groups to which we have all spoken the other way—as the hon. Gentleman mentioned. The Government are taking action on that. The FCA report is an interim one and lots of things are in process. I am committed to transparency, but the question is what is relevant to the Bill.
The objective of the clause is to ensure that schemes are run effectively. It contains powers to make regulations that will specify what aspects of the scheme’s systems and processes the regulator must take into account in deciding whether they are sufficient to ensure that the scheme is run effectively. Examples of what such regulations may cover are listed in the Bill. The list already includes processes relating to transactions and investment decisions. We have been clear that the examples given are not exhaustive and that regulations may include other matters relevant to systems and processes. A guiding principle in setting the scope for the authorisation regime has been ensuring that master trust regulation is proportionate.
I should point out that existing legislative requirements already require trustees of occupational pension schemes offering money purchase benefits, including master trust schemes, to make an annual statement. The hon. Gentleman did not mention that: they are already required to make an annual statement regarding governance, which is known as the chair’s statement. It is appended to the scheme’s annual report and accounts.
The Government have an obligation under section 113 of the Pension Schemes Act 1993, as amended, to make regulations requiring transaction costs and administration charges of money purchase schemes to be published. We intend to consult, because the subject is very complex, and we are not, as the hon. Gentleman asserted, kicking it down the line. It is not that the Department for Work and Pensions does not want to do it. We intend to consult this year about how this information is published and proactively reported to pension scheme members.
Alex Cunningham
The challenge from the hon. Member for Ross, Skye and Lochaber is one I need to take back to those who advise me, to get an even greater understanding. I thought we would hear a few words of support from him on transparency, on which the Minister and I certainly agree.
I appreciate the Minister’s response. As he says, this is quite complex. I do not believe for one minute that the Government do not want to carry out the consultation exercise, but people out there in the industry are very keen that the Government get on with this, as are members. Members are keen to understand the costs and what they will be told about what their investments are costing them. I will reflect on the Minister’s answers in full, but in the light of what he said, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 12 ordered to stand part of the Bill.
Clause 13
Continuity strategy requirement
Question proposed, That the clause stand part of the Bill.
Richard Harrington
As I explained, there are criteria that a master trust must meet to be authorised by the regulator, one of which is that the scheme has an adequate continuity strategy. The clause sets out the requirements for that continuity strategy. It must set out how the interests of scheme members will be protected if the scheme experiences a triggering event—that is, an event that could put the scheme’s future at risk.
The aim behind the clause and the related measures is to ensure continuity of pension saving for the members of the scheme when that scheme experiences an event that could put its future at risk. That also benefits employers using the scheme, particularly those using it to meet their automatic enrolment legal obligations. An adequate continuity strategy would demonstrate that careful consideration had been given to what the scheme would do if it were at risk of failing. That should make the closure of master trusts more orderly and managed, which is good for members and employers. We all agree that chaotic and unplanned closures would likely be detrimental to them.
The reasons for and circumstances that could lead to a master trust failing may be different from more traditional occupational schemes. The risks for members and employers are different. That is of particular significance because master trusts tend to have a relatively high number of employers and members, and therefore tend to be less engaged than when an employer has a single scheme for their own employees.
That means that winding up a master trust may involve a lot of work and take a lot of time, and be complicated, difficult and expensive. Regulations under the clause will set out what the strategy should include and what actions the scheme will take to manage and protect the assets. The Government believe it essential that master trusts have adequate continuity strategies.
Nigel Mills (Amber Valley) (Con)
I have a quick question. Subsection (9) says that the strategy must be sent to the regulator within three months of being revised. Given that that must mean the strategy has been revised and finalised, why would we not want the regulator to get sight of it much quicker, in case there is something in it we are concerned about?
Richard Harrington
I believe the three months was reached after discussion with the regulator, taking the worst case into consideration. That is a long stop—it would generally be quicker than that—but it came out of discussions with the regulator.
We believe it is essential that master trusts have those continuity strategies and I hope clause 13 will stand part of the Bill.
Question put and agreed to.
Clause 13 accordingly ordered to stand part of the Bill.
Clause 14
List of authorised schemes
Question proposed, That the clause stand part of the Bill.
Richard Harrington
I am confused. I am proposing that clauses 14 to 20 stand part. Is that correct?
Richard Harrington
I am sorry, I just wanted to make sure. I thought that was the case.
The clauses make provision for a new supervisory regime for master trust schemes. One of the great strengths of the authorisation regime is that its requirements are ongoing. An authorised master trust will have to ensure that the Pensions Regulator remains satisfied, and is not just satisfied at the beginning, that it continues to meet the authorisation criteria to continue operating in the market. The clauses ensure that the regulator receives and can request the information it will need to be satisfied that the authorised schemes continue to meet the authorisation criteria, and it can withdraw the authorisation if that ceases to be the case. I believe they are very sensible clauses.
Clause 14 requires the regulator to maintain and publish a list of authorised master trust schemes. This provision will help employers looking for a scheme for automatic enrolment purposes and ensure that there is transparency about which master trusts have achieved authorisation. Clause 15 requires the trustees and scheme funders of authorised master trusts to send the scheme accounts and the scheme funder’s annual accounts to the regulator annually. This information is necessary for the regulator’s ongoing financial supervision of the scheme. We believe that it will play a key role in the regulator’s consideration of the reasonableness and accuracy of the estimates set out in the business plan, which I mentioned before, and about the running costs, sources of income and profit and loss in relation to the master trust’s activities.
The clause will also require each master trust scheme funder to provide its accounts to the regulator on an annual basis. Those accounts are also required as part of the authorisation application at the beginning, but the clause ensures that they have to do it on an ongoing basis. Taken together, that will enable the regulator to risk-assess the solvency of scheme funders and the strength and enforceability of their commitment to providing funds for the master trust.
Nigel Mills
I have another boring techie question, I am afraid. The clause specifies that the scheme funder’s accounts must be provided within nine months of the end of the financial year, but for the actual master trust scheme accounts it says
“no later than two months after they are obtained by the trustees.”
Is there some other provision that creates a backstop date when the trustees have to get those accounts or could we be waiting, in theory, forever to get the actual accounts for the scheme? I guess there must be a provision somewhere.
Richard Harrington
If I may, I will return to that point. I am a little confused by it, although I am not saying that my hon. Friend is trying to confuse me. If I may, I will continue in full flow and will do my best to answer it by the end of my comments or apologise to him.
The measure will enable the regulator’s assessment of the financial sustainability of the master trust to take that information into account, to the extent that it effects the financial position of the scheme. The combination of the information from the scheme accounts, the scheme funder’s accounts, the business plan and supporting documents will support the regulator’s ongoing financial supervision of a master trust.
Clause 16 provides that the regulator may, by notice in writing, require the trustees of an authorised master trust scheme to submit a supervisory return. The Government recognise that the requirement means additional work for trustees. Therefore, the clause provides that a supervisory return can be requested only once in any 12-month period at most, and that trustees are given at least 28 days to compile and submit the return. It may be appropriate for the Government to specify the information that can be requested through such a return. The clause allows the Secretary of State to make regulations to that effect.
Clause 17 provides that the regulator must be notified in writing if significant events occur in relation to an authorised master trust scheme. Those events will be defined through regulations. I will briefly explain what the Government intend to capture by the term “significant events” and give an example.
We intend that the list of significant events will capture events that could affect the ability of an authorised master trust scheme to continue meeting the authorisation criteria. I should like to be clear that the occurrence of a significant event in a master trust scheme will not necessarily have an impact on the ability of that scheme to meet the authorisation criteria, but it may have such an effect. For example, the scheme may have a change of trustee. As the fitness and propriety of a trustee is linked to the authorisation criteria, the regulator must be informed of such a change so that the new trustee may be assessed against the relevant standards—the regulator may well do that, and that would not affect the scheme’s authorisation status. Equally, there could be an impact. The clause sets out who will be subject to the reporting duty, and again the regulator can issue a civil penalty for failure to comply.
On clauses 18 and 19, for the first time, the regulator will have the function of authorising a pension scheme before the scheme can operate in the market, as I mentioned. The implications of the decisions that the regulator will have to make are major, and we must be satisfied that we have given the regulator the tools it requires to ensure that such decisions are fully informed. It is therefore important for the Bill to make provisions that allow the regulator to gather the information it needs about the master trust schemes. The clauses will ensure that the regulator can use all the information-gathering powers effectively in relation to master trusts and the new authorisation regime.
Clause 20 gives the regulator the ability to withdraw a scheme’s authorisation if it stops being satisfied that it meets the authorisation criteria. The clause is fundamental to the Bill; without it, there would be no consequence for a scheme that becomes authorised and then lets standards slip, or if events occur that materially impact whether the regulator remains satisfied that the authorisation criteria have been met.
The regulator seeks to support and assist those involved in running pension schemes before it comes to sanction them, but if a scheme no longer satisfies the regulator, the regulator must have the power to withdraw authorisation from the scheme. We will come to discuss the consequences of a decision to deauthorise a master trust scheme in due course, because such provisions are made later in the Bill. The clause simply provides a necessary power so that the regulator can make such a decision. Without that, the authorisation regime would be reduced to little more than a one-off check at the beginning and would not work to protect the interests of master trust pension schemes.
I will think about the point made by hon. Friend the Member for Amber Valley and either write to him overnight or bring a response to the next sitting. I apologise, but my mind has been on these matters and I will have to think about his point, which was a very good one.
Question put and agreed to.
Clause 14 accordingly ordered to stand part of the Bill.
Clauses 15 to 20 ordered to stand part of the Bill.
Clause 21
Triggering event: duties of trustees
Question proposed, That the clause stand part of the Bill.
Richard Harrington
Clauses 21 and 22 are the first in a series that extends what happens when a master trust experiences a triggering event, which I mentioned earlier. To remind members of the Committee, a triggering event could put a master trust scheme at future risk. The aim of the next series of clauses is to increase the level of oversight by the regulator during the triggering event period and to mitigate the risk to members and employers.
The provisions also intend to cover the way in which the situation is resolved, ensuring that it is supportive of a member’s continued saving in a pension scheme and of an employer’s automatic enrolment duties. The measures take account of the fact that there is likely to be a lower level of employer engagement in or influence over the running of the scheme, and the complexity of addressing the situation when there are multiple employers who also have automatic enrolment duties to fulfil.
Craig Mackinlay
I seek just one clarification from the Minister. Earlier today we agreed to Government amendment 3, which defined a scheme funder as
“a body corporate or a partnership that is a legal person”.
However, item 5 in the table of triggering events listed in clause 22(6) interprets a scheme funder slightly differently, as
“a person or body of a kind that meets requirements prescribed under…the Pensions Act 2004”.
I am concerned that we have agreed to an amendment that exempts individual persons, but there seems to be a slightly different interpretation of what the scheme funder is in the table of triggering events. It may just be an oversight, but some clarification would be helpful.
Richard Harrington
I will get back to my hon. Friend on that very technical point, but I do not believe that there is any intention for the definition to be different.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Clause 22 ordered to stand part of the Bill.
Clause 23
Notification requirements
Alex Cunningham
I beg to move amendment 28, in clause 23, page 16, line 19, after “employers” insert “and members”.
This amendment would mean that members must be told of any triggering events, not just the employers.
The Chair
With this it will be convenient to discuss amendment 29, in clause 26, page 19, line 10, at end insert
“and Trustees should then notify members to this effect”.
This requires Trustees of the Master Trust to notify members once TPR is satisfied that the triggering event has been resolved.
Alex Cunningham
I will continue to champion the members of master trusts this afternoon. The amendment would simply ensure that when triggering events happen, and if and when they are resolved, information on them flows right through the communication chain. As I said when I spoke on member engagement, it is important to understand that we need to put the member at the heart of the process. If members find out only at second hand about such events, which affect their hard-earned cash, it is bound to result in lower levels of trust—never mind all the anxiety and everything that goes with it. I pose the question: how would hon. Members feel if no one told them that there was an issue with their pension pot? I know that is rare for Members of Parliament, but if they had a separate pension pot and were not given that information, would they not be concerned? They would not be best chuffed, and they would want to know why they were not being informed.
Trust is vital, and it is at very low levels both in financial services and, more importantly, in us who make the law. How can we look our constituents in the eye if they ask us, “Why did you not put me first? It’s my money. It’s my retirement at risk”? There are those who claim that there are problems with reaching vast numbers of people, but this is the 21st century and it is not necessary to fell trees to make paper to send out hundreds of thousands of letters. It is a simple of chain of events, and if it can go to employers I believe it should also go to members.
Richard Harrington
Amendment 28 would require the trustees of a master trust that experiences a triggering event to notify all the members that the event has occurred and of other matters to be set out in regulations. The explanatory note to amendment 29 says that the intent is to require trustees to notify members once the regulator is satisfied that the triggering event has been resolved, but the effect of the amendment is a bit wider. It would require the trustees to inform members of the regulator’s decision—in other words, whether it is satisfied that the event had been resolved or not.
Clause 23 requires key people associated with the master trust to notify the Pensions Regulator if the scheme experiences a triggering event. Clause 26 sets out the framework for a scheme pursuing continuity option 2—in other words, the trustees aim to resolve the triggering event. The resolution is the important part of it. Once the trustees believe they have resolved the event, they submit evidence to that effect to the regulator. Having considered the evidence, the regulator notifies the trustees of whether it is satisfied that the event has been resolved. Our aim is for events to be resolved where possible. The scheme can then continue and members can keep saving in it. We have not required the trustees to notify members.
As the hon. Gentleman said, at the point that the triggering event happens, the trustees may be in discussions with the regulator and may not have reached a conclusion about whether the scheme will continue to operate or whether it will be wound up.
Alex Cunningham
I accept that the triggering is the actual start of the process, and that there may well be discussions. At what point does the Minister think the members ought to be told that a triggering event has in fact taken place and that their scheme is in some doubt?
Richard Harrington
To rebut that point—I emphasised the words “resolve” and “resolution”—we believe that the majority of triggering events will end up with a very satisfactory resolution. Remember, many members do not take an active decision to join; they join through their employer. They are not actively engaged in the scheme; their employer is the conduit, so providing incomplete information to members would cause undue distress and risk unintended consequences, such as members opting out of the scheme and stopping saving in a pension, when a resolution to the triggering event could very easily be agreed with the trustees or, indeed, opposed by the regulator.
If a scheme resolves its triggering event and continues to operate, I do not see why members should see any change. It is exactly the same for them: their pension saving will not be disrupted. I would not want them to be unduly alarmed or confused. The intervention of the regulator during the triggering event period, and the additional controls that are put in place during that period, will help to ensure the scheme gets back on track.
If the scheme is going to wind up—I believe this is the relevant point—members will be informed well ahead of anything directly impacting on them, and will be given the information and options.
Alex Cunningham
If the members are going to be told about the wind-up, where in the regulations is the requirement for the master trust to inform them?
Richard Harrington
The regulations have not yet been published, but the hon. Gentleman makes a valid point.
The aim behind these clauses is to ensure that members continue to save into a pension because they do not believe that the sky is falling in—the entire system is intended to ensure that that is not the case. To that end, members are not informed at such an early stage as is proposed in amendment 28, because of the adverse implications that could have and the absence of any practical advantage for members. What advantage would that provide to members, given that the matter will be resolved? There does not appear to be an obvious benefit.
However, I recognise how important it is that members are informed well ahead of something happening that might have a direct impact on them and—I think this is the core of the hon. Gentleman’s point—disrupt their pension saving. I am confident that the measures included in the Bill, and those proposed for inclusion in regulations, will achieve that outcome. I therefore ask the hon. Gentleman to withdraw his amendment.
Alex Cunningham
I am particularly interested to know what proposals there might be in regulations to ensure that the member is told, whether at the winding-up stage or when it first has an impact on them, and how that will be defined. I hope that the Minister will respond to that point before I sit down. I accept that it is particularly important that members are engaged throughout the process. Unfortunately, the Minister does not agree with me on that point. I believe that there is no more key a person in this chain than the member, but I accept that they should be informed when it is a significant thing affecting their lives. The Minister might like to intervene to explain what proposal there will be in regulations to ensure that members are informed when there is a material impact on their pension pot. Otherwise, at this stage I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 23 ordered to stand part of the Bill.
Clause 24
Continuity options
Question proposed, That the clause stand part of the Bill.
Richard Harrington
The clause sets out the two continuity options that must be pursued by the trustees when there has been a triggering event. Option 1 requires the scheme to transfer out all members’ accrued rights and benefits and then wind up. Option 2 is for the scheme to resolve the triggering event to the satisfaction of the Pensions Regulator. Trustees will have a choice under the regulator’s authority, and once the regulator has decided to withdraw authorisation, that is final, or there is a notification that the scheme is not authorised and then they have to pursue continuity option 1.
Our aim is that members should continue to save despite the master trust of which they are a member experiencing a triggering event. Therefore, where the scheme is able to resolve its issues, it should do so. However, where the issue could lead to the failure and closure of the scheme, the members should be transferred out, under the auspices of the regulator, hopefully to continue to save with as little disruption as possible.
If authorisation is withdrawn or refused by the regulator, or there is a notification that the scheme is not authorised, members will have to be transferred out and the scheme wound up. Irrespective of the option, we want the process to be as smooth and as managed as possible. The mismanagement of an issue or an unmanaged closure of a scheme would be bad for members and could be detrimental to confidence and lead to members opting out of pension saving, which is the last thing we all want.
Where a master trust experiences an event that could lead to its failure, there needs to be greater planning and control and more safeguards for members and employers. It is important that the scheme has done detailed planning so that what happens following a triggering event is thought through and organised and the process is orderly and managed. That should help to ensure ongoing automatic enrolment without disruption.
Richard Harrington
I beg to move amendment 5, in clause 25, page 17, line 21, leave out “Master Trust” and insert “pension”.
This amendment and amendment 8 enable trustees pursuing continuity option 1 to propose a transfer of members’ accrued rights and benefits to a pension scheme that is not a Master Trust scheme, as long as the alternative scheme has characteristics specified in regulations, and any additional requirements in the regulations are met.
Richard Harrington
The amendments, which apply to clauses 25 and 34, continue with the continuity options. These apply when the trustees of a master trust are pursuing option 1. Clause 25 sets out the framework for continuity option 1. This is where the scheme transfers out all the members’ accrued rights and benefits, and winds up. The amendments would allow regulations to be made in future that would let the trustees in this situation choose a scheme that is not a master trust to receive their members’ rights and benefits.
The receiving scheme would have to have characteristics set out in the regulations. The non-master trust receiving scheme would be made subject to exactly the same restrictions on increasing or introducing the new charges as those to which master trust receiving schemes are subject. The amendments would enable the type of schemes that can be receiving schemes to be widened where a master trust is going to wind up and has to transfer all its members out.
In that situation, although members have the opportunity to make their own choice about where their accrued rights and benefits go, where they do not make a choice there needs to be provision for their rights and benefits to be transferred into a suitable pension scheme. At present that is restricted to another master trust. These measures permit this to be opened up by providing a regulation-making power to include other pension schemes, should that be appropriate. It may well not be appropriate, but in some cases it will be. Such schemes could include personal pensions and pension schemes that provide decumulation options, such as drawdown. This means we will be able to react appropriately to future innovations and developments in the pensions market. Indeed, the rise of master trusts shows how quickly markets change. This may be of particular use where members were using a decumulation option, as it leaves open the possibility that members could make use of new decumulation products in future.
Allowing other types of pension schemes to receive transferred members, as long as they meet specified requirements, could increase the options available to trustees, introduce extra flexibility and widen the market for potential schemes. This might be useful if trustees found that they were struggling to find somewhere appropriate for their members’ rights, which might particularly benefit members using decumulation options. Being able to increase the options in future might help reduce the risk that trustees of failing master trusts might not be able to find another master trust to take their members on.
As these amendments will mean that it is possible to widen the options available to the trustees of a master trust that was closing, and as that would be for the benefit of members, I commend them to the Committee.
Alex Cunningham
We give a general welcome to the amendments, some of which have been tabled in response to issues raised by my colleagues in the other place. The amendments are intended principally to ensure that scheme members are protected in the event of a winding up, and we certainly welcome that. We also wish to ensure that a master trust winding up does not disincentivise savers or negatively affect their rights and benefits.
Government amendment 5 means that if there is a triggering event and a master trust has to wind up and transfer members and their benefits, this can now be to a scheme other than another master trust scheme. This change, which has been made since the Bill left the House of Lords, invites three questions to which the answers are not clear. First, in the event of a failing master trust winding up, what conditions and regulatory standards must a receiving scheme that is not a master trust meet before the Pensions Regulator will authorise the transfer of members and their assets to it? Secondly, how will the concept of scheme funder in the Bill be applied to a receiving scheme that is not a master trust?
Thirdly, an essential provision in the Bill to protect master trust scheme members from bearing the costs of sorting out a scheme failure is in clause 34, which places a prohibition on increasing members’ charges during a triggering event, including wind-up and transfer. The prohibition is binding on both the transferring and receiving master trust scheme. Can the Minister give a categorical assurance that the prohibition on increasing member charges will, in the light of the amendment, apply to any receiving scheme in a triggering event? If the receiving scheme is not a trust-based scheme, which regulator will police adherence to that prohibition? Where is the line of vision in the Bill to show that all receiving schemes, master trusts or otherwise will be bound by the prohibition on increasing members’ charges?
We remain somewhat concerned that the Government have chosen to pursue their aim by introducing broad powers for the Secretary of State to make regulations in amendments 8, 10 and 12. We do not believe that approach provides a strong enough guarantee to scheme members that their benefits will not be eroded through the course of the transfer. Can the Minister guarantee to scheme members that that will never be the case? If he can, why not place such a guarantee in primary legislation? If he cannot, why not?
Richard Harrington
I have listened carefully to the hon. Gentleman’s points. This goes back to the core question of whether things should be in primary or secondary legislation and why. I repeat the argument, which I think is very reasonable, that part of the Bill is providing flexibility for the way things will change in the future. Whichever party happens to be in power, primary legislation is very difficult and takes a long period. The industry moves far more quickly. I know I keep repeating the same answer, but that flexibility is very much the principle of the whole Bill.
There is a difference in principle between us, but I hope the hon. Gentleman will agree that I have tried to be pragmatic with the arrangements, which provide the necessary practicality. I cannot therefore give him the undertakings that I would like to, because of the flexibility within the Bill, but I am convinced that this system will provide the most protection for members. As he knows, a lot of thought has gone into this. It is not a question of dispute based on an irresistible force and an immovable object; we have come up with a suitable compromise.
Alex Cunningham
I recognise the constraints and difficulties of trying to develop regulations on the hoof, as I was perhaps requesting of the Minister. If members started to understand this area, they would be really worried about it and want to understand it more, but I accept the Minister’s explanation.
Amendment 5 agreed to.
Amendments made: 6, in clause 25, page 17, line 23, leave out “subsection” and insert “subsections (1A)(b) and”.
This amendment is consequential on amendments 5 and 8.
Amendment 7, in clause 25, page 17, line 24, after “the” insert “Master Trust”.
This amendment is consequential on amendments 5 and 8.
Amendment 8, in clause 25, page 17, line 27, at end insert—
‘(1A) Each pension scheme proposed under subsection (1)(a) must be—
(a) a Master Trust scheme, or
(b) in such circumstances as may be specified in regulations made by the Secretary of State, a pension scheme that has characteristics specified in regulations made by the Secretary of State (“an alternative scheme”).”.
See Member’s explanatory statement for amendment 5.
Amendment 9, in clause 25, page 17, line 28, leave out “The notification” insert “Notification under subsection (1)(b)”.
This amendment is consequential on amendments 5 and 8.
Amendment 10, in clause 25, page 17, line 33, leave out subsection (3) and insert—
“(3) The Secretary of State—
(a) must make regulations about how continuity option 1 is to be pursued, in a case where a proposed transfer is to a Master Trust scheme;
(b) may make regulations about how continuity option 1 is to be pursued, in a case where a proposed transfer is to an alternative scheme;
(c) may make regulations for the purpose of otherwise giving effect to continuity option 1, in either case.”.
This amendment confers power on the Secretary of State to make regulations about how continuity option 1 is to be pursued, where a proposed transfer of members’ rights and benefits is to a pension scheme that is not a Master Trust scheme.
Amendment 11, in clause 25, page 18, line 29, leave out “receiving”.
This technical amendment removes an unnecessary word from clause 25(4)(l).
Amendment 12, in clause 25, page 18, line 37, at end insert—
“(4A) Regulations under subsection (3)(b) may include—
(a) any provision mentioned in subsection (4);
(b) provision deeming any member whose accrued rights or benefits are to be transferred to an alternative scheme to have entered into an agreement with a person of a description specified in the regulations.”.
This amendment makes it clear that regulations about how continuity option 1 is to be pursued in a case where a proposed transfer is to pension scheme that is not a Master Trust scheme may include any of the provision mentioned in clause 25(4) and also provision deeming a member to have entered into an agreement with a person (such as the provider under the new scheme).
Amendment 13, in clause 25, page 18, line 46, leave out “subsection” and insert “subsections (1A)(b) and”.—(Richard Harrington.)
This amendment makes regulations under the new subsection (1A)(b) (specifying alternative types of pension schemes to which transfers can be proposed) subject to the affirmative resolution procedure. (Regulations under the new paragraph (b) of subsection (3) (about bulk transfers to schemes other than Master Trust schemes) will also be subject to the affirmative procedure.)
Clause 25, as amended, ordered to stand part of the Bill.
Clause 26
Continuity option 2: resolving triggering event
Question proposed, That the clause stand part of the Bill.
Richard Harrington
The clause sets out the framework where a scheme pursues continuity option 2, which we have not mentioned in detail. The clause places a series of requirements on schemes and the regulator to ensure that a triggering event is resolved to the regulator’s satisfaction. Subsections (2) and (3) set out that once the trustees consider that they have resolved a triggering event, they must notify the Pensions Regulator, setting out how they consider that has been achieved. Subsection (4) provides for the time period for the notification to be prescribed in regulations. Subsection (5) requires the regulator, having considered a notification, to notify the trustees of whether it is satisfied that the event has been resolved.
Our aim is to ensure that where trustees decide to try to resolve a triggering event, they have the opportunity to do so, so that the scheme can continue and its members can continue to save in the scheme with as little disruption as possible. However, following a triggering event, the trustees must set out a comprehensive and detailed implementation strategy containing the steps that they plan to take. We consider a scheme that has had a triggering event to have increased risk—that really is part of the definition of a triggering event—so such schemes need greater and more in-depth planning, safeguards for members and employers, and greater protection for members. However, we want members to continue to save and employers to continue to comply with their legal automatic enrolment minimum obligations, and for there to be general confidence in the master trust market.
We do not want to restrict how trustees resolve a triggering event, but we want to encourage and facilitate the continuity of pension saving by members. The best way to achieve that is for schemes to have the freedom to resolve their specific issues in the most appropriate way, but under the supervision of the regulator. There has to be an external check that triggering events have been properly resolved, because otherwise we could not assure the protection of members’ savings, and the regulator provides that. We consider that to be the best way of ensuring the continuity and security that we want. We believe that the clause provides the framework for doing that, so I ask the Committee to support it.
Question put and agreed to.
Clause 26 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Steve Brine.)