Pension Schemes Bill [HL]

Debate between Earl Howe and Lord McKenzie of Luton

Committee stage & Committee: 4th sitting (Hansard) & Committee: 4th sitting (Hansard): House of Lords
Wednesday 4th March 2020 Grand Committee

[Lord McKenzie of Luton]

My Lords, this issue has been rumbling around for far too long and it is time to try to get a solution to it, particularly, as many noble Lords have explained, because of the pressure that the NHS would have been under anyway but for the recent crisis. My noble friend Lord Warner made a strong case with his proposition and we would certainly like to reflect on it. I know that the problem is that lots of people have reflected from time to time on a possible solution. That reflection goes on, but we do not yet have a solution. But Report on this Bill will be coming up shortly, and of course we have a Budget of some sort not far in the distance.

I have a couple of questions. I do not know whether my noble friend Lord Warner or the Minister can help with them. Was the one-off payment that the NHS made to cover the annual allowance taxable, and what might the consequences of that be? Under the scheme-pays arrangement, as the noble Baroness, Lady Altmann, hinted, if the problem is the penal interest rate then what is to stop those rates being adjusted, and who controls them?

We also need to bear in mind in all this is that these rules, unless I misunderstand them, have general application in the tax system. We need either to find a way of having some special arrangements or to accept that the adjustments we make here would have to be run for the tax system generally. We will need to work through the consequences of that. I am conscious that this contribution has not added one bit of sense to a practical solution, which is what we need to reach. Maybe, at the end of the day, we simply need to rank the solutions that we have on the table and choose the best, even though that may not be optimisation.

I am sure we all remember the pressure about this—I certainly remember pressure from the old Luton and Dunstable Hospital about it—and the real adverse effect that it causes on the delivery of services. We cannot continue to allow that to go forward; we simply have to drive through a solution to this. That is the challenge; presumably, the Treasury has ultimate responsibility for meeting it. But if it will not then we should, with the help of my noble friend Lord Warner and his expertise in these areas.

[Earl Howe (Con)]

My Lords, the amendment from my noble friend Lady Neville-Rolfe would commit the Secretary of State for Work and Pensions to review the tapered annual allowance on tax-relieved pension savings and require the Secretary of State to set out how pension schemes could mitigate any adverse effects of the taper. On the other hand, the amendment from the noble Lord, Lord Warner, would commit the Secretary of State for Work and Pensions to make regulations to require the NHS pension schemes to reimburse members for pension tax charges and, in particular, annual allowance charges.

I will set out where matters currently stand on this. First, in recognition of the impact that the tapered annual allowance is having for some doctors this year, NHS England has announced—as has been mentioned —a special arrangement for 2019-20 only, which doctors in England can use to ensure that they will not be worse off as a result of taking on extra shifts this tax year. This arrangement allows senior clinicians to defer an annual allowance charge through scheme pays. Their NHS employer will make a contractually binding commitment to pay a corresponding amount on retirement, ensuring that they are fully compensated in retirement for the effect of the scheme-pays deduction on their retirement income.

Health is a devolved matter. This special arrangement applies only to England, but we are aware that the Welsh Government and NHS Scotland have also put arrangements in place for the current tax year.

The Government most certainly recognise that urgent action is needed to resolve the pensions tax issue, which has caused some doctors to turn down extra shifts for fear of high tax bills. We are committed to ensuring that hard-working NHS staff do not find themselves reducing their work commitments due to the interaction between their pay, their pension and the relevant tax regime. That is precisely why the Government are taking forward their manifesto commitment to carry out an urgent review of the pensions tapered annual allowance, to make sure that doctors spend as much time as possible treating patients. This builds on the Treasury’s review into the effect of the tapered annual allowance on public service delivery, announced last August. The Government have announced that these reviews will report at the Budget on 11 March.

I understand that the ongoing reviews have received evidence from the British Medical Association, the Academy of Medical Royal Colleges and other representative organisations from across the public and private sectors. The Economic Secretary to the Treasury has held round-table discussions with key health sector stakeholders, as well as representative organisations across the public sector. The evidence provided will ensure that the Government can consider fully the impact of the tapered annual allowance and its effects on the NHS and other public services.

The amendment from my noble friend Lady Neville-Rolfe would have the Government commit to yet another review of matters relating to the tapered annual allowance. I hope she will accept that there is no need for a further exploration of this matter when the two reviews are ongoing and have not yet concluded, especially as those reviews will report shortly.

The amendment proposed by the noble Lord, Lord Warner, would commit the NHS pension scheme administrators to reimburse their members to the extent they had incurred an annual allowance tax charge. The practical difficulty with this, which I am sure the noble Lord does not intend, is that reimbursement from the scheme for tax charges could trigger an unauthorised payments tax charge for the member and a scheme sanction charge for the scheme. Noble Lords will appreciate that this is a very complicated area of tax law and, as I have said, could result in further unforeseen tax charges arising.

The noble Lords, Lord Warner and Lord McKenzie, referred to the interest rate being applied in this area. Perhaps I could just explain the background to this. HMRC rules require that when scheme pays is used to pay a tax charge, an actuarially fair reduction is made to the value of the pension. The discount rate used to value this reduction for public service pension schemes is the SCAPE discount rate plus CPI. The SCAPE discount rate reflects the Office for Budget Responsibility’s forecasts for long-term GDP growth in line with established methodology. Due to recent changes to the SCAPE rate and the CPI, the scheme-pays discount rate has fallen in 2019 to 4.8%.

My suggestion to my noble friend and the noble Lord, Lord Warner, is that it is preferable to wait for the outcome of the two reviews, which are ongoing but have not yet concluded. As I mentioned, they will report shortly, on 11 March. Ultimately, this is a matter for my right honourable friend the Chancellor. I am sorry to have to leave matters in the air, but I hope that my noble friend and the noble Lord will take away from this a good degree of reassurance that the Government are taking seriously the question of what impact the tapered annual allowance is having on NHS pension scheme members and that reviews into this matter are already under way.

--- Later in debate ---

[Lord McKenzie of Luton]

My Lords, I, too, support this amendment. We should congratulate the noble Baroness, Lady Altmann, on the diligence with which she has persisted on this matter for quite a long while. As she hinted, she was responsible for convening an industry group that spent a lot of time digging into this to make sure its focus was right.

The reality is clear. There are two systems giving tax relief and no reason in principle why they should not both deliver the same result. One does not for low earners at the moment. Which of the two systems you are in depends on your employer’s choice. That simply cannot be right. As the noble Baroness said, there are ways of dealing with this. I understand that the Treasury has set its face against that to date. Of course, for the Treasury, the downside is that providing a bit more tax relief means having a little less revenue. However, we are talking about the lowest paid, who are being disadvantaged by this. It is about time that this was brought to a halt.

[Earl Howe]

My Lords, I am grateful to my noble friend Lady Altmann for her amendment. I am well aware that she is a passionate and long-standing campaigner on the issue of lower-paid workers automatically enrolled into a workplace pension who may not benefit as much as other lower-paid workers for their pension saving.

As my noble friend will know—I hope she will not mind my saying this en passant—pensions tax relief is a matter for the Treasury, with the differing treatment of people in net pay arrangements and relief at source pension schemes determined by the Finance Act 2004 which, strictly speaking, is outside the scope of the legislation before us. That does not prevent me giving her as full an answer as I can.

Automatic enrolment legislation defines which qualifying workers are to be put into workplace pensions by reference to their age, earnings level and their being working or ordinarily working in the UK. I appreciate that this is essentially a probing amendment and that the precise wording is of secondary importance, but its reference to the low paid is not a definition recognised in the Pensions Act 2008. It would make it very complex and burdensome for employers accurately to identify the group to be covered by the proposed regulation-making powers.

Automatic enrolment has always sought to balance its core aim of helping working people build up their retirement savings with an implementation approach that recognises the costs and administrative burdens that will inevitably fall on employers. We are mindful that those duties must be proportionate and restricted to the minimum necessary to achieve our policy objectives. That is why pension scheme choice under automatic enrolment is reserved to the employer, who is required to use a scheme that meets minimum quality standards set out in legislation. Tax relief is only one of the factors that an employer should be considering when choosing a scheme for its employees, alongside whether it will accept all its staff, how much it will cost for the employer to administer and whether it will work with the existing payroll systems.

The employer’s decision will be informed by detailed guidance provided by the Pensions Regulator via its automatic enrolment compliance website, including information about the tax implications of different types of scheme. We should remind ourselves that there is guidance on the Pensions Regulator’s website to help employers understand the impact of scheme choice on lower earners below the personal allowance. I am well aware of how much assistance my noble friend gave on this when she was Pensions Minister.

Consequently, the current legislative framework is not set up to allow government to impose broad, undefined requirements on pension scheme trustees, managers or administrators in the way proposed by the amendment. Employers have duties under automatic enrolment, and they select a pension provider from the marketplace, based on their legal obligations towards qualifying workers and the commercial needs of the organisation.

The suitability of an automatic enrolment scheme is determined primarily through statutory quality requirements. Many employers will choose a master trust scheme, which is subject to an additional regulatory framework. All automatic enrolment schemes are registered pension schemes and their members are further protected by the broader legislative framework for occupational and personal pension schemes.

--- Later in debate ---

[Lord McKenzie of Luton]

I heard the Minister’s reply, which seemed a recipe for no action—not this year or next. Given all the hard work that has gone into developing thoughts on this, that does not seem fair. If we are saying that the legislation—or the regulation—is not fit for purpose as it is, why do we not change it? Whatever happened to taking back control?

[Earl Howe]

I promise that nothing I said was intended as a recipe for no action. The problems that my noble friend articulated well relates to how we solve this problem, not whether we are committed to doing so. Unfortunately, it does not admit of a straightforward answer. If it did, we would have solved it long ago.

Pension Schemes Bill [HL]

Debate between Earl Howe and Lord McKenzie of Luton

Committee stage & Committee: 3rd sitting (Hansard) & Committee: 3rd sitting (Hansard): House of Lords
Monday 2nd March 2020 Grand Committee

[Lord McKenzie of Luton]

My Lords, this amendment goes to the heart of protecting people’s pensions. We have touched upon a number of issues surrounding the same sort of concepts during debate on the Bill and in other legislation, such as financial guidance provisions. We should see whether we cannot get together a comprehensive note of how these things are covered. I am bound to say I am unclear as to what is and is not covered in all circumstances, so it seems that would be beneficial.

Concerning the specifics of the amendment, we clearly give it broad support. It raises practical issues, as I am sure the noble Lord, Lord Sharkey, would identify, particularly on responding to approved questions. I am not sure who is on hand when the questions are being asked. We have seen what happened with taxi licences and such things in the past. The provision could give rise to challenges but the thrust is right: it is another attempt to make sure that people are aware of the consequences of what they do, to the fullest extent possible. As I say, I am not sure whether we have a comprehensive arrangement yet across all pensions and circumstances. It seems that it would be worth some effort to try to get that into place. With those words, I am happy to it give broad support. When the Minister replies, I am sure there will be some stumbling blocks in it but if we do not keep pushing and shoving, we are not going to make progress on this.

[Earl Howe]

My Lords, I am grateful to the noble Lord, Lord Sharkey, and my noble friend Lady Altmann for tabling this amendment because it provides me with an opportunity to update the Committee on the progress that the Department for Work and Pensions, the Financial Conduct Authority and the Money and Pensions Service have made on delivering the stronger nudge to pensions guidance. As noble Lords are aware, this is a requirement of Sections 18 and 19 of the Financial Guidance and Claims Act 2018.

Before that, however, I would like to talk briefly about the take-up of Pension Wise guidance, which is a very positive story. The service is on target to exceed 200,000 guidance sessions this financial year, more than tripling those in its first year of operation. Recent Financial Conduct Authority data suggests that 52% of personal and stakeholder pensions accessed for the first time in 2018-19 received either regulated advice or Pension Wise guidance. That clearly demonstrates that the work the Money and Pensions Service, Government and the industry are already doing to promote both Pension Wise guidance and regulated financial advice is working.

I would like to talk about the measures in the Financial Guidance and Claims Act 2018 which were designed to further increase the take-up of Pension Wise guidance. Sections 18 and 19 require the Government to deliver a stronger nudge to pensions guidance. As the Committee is aware, MaPS is testing options for the best way to do that, in a way that complements the suggestions made by the noble Lord, Lord Sharkey, during the passage of the Act that his amendment was

“designed to be a nudge, rather than any kind of probably unenforceable or counterproductive compulsion.”—[Official Report, 31/10/17; col. 1294.]

As noble Lords are also aware, the drafting of Sections 18 and 19 was influenced by the Work and Pensions Select Committee. Following trials, those sections will deliver a final nudge to consumers to consider taking guidance prior to accessing their pension.

The Government firmly believe that, to effectively prompt more people to take guidance before accessing their pension where it is appropriate, we need to understand the impact of the nudge, and ensure that we avoid creating perverse incentives. We do not disagree with the principles of the amendment—work is already under way to establish how best to ensure that people thinking about accessing their pensions are encouraged to take guidance. We believe it is essential to use the evidence base that the trials on a stronger nudge will provide, and to consult before implementing the primary legislation in the Act. We would welcome the thoughts of the noble Lord and my noble friend on the proposals in the consultation.

The trials to test the most effective way to deliver on Sections 18 and 19 are due to conclude shortly, and an evaluation report is expected to be published by MaPS this summer. We are working to deliver on the requirements of the Act as quickly as possible, and as such we are already preparing for a public consultation this year. The Financial Conduct Authority will also consult on rules that have regard to these regulations, to make sure that there is consistency between occupational pensions and personal and stakeholder pensions.

The noble Lord seeks to require a member to provide responses to questions before a transfer can proceed. The effect of the amendment is that trustees would have the power to refuse a transfer should members’ responses not meet the conditions which the amendment proposes should be set in regulations. I assure him that the Government are already introducing conditions that seek to safeguard members against the risk of being defrauded. That change will strengthen trustees’ discretion in respect of transfers. Transfers were discussed in the earlier debate on Clause 124. The Government are amending members’ statutory right to transfer, to allow conditions to be imposed for transfers between schemes. That is aimed at ensuring that transfers are made to safe destinations. Non-statutory transfers can still take place, if the scheme rules allow. However, the amendment puts responsibility on members, not trustees, to assess the appropriateness of the receiving scheme. If the questions to be asked of members are specified in regulations, as proposed new subsection (1)(c) requires, an unintended consequence could be that fraudsters will be enabled to game the system. Members could be coached to provide answers that lead to transfers that should have been refused.

As noble Lords will recall, we have banned cold calling on pensions in legislation and established Project Bloom: a joint task force between government, regulators and law enforcement to share intelligence, raise awareness of scams through communications campaigns, and take enforcement action when appropriate. The FCA and the Pensions Regulator launched the latest ScamSmart advertising campaign on 1 July 2019, which has targeted those approaching retirement, as they were identified as being most at risk from scammers. There is also an FCA warning list, an online tool that helps investors check if a firm is operating with the right authorisation and find out more about risks associated with investment.

The noble Lord raised a specific concern about transferring out of DB schemes. Since January 2018, following its work on the British Steel pension scheme, the FCA has been working closely with both the Pensions Regulator and the Money and Pensions Service to ensure that it monitors pension transfer activity in DB pension schemes that might be subject to increased transfer activity. Also since January 2018, the FCA has issued tripartite letters to over 50 defined benefit pension scheme trustees. The tripartite letter reminds scheme trustees of their responsibilities when issuing transfer values to members and requests them to provide data that allows it to monitor scheme activity. On 21 January 2019, the FCA published a new protocol for how the three organisations—the FCA, TPR and MaPS—will work together to share information and work with pension scheme trustees, and that protocol addresses many of the recommendations made in the Rookes report.

I want to touch on one other point raised briefly by the noble Lord, Lord Sharkey. He suggested that the new pension freedoms might be encouraging people to draw down savings too fast, putting them at risk of scams. In fact, the Financial Conduct Authority’s Retirement Outcomes Review did not find significant evidence of consumers drawing down their savings too fast. The study’s findings, published in June 2018, found that most of those withdrawing had some other form of retirement income or wealth.

Clearly, it is of the utmost importance that information and guidance are available to people and that they are aware of it. That is why there are now more opportunities for people to access guidance earlier in the pensions journey. Alongside the stronger final nudge trials, Pension Wise continues to run successful advertising campaigns across multiple channels, as well as working with employers nationally and locally to encourage them to engage with their employees at their place of work. The Financial Conduct Authority’s “wake-up” packs also encourage people to think about their pension options and include signposting to Pension Wise.

I reassure noble Lords that we are very aware of the importance of the need to make progress with implementing the requirements placed on government, the Money and Pensions Service and the Financial Conduct Authority, as set out in the Act. Our aim is to find an effective and proportionate way to do this.

To conclude, I accept that this work might not have progressed as quickly as perhaps noble Lords would like, but that is for a good reason. I believe it is very important to get this right and ensure that the policy is developed based on evidence. We always talk about evidence-based policy and this is a classic example of that. The trials will conclude very shortly and will be followed by an evaluation report. We will consult this year and will seek to lay regulations as soon as possible after that, alongside the rules that will be made by the Financial Conduct Authority.

For the reasons I have explained, I hope that the noble Lord will feel able to withdraw the amendment.