Pension Schemes Bill [HL]

Debate between Lord Freud and Baroness Altmann

Committee: 2nd sitting (Hansard): House of Lords
Monday 28th November 2016 Lords Chamber

[Baroness Altmann (Con)]

My Lords, I support these amendments, and I would like to probe the Minister on what the pause order is really meant to achieve. As the noble Baroness, Lady Drake, has just asked, how does he envisage it will work in practice? If a pause order is introduced by the Pensions Regulator, it is likely that an employer will be in breach of its auto-enrolment duties and potentially in breach of contract with its employees. In those circumstances, we could need some of the bulk DC transfer regulations, which we have discussed and I hope we may come to later, to enable a scheme to ensure that such transfers can be made relatively swiftly and without too much expense—perhaps before a triggering event, although the proposal is currently only if there is a triggering event. That would require some of the existing regulations that are made with DB schemes in mind to be undone.

[The Minister of State, Department for Work and Pensions (Lord Freud) (Con)]

My Lords, I thank noble Lords for the debate last Monday when a number of amendments were considered. Today should bring an equally interesting discussion on a slightly broader range of topics. This group relates to the new pause power introduced in Clause 31, and includes some amendments tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, and some tabled by me. I thank the Committee for its forbearance in considering government amendments at this stage.

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[Baroness Altmann]

If there is no such provision as that in Amendment 46, what exactly protects members and employers by ensuring that they can continue with their legal duties to contribute to pension schemes for their members under auto-enrolment? Currently, it is not clear to me how it is intended that this pause order will fit with the legal obligations or contracts between the employer and the employee in relation to ongoing pension contributions.

[Lord Freud]

I think I am right in saying that the pause order would effectively trump those obligations while it is operating. However, I will come back on the detail of that. I think that is accurate. That is why it is in the legislation—so that there is legal clarity about the obligations people have when they pay into a scheme that is formally paused by the regulator.

Under Amendment 50, the pause order would not be able to prevent payments with regard to ill health benefits. The current provisions mirror those in the Pensions Act 2004 with regard to the Pensions Regulator’s freezing order. I am not convinced that there is sufficient argument on why this should differ to those provisions. In particular, the pause order direction can specify payments, so—in response to the noble Baroness, Lady Drake—the regulator will be able to consider whether to use the power to stop such payments.

The provisions in Schedule 1 to which the noble Baroness has added her amendments make it clear that there is no impact on orders made on divorce which modify members’ rights in the scheme. They do not provide for generalised exemptions to the power to prevent transfers under the pause order. The amendment would mean that, regardless of the situation, ill health payments could not be affected by a pause order. Government Amendment 47 would enable the regulator to tailor the pause order to the circumstances with regard to stopping benefit payments. I hope that the noble Baroness will agree that that solution is better than the one in Amendment 50. That would include being able to apply the pause to specified benefits and specified members, and in a way that would take account of the specific case and situation. I therefore trust that this gives some comfort that the regulator could consider certain types of membership.

To come back to the question raised by my noble friend Lady Altmann, on the legal duty for employers, paragraph 13 of Schedule 3 ensures that a pause order will not cause employers to fall foul of their legal duties. I am glad to be able to confirm that.

[Baroness Altmann]

Does that also apply to a contract between the employer and the employee for pension contributions rather than just under auto-enrolment, if it is a term of the employment contract?

[Lord Freud]

I think that the situation is the same—the fact that you have primary legislation will allow that to happen. I will clarify that, but I think that is the point of primary legislation.

I make the point to the noble Baroness, Lady Drake, that the Pensions Regulator will make a pause order only under carefully considered circumstances. The pause order may last for the duration of a triggering event period but is not likely to continue for a significant length of time, and the regulator must weigh up the potential impacts on members when considering whether to issue such an order.

I shall now turn to the government amendments on the pause power.

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[Lord Freud]

Let me just respond. The difference is that we are trying to get control of an obviously difficult situation. The pause is to allow the regulator to go in and make sure that the situation is sorted. We are not talking about keeping the flow of things going in a normal way; we are talking about a very difficult situation. We are worrying about losing the money that is already there, not about the smooth flow. We are typically talking about a very short period. Setting up large paraphernalia, which the noble Baroness is beginning to drift towards, would not be the point. The real point is to get the funds transferred as quickly as possible.

The noble Baroness asked where the legislation is. I can direct her to Clause 31(5)(c), which states that any contributions not paid over to the scheme are returned to the member, and paragraph 13 of Schedule 3, which ensures that the pause order will not cause employers to fall foul of their legal duties. I hope that that helps the noble Baroness in her consideration of what we are doing.

[Baroness Altmann]

I have a couple more probing questions for my noble friend. The pause order is obviously intended to be used only in exceptional circumstances and in extreme concern about the solvency or probity of the master trust itself. I can certainly understand that, in that situation, one would not want to take any new employers, so it would pause adding any new employers. But it still seems that there is no protection for the ongoing accrual of members’ pension benefits, which is what we are trying to do with auto-enrolment. If the procedures suggested in the amendments in the names of the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, are not considered appropriate—in other words, for the regulator itself to collect in the contributions—would it not be prudent at this stage and before the legislation is passed to have a proper plan for how ongoing contributions can be made and collected, perhaps through some form of bulk defined contribution transfer, even on a temporary basis, for members without consent to another master trust? At this stage we should produce such a plan rather than wait and hope that it will be okay.

[Lord Freud]

I am grateful to my noble friend. There are different processes going on and the intention of the pause order is not to be the paraphernalia for sorting out a scheme that is in difficulty. What we are looking at is a process we can go to where we can discuss option 1 and option 2 in order to transfer the funds to a better functioning scheme. While we are doing that, we are pausing it to allow the process to happen. It is important to view the two things on more of a sequential basis than trying to make a big performance of the pause order. It is there for a different reason: it allows us to get on with sorting out the scheme and making the transfers that my noble friend is looking for.

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[Baroness Altmann]

Perhaps I may follow up that comment. Yes, indeed, there will be transfers on a triggering event, but I seek some reassurance that proper provision will be made for bulk transfers that do not depend on defined benefit rules which make those bulk transfers much more costly and time-consuming and do not automatically ensure that they can occur in a timely way. Does the Minister also consider that there could be circumstances where a bulk transfer could happen without a triggering event? We are trying to consolidate schemes, but we know that there are schemes already in existence that will need to consolidate and either will not or will not wish to meet the authorisation criteria. If there were the possibility of doing so, that would be helpful. Finally, going back to a point that I raised on our previous day in Committee, it is true that the Bill will place what is potentially a legal duty on trustees to effect a transfer, so there will be an obligation for that transfer to happen. But I am not clear that we are any the wiser as to who would be able to fund the transfer if the records of the scheme are in disarray and there are no funds to pay for advice or administration services to enable the transfer to be made. What provisions can we rely on to ensure that the transfer takes place, and of course I am referring again to some kind of potential back-stop insurance as required in case the costs cannot be met anywhere else.

[Lord Freud]

We are currently considering whether there may be some scope to simplify the current arrangements which will make life easier for defined contribution schemes when making bulk transfers, but we must do that at a time when we do not compromise member protection. As my noble friend will be well aware, there are certain protections in place such as the requirement for an actuary to certify that the members’ rights in the receiving scheme are broadly no less favourable than those which are being transferred. When a transfer is made under the mechanisms of this Bill, after a triggering event when the regulator is looking at it, one of the main points is to make sure that there is adequate capital to fund such an event. I will have to come back to my noble friend on how that will work when a bulk transfer is made and the regulator is not involved in the process. What one would normally expect to see is a negotiation with the receiving scheme manager to ensure that it is able to fund the transfer because of the benefits of scale through putting together two systems. I imagine that when the regulator is not involved in the process, that is where the money will come from. I will double-check that and come back to my noble friends, but that is how I foresee it happening.

Pension Schemes Bill [HL]

Debate between Lord Freud and Baroness Altmann

Committee: 1st sitting (Hansard): House of Lords
Monday 21st November 2016 Lords Chamber

[Baroness Altmann]

I ask my noble friend for some reassurance on the issue of defining the whole structure via the word employer. An employer in a single employer scheme may be considered a single employer but they may be attracting money from members who used to work for other employers and do not currently accrue. Therefore, I hope that the intention of the Government for the Bill is that it should apply in the case where there is a single employer but he has attracted money from people who worked for other employers in the past. I recognise that my noble friend says that this may be captured in Clause 39, but I would be grateful for some reassurance on that point.

[Lord Freud]

At the moment, these schemes would not be within the master trusts legislation. I cannot give a full answer now because I am not sure what other protections there may be for people in this situation, but we will have a chance to come back to this issue again and again and I shall make sure that we have a dialogue on this point later, as we consider the Bill in Committee.

This Bill addresses the risks that arise in master trusts. It is important to remember that these risks are specific to this particular type of structure, and it is therefore important that the definition reflects those structures and does not go wider. This ensures that the regulation in the Bill is a proportionate response to the issues arising. I hope that with these explanations and assurances particularly on the process of consultation, noble Lords are reassured, and I ask them not to press their amendments.

Pension Schemes Bill [HL]

Debate between Lord Freud and Baroness Altmann

Monday 21st November 2016 Lords Chamber

[Baroness Altmann (Con)]

My Lords, I, too, support the amendment. I am concerned that there are well-intentioned measures in the Bill designed to ensure that there is capital adequacy in these schemes. One hopes that they will work but how will any regulator know in advance what capital is actually adequate? The circumstances in which wind-up could take away people’s pensions, even if the assets are ring-fenced and protected for the members, are those in which there is no other mechanism for covering the wind-up costs. That is where the members’ pensions would be at risk.

Indeed, we saw this a number of years ago with defined benefit pension schemes, which is precisely why we ended up with the Pension Protection Fund. The Government put in well-meaning legislation that required minimum funding standards for defined benefit schemes which were supposed to ensure that members’ pensions were safe even if the scheme or the employer failed. Unfortunately, the situation with the schemes—due to lack of competent administration in some cases but not all; sometimes due to market movements as well—led to members losing their pensions, and the only real protection that ended up being available was this backstop insurance in the form of the Pension Protection Fund.

Yes, we need capital adequacy. Yes, the Bill is really important. But I would be really grateful if my noble friends the Ministers explained why the Government do not feel this is necessary, or how proper protection for members in extremis can be provided. For example, will NEST guarantee to take over these liabilities? Is there some other plan? I would be grateful for some reassurance from my noble friends.

[The Minister of State, Department for Work and Pensions (Lord Freud) (Con)]

Amendment 18 requires the Secretary of State to,

“make provision for a compensation fund or for the funding to be provided by another source as a last resort”,

in circumstances where the scheme has had a triggering event and has insufficient resources to pay the costs referred to in Clause 8(3)(b)—that is, the costs of complying with duties imposed under the Bill during a trigger event, and the costs of continuing to run the scheme for a period of six months to two years—and a prohibition on increasing charges during the trigger period applies.

The amendment speaks to the heart of what the Bill is about: protecting members. Along with a number of other amendments, it seeks to add further protections and, perhaps, test us a little on the extent of the measures the Government have provided for in the Bill as introduced. I welcome both the focus on member protection and the opportunity to explore the specific measures in the Bill which provide the members with security should the scheme decide to close or start to fail. The amendment would mean that if a scheme experienced a triggering event and had insufficient money to pay for the costs associated with the options the scheme may pursue following a triggering event, other funds must be provided. It also goes further to say that it is the Secretary of State who must provide a compensation fund or for the funding to be provided by another source.

In responding, I will touch on a few areas. I will outline, first, the measures which provide that sufficient funds must be held; secondly, some of the costs and complexities that would be introduced into the system should a compensation fund or other funding be required; and, thirdly, the compatibility with the regime provided for in the Bill.

I turn to the measures which provide that sufficient funds will be held. First, the main provisions in the Bill requiring schemes to hold certain funds are in Clause 8, which provides that for the scheme to be authorised it must satisfy the regulator that it has sufficient resources to meet certain costs. This includes the costs of complying with the requirements under the Bill once the scheme experiences a triggering event and those of running the scheme for a period of between six months to two years, in the event of a triggering event occurring. The Government believe that these measures are sufficient and that this is an appropriate regime for the types of funding in question here. Further, members’ savings are protected via the restrictions on using members’ pots to pay for these costs provided at Clause 33. We therefore consider that the amendment is unnecessary.

However, it would be helpful to explore the counterarguments or challenges as to whether this is adequate risk mitigation—in particular, to explore any suggestions that there is still some risk in relation to: the period before the authorisation regime is up and running; the calculation of those funds to ensure they are sufficient at the point of need; the availability of the funds at the point of need; and the funds diminishing over time. Finally, what happens if the lack of these funds leads to the regulator withdrawing authorisation and creating a triggering event? Let me set out how those risks are addressed within the regime.

In respect of the period before the regime is up and running, paragraph 7 of Schedule 2 provides that the scheme funder is liable for these costs. It places this liability on the scheme funder when a triggering event has occurred in an existing scheme and the liability for those costs does not lie elsewhere. The prohibition in relation to increasing members’ charges applies during this period, so members are protected. If the funder should be in financial difficulty, the matter should be pursued via the normal court channels or insolvency processes. It is not the members’ money which is at risk in these scenarios; it is the running costs of the scheme and payment for activities during the triggering event period.

We also know that other schemes may well rescue the failing scheme, as has happened before, to protect the reputation of the industry. This is a different dynamic from what would be the case in non-money purchase schemes, where the debt is about money needed to pay member benefits and where funding obligations to pay for the promised benefits would attach if another entity took over the scheme. The master trust industry can support the movement of members—some trusts are willing to do so—or take over failing master trusts, so government intervention is less warranted where an industry solution may be possible. This might be an appropriate point to deal with the question from the noble Baroness, Lady Drake, about the identification of receiving schemes. They will be on a list kept by the Pensions Regulator, and some industry players may wish to step in and identify themselves.

On whether the funds available to the scheme will be sufficient, regulations will set out matters that the regulator must take into account when deciding whether it is satisfied that those funds are sufficient. We anticipate that these will include matters that will support the establishing of the assets needed to cover these specific costs, such as the business plan, the size of schemes, the costs of contracts and the value of assets, the nature and level of assumptions made in that business plan, the security of the scheme funder and the state of the scheme administration. Also covered will be the range of potential assumptions that may be used in arriving at the figure required.

Regulations may also specify the information that the regulator must take into account and requirements relating to the financing of the scheme or funder, such as requirements relating to assets, capital or liquidity. We anticipate that these will include matters such as how the funds are to be held to ensure that they may be accessed for specific purposes only, so that they are safe in the event of the funder becoming insolvent. In this way the Bill provides that to be authorised, a scheme must hold sufficient funds for those costs and that these funds must be held appropriately.

The supervision part of the regime focuses on ensuring that the funds remain sufficient and are not eroded over time, and that the Pensions Regulator can act swiftly should a drop occur in the funds held. There are measures in the Bill that work together to provide that this requirement to hold funds to cover the costs of the triggering period is an ongoing requirement, and one that the regulator will be able to supervise. Clause 19 states that if the regulator stops being satisfied that an authorised scheme meets the authorisation criteria, it may decide to withdraw the scheme’s authorisation.

Further, alongside the information-gathering powers that the regulator has under the Pensions Act 2004, Clause 14 requires the scheme and funder to submit annual accounts, while Clause 15 gives the regulator the power to require schemes to submit a “supervisory return” and Clause 16 places a requirement on certain persons to report “significant events”. We anticipate that these significant events will include matters in relation to the funds held under Clause 8. Through these means, the Pensions Regulator will have a stream of data in relation to which it can make further inquiries to ensure that it remains satisfied that the criteria continue to be met, and it can take action if that ceases to be so.

If the regulator becomes concerned that the assets are no longer sufficient to satisfy it that the criteria are met, it may issue a warning notice to withdraw authorisation, which is a triggering event, and will have access to the pause power and direction-making powers under the triggering-events part of the Bill. In this way, the Pensions Regulator can act quickly and decisively as soon as any risk arises, to diminish risk and prevent the situation deteriorating any further. On the question from the noble Baroness, Lady Drake, about which liabilities the receiving scheme will have for debt in the existing scheme, the Bill imposes no liabilities on the receiving scheme for debt in the existing scheme.

This approach caters for a number of different structures under which the master trust schemes have been set up. It ensures that the regulator can make a scheme-specific assessment of the funds that must be held to cover the requirements. It helps ensure that the risk of the scheme not holding these funds, or of the funds being eroded, is minimised.

In addition to the consideration that this risk is already dealt with via the Bill’s provisions, I will turn to a second matter: the costs and complexity that this amendment could introduce into the regime. As soon as compensation is added to the regime—based on the concept that where the funds are insufficient, someone else will step in—an element of moral hazard creeps in, as the noble Baroness, Lady Drake, acknowledged. Master trusts are businesses set up to provide a service to a number of employers. Many are set up to make a profit; some are not-for-profit, but all are selling or marketing their services to employers and must take responsibility for providing protection to their members. I would also be concerned about the added cost of delivering a compensation fund. Noble Lords have left it for regulations to establish whether this fund or requirement would be a government-funded compensation scheme or a levy-funded compensation scheme, or on whom any additional sourcing requirement would be placed. So this would be a broad regulation-making power.

In terms of what type of compensation may be envisaged, if it was levy-based there would be additional administrative costs to consider, as well as additional costs to the schemes that would presumably need to contribute to it as well as holding funds for their own scheme for a very low risk, as my noble friend Lord Flight pointed out. These would be funds that the scheme could not use for its own risk mitigation. The type of risk we are looking at here does not warrant the introduction of a compensation scheme. Members’ pots or promised benefits are not at risk. Clause 33 provides protection when a trigger event occurs, as it prevents charges being increased or new ones being introduced. It is about the risk of the scheme being unable to meet costs related to paying for activities under the trigger events such as wind-up, bulk transfers, finding a new funder or suchlike. The cost and complexity of a new compensation fund is not warranted.

A third matter is that I am not convinced that the amendment is compatible with the wider regime provided for in the Bill. There would be some significant challenge in ensuring that this provision did not lead to unintended effects: if, for example, the other source of funding was to place a requirement on a specific person to provide the costs as a last resort. The regime has been specifically crafted to ensure that all types and structures of master trusts can comply with the requirement. This has been specifically designed to ensure sufficient flexibility in enabling schemes to comply with the obligation.

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[Baroness Altmann]

Will my noble friend write to me with some clarification on how costs would be covered? If a scheme fails and records are in disarray, how would the costs of wind-up be covered? I accept that they cannot come out of the members’ pots. If the company running the scheme or the employer has failed, where will the money come from to make sure that members’ current pension funds are transferred over and the costs of administering the transfer, executing the bulk transfer and clarifying the records are met? Currently it would seem that the members’ pots will be in limbo. The money cannot come out of their pots, but there is no one else to pay.

[Lord Freud]

The money cannot come out of their pots, but the Pensions Regulator will be looking to transfer those pots to another master trust. The protection that this amendment and my noble friend are suggesting is almost conditioned by what we watch in the defined benefit market. This is a different situation, where there are protected pots. There may be costs in a catastrophic situation, but they will not fall on members, and it is not the job of government to protect non-members from getting into a mess.