Pension Schemes Bill [HL]

Lord Hutton of Furness Excerpts

Committee stage & Committee: 1st sitting & Committee: 1st sitting : House of Lords
Monday 24th February 2020 Grand Committee

Moved by

[Lord Hutton of Furness]

10: After Clause 28, insert the following new Clause—
“Duty to notify the Pensions Regulator: fit and proper persons requirement
(1) The trustees of an authorised collective money purchase scheme must notify the Pensions Regulator within two weeks of a person assuming a role listed in paragraphs (b) to (e) of section 11(2).(2) The Pensions Regulator must— (a) assess whether the person in respect of whom notice is given under subsection (1) is a fit and proper person to act in the relevant capacity, and(b) if it is not satisfied that the person is a fit and proper person to act in that capacity, consider whether to withdraw the scheme’s authorisation in accordance with section 30.”

[Lord Hutton of Furness]

My Lords, the provisions in the Bill dealing with the authorisation of CDCs are based on the equivalent provisions of the 2015 Act. We all know that those provisions have not been brought into effect and we therefore have no firm evidence as to whether they are robust, but there is a genuine problem with the way in which they are designed to work.

The powers conferred on the regulator appear to be confined to the initial authorisation of a collective money purchase scheme—I am talking specifically about the fit and proper persons test. The powers given to the regulator by Clause 11 are tied specifically to Clause 9, which, as noble Lords will see, is about the decision on the initial application to authorise a collective money purchase scheme. What is going to happen if, as inevitably will happen at some future date once the scheme has been authorised, there is a change in the trustee membership of the scheme, or if any of the other persons referred to in Clause 9 change? It is not at all clear that the Pensions Regulator at that subsequent point has the power to determine whether that person is a fit and proper person to act in any of the capacities referred to in Clauses 9 and 11.

The regulator has the power in Clause 30 to withdraw authorisation from a collective money purchase scheme if he or she regards the authorisation criteria as not being met. That might include, for example, that a trustee or any other person is not considered to be a fit and proper person. Clause 29 allows the regulator to issue risk notices if there is a prospect of the authorisation criteria being breached—that, again, might include that one of those persons is a not a fit and proper person. However, the power of the regulator at that point is to withdraw authorisation for a collective money purchase scheme; it is not to make a determination about whether anyone is a fit and proper person. It is really a sort of nuclear option, which is to withdraw authorisation from the entire scheme. That clearly cannot be appropriate; it would not be in the best interests of the scheme members.

I acknowledge that my amendment is almost certainly imperfect—let us get that issue out of the way—but it is designed simply to allow us to have a discussion. I hope that the Minister can reassure me that I am completely off beam, but is it not better to have it made explicit in the Bill that it is in respect not just of the initial application that such judgments have to be made about fit and proper persons but of each subsequent appointment?

[Lord McKenzie of Luton]

My Lords, I have put my name to this amendment for the clear reasons that have just been stated. There should be a continuing obligation to make such a judgment, because, between decisions and determinations, many sorts of things could happen to the individual involved. Be it an annual event or a one-time event, there needs to be an ongoing obligation for a judgment to be made.

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[Baroness Stedman-Scott]

I thank the noble Lord for his question. I am advised that we will write to him with the answer.

[Lord Hutton of Furness]

My Lords, I am grateful to the Minister for her response but something is still not clear to me. She says that there is a continuing power on the Pensions Regulator’s part to vet all appointments that fall under Clause 9. I cannot find that continuing authority; I do not know where it is in the Bill. If she could, at some future point, alert me to what provision of the Bill covers that ongoing authority on the regulator’s part to make appointments, I would be grateful.

The second interesting point is that the Minister referred to Clause 28 as if it had some relevance to the point covered by my amendment. There is no definition of “significant event” in the Bill; it will be set out in future regulations. My concern may well be addressed if the Minister were to confirm that any new appointments of trustees or other persons listed in Clause 9 falls within the definition of “significant events”.

I know that my final point goes beyond my amendments; I hope that I am allowed to make it. On the assumption that the Bill becomes law—I very much hope that it does—it is striking that we have a specific set of provisions for how trustees for these collective money purchase schemes are to be appointed; they must be fit and proper persons, for example. But if one looks at the appointment process for other pension schemes, such as defined contribution and defined benefit schemes, there is no parallel provision. Under the Pensions Act 2004, those trustees must have some knowledge of pensions law and of their own scheme, but there is no equivalent provision for the appointment of trustees to other pension schemes. I wonder whether it is justifiable to have this particular provision relating just to these new pension schemes—perhaps it is—but not to have a parallel provision for other trustee and significant appointments to DB and DC schemes.

My only request to the Minister at this point—we may come back to it—is that this may be an appropriate time for us to take a wider look at overall pension scheme governance. In my view, there is nothing more important to the health and well-being of a pension scheme than the quality of the governance in place to oversee it. If it is appropriate for trustee and other appointments to these new pension schemes, of which I am very supportive, to be subject to this process, there is a convincing case, too, for an equivalent provision for defined contribution and defined benefit schemes.

[Lord Flight]

The noble Lord is absolutely right. It is extraordinary that one group has a lot of requirements when another has none. Historically—let us say 30 years ago—trustees of pension schemes were often not remunerated. Someone applying to be a CDC trustee today would not think of taking on the responsibilities unless they were remunerated.

[Baroness Stedman-Scott]

On the first point made by the noble Lord, Lord Hutton, we will write to clarify things. We have not listed “significant events” in the Bill because if members are to be protected, it is important that such events can be adapted to emerging threats as well as lessons learned through live running. We want to ensure that these events are appropriate and reflect the specific risks that may be posed by CDC schemes. We will consult with the regulator and others before laying any regulations before Parliament. We will consider the noble Lord’s final point—it was well made—about pension scheme guidance in terms of the new CDC scheme and existing schemes and come back to him on it.

[Lord Hutton of Furness]

I beg leave to withdraw the amendment.

Amendment 10 withdrawn.

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[Lord Vaux of Harrowden]

I hope the Committee does not mind if I start by saying that my name is pronounced “Vaux”. I blame the noble Lord, Lord Brougham and Vaux, for the misunderstanding.

Amendment 13 is very straightforward and, I hope, not too controversial. We have already had discussions today on the importance of communication regarding CDC schemes. CDCs are often described as being somewhere in between defined benefit schemes and defined contribution schemes. That is an important misunderstanding; they are not. They are defined contribution schemes, with none of the guarantees of any level of outcome that a defined benefit scheme provides. We have heard comments today about accrued benefits and about transfer values being calculated based on target benefits payable. All these things are more like defined benefit schemes but, in reality, do not relate to CDC schemes.

Given that the schemes provide these target outcomes, there is a real risk that employees signing up will not fully understand the reality that they are taking all the investment risk and the employer is taking none. In particular, unlike with a DB scheme or an annuity under a DC scheme, the amount of pension can and does vary year on year, up or down, after it has started to be paid. This is again a very important difference from a defined benefit scheme or an annuity under a defined contribution scheme.

The experience in the Netherlands in 2012-13 shows how this can come as a surprise. People were deeply shocked when their pensions were cut in actual terms by up to 7%. Very few Dutch schemes have managed to keep up with inflation over recent years, and further cuts are expected in the coming years despite having been postponed this year by government jiggery-pokery. This has seriously undermined faith in the schemes because people expected to be paid a consistent, inflation-linked pension under them, and they have been shocked. If we are to avoid a similar loss of face, it is essential that the risks are made very clear in any publication issued by the schemes. That needs to cover all interactions: when people are considering whether to sign up; whenever statements and other communications are sent to members; when people are nearing retirement and deciding what to do; and, as pensioners, as time goes on. Most commentators on the Dutch situation highlight that the proper communication of risk is one of the biggest clear lessons that we should learn from the Dutch experience in setting up our own similar schemes.

The Minister said at Second Reading, and she has repeated today, that the Government will ensure that in communications to members, particularly at key points throughout a member’s pension scheme journey, CDC schemes are clear and transparent that benefit values may go up as well as down—or down as well as up, actually. However, that does not seem to be a requirement in the Bill. The regulations about publications in Clause 46(2) do not seem to facilitate that, and I cannot find it anywhere else. Clause 46(2) says that the regulations may, among other things,

“require the trustees to publish a document specified or described in the regulations … require information or a document to be made available free of charge … require information or a document to be provided to a person in a form or by means specified or described in the regulations … require or permit information specified or described in the regulations to be excluded from a document when it is published in accordance with the regulations.”

Nowhere does it talk about the importance of communicating risk. Amendment 13 would simply make the clear communication of the risks—just as the Minister has said will happen—a legal requirement. I very much hope that the Government can accept this really very simple proposal.

[Lord Hutton of Furness]

The noble Lord, Lord Vaux, has drawn attention to an important issue. The wording of Clause 15, which deals with communication requirements that the Pensions Regulator has to be satisfied with, is all about the systems and processes of communication. I accept that that is important but so is the content of the communication. The issue of risk, and who carries the principal burden of risk in a collective defined-contribution scheme, is central. Anyone who has followed what happened in the Netherlands a few years ago will be aware of the enormous sense of disappointment, anger and, I think, surprise that many of the scheme members felt when their pensions in benefit were reduced. No one thought that was possible but of course it was, because, at the end of the day, collective money purchase schemes are, as the noble Lord said, collective defined contribution schemes. The risk is entirely on the scheme member; it is not on the employer at all. No guaranteed promises are being made to scheme members about what their retirement benefits will be.

The issue of the content of the communications that the scheme must make available to its members is just as important as the systems and process of communication. It is a mistake in the Bill for the emphasis to be placed on just the systems and processes, as it is, with no acknowledgement of the importance of the content.

[Baroness Altmann]

My Lords, I added my name to the amendment moved comprehensively by the noble Lord, Lord Vaux. I want to add a few points.

As many of us said at Second Reading, communication is one of the key issues of this type of pension scheme, especially in a country that is used to traditional defined benefit schemes, which were thought to offer guaranteed pensions—and have done so in most cases. This is completely different. Indeed, it relates to the idea of capital buffers and some kind of insurance. If there are no buffers and there is no insurance and things go wrong, it is entirely possible that the member will get no pension from this type of pension scheme. Will that concept of risk be explained to members? Will it be explained to members who may, as my noble friend Lord Young said, be transferring into a CDC scheme?

The aim of this scheme is to offer lower-cost administration and better returns on the investment than an individual defined contribution scheme because of the economies of scale and access to a wider range of assets—perhaps also with more individualised professional management of the scheme as a whole—and to offer better income prospects than what an individual would achieve through buying their own annuity, with all the risk and profit margins involved in that transaction. Communication to the members that this does not guarantee a pension and that there are no pension rights in this CDC scheme will be crucial. Explaining to members, who will be contributing their own resources, what this means—not least to Royal Mail members, whose guaranteed defined benefit scheme was ultimately picked up by the taxpayer and then moved into a new type of defined benefit scheme that was considered unaffordable by the new body and is being replaced by this scheme—needs to be an integral part of establishing the scheme.

I thank the noble Lord, Lord Vaux, for raising this important issue. I hope that my noble friend will take it on board.

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[Lord Hutton of Furness]

My Lords, I shall speak to my Amendments 23, 24, 25 and 26. It was clear at Second Reading and has been again today that most Members of your Lordships’ House accept the need for this new criminal offence: I certainly do. Recent events have confirmed that there is a gap in the law and we should try to fill it—that is our responsibility. However, when it comes to the creation of new criminal offences, there are always some important questions to be clear about, from the beginning. Who are we aiming this new criminal offence at? Have we got that right, and are we clear, in the way the offence has been drafted, that we are catching or bringing within the net of this new offence those people and those people alone?

We need to be clear who can prosecute. It is interesting to look at the origins of this offence, and the way it came about in the consultations. It is clear in the Green Paper and the White Paper that the Government, rightly, had in mind that the Pensions Regulator would be the prosecuting authority. That is not the case in the Bill, where we have the rather unsatisfactory state of affairs that not just the Pensions Regulator but the Secretary of State and the Director of Public Prosecutions can prosecute. As I said at Second Reading, that does not clearly set out where the prosecuting authority lies, which is why I support Amendment 35, tabled by my noble friend Lady Sherlock.

There is a parallel here with other offences. This is a new offence, complicated in nature and unclear in its precise scope. When Parliament is creating new offences such as this, it has a responsibility to the general population—and, in this case, to those concerned with the governance of pension schemes—to help them understand what is covered by this new legislation and what actions people need to take to make sure they stay on the right side of the law. Amendment 35 would help us clarify some of those issues.

There is a general problem with the way this clause has been drafted, which has been a familiar theme of the comments of the noble Baronesses, Lady Neville-Rolfe and Lady Bowles. I support much of what they said. I am concerned that this offence, in its current form, is drafted too widely. When it was envisaged, and the Government did their consultation, it was going to be an offence to catch the behaviour of unscrupulous employers or directors of companies. That is the origin of this offence. We do not need to go into the detail of the case, but we all know what we are talking about.

It is clear, from a cursory reading of this clause, that this offence would cover more than just employers and company directors. It could cover scheme trustees, actuaries or advisers, or pretty much anyone in a position to give advice on the management of a pension scheme. I genuinely doubt that was the intention of the Government when they consulted on this clause. They have made this provision too broad in scope. They should have another look at the way that this clause has been drafted.

They should definitely have another look at who the prosecuting authority should be. Generally, in our system, it is very unusual for the Secretary of State to be able to bring a criminal prosecution against another person. There may be one or two examples I am not aware of, but I am sure the Minister is well advised about how many situations there are in which the Secretary of State has such a power. Generally, it is best to leave criminal prosecutions in the hands of criminal prosecutors. With the best will in the world, and the high regard I have for the Secretary of State, she is not a criminal prosecutor. I would not want her to be in the position of being advised to bring a prosecution. I would like the Minister to set out how that process would work within the department. It would be unusual. As a Secretary of State, I was never advised to bring a criminal prosecution. Particularly if the DPP and the Pensions Regulator both decided not to bring a charge, it would be extraordinary for the Secretary of State to be able to carry on with a criminal prosecution none the less.

The third question about criminal offences is pertinent to this offence. What is the penalty for the wrongdoing that we have in mind? To go back again to the Green and White Papers, the origin of this offence was the behaviour of unscrupulous employers, who deliberately put at risk scheme members being able to acquire their scheme benefits. By its very nature, that is a serious offence and the draft statute we are discussing has a sentence of up to seven years’ imprisonment for such an offence. Bring that on. That is an appropriate statutory offence.

What I do not understand about this offence, in what would be new Section 58B(9)(b) of the statute, is that it could be tried either way. It could be tried on indictment, where the statutory sentence of imprisonment would kick in, or it could be tried on a summary conviction. But by its very nature a summary trial implies that an offence is not as serious as a charge that can be brought before a jury in a Crown Court. For the life of me, I cannot understand why this offence has mutated into a serious and a less serious offence at the same time. That is incomprehensible to me. This is a serious offence that should be tried on indictment by an appropriate criminal prosecutor.

I am afraid that in my humble view this clause needs a complete rethink. It is too wide of the mark and obtuse in what it is covering, and the sentencing arrangements are indecipherable; they are an inherent set of contradictions. This should be an offence triable on indictment only, period, because we are talking about serious offences.

The noble Baronesses, Lady Neville-Rolfe and Lady Bowles, both referred to the wording used to describe this offence. I have simply tried to bring into the Bill the wording that the Government themselves consulted on when the offence was being talked about and conceived. It was about wilful or reckless behaviour; in fact, I think the Government used the phrase “grossly reckless behaviour” in their consultation. In the way that this offence has been drafted, I absolutely accept that the Government are trying to ensure that the offence is based on wilful or reckless behaviour, but there is almost an obligation on the Government when they have consulted on a particular offence to stick as closely as possible to how that consultation was done, developed and extended, and to bring forward legislation that as closely as possible represents that offence in any new legislation. I think there is a way that the Government could do that. My amendment is one simple way of doing it, although there may be a better way. I think it is incumbent on the Government to try as far as possible to stick to what they consulted on, but there is a very real danger that this clause will not do that. I hope the Minister will be able to offer me and other Members of the Committee some reassurance that the Government might be willing to have another think about the nature of this new offence.

[Baroness Bowles of Berkhamsted]

My Lords, I am sorry to rise again but I did warn the Committee. I agree that it is necessary to look again at the precise wording. I do not think that “recklessly” is covered, and it should be. It may well be a solution to remove trustees from the scope.

I want to address the concerns I have about defining “reasonable excuses”. Sometimes you can end up forcing unintended interpretations that can work both ways, either giving loopholes to bad behaviour or unintentionally limiting the scope of excuses. That means, if you like, it can work for the prosecution or the defence, but it means you do not get what you thought you had got. If anything is specified or picked out as an example, it needs to be clear that it may not be binding in all circumstances and that the examples are not an exhaustive list, so that if something else is brought forward as a defence it is legitimate for it to be considered.

There are certainly regulators that have fallen into the trap of too many guidelines. The FRC was criticised in the Kingman report for the detrimental effect on reporting and audit of too many guidelines, resulting in boilerplate recitations rather than thoughtfulness. In this subject, we are also interested in thoughtfulness and people thinking about what they are doing. We debated the FCA report into GRG in the Chamber on 27 June last year, and the FRC gave a line-by-line report of how its published interpretation of “fit and proper” had greatly narrowed what in my personal experience was always held out to be a wide-in-scope basic test. It was even described to me by some people as our version of “unconscionable conduct” in that bad conduct would not be fit and proper and that was the way in which we went about getting bad behaviour. However, in the GRG case and the report from the FRC we found that not to be the truth because of the guidelines and training that were put around those words. So what we do here needs to be done with care.

Concerning Amendments 19 and 20, it should not be a reasonable excuse to do something just because someone else has or might have done it. That is an excuse for a race to the bottom and to disengage from responsibility. It is reasonable to have regard to market practice but the competitive urge to do what others do or to push it a bit further has to be resisted—such behaviour was among the causes of the financial crisis.

I fully accept that there are difficult matters to balance for business; these are in part explored in later amendments relating to dividends. Perhaps the law has not been clear enough so far about what are the right priorities; in the past, pensions have been put at the bottom of the pile, with deficits paid down slowly and surpluses raided and holidays taken rather more eagerly, with a lax attitude when the company is generally well capitalised. That has been the wrong message. I believe it is now the right time to clarify that obligations rank ahead of options in the balance of legitimate interests and call on capital.

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Further, as it is not just the Pensions Regulator which could bring forward a prosecution, the amendment would give the Pensions Regulator and the Pension Protection Fund the power to overrule the decision of other prosecuting authorities, such as the Director of Public Prosecutions. We believe that that would be inappropriate.

[Lord Hutton of Furness]

I hear what the Minister says about prosecuting authorities but can he turn his remarks to the subject of why in those circumstances the Secretary of State should be considered a legitimate prosecuting authority? He has not mentioned that. I understand his points about the DPP and the Pensions Regulator but what about the Secretary of State?

[Earl Howe]

I was coming to that but I will deal with it now. The Secretary of State for Work and Pensions can institute proceedings for an offence under new Sections 58A and 58B in England and Wales only. This drafting mirrors the legislation of similar offences, such as insider dealing in the Criminal Justice Act 1993, as well as offences in the Financial Services and Markets Act 2000 and the Insolvency Act 1986, where the Treasury or the Insolvency Service could bring prosecutions.

The inclusion of the Secretary of State here enables the Government to ensure that the most serious conduct that harms pension schemes will remain punishable in the future. For example, if the ability of the regulator to bring about proceedings is hindered or the regulator ceases to exist—or exists in a different form—this provision could cut in. It is not envisaged that the Secretary of State will institute prosecutions where the Pensions Regulator or, where relevant, the Director of Public Prosecutions has decided against it. Further, where the power to institute prosecutions is exercised, the guidelines from the Code for Crown Prosecutors will apply.

[Lord Hutton of Furness]

Where will that be set out? If the Secretary of State will not prosecute in those circumstances, how will that be made clear?

[Earl Howe]

It will be made clear—in practice, if anything—but the Secretary of State will reserve the power for the rarest of occasions, I imagine, in the circumstances that I outlined. The normal course would be for the traditional prosecuting authorities to act. Only where the Secretary of State sees an egregious example of someone likely to get away without prosecution for reasons beyond the control of the prosecuting authorities will he or she step in. I cannot generalise about the circumstances. That power is there, as in the other Acts that I mentioned, very much as a long-stop provision.

Amendment 35, in the name of the noble Baroness, Lady Sherlock, proposes a new clause requiring the Pensions Regulator to publish guidance on how it intends to use the new criminal offences. We think this amendment is unnecessary. The Pensions Regulator already has a general prosecution policy in place which sets out the matters it considers when using its prosecution powers. The Pensions Regulator intends to issue further specific guidance explaining its approach to prosecuting the new offences under Part 3 of the Bill.

I fear there is also a practical difficulty, because it is unclear how the amendment could be implemented. The amendment would require the Pensions Regulator to publish guidance pertaining to the new offences at the point of Royal Assent. The problem with that is that the provisions in Part 3, which include the new criminal offences, are subject to changes up to the point of Royal Assent and it would be unwise to pre-empt the will of Parliament by preparing guidance based on draft provisions. It is expected that, following Royal Assent, the regulator will consult on the contents of the guidance for the new offences and expects to publish this guidance prior to commencement. It is clearly important that the industry’s views are sought on what is contained in the guidance, and the timing requirement proposed in this amendment would mean the regulator would consult before the offences are finally settled.

A further reason the amendment is unnecessary—indeed, I would say inappropriate—is due to the inclusion of the phrase

“guidance … concerning the operation of law”.

This phrase has a very specific meaning, and implies that the intention behind the amendment is that it will be for the Pensions Regulator to determine how the legislation should be interpreted. This is of course a matter for the courts, which will make the decision as to whether an offence has been committed in a particular case. Therefore, while the regulator’s guidance will provide assistance as to how the regulator intends to use the new criminal offences, it will not be definitive; nor could it or should it be, since something deemed to be reasonable in one case, for example, may not be reasonable in another. I should mention, for completeness, that there are a number of technical issues with all these amendments which could cause confusion. I shall not go into them here, but I can explain the details to noble Lords if necessary, outside the Committee.

My noble friend Lady Neville-Rolfe asked what kind of estimate we make of the number of people who might go to prison under these criminal offences. Clearly, irresponsible treatment of pension schemes is rare; however, it is important that where we have wilful or reckless behaviour, appropriate sanctions are available. The Pensions Regulator has successfully brought 16 convictions over the past two and a half years—it is of course for the courts to decide who gets convicted and what the penalty should be. I hope it is widely accepted that the Pensions Regulator must meet a higher threshold before a criminal prosecution can be commenced. As the Pensions Regulator has already commented, it would use these new powers only in the right circumstances.

The noble Lord, Lord Hutton, asked a further question about the words “any person” and what other legislation uses that phrase. It is the norm for criminal offences across the statute book to be drafted as applying to “any person” and I can give him examples—I would be happy to write to him.

It is clear that the majority of employers want to do right by their scheme. However, we must ensure that there are sufficient safeguards to protect members’ pensions from the minority who are prepared to put them at risk. If the category of persons whose conduct is within the scope of the offences as set out in Clause 107 were to be narrowed in the way that some of the amendments propose, we believe that the deterrent provided by the offences would be weakened, as indeed would the safeguards built into them. In contrast, making the scope of the activities caught by the offences wider, as separately proposed by other amendments, not only risks removing a key consideration of the level of impact of the conduct but also reduces safeguards. The Government have therefore sought to strike a balance to ensure that members’ benefits are protected while taking into account impacts on business.

I apologise again for speaking at such length, but I hope that the comments I have made will allow noble Lords to feel comfortable in not pressing their amendments.

Pension Schemes Bill [HL]

Lord Hutton of Furness Excerpts

2nd reading & 2nd reading (Hansard): House of Lords & 2nd reading (Hansard)
Tuesday 28th January 2020 Lords Chamber

[Lord Hutton of Furness (Lab)]

My Lords, it is a great pleasure to follow the noble Lord, Lord Kirkhope, with whose remarks I am mostly in full agreement.

This is a necessary Bill, and I am delighted that we have the opportunity to have this Second Reading debate so early in our Session. It is designed to make a number of welcome reforms, which will, for example, help reinforce the existing safeguards protecting defined benefit pension schemes. The reforms have been made necessary, as we have all seen, by recent scandals, especially in the case of BHS, which have highlighted failures in the existing framework. Measures such as these provide greater confidence in pension savings, help assure savers that schemes are properly managed and assist the process of encouraging more people to save for their retirement, whether in DB or DC schemes. That should remain the focus of pension policy. Sadly, there are still far too many workers in the UK—many millions—who are either not saving for their retirement at all or are seriously undersaving. This is still a subject that we in this House and in Parliament as a whole should keep under careful review, because we cannot afford complacency.

I also welcome the fact that the Bill has been the subject of extensive consultation, as the Minister said in her opening remarks, because that helps build consensus, which is important if these reforms are to be allowed to work over the long term. I welcome particularly the clauses providing for collective money purchase schemes and the new pensions dashboard. I do not believe that collective money purchase schemes are a panacea or somehow represent a miracle cure, but they give employers a new option. These schemes are designed to focus on levels of retirement income, which is entirely right, but without the significant costs and risks faced by employers in respect of defined benefit schemes, which, as we all know, have almost entirely disappeared from the private sector in the UK. Collective money purchase schemes add a new string to our bow, and it is right that we should debate these provisions in more detail.

The pensions dashboard will contribute towards greater knowledge and awareness for pension scheme members and is an important part of the Bill. There is some evidence from the Netherlands that dashboards can help increase engagement with pension savings, and the FCA highlighted the need for this in 2016. The details are going to be set out in regulations under the Bill, and obviously we will need to take the greatest care in establishing how this can best be done. The Minister said in her opening remarks that she wanted to present draft regulations covering Part 1 of the Bill for Committee stage. That is a noble and brave offer, and I hope that she will be able to do that for Part 4 as well, because this will be very important indeed.

I echo many of the comments in this debate about the importance of doing no harm to consumers in the process of setting up these pensions dashboards. The obvious way to avoid that is for there to be a publicly funded dashboard service. If there are going to be multiple dashboards driven by commercial interest, it is crucial that we establish an overarching duty on the part of those providers to act in the best interests of savers. There is no hint or sign of that in the Bill as currently drafted.

I also understand and support the need for the new criminal offences in the Bill, because I think that they are fully justified. However, as has been referred to by a number of speakers, the scope of the proposed new offence in Clause 107—what will be new Section 58B of the Pensions Act 2004—goes significantly beyond the criminal sanction proposed in the consultation which preceded the Bill. The original framing of this offence was going to criminalise

“wilful or reckless behaviour in relation to a pension scheme”

and was targeted, so we were told, at a small minority of employers and connected persons. In fact, the wording “wilful or reckless behaviour” was used by the Minister in her opening remarks. The problem is that the Minister’s words do not appear in the Bill.

By contrast, the wording in the Bill is much wider, as it covers anything that

“detrimentally affects in a material way the likelihood of accrued scheme benefits being received”.

It is clear that not only is the scope of this new offence much wider than what was originally proposed but it is also very possible that it could operate at a much lower level—criminalising the existing material detriment test, which forms part of the contribution notice regime, and bringing into its net persons associated with scheme management and administration. I really do not think the case for this extension has been made.

The use of the word “likelihood” in this context is also an intriguing concept. Would it bring, for example, corporate investment decisions or taking on new corporate debt within the range of the new offence? I really do not think that it should, but these are things we will have to examine in Committee.

There is also a strong argument for saying that the parameters for any new offence such as this, where there is considerable room for interpretation, should be clearly set out in a statutory code of practice—to define those parameters in advance so that people know where they stand. That is exactly what Parliament decided to do with the Bribery Act 2010; when there was a new offence which was quite extensive in its scope, it was accompanied by extensive Ministry of Justice guidelines.

Before I leave this part of the Bill, the other thing that troubles me is that, the way it is currently drafted, there are three prosecuting authorities: the Secretary of State, the Pensions Regulator and the Director of Public Prosecutions. I do not think that is appropriately drafted at all. I do not want to see the Secretary of State bringing criminal proceedings where, for example, the Pensions Regulator or the DPP might have decided not to do so.

There is much to welcome in this Bill, but it is also quite clear that there is much work to be done in Committee.

Pension Schemes Bill [HL]

Lord Hutton of Furness Excerpts

Monday 21st November 2016 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, I am grateful to the noble Lord, Lord McKenzie, for his introduction to the amendments. I hope to be able to respond almost as briefly—and as eloquently.

Amendment 13 would amend the description of one of the people whom the Pensions Regulator must assess as fit and proper. It would change the description of a person who,

“(alone or with others) has power to vary the scheme (where the scheme is not established under a trust)”,

by removing the words,

“where the scheme is not established under a trust”.

The preceding paragraph refers to a person who has the power to vary the terms of the trust under which the scheme is established, and the paragraph in question here is a counterparty to that provision. The two paragraphs work together to ensure that any person who has the power to vary the terms of the trust or the scheme is subject to the fit and proper person test. Clause 7(2)(d) describes the persons who have this function under a trust-based scheme and Clause 7(2)(e) describes an equivalent for schemes which are not set up under trust. Clause 7(2)(e) is therefore specifically to cater for those relatively rare exceptions where a master trust may be set up outside the trust-based structure and to ensure that we do not create an avoidance loop hole.

Incidentally, we have maintained the term “master trust”, as that is how such schemes are known in the industry, even where they may be set up outside the trust-based structure. Clause 1 defines what the term means for the purpose of this part of the Bill, to ensure that there is clarity about who is in scope of the new regime, but it is not necessarily the case that it would be possible only ever to set up the sort of scheme captured under trust. It would be relatively rare, but we need to cater for such circumstances. We would want the regime to bite where schemes were not set up under trust, and this is one place in the Bill where something separate is needed to provide such cover. The two paragraphs provide that anyone who has power to vary the terms of the master trust must be subject to the fit and proper test.

I welcome the sentiment expressed in Amendment 14, which would require the regulator to ensure that the authorisation criteria had been met continuously and that it should not be a “once and done” affair. I agree that it would not be sufficient to require the scheme to satisfy the regulator on these matters only once at the point of application for authorisation. The intent of the Bill is that the standards must be maintained continuously.

Clauses 3, 4 and 5 together ensure that a scheme cannot operate unless it is authorised—with various modifications for existing schemes in Schedule 2, which we will come to later—and provide for a clear application process and decision by the regulator. Clause 19 also allows for the Pensions Regulator to withdraw that authorisation at a point at which it stops being satisfied that the criteria are met. To be clear: this does not mean that the scheme will be asked to reapply for authorisation regularly and that, if it fails, this is the only way to change its status. Nor does it mean that, once the test is passed, the scheme will always remain authorised; the criteria must continue to be met. It does mean that the regulator can withdraw authorisation if it is no longer satisfied that the criteria are met. The scheme must be able to show to the regulator’s satisfaction that it is meeting the criteria on an ongoing basis.

[Lord Hutton of Furness (Lab)]

I am grateful to the Minister for his comments, which have been very clear, but where I am struggling with his account of this part of the Bill is his saying that the regulator has almost an implied power to review, for example, whether a newly appointed trustee is a fit and proper person. There is nowhere in the Bill so far as I can see where that implied power is expressed. It is always better for such matters to be dealt with by giving the regulator an express power than to rely on some clever interpretation of words to get to the point where it is implied the regulator has a power to review when all it has is, in the words of the Minister, the power to withdraw authorisation, which is altogether different.

[Lord Young of Cookham]

I take the point that the noble Lord has just made. I hope to be able to reassure him that other provisions in the Bill will satisfy him that the regulator will have the necessary information to withdraw authorisation if something happens that requires it. I will come to that shortly.

As a public body, the regulator must exercise its general functions reasonably and consistently with its duty to be satisfied that the scheme meets, and therefore continues to meet, the authorisation criteria. With respect, a specific regulation-making power to require the regulator to review fitness and propriety is not necessary.

I turn to other clauses, which I hope shed some light on the issue raised by the noble Lord, Lord Hutton. Clause 14, requiring the submission of annual accounts, Clause 15, requiring the submission of a supervisory return and, crucially, Clause 16, which creates a duty to notify the regulator of significant events, all serve to ensure that the Pensions Regulator can take an ongoing view of risk in relation to whether it remains satisfied that the scheme continues to meet the criteria.

Additionally, the regulator also has its information-gathering powers to bring to bear, so it can ask schemes for information to assist in assessing whether it remains satisfied that a scheme continues to meet the criteria and inquire for more information about reported events or information provided. The duty to notify the regulator of significant events, which is provided for in Clause 16, will be supplemented by regulations which specify the events which must be reported. Although we intend to consult on the regulations, our current thinking is that such events will include a change in status of anyone subject to a fit and proper test and any change in the personnel who are subject to the fit and proper test. The use of the significant events regime in Clause 16 to achieve this end is not set out in express terms in the Bill because of the detail which will follow in regulations, but I hope that my outlining of the intent above has helped to clarify this. I have no doubt that later we will return to Clause 16 for further debate.

Amendment 15 would change the regulation-making procedure in Clause 7 from the negative procedure to the affirmative procedure. I note that in an otherwise critical report, the Delegated Powers Committee acknowledged that this clause was one where the negative procedure might be appropriate. None the less, I refer to what my noble friend said in earlier debates about wanting to stand back and look at the totality of procedures, affirmative and negative, and then come to a conclusion at the end on whether we strike the right balance. On that basis, I hope the amendment might be withdrawn.

Pensions: Reforms

Lord Hutton of Furness Excerpts

Thursday 18th June 2015 Lords Chamber

[Lord Hutton of Furness (Lab)]

My Lords, it is an enormous pleasure for me to follow the noble Lord, Lord Flight, of Arundel. He brings tremendous expertise and knowledge to our proceedings on pensions and in a sense, although I hate to say this, has made my speech pretty well redundant because I want to echo everything that he said. He made some very important points but that will obviously not stop me, as a former politician, making my own speech in my own way. I hope to avoid repeating all the things that he said but he has done the House a great service. I say that because pensions and retirement saving will be one of the most important issues facing Parliament for the next few years, and the reasons why are self-evident.

Britain is changing; we are getting older and the demographic forces at work will literally change the face of our society in our own lifetime. It is therefore absolutely obvious—I think it has been to us all for a long time—that if we are to manage the effects of that change sensibly and avoid the calamity of the next generation of pensioners finding themselves living a life of poverty, which has been the curse of just about every previous generation of pensioners, then we have to take matters into our own hands. In simple terms this primarily means that, as individuals, we all have to accept more direct personal responsibility for ensuring that we have adequate means in our retirement years to sustain and afford the lifestyle that we want.

This is also a critical point in understanding the reforms of the last 10 years and making sure that they work because, as the noble Lord, Lord Flight, said, we have the best chance of managing this demographic change effectively if we can try to maintain and sustain the consensus about retirement savings and pensions that has existed since the noble Lord, Lord Turner, and his fellow commissioners produced their ground-breaking report in 2005. Sometimes in politics, consensus is not a good thing and you need someone to stand up and say something difficult to change things. That in fact was what the noble Lord and his fellow commissioners did. In the process of producing their report, they established a new common ground between all the main parties. This is one area where we should all strive to sustain that consensus—and, to their credit, the previous Government did that. They took forward auto-enrolment, which is a fundamental pillar of encouraging greater personal financial responsibility for retirement, and implemented those significant reforms. They also took forward a very necessary change to the social security state pension in the United Kingdom. The new single-tier flat-rate pension is an excellent idea. There have been and there probably will continue to be disagreements about aspects and details of those policies. I do not think, however, that there is anyone left standing who does not think that those reforms are some of the essential things that we need to do to encourage more people to save more for their retirement. That is the holy grail that we now have to pursue.

The last thing any of us should want to encourage is a return to the decades of disagreement and division that were the hallmarks of the previous 20 years of pension policy. It will not help us build for the long term, and that is fundamental if we are to encourage more people to save more for their retirement years. A constant chop and change will, by definition, undermine any policy designed to encourage long-term saving. We have to sustain the consensus. We have to maintain it; we have to work at it if Britain is to be a nation of savers. As the noble Lord said, we have an awfully long way to go if we want to be a nation of savers. Our savings rate at the moment is a matter of dispute among economists as to how to best calculate it, but it is probably about 6%. Once automatic enrolment and the reforms that the Turner commission recommended have matured fully, we know that people will be saving around 8% or 9% in the defined contribution schemes in their workplaces. The simple truth is that that will not be enough. It is not going to give people sufficient retirement income for the extra decade or more that they can now expect to live.

I will talk primarily about workplace savings and pensions because these are absolutely fundamental. As I said, we are going to have to take more personal responsibility for our income in retirement, and that is clearly the logic behind the reforms to the basic state pension. The fundamental question that is inevitably going to arise during the course of this Parliament, particularly when we get to 2017-18, when automatic enrolment has matured, is “Are people saving enough?”. It has been a success so far: we have 2 million new people saving in workplace retirement accounts, and opt-out rates have been very low. However, of course people are contributing only about 1% of their salaries today. I do not think many people will notice that coming out of their pay packets. When that starts to creep up to 3% or 4%, people are definitely going to know. Will that increase the rate at which people opt out of these new savings plans? Probably. I think we can expect the opt-out rates to start rising. Therefore, there is going to be a pretty obvious moment in this Parliament when we are going to have to stop and ask ourselves, “Will the current course be sufficient to equip people with the income they need for their retirement?”. I do not think it will be. The question is not “Do we have to look at this issue again?” but “When will we have to look at this again?”. Of course, there are two aspects of this equation—how much people are putting in, and how many are opting out. At some point, we will have to look at both issues.

I welcome the Minister to her place on the Front Bench. As the noble Lord, Lord Flight, said, she is a lady of tremendous status and knowledge of pensions, and we look forward to her time as Pensions Minister with great excitement. To encourage her a little bit, I do not think she needs to start digging around in the undergrowth just yet. It will be important to see what happens in 2017-18, when we get to the point where people are contributing the maximum amount envisaged under the legislation. That moment is going to come during this Parliament. There are some cases of public policy of which we can say, “We tried to encourage people, but they did not take up our incentives. They just went on in the way that they were doing before”. We could do that on this occasion. We could shrug our shoulders and say, “It is all too difficult. We have had 10 years of legislation. We tried to encourage people to save, but they did not”. I do not think we can ignore any evidence that is emerging that people are not saving, or that their savings are not sufficient. We are going to have to do something.

Obviously the question then is “What are we going to do?”, because making people save—removing the right to opt out—is a very big policy step to take. So, too, would be increasing the contributions into these pension plans because, of course, legislation restricts the amount that employers can contribute to 3%. That is a very big step to take. If we get anywhere near that, I would strongly suggest to the Minister that she ought to have another look at the Work and Pensions Committee’s report from the last Parliament and its recommendation that the Government set up an independent pensions commission. I was the Secretary of State who decided not to do that in 2005, so I am holding my hands up and saying, “I am guilty”, but I think that we now need to have another look at this, at the 10-year mark since the noble Lord, Lord Turner, produced his report. We are at this critical juncture, and we may well face some important decisions in the next couple of years about going further, and probably faster, in encouraging more people to save. If we are to take the noble Lord’s advice and maintain the consensus, as I think we should, we must also ask: who and how? What is the best way in which to maintain that cross-party consensus? Would it be best served by the Minister coming to this House and making an announcement, or by bringing together people with knowledge and experience of the industry and the changes that are taking place in society and asking them to report to Parliament on the next steps? There is a precedent, in that we did that a few years ago with the independent Committee on Climate Change, to try to take as much of the politics as we could out of it. There is a useful precedent that the Minister might want to follow. The adequacy of savings will be a major issue in this Parliament and we have to address that before we go any further.

The issue of adequacy can also be tackled from the other end of the telescope. There is the question of what we do with the legislation on auto-enrolment, but there is another debate that the previous Pensions Minister, Steve Webb, opened, which was long overdue, on the adequacy of defined contribution as a savings platform. I think that DC is a good thing and an inevitable thing, as the noble Lord said, because employers were leaving DB and they are not going to come back. There has to be a better savings platform for people in the workplace, and defined contribution will do all the heavy lifting in the decades to come. But it is pretty clear that the track record of defined contribution has been pretty patchy, and there are a lot of concerns about whether it can do all that heavy lifting. The debate that the former Minister opened up on defined ambition pensions is a very worthy one, which I hope that the Minister will find it within herself to prosecute.

I am particularly not a fan of collective defined contribution schemes, not because I have anything in principle against them but because I do not think that they can be grafted on very neatly to the UK pensions savings system. I hope that I am wrong, but I do not think that I will be. Employers are not really showing any signs that they want to share more of their longevity or interest-rate risk with their employees. I do not think that that is going to happen. But there is a lot to be said for the writings of the leading US pensions thinker, Robert Merton, and I hope that the Minister has had the opportunity to read them, or will have shortly. Robert Merton won the Nobel Prize for economics with his work on financial instruments. He has a very clear view of the inadequacy of DC and the fact that it is focused on the wrong risk. We are managing volatile assets and trying to focus on that, and we look at the pension pot and try to grow that, but there is no one really managing the risk that the income that the saver might have when retiring on a DC plan is going to be inadequate. Of course, the wonderful thing about defined benefit plans is that you will know pretty well all the way along what your retirement income is going to be; it will be expressed as a fraction of your earnings, whether it is a career average or final salary. So you will know what your retirement income is and you can plan accordingly. That is a great comfort and peace of mind to savers. Unfortunately, in the switch from defined benefit to defined contribution, we have completely lost the fundamental and important language of income. We talk about assets and the value of those assets, but no one can really talk about income to someone saving on a DC plan: “What is the retirement income that I can expect to see?”. I hope that that will be looked at in the department and, if the Minister is so minded, the department will task a new independent pensions commission with responsibility for looking at it. This is an issue that needs to be explored more fully—a fundamental, almost do-or-die issue. If defined contribution is going to do the heavy lifting, we must keep our focus on DC as a savings platform, in addition to being concerned about whether people are saving enough or at all.

The noble Lord also drew our attention to the other significant reform of the last Parliament—the change to the rules about annuitisation. It is absolutely right that in today’s times people should have more control over their money. We do not want to be treated like idiots or children. At a time when annuities do not look like a good deal for a lot of savers because of the historically low rates of interest, it is right that they have more choice. That is particularly true if that saver also has the benefit of some legacy DB in their savings plan, as they might have accumulated a few defined contributions pots because their jobs have moved and they have changed.

So I have no objection in principle to the reforms, but it is important that the Government are doing something to monitor this and make sure that they know what is going on in the marketplace. They must know what people are doing. I do not see that they have any means at their disposal at the moment for collecting that information. and they need them. They need to bang heads. One can disagree with a policy—people can think it is a good or a bad thing—but, it having been legislated for, it is unacceptable for financial service providers to block people’s access to their pension pots if they want to cash them. If that is what is going on, Ministers need to act.

The Minister has an enormous agenda. I wish her the very best. She has the good will of everyone in this House behind her in tackling some of the enormous responsibilities that she has been charged with.

Pensions Bill

Lord Hutton of Furness Excerpts

Wednesday 26th February 2014 Lords Chamber

[Lord Turner of Ecchinswell (CB)]

My Lords, we have before us this afternoon a series of interconnected issues —the one of aggregation versus pot follows members, the issue of charge caps and the issue of transparency of charges. They are all related, because they are all to do with the absolute importance of getting value for money for pensioners. When we did the work of the Pensions Commission some eight years ago, the commissioners had two main concerns about the existing system of private pension provision. The first was a low level of participation and savings, and the second was very poor value for money—the phenomenon of many people, particularly those working for small and medium-sized enterprises and on a lower income, who paid fees such that by the time they came to retirement 25%, 30% or even 40% of their entire pension pot had disappeared in the fees charged to them.

Auto-enrolment addresses the issue of participation and, to a degree, that of cost, because it has removed some of the selling costs involved. It is essential to address the other issues driving costs, of which one is the proliferation of pots and the administration cost that comes with it. Therefore, it is good that there is a strong consensus that we need some form of policy intervention to arrive at a better consolidation of pots. I would accept that it could be done either way—by pot follows member or by aggregators—but I have not been convinced by the arguments that pot follows member is the superior route.

Part of the logic originally put forward, as the noble Baroness, Lady Drake, has said, was I think completely false—the idea that, if we had aggregation, we had to limit the transfer of the pots to only £2,000 versus a much higher transfer amount that would be allowed for pot follows members. There was absolutely no logic to that assumption. Indeed, I stress the point that there is no logic in any limit on transfers at all. The logic put forward by the impact assessment is that we need to avoid too much concentration of provision in this industry, so that a cap on transfers makes sure that the business is shared around in a fair fashion for lots of different providers. But it is very clear from the OFT work that this is not a market in which market competition works well, and the aim is not to have competition for its own sake; having a large number of competitors for its own sake is not an end. Competition is a good thing if it produces better value for consumers. If it is the case that aggregation into a relatively small number of aggregators will result in lower costs to savers, that should be our preferred route—one that is best for customers, not one that tries to spread the business around as a form of fairness to those already providers in the market. As a very thoughtful paper produced by the Centre for Policy Studies put it:

“The proposed pot size limit on transfers serves no consumer purpose: it should be scrapped”.

If we accept the logic that we should be allowing full transfers of whatever amount people have to enable us to get to what the Secretary of State called one big fat pot, that highlights one of the real dangers in pot follows member and makes it even greater—the danger that people can see their funds transferred into a higher charge scheme. Suppose someone has been in a NEST-administered scheme with one employer, paying 50 basis points—0.5%—for a default fund investment and then changes jobs and moves to a new employer who has chosen a scheme with a higher charge rate—perhaps 75 or 100 basis points. They will have originally made a decision to accept auto-enrolment on the basis of one set of charges but now we decide, in an Act of Parliament, to transfer them to somewhere where they will face higher charges in a way which, as I highlighted earlier, has not just a marginal but a huge effect on the amount of money they pay in charges and, therefore, on their pension for the whole of their retirement.

If we were committed to having in place very robust rules on the charge cap—this is why the issues before us this afternoon are somewhat linked—so that, for instance, we were confident that, if you had pot follows member, you would be going from a 50 basis point fund in NEST to a 50 basis point fund in where you had been transferred to, I accept that the decision might be a bit more balanced, although I think the other arguments that the noble Baroness, Lady Drake, put forward would still apply. However, we do not have that robust commitment in relation to the principle of a charge cap, let alone that it should be set at something like 0.5%. In the absence of that, we should not preclude the option of aggregation, which may well prove a more effective route to get to the low costs that we require above all for savers.

[Lord Hutton of Furness (Lab)]

My Lords, I am happy to have the opportunity to make a brief contribution to the debate on this amendment. It is the first time that I have put my name to an amendment in this House. I have done so because I believe that this is a very important point in the progress of the Bill. Clause 33 is to be welcomed in principle. It is the first time that a Government have addressed the problem of the large number of small pension pots that are out there. We need a solution to that problem, so I absolutely welcome the Government’s attention to this policy. We all know that one of the by-products of auto-enrolment —it is a very good policy which clearly at this early stage is encouraging more people to save—is that we will see many more of these small pots created. It is certainly not in the interests of pension savers for these small pots simply to stay where they are.

I do not want to repeat the very able arguments put by my noble friend on the Front Bench, by my noble friend Lady Drake and, indeed, by my noble friend Lord Turner, but I will make a slightly different point. Your Lordships’ House has heard the technical arguments, which are complicated and difficult to digest. I come at this debate from a slightly different angle, having been a former Pensions Minister. There are many other former Ministers in this House and I hope that the international fraternity of former Ministers, who are represented so well in this House, will understand this point. There comes a moment in the gestation of any policy when it is necessary to take a step back to be sure about it and to satisfy yourself that the policy is the right one—particularly given the fact that, as my noble friend Lord Turner said, if we do not amend the Bill, we will make the transfer of these pension pots compulsory and run the risk that people could lose out. That is a real hazard of which we need to be aware. In my experience, the best time to take that pause is before you take that step; you should not to do so once you are committed to it, perhaps irrevocably, and when some people will lose out as a result.

I have been in this House and another place long enough to know the difference between a destructive amendment and a helpful one. I definitely would not have put my name to this amendment if I thought that it was in any way a torpedo below the waterline of the Government’s policy. It gives the Government the opportunity to take stock of the situation. There are serious concerns about the impact assessment undertaken to support the policy. Many others have spoken of their concerns about the impact assessment. It would be a misstep on the part of this House to take a decision on the basis of what we have been presented with. The impact assessment is simply not reliable enough.

All the amendment does is invite the Government to take another look at this policy. It does not rule out pot following member, if that is what the Government are committed to doing; it simply gives them the opportunity, without coming back to this place, to follow the path of aggregation. Many of us believe that the opportunities of aggregation have not been fairly and fully explored by the Government. We should look again at the issue of aggregation, but I do not want to mandate that as a policy for the Government. That would not be right, but it would be absolutely sensible and in the interests of millions of pension savers for us, at this very late hour, to take a step back—not to rule out the possibility that this might be the eventual path that we follow, but to allow us, and Ministers in particular, to take another look at the benefits of aggregation. I genuinely think that that would be the right course of action for Ministers to take at this moment, and I hope that the House agrees with that.

[Lord Stoneham of Droxford (LD)]

My Lords, it is a good thing that in this debate no one disputes the need to consolidate pension pots to ensure that savers keep track of their pension savings and get the best return with the lowest charges. Nor does anyone dispute that inertia is an accepted principle to encourage savings through auto-enrolment, and should now be followed to encourage consolidation of pension pots. Let us remind ourselves that this measure covers people who do not want to opt to do things according to their own decision. It deals with people who are not at the moment making a decision as to what to do with their pension pots and it runs the risk of leaving them stranded.

We have to make a choice between two options—pot follows member to their new employer or the aggregator system. Let us also remember that this amendment merely delays a decision in order to allow more consideration. I do not want to make a political point, but this issue should have been addressed earlier and the problem is mounting. We know that in Australia, for example, as a result of changes made 20 years ago, there are 30 million stranded pension pots. That demonstrates that the sooner we get a consolidation process in place the better.

I have spent the past couple of weeks since Committee looking at the alternatives. One thing I think that we have to challenge is the ongoing closed nature of the pension sector, which relies on passive, uninformed and, sadly, often uninterested consumers, while the providers have a self-interest in prolonging obscurity and lack of information, leading to higher charges and lower performance.

The aggregator model basically assumes that competition and greater accountability cannot open up this marketplace. However, there is no clear proposition of what the aggregator model will actually be like. Will it rely on a small number of large schemes dominating the market, or will there be an unlimited aggregator model in which any scheme that meets certain criteria on charges and governance can act as an aggregator? There is no clarity about who will be responsible for selecting the aggregator scheme for the individual’s pot as it is to be transferred on moving jobs. Would it be done by the individual’s old employer, the old scheme, the new employer, the new scheme or by some form of automatic allocation?

The aggregator model is promoted as a safe haven for accumulated pension savings, with the implication that higher governance standards and restricted charging will offer greater security than pot follows member. I have to say that there is a difference in outlook on the process of reform between the two sides of the House on this issue. The aggregator model, by breaking the link with the employer’s current live scheme, will make it more difficult for individuals to understand where their money is and to engage with their retirement savings. An aggregator model will be a further distortion of competition in the pensions sector. We know that the sector is overconcentrated at the moment; we will merely be making it worse. Size also promotes complacency and inefficiency, and could increase risk where competition is weaker. It does not seem logical to attack regulated cartels in the energy and banking sectors but promote them in the pensions sector. The aggregator model will exploit inertia, too. Once the aggregator has the worker’s first pot, it is likely to receive subsequent pots because the consumer will make no active choice and there will be no incentive to innovate or improve performance.

In the member follows pot proposal we are providing two countervailing forces. There will be greater transparency for the consumer, who will remain close to their pot and will have a greater opportunity to understand the pension provision they are making, as well as its return and its charges. The employer will also be motivated to make the best provision for their staff in order to motivate them and keep them. The pot follows member proposal would be a more natural evolution of the market. An aggregator would be an irreversible sea change, as so much money would be concentrated in aggregator schemes that you would not be able to change the consolidation model without breaking up the aggregators.

--- Later in debate ---

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)]

My Lords, I feel rather privileged to have been here this afternoon to hear a pantheon of some of the leading pension thinkers in the country concentrate on an issue. As a result it has been a very interesting debate. Clearly we all agree that this is a very important topic. We need to find a solution to the issue of small pots and I will make a case for why the Government believe that automatic transfer is the right solution and why we do not need any alternative provision.

We are clear that the pot-follows-member model, with small pension pots automatically moving and being combined with the individual’s current live workplace pension, will lead to increased consolidation of pension pots, better outcomes in retirement and better member engagement, as well as administrative savings for the industry. The pot-follows-member model builds on the essential foundation of automatic enrolment —the employer/employee relationship that is proving so successful in driving retirement saving, including among those who have never had a pension before. Employees identify with this relationship and with the idea of pots following them to their new employer.

My noble friend Lord German mentioned the research carried out by NOW: Pensions. It showed that 39% of individuals would like their pot to follow them automatically compared with 6% who wanted their pot sent to an aggregator scheme. For the purposes of that research, NOW: Pensions defined the aggregator model as a pot that is automatically moved to a central scheme that meets certain standards. This definition, although high level, is helpful because otherwise we have no clear sense of what an aggregator actually is. Indeed, these amendments do not help define what an aggregator is or how it would work. In fact, these amendments—which have been revised since we discussed them in Grand Committee—appear to be even less workable than before. For instance, they appear to give the decision about where to move the pot to the ceding scheme. By definition, the ceding scheme is the scheme with the least interest in the individual and their outcome in retirement because it is losing the pot.

This seems entirely counterintuitive when compared with the successful current account switching service—CASS—that helps customers move banks. This service puts the onus on the new bank to ensure that the switch happens, because it was recognised that the bank gaining the account will have more interest in making the move as smooth as possible than the old one. It is perhaps not unreasonable that when people move employers and join a new pension scheme they will expect the new scheme to do the work of transferring the pot for them, as happens when they switch their current account, but this would not be true under a push transfer model which these amendments would introduce.

I agree with my noble friend Lord Flight, who points out a real problem with the proposed aggregator model. It really is not clear who chooses where the pension is aggregated. There are other fundamental flaws, such as the lack of any provisions to ensure that the same scheme is used each time—someone could end up with pots in multiple aggregators, undermining the core aim of consolidation. Moreover, there is no definition of what an aggregator is, who could set one up and what the criteria for doing so would be. This lack of clarity will not help the industry in driving forward the development of the implementation model. Noble Lords may say that this detail can be worked out at a later date, but it is exactly this detail that needs to be resolved before any measure can be put on the statute book.

I have real concerns that the House is being asked to accept a theoretical concept, with all the details to be entirely devolved to secondary legislation, but I also have issues with the concept itself. The Government welcome the recent Office of Fair Trading report and accept its conclusions. The OFT was damning of the pensions market, saying that,

“the combination of a complex product and weaknesses in the buyer side of the market means that competition cannot be relied upon to drive value for money for all scheme members”.

We have heard the argument that the introduction of automatic transfers into aggregators will shake up the market and essentially skew it in favour of consumers by ensuring that all can save into large schemes that provide excellent value for money. However, I believe that the aggregator model would skew the market in favour of large providers and would reinforce the dominance of a few big players.

I believe the assumption is that aggregators would in some way be licensed and that schemes would have to meet certain standards to be able to act as aggregators. This would favour current large schemes that have the business model to enable them to accept large numbers of pots from individuals with employers they have previously had no contact with. Alternatively, if the large players in this market do not take the challenge, the Government would have to subsidise an aggregator scheme, which would raise state aid issues in Europe.

Aggregator schemes would enjoy a huge advantage over the rest of the market. They would be the default destination for almost all pots and, as the consumer would not be making an active choice, there would be no incentive to innovate. We have estimated that there will be three-quarters of a trillion pounds in lost pots by 2050, which is a lot of money—

[Lord Hutton of Furness]

I am very grateful to the Minister for giving way. Can he tell us what assumptions underpin the figure that he has just given to the House?

[Lord Freud]

Those figures are pretty detailed and I will write to the noble Lord with them if I do not get a detailed breakdown in the next minute or two—which I might. It is a huge amount of money, which the noble Lord will appreciate as well as anyone else, and it is a lot of money to have in a complacent and stagnant market. If, as the noble Baroness, Lady Drake, suggested, employers could choose the aggregators, and these aggregators were to become open to active members, this market dominance would be complete.

Pensions Bill

Lord Hutton of Furness Excerpts

Wednesday 8th January 2014 Grand Committee

[The Lord Bishop of Chester]

My Lords, I support this amendment. The background seems to be one of a general lack of provision for pensions for older people in the future. There is a major shortage of pension savings, and my impression is that that is getting worse rather than better, for all sorts of reasons. My experience of young people—I use the word “young” to include people in their 30s—is that they do not think about pensions as much as they should. Anything we can do to encourage people to take a long-term view and think for the future must be a good thing. The principle, therefore, of deferring taking the state pension until you really need it seems a healthy principle to encourage in our circumstances. My anxiety is that, in the future, a lot of people are going to be very short of money when they are older. It seems fundamentally right to do anything we can to encourage that culture of not taking the pension until you need to.

If you are going to encourage people to do that, maintaining the flexibility so that they can either take additional income when they do take their pension, or a lump sum in lieu of the money they save, seems to be a sensible inducement. If you just look on it as an issue of encouraging savings, one of the lessons of the last decade or so is that we need to encourage the thought of saving in our culture. It may be just as easy to take the pension and put it into a building society account or whatever but why not offer the option of the Government allowing the lump sum to be taken? Another reason for supporting the amendment is the principle that if it ain’t broke, why do you need to change it? What is wrong with the current arrangements that means that we want to change them?

My third reason for supporting this is that, in principle, I think there should be parity with how we relate the state provision of pensions to private provision, which normally allows the option of taking part of the pension as a lump sum. That is an important principle of flexibility and, indeed, defined benefit schemes now typically make that option more available than they used to. There seems to be a simplicity—to use the Minister’s point—in treating state pension and private pension arrangements in broadly similar ways.

[Lord Hutton of Furness (Lab)]

My Lords, I do not want to detain the Committee for any length of time here but my noble friend has raised a very important issue of principle that the Committee should consider very carefully. I hope that at some later point the whole House might as well.

In relation to the Amendment 31A moved by my noble friend Lord Browne, the Minister, quite sensibly, prayed in aid the existing rules and said that the provisions simply reflected that. In essence, that was his argument for continuity. Here, he is proposing something quite different—he is proposing to take away a freedom and a choice that have existed for some considerable time from people who want to defer claiming their state pension. We should not do that unless there is a compelling reason for so doing. The principle of choice for people retiring should be preserved. They might want to, for whatever reason—and maybe the Minister would not agree with the reason—take their deferred pension as a lump sum. I cannot think of any good reason why we should not allow them to continue to do that. It cannot have any overall implications for public spending so there cannot be any cost to the Treasury.

Pensions Bill

Lord Hutton of Furness Excerpts

Tuesday 3rd December 2013 Lords Chamber

[Lord Hutton of Furness (Lab)]

My Lords, I draw your Lordships’ attention to the interests that I have declared in the register. I am an unremunerated non-executive director of Pension Quality Mark Ltd and advisory director to Dimensional Fund Advisors.

There is a great deal in the Bill that can be welcomed and supported. I genuinely believe that it takes forward much of the consensus that has recently been established in this country about the best way to ensure that more people retire with an adequate pension. That is a very important thing to be doing. There are some people—maybe even in this House—who recoil from the concept of a consensus in politics, but when it comes to pensions policy, consensus is a very important thing to strive for, in that it establishes the conditions for people to plan for the future with some confidence. The one thing that has bedevilled pensions policy in the UK in recent years has been the constant stop and start, chop and change, which has acted as a deterrent to people saving.

I, too, pay tribute to the noble Lord, Lord Turner, my noble friend Lady Drake and Sir John Hills—the three commissioners who made up the Turner commission —for helping us to focus our collective attention on two fundamental problems that we face in this country. If the goal is to ensure that more people retire with an adequate income, which I think is the right policy because we cannot ask the taxpayer to shoulder the principal burden in future years in the way that it has done in the past, we know that we have to address these two fundamental problems.

Not enough people are saving and what they are saving is probably not going to be enough to give them an adequate retirement income, so we have to address that. We are addressing that now with auto-enrolment. The speakers in this debate have already drawn attention to the progress that we are making. The Minister referred to the nearly 2 million savings accounts that have been established under auto-enrolment. That is to be welcomed, there is no question at all about that, but we need a reality check here. These are early days for auto-enrolment. The big challenge and the big test for auto-enrolment are still to come, but so far so good: we are making good progress.

However, we should never lose sight of one very important factor: it is wrong to say that we have an established or developed savings culture in this country. In fact, the opposite is true. We know from the Office for National Statistics survey of occupational pensions that in the year running up to auto-enrolment the number of occupational pension savers in this country fell by almost half a million—in one year. It is going to be a significant challenge to move from a culture that honours and pays homage to debt, consumerism and spending to one that puts a premium value on saving, but we have to make that transition. Auto-enrolment is the right policy to ensure that we make progress in that direction. The Bill makes some changes to auto-enrolment, such as the technical changes in Clauses 36 to 40. Some of those are to be welcomed. There is quite a lot of detail that needs to be fleshed out as we move to Committee and Report.

The issue of how much people are saving is altogether more complicated. Today is probably not the time for a debate about how much people are contributing via auto-enrolment into these new savings accounts, but the time is probably not far off when we will have to have a very honest debate in this country about whether 8% or 9% of earnings going into a defined contribution pension will be sufficient to guarantee people a decent and adequate pension in retirement. I, for one, do not believe it is.

The group of savers that we should be most concerned about are actually not those who are the lowest paid. They will do well in auto-enrolment, together with reforms to the state pension that I want to say a word or two about in a minute. The people we in this House should be most concerned about are those on median earnings, who are above the lowest threshold of earnings, who are almost certainly not heading in the right direction at the moment when it comes to ensuring that they have adequate pensions. That debate cannot be postponed for very much longer.

The second of the two big problems that we face in this country concerns the state pension. It has been clear to all of us—it was certainly clear to my colleagues in the previous Government—that the state pension has become far too complicated and far too wrapped up in means-testing, and there is a serious risk that it will act as a deterrent to people taking the principal responsibility themselves to save for their retirement. That would have been a major, mortal threat to auto-enrolment and the principle behind it, which is to shift over time the burden of responsibility for saving from the state to the individual.

Like my noble friend Lady Sherlock, who made an excellent speech from the Front Bench—to be fair, the Minister did too—I think that moving to a single state pension represents an historic opportunity to make sure that we avoid that car crash. Moving to a single state pension can complement auto-enrolment and not undermine it—and there would have been a good chance of that happening if we had continued on the path that we were on.

All I shall say about the single state pension today on Second Reading is that reform, very important and welcome though it is, is not going to be straightforward. I remember well the time when I had just become Secretary of State for Work and Pensions. I was going through a briefing with my officials on the nature of the state pension. We had a full discussion about that—there were pages in my briefing note about it and I hoped that I had got my head around it. When I turned the volume over to deal with the state second pension, there was nothing in the folder. I asked the Permanent Secretary at the time, “Where is the briefing on the state second pension?”. He said to me, “Secretary of State, it’s too complicated for us to explain it”. I was never quite sure whether he meant, “You aren’t capable of understanding it so I’m not going to bother with trying to do that”, or whether they were saying something which was actually true—that is, that it had become too complicated. I think that the latter is the case. There is no doubt in my mind that it has become complicated. As a consequence, there are some genuine transitional issues to sort out. I am quite sure that it is the right thing in principle to be doing. We know that some people will lose out; for example, people who due to their earnings would have built up a higher state second pension if these changes had not been made. It will be very important, although the principle is right, for Ministers to keep their minds open about how this change can best be implemented. However, as I have said, I think that it is the right thing to do.

Like others, I welcome Part 2 of the Bill, in particular the commitment to keep the pensionable age under regular review. This change will be necessary if we are to stay ahead of the demographic changes that have already had a tremendous impact on our society and that, if anything is true, are accelerating. Many think that at some point this trend for longer life expectancy will flip into reverse; I really doubt that to be true. There is no doubt that the pressures, both financial and societal, will build up unless we stay ahead of the process of demographic change.

That is easier said than done in many respects, and I say that for one reason: the age at which people retire, certainly for men, and for women in fact, had not changed for several generations. My grandfather would have retired at the age of 65. We have all come to expect as a natural order of things to get to that age and then retire. That is the old world and it has to be left behind, but it is sometimes difficult to persuade people to understand that. The good news is that I think that people have generally taken a very pragmatic view. If you compare the response in Britain to the increasing age at which the state pension is payable with the response to similar reforms in other European countries, you can detect a degree of welcome pragmatism here in the UK, and that bodes well for the future. However, further change is necessary and it is right that we make sure that the process is as objective and non-partisan as possible, which is why Part 2 is to be welcomed.

There is therefore a great deal to be welcomed in the Bill. I would like to say that the same is true of Part 5, particularly the clauses dealing with the transfer of pension benefits, but I really cannot say that to your Lordships’ House. The Government have made a significant mistake, or stand on the threshold of doing so, in their reforms around pot follows member.

The Minister made it clear that there could as a result of auto-enrolment be up to 50 million small pension pots being established. People will change employment fairly regularly, particularly early on in their working careers, and there is a danger of lots of small pension pots being developed and basically left dormant. We should not be complacent about that; we have got to decide what to do about it. The Government have come up with the idea of pot follows member. The other obvious course open to them, which my noble friend referred to from the Front Bench, to use aggregation as the default option, has been rejected.

I say to the Minister that I hope he can reflect on this with his colleagues. I think that a mistake is about to be made here and I hope that we can avoid it even at this late stage. I have nothing in principle against pot follows member—there is a logic to it—but making it the default option through legislation is the wrong decision. I say that it is wrong because it lacks ambition. It exposes some savers to the risk that they will move from well run, well managed, good value-for-money schemes into schemes that are less well run and provide less value for money. I am not entirely sure that the minimum standards will iron out or rule out that hazard.

When it comes to setting policy in this area, we must keep asking ourselves: what is the best thing for people who are saving? It is not necessarily the same thing to ask ourselves: what is the least risky reform for Ministers to make? The question is: what is in the best interests of savers? I accept that aggregation poses some significant challenges—there needs to be a clearing house, proper data, and so on—but that route genuinely offers the prospect of higher pensions in retirement than pot follows member.

The National Association of Pension Funds has made that argument very clearly. In my experience as a Minister, when the NAPF says, “You really need to think carefully about that”, Ministers really need to think carefully about the course of action that they have proposed. But it is not just the NAPF, it is other commentators, too. I am a great admirer of Michael Johnson and his recent pamphlet for the Centre for Policy Studies, which is not an organisation that I would naturally find myself standing up in the House to support. He has basically said the same thing to Ministers.

My noble friend is right to say that we need to debate those provisions in due course, and I am sure that we will. I hope that the Minister and the Government are open, even at this late stage, to taking a different perspective. The issue is: what should be the default option? I genuinely think that it is a mistake to offer pot follows member.

With that, I end my remarks. I look forward to taking part in Committee and on Report. I echo the congratulations that many others have offered to the Pensions Minister on taking forward these important historic reforms to the state pension. I am sure that it is the ardent wish of everyone in the House that the reforms work to support the savings culture that we so desperately need.

Pensions: Occupational Pensions

Lord Hutton of Furness Excerpts

Wednesday 1st February 2012 Lords Chamber

[Lord Hutton of Furness]

My Lords, probably for as long as most of us in this House can remember, successive Governments in the United Kingdom have been wrestling with three unpalatable facts about occupational pensions. First, fewer and fewer people are saving for their retirement. When they are saving, they are almost certainly not saving enough to cover the extra years for which we are living. For perfectly good and understandable reasons, the previous Labour Government, of whom I was proud to be a member, introduced a series of reforms to the state basic pension which have served to make the system much more complicated and reliant on means-tested benefits. The consequence is that we might have done some damage to the principle of personal responsibility for saving.

So we have three very difficult problems to wrestle with. I endorse all the comments and concerns of my noble friend Lord McFall and many of those introduced to our debate by the noble Lord, Lord Freeman. If those are the three problems that we are wrestling with, I am glad to say that successive Governments have found within themselves the ability to reach a reasonable consensus about how we deal with them. The noble Lord, Lord Turner, did the country a huge favour in 2005 with his report which the previous Government took forward and the current Government are now taking forward in a sensible fashion.

My advice to the Minister is not to tinker with the framework. That has been one of the enduring problems with pension law and pension law reform; we have never allowed the dust to settle on any of the reforms that we have introduced. That has created the problem that both noble Lords have referred to: the lack of confidence and trust in our pensions saving system.

It is too early to judge whether these reforms are likely to be as successful as we all in this House and outside want them to be. We are heading for a very difficult place. It cannot be right that the price that our society pays for increasing longevity—rising life expectancy, which is a great prize in our community—is increasing levels of intolerable poverty among that rapidly growing age group. We have it in our grasp, with the reforms that the noble Lord, Lord Turner, outlined a few years ago, to prevent that outcome, but we have to guard against the law of unintended consequences. It was perfectly right to set the contribution levels for NEST as they were. It is a very big change for many employers, particularly smaller employers, now to have to make pension contributions, and we must guard against the consequences in our labour market of going too far and too fast. I think that we all understand that. We must be mindful that NEST, although a step in the right direction, could have negative consequences for existing saving products, particularly in the defined contribution sector.

There is a way out of this conundrum. Living longer does not have to mean the end of the world as we know it. On occupational pensions, I think that we have a reasonable direction of travel. I support what Ministers are trying to do with the state pension, which is to make it more generous and more universally available to get us out of this very difficult space we are in with the current means-tested rules around pension credit. If we can find a way to ensure that there is a decent platform on which people can save without worrying about whether it is in their interests or not to save—whether any of those extra savings will be clawed back through lost pension credit and so on—we will have done the country a big favour. We will have reinforced the principle of personal responsibility for saving, with which we must not interfere or blur. If we do that, we will leave future generations with bills that I very much doubt they will be able to pay.

Both noble Lords have basically raised all the points that I wanted to raise. That will not stop me from raising them in my own terms. We face two fundamental problems right now, given that, sadly, defined benefit schemes in the private sector are now clearly on the way out and are not coming back. That is a consequence of a number of factors of which we in this place and elsewhere will be very well aware. It means that defined contribution schemes will have to do most of the heavy lifting when it comes to breaking through into the sunnier uplands where more people are saving more for their retirement, allowing those savings to stretch for the extra years for which we know that people are living. We have to find a way through that.

The Pensions Regulator issued an important consultation document last year about reform of regulation for DC schemes. Like other noble Lords, I hope, I look forward to the outcome of the consultation. The regulator has identified many of the important issues to do with improvements in governance and oversight in DC schemes, which will not go away. We have to find a better way through to ensure that DC schemes produce better results for those who are saving in them than they are currently. I am not saying that regulation is the only way through; we must be mindful of the consequences of overregulation, but the Pensions Regulator has identified issues which, I hope, will result in more concrete proposals.

The second issue, which is of much greater concern, is what Europe is planning to do on defined benefit schemes. It is impossible to exaggerate—although we all exaggerate as a profession, as politicians—the danger that lurks behind the proposals from the European Commission. They would mean the end of defined benefit in the private sector. I want defined benefit schemes to continue in the public sector, and I believe that there is a way to do that, provided that reforms are made, but we should not sit back and welcome the demise of DB in the private sector, because that is what will happen if we move to Basel III-type insolvency regulatory frameworks for DB. That is the wrong regulatory tool. I understand why the European Commission wants to guard against the dangers and hazards, but good intentions do not always make good regulation. The Government are right to resist those proposals very strongly, because they would be a step backwards.