Pension Schemes Bill [ Lords ] (Second sitting)

Alex Cunningham Excerpts

Tuesday 7th February 2017 Public Bill Committees

[Richard Harrington]

The hon. Member for Stockton North made various points, and I would like to briefly rebut them. I have already made my first point, in response to the hon. Member for Ross, Skye and Lochaber. The Bill adds to the protections by prohibiting increased or additional charges that could be levied on members for the cost of winding up or transfer during a triggering event period, so members’ savings are safe. As was discussed extensively in the other place, the clause addresses the situation where the scheme does not have sufficient funds to pay for the transfer of accrued rights or the wind-up of the scheme during a triggering event period. The Bill provides that a master trust scheme must have resources available to pay for those costs.

The hon. Member for Stockton North asked me a clear question: how frequently will the Pensions Regulator monitor this? To be clear, the supervisory measures allowed for in clauses 14 to 20 state clearly that the regulator is under a duty to authorise these schemes. That is a new approach for the regulator, which will be working with all the master trusts, both before and after authorisation. The regulatory regime is therefore an active process, which rightly focuses the most attention on the highest risk schemes, while maintaining regular contact with all master trusts in the market. It is based on a case management approach, which is not random or ad hoc because it is underpinned by the existing reporting and regulatory framework and activities. Those in turn are strengthened by the new supervisory return and significant events negotiation requirements, which the hon. Gentleman will be familiar with.

The hon. Gentleman seemed to imply that the Government have not made any provision to pick up the pieces if a scheme fails. I maintain that that is not the case. The triggering event regime outlined in the Bill means that the regulator will be closely involved with how the scheme proceeds to resolve its difficulty or close—it has to do one of the two. The regulator already has powers that can be used to support a failing scheme. A good example is the power to appoint a trustee to get into a scheme and act as a trustee—so it can impose a trustee on a scheme and help to sort it out.

The hon. Gentleman also suggested that if the risk is so minimal, the clause does no harm as a back-up measure. He used the sledgehammer and nut analogy, which I think Lord Freud used in the House of Lords, so it is a cross-party analogy. If it is a nut, it might be a small nut, but what is going to happen to the nut? That is not said in a very Hansard-like way, but I think we know what it means. I would say that that underestimates the impact of having an unspecified government intervention of this nature.

[Alex Cunningham (Stockton North) (Lab)]

I accept the point the Minister is outlining, but the possibility remains. We know what our financial industries are like. We have seen failure after failure in pension schemes, in the markets and the banks. What happens in the event of a major fraud in a master trust and there is nobody left to pick up the pieces?

[Richard Harrington]

I will deal with that point a little later. First, let me explain why having unspecified Government intervention is not good.

First, such intervention gives rise to moral hazard. Elsewhere in pensions and regulatory regimes where lifeboats exist, there are measures against moral hazard. We do not want a situation where people can be reckless because they know they can rely on the Government, and setting up ways to get out of their obligations because they know that the Government will pick up the pieces.

[Alex Cunningham]

The Minister has used the word “unspecified” several times, but he has the opportunity in regulations to consult the industry on how it would set up a funder of last resort. That is what we want. We do not expect him to say, “Right, the Government will underwrite this.” We are saying that there should be a consultation exercise to ensure that a funder of last resort can be put in place so that this very small nut that needs to be cracked can be dealt with.

[Richard Harrington]

I apologise if I put words into the hon. Gentleman’s mouth. It is currently unspecified; I agree it could be specified with compensation. The core point and, excuse the pun, the kernel of the nut is that it would still be a Government scheme, with moral hazard.

Secondly, the hon. Gentleman has probably heard significant players in the master trust industry voice serious concerns to us about clause 9. They believe that it could give rise to a rush to exit the market by otherwise successful schemes thinking, for example, that, not unusually in this field, they would have to pay a significant levy over not very much. The hon. Gentleman’s points are all valid in their way but Government have to make a judgment. That is why there is a respectable disagreement over clause 9. We have all thought about it carefully.

I believe the Bill strikes a delicate balance between prevention and self-regulation and Government intervention —something that is very hard to do. The clause would disrupt that balance and confuse the regulatory approach. I do not believe that it is a harmless catch-all. I accept the point, as shown by the banking crisis, Equitable Life and other incidents, that such things happen—I would not say it was because it was a Labour Government during the banking crisis or another Government with Equitable Life that those issues arose. It is not possible to give absolute guarantees, but we can reduce risk to the lowest possible level and that is what the Bill aims to do.

In our view, the risk level is already very low for this type of master trust scheme. That is backed up by the Pensions Regulator’s current information about the very small number of schemes that are in trouble. That will be published but is not quite ready. To create a Government-backed scheme would perversely create a moral hazard, as I have explained.

--- Later in debate ---

[Alex Cunningham]

I am delighted to serve under your chairmanship, Ms Buck, albeit with a frog in my throat. Our concern with this clause regards the strict nature of requiring a master trust to be a separate legal entity, which could have numerous consequences across the board. Since the contents of the Bill have become known, I have tried to meet as many parties and groups as possible that have an interest in the Bill, to hear their perspectives, thoughts and concerns. This clause came up often. I note that the Minister has tabled amendments to it, which I welcome as a first step towards recognising that the original clause was not fit for purpose.

Amendment 3 widens the definition of the two legal characteristics that a scheme funder must meet in order for a master trust to be authorised by the Pensions Regulator. It gives the Secretary of State greater discretion in exempting a scheme from the second requirement. However, the amendment does not make clear what policy considerations will apply to how that discretion is applied. Will the Minister confirm that insurance companies regulated by the Financial Conduct Authority with master trusts will be exempt from the second requirement, giving members access to the full resources of the insurance company, which will carry full liability for costs in the event of a master trust scheme failure? Our amendment 26 seeks to clarify just that—namely, that if an organisation is already regulated by the Financial Conduct Authority, which is incredibly thorough with its regulation, it does not need to register as a separate legal entity as well.

As the Minister said, my colleagues in the Lords raised concerns about the clause, proposing instead that the scheme funder be approved by the Pensions Regulator, but that was rejected with the argument that it would be more difficult for the regulator to obtain transparency on the financial position of the funder and its financial arrangements with the master trust. Instead, colleagues tabled a motion requiring the scheme funder to be constituted and to carry out its activities in a manner that enables its financial position, and the financial arrangements between it and the master trust, to be transparent to the regulator. However, that was withdrawn on the assurance that the Government would be considering that later in the legislative stages.

So here we are, with an amendment from both the Opposition and the Government on how to ensure that we are not unnecessarily enforcing regulation on companies that are already bound by strict regulation elsewhere. The difference here is that the Government’s amendment is on the vague side. The second requirement for the scheme funder that the Government have proposed is that it carries out only activities that relate directly to master trust schemes of which it is a scheme funder or prospective scheme funder. The line in amendment 3 following on from the second requirement gives the Secretary of State the power to

“make regulations providing for exceptions from the second requirement.”

That needs more detail and clarity. What possible exceptions do the Government have in mind? Has the Minister yet considered what these exceptions may be?

We need stability, and to provide stability for the numerous businesses and companies that rely on us to provide effective laws governing their livelihoods and, particularly in relation to master trusts, the livelihoods of millions of people in this country. This is not largely a matter that we disagree on—I think we share the same aims—but I want to be able to provide more assurance to the companies watching today that we will not seek to bear down on them with extra costs and paperwork when they are already abiding by regulation from the Financial Conduct Authority.

Although the Government’s amendment does not give me enough specifics about the type of exceptions that they would give the Secretary of State the power to decide, I welcome their approach and their acknowledgement that it is counterproductive to place extra requirements on companies that already follow the rules diligently. We had a particular concern that forcing a restructuring on master trust schemes could weaken the position of the funder, which is especially important when one considers the debate on the issue of the funder of last resort. We need larger companies to be in a position to pick up failing master trusts, and should ensure that they are well equipped to do that.

I welcome the amendment from the Scottish National party Members, which would also allow exceptions to the requirement that a scheme funder carries out only activities directly relating to the scheme for which it is a funder. I am optimistic that we will leave here today having made positive progress on this matter, as we largely seem to agree on the principle of exceptions.

Amendment 26 would except insurers that operate under stringent Financial Conduct Authority regulation. Where insurers with master trusts operate under both sets of regulation, it must be ensured that unnecessary duplication or overlapping of the requirements is avoided. In particular, insurers should not have to reserve even more additional funds to meet the requirements set out for master trusts, as they already hold the resources needed for this purpose under other regulatory regimes. Members of master trust schemes used for automatic enrolment should meet high solvency and reporting standards, but these organisations have already met standards set under other frameworks, such as that of the FCA. We believe that it is not necessary to expect large companies with significant capital to be required to hold additional capital on top of that in order to meet the new obligations in the Bill.

Can the Minister provide assurance right now that insurance companies that are already under strict regulation by the Financial Conduct Authority will be exempt from the separate legal entity clause, and will he provide clarity on when we can expect to see the Secretary of State’s regulations? The scheme funder requirements in the Bill will bring no additional benefit to the many people in master trust schemes operated by insurers, which are already well protected. Additional requirements on FCA-regulated insurance companies will lead to significant additional costs. I hope that the Government can address my concerns, and that they will outline exactly what regulations the Secretary of State will look to implement.

[Ian Blackford]

The Minister’s amendment of 31 January —Government amendment 3—gives the Secretary of State power to make regulations providing for exceptions to the requirement that a scheme funder must carry out only activities directly relating to the master trust. We do not know what conditions will attach to the exceptions, or even if the Secretary of State will exercise that power. An indication of the Government’s intentions would be helpful. However, the indication that there will be some discretion is positive. I would welcome clarification from the Government on how and when the regulatory powers outlined in the amendment will apply, and in what circumstances they might be used.

Will the Government confirm whether they plan to consult with the insurance industry before defining “information” and “additional requirements”? Zurich has said that the approach taken by the shadow Pensions Minister in amendment 26 and the SNP’s amendment give greater certainty, which would be preferable. As far as Labour’s amendment 26 is concerned, we share the concerns about the unnecessary duplication of requirements for insurers, which already operate under stringent regulatory standards. Our amendments 34 and 35 would have a similar effect to amendment 26, as they state that the requirement need not apply to firms whose activities are already restricted by virtue of existing regulation.

The Prudential Regulation Authority’s rules mean that insurers’ activities are restricted. This will mean that the activities of the scheme funder not directly related to the master trust are transparent and do not threaten the solvency and sustainability of the master trust. Amendment 35 makes provision for the Secretary of State to define “restricted activities” in regulations, including through a list of specific activities restricted in order to minimise risk of loss by master trust scheme funders.

--- Later in debate ---

[The Chair]

Will the Opposition confirm whether they wish to press their amendments to a vote?

[Alex Cunningham]

I do not intend to.

[The Chair]

Thank you.

[Alex Cunningham]

It is amazing the amount of consensus that we are managing to achieve today, but I still return to duplication. The Minister is saying that measures will be in place through regulation to ensure that we do not have the duplication I am concerned about. It all boils down to these invisible regulations.

I am grateful to the Minister for providing clarity on the areas that will be covered by the consultation on the future regulations. The industry is concerned that they are a considerable time off. He said it is not long until 2018, but the cliché is that a week is a long time in politics. It is important to send clear signals to the industry, particularly to those who are likely to be or could have been compelled to have the additional administrative burden on them, to make it clear to them that this will not be required because they should be able to read much of that in the document that goes out for consultation.

Amendment 3 agreed to.

Amendment made: 4, in clause 11, page 7, line 20, leave out subsection (6) and insert—

‘( ) The first regulations that are made under subsection (3A) are subject to affirmative resolution procedure.

( ) Any subsequent regulations under subsection (3A), and regulations under subsection (4), are subject to negative resolution procedure.”.—(Richard Harrington.)

This amendment makes provision about the Parliamentary procedure for the new regulation-making power provided for in amendment 3. The power will be subject to the affirmative procedure when first exercised, and to the negative procedure on any subsequent exercise.

Clause 11, as amended, ordered to stand part of the Bill.

Clause 12

Systems and processes requirements

[Alex Cunningham]

I beg to move amendment 27, in clause 12, page 7, line 43, at end insert—

“() A minimum requirement of annual reporting of administration, fund management costs and transaction costs for each asset class, drawdown product and for active and passive asset management strategies.”.

This amendment would introduce annual reporting requirements for Master Trusts.

In his speech to the TUC last week, the Minister spoke about the consensus there may be in Parliament about pensions policy. In some areas, he is right, but he and I know that we are in very different positions on matters such as the future of the state pension and how it can be applied to different people in different circumstances—the Women Against State Pension Inequality Campaign has been mentioned in that context. One area where the Minister and I agree and which affects the Bill and clause 12 is the need for maximum transparency in the pensions market, revealing to members of pension schemes, including master trusts, exactly what fees they are being charged and for what. In his speech to the TUC, the Minister said:

“We have to get transparency. It’s not an option to do nothing. I’d like to thank the many people in this room that have worked for it.”

The amendment would give the Minister and his Government the opportunity to demonstrate that consensus does exist, to prove their credentials on transparency and to ensure that members of master trusts have access to an annual report of administration, fund management costs and transaction costs, so that they can see exactly how the fees are broken down and what they are actually paying for. It would also help to satisfy the Financial Conduct Authority’s desire to reveal all costs, which it believes will result in competition and potentially better performance for members.

No Member of this House would go into a marketplace to buy anything without seeing the cost clearly displayed, whether that be a large white goods item or just a new shirt or blouse. Similarly, we must ensure that each member who is auto-enrolled into a master trust can establish what each investment choice and drawdown product costs. Anything short of that betrays millions of citizens. We have a duty to ensure that a reporting line is opened between the master trust and its members if we are to achieve what Opposition Members and, I believe, the Minister want to achieve.

I know there may be some resistance from those in the industry to some of those ideas, even though most have tried to convince me over the past few months that I have been shadow Pensions Minister that they are open to greater transparency, are trying to deliver on it and will do so much better in the coming months. However, I think we need to help them by laying down a marker in the Bill that will set a standard of the Government’s expectation.

In the upper Chamber debate, Lord Freud said

“We clearly need to ensure that trustees of occupational schemes and the independent governance committees of workplace personal pension providers have complete, consistent and standardised cost and charges information before they can report it to members; at this point, they do not… We want pension scheme members to have sight of all ?costs and charges, regardless of how they are incurred, and to give members the confidence that there are no other hidden costs and charges.”—[Official Report, House of Lords, 19 December 2016; Vol. 777, c. 1527.]

There is that consensus again. I could not have put it better myself, although the noble Lord could have done more to make it a reality in the Bill.

Rather than wait for the final outcome of the consultation exercise on pension fund cost collection promised by the Secretary of State, the amendment would being master trusts into line with those in the Netherlands, where there is a statutory requirement for trustees to report to their members on three cost headings: administration, investment management and transactions. We need data that enable clear analysis of costs incurred and can be applied ex post to the gross returns delivered by workplace pensions. Then we can get to the real gross return that has been generated on the assets and assess how much of that real gross return has slipped from the saver to the financial services sector. By understanding that slippage in its entirety, we can begin to understand what money has been paid for whatever value has been generated.

Some good things are already happening in the pensions world, but much more needs to be done to progress the transparency agenda. The only area of asset management that is ready to be analysed is the funds used by the local government pension scheme. They are about to be analysed by the scheme advisory board, to ensure they are delivering best value for sponsors and members alike. The architecture to get the data, analyse it and present it is being discussed with a view to being built, and will form a platform from which other projects, including the value-for-money analysis needed for all workplace pensions, can be delivered.

I believe the Minister is a fan of this work too, so I hope that he and his Government recognise that the easiest and most efficient way to ensure that data for master trusts are collected is to adopt the LGPS cost template. After all, it has been sanctioned by the Department for Communities and Local Government and the data points agreed with Investment Association members, who in the main will be the same suppliers of asset management to the LGPS.

What an opportunity we have before us to herald the day that every person auto-enrolled into a master trust is given the opportunity to understand what pension system they are going into, how much it costs and how much they will get—even if in a defined-contribution scheme that is more estimation than fact. To do otherwise than give them that advantage is a clear breach of fiduciary duty owed to scheme members. We are all aware that the average size of a pot for a person in a master trust is very small, but the principle of driving best value is probably all the more important.

I asked for a simple example of what changes in costs could mean for a member of a pension scheme, and the Unison guide—perhaps I should declare that I am a member of Unison—to defined-contribution costs provided the following example. A total annual contribution of £10,000 might be made up of £4,000 of personal contribution, £4,000 of matched contribution by the corporate sponsor and £2,000 of tax top-up. If we make that level of contribution constant over 40 years, use a 5% gross performance figure, which is the market rate of return over the longer term, and vary the costs of the industry from 0% to 2%, then at nil percentage cost the final size of the pension pot is £1,268,000. At 0.75% costs, the final size of the pension pot is £1,051,000. At 2% costs, the final size of the pension pot is £777,000. That is a huge difference.

The FCA’s “Asset Management Market Study Interim Report” said:

“The evidence suggests there is weak price competition in a number of areas of the asset management industry. This has a material impact on the investment returns of investors through their payments for asset management services.”

The example I just gave probably demonstrates that. One of the FCA’s conclusions was that there should be a requirement for increased transparency and standardisation of costs and charges information for institutional investors. The Minister’s affirmative one-word answer to my question on the Floor of the House about whether the Government had agreed to implement the FCA’s recommendations in full was very welcome. Today, we have the opportunity to deliver in part some of what is desired through the Bill.

It is a fundamental market failure that no pension fund can currently understand its cost basis. It follows that if there is no understanding of costs, the investment strategy cannot be fully evaluated. Members cannot make the accurate choices needed to improve their investment performance without that knowledge. If a member is incurring costs above 0.75%, we know that will have a considerable impact on the value of pension pots both in accumulation and in decumulation. That is why we must ensure that reporting to members includes the accumulation and drawdown phases.

Since the Government introduced the drawdown option in their new pension freedoms, all the attention has been on whether members will be wise with their money. No real attention has been paid to the costs associated with the option, and probably even less attention to the potential long-term effects of a decision to access a lump sum at a much earlier stage in a person’s life. The aim is to keep options open and increase income through investment growth, but if investments do not go the way the member would hope, or if their pension pot is depleted by opaque charges, the income will be reduced all the more in the longer term. The risk and the responsibility rest with the member. Charges for ongoing administration and investment management will be deducted from their account, which is all the more reason transparency and low charges are important. Members of this House should therefore see that the efficient management of members’ funds is critical in ensuring that we do not create a pension crisis that our citizens are forced to endure in their retirement.

I will turn to the FCA’s excellent interim report in a bit more detail. The UK’s asset management industry is massive: it manages £6.9 trillion of assets. I am not sure whether a trillion is a billion billions? I think it is a billion billions.

[Richard Harrington]

I am not an expert, but I think it is different in the United States from here—like most things.

[Alex Cunningham]

The Minister tempts me, but I will move on. The UK’s asset management industry manages more than £1 trillion for individual investors in the UK and £3 trillion on behalf of UK pension funds and other institutional investors that is invested by that management industry. The service offered to investors comprises a search for return, risk management and administration, although it is the investor who bears virtually all the risk.

More than three quarters of UK households with occupational or personal pensions use such services, including the more than 10.2 million people saving for their retirement through pension schemes. Very few of us are not touched by this sector, although most people have probably never heard of it; more important, they will have little idea how much of their hard-earned cash goes into the industry. The FCA’s report confirms that asset management firms

“have consistently earned substantial profits…with an average profit of 36%. These margins are even higher if the profit sharing element of staff remuneration is included.”

--- Later in debate ---

[The Chair]

That is a matter for the Opposition spokesman.

[Alex Cunningham]

I am disappointed that the hon. Gentleman is not following my argument, but perhaps he will as I move to my conclusion.

As I was saying, charges for active investments have remained stable, unlike charges for passive investments, which have been falling. The FCA suggests that that reflects competitive pressures and the unwillingness of funds in the active fund market to undercut each other, and it says that weak pressure on prices can lead to weak cost control. The FCA report is particularly scathing about the role of investment consultants: with 60% of that market controlled by three firms, the FCA is considering a market investigation reference to the Competition and Markets Authority. The report concludes with a number of very welcome interim proposals on remedies, not least on transparency and all-in fees, but this is a hugely powerful and profitable sector and it will be lobbying hard to water down any action.

The Secretary of State confirmed that the Government will consult on hidden costs and charges later this year. On Second Reading, he said:

“Transparency is a key area. Hidden costs and charges often erode savers’ pensions. We are committed to giving members sight of all the costs that affect their pension savings… We plan to consult later in the year on the publication and onward disclosure of information about costs and charges to members. In addition to the Bill, other things are clearly required to give greater confidence in the pensions system.”—[Official Report, 30 January 2017; Vol. 620, c. 756.]

I asked in that same debate why it is necessary to start consulting people when we should simply be saying that we want to know what all the costs are in the entire investment chain. I said that, yes, I agree with consultation—but surely we are getting to the end of the tunnel on that.

The FCA is currently holding two separate consultations on cost transparency. The first is in response to the watchdog’s interim report on its asset management market study and calls for an all-in fee approach to quoting charges. The second, which closed to responses on 4 January, could require asset managers to disclose aggregate costs and then provide a further breakdown on request. That is good news and surely statutory bodies such as independent governance committees, the Local Government Pension Scheme advisory board and the Pensions Regulator are quite capable of making sure that whatever comes out of the FCA’s consultations is enforced. The only beneficiaries of further consultations are the asset managers, who will have won yet more years of grace in which they can operate under the radar.

The Investment Association has questioned the data and metrics the FCA used to come to its conclusions that active funds do not on average provide better value than passive funds. I am concerned that, despite making all the right noises and promising full transparency, the Investment Association has set out to kick the consultation process down the long road by persuading the Department for Work and Pensions that it needs to discover exactly what the FCA has spent the past two years discovering.

If we are to have another consultation, it will be in the teeth of all the evidence gathered so far, at enormous expense to Government and to the private sector, and will serve employers and workers very badly. Perhaps it is time for the DWP to stop consulting and start turning the current consultations into enforceable legislation. It should learn from its colleagues at DCLG, who, as I said earlier, have endorsed the work of the LGPS advisory board. DCLG’s own programme of fund consolidation included advice that the newly forming asset pools should prove to them that active fund management should be no more expensive than passive.

[Craig Mackinlay (South Thanet) (Con)]

I do not want to stop the hon. Gentleman when he is in full flow—we are very much enjoying his oration about the effects of compounding and charges. Surely, as we have more master trusts and the auto-enrolment market gets bigger and bigger, it will be a natural feature of that market that people will be more interested and aware of the charging structure. My personal view is that the concerns that the hon. Gentleman raises will come out as the market expands and evolves, and more and more of these trusts come forward. Much as I have enjoyed what he has to say, I have a feeling that that will be the natural progression of things in the market.

[Alex Cunningham]

Although I am grateful to the hon. Gentleman for his intervention, it is perhaps a typical response from a Conservative politician: just leave everything to the market. In my opinion, we should not leave everything to the market.

When offering investment funds to employers and members, master trusts need to prove the value of the investment post-charges and that active strategies are no more costly than passive. They should remember that the transaction cost issue, badly delivered in 2013, is up for review in 2017 and forms part of the auto-enrolment review.

The People’s Pension, the not-for-profit master trust launched by construction sector financial provider, B&CE, with 1.7 million members, is NEST’s closest private sector rival.

[Ian Blackford]

Could the hon. Gentleman recap and clarify what he just said—that active fund management is no more expensive than passive fund management?

--- Later in debate ---

[Alex Cunningham]

That is exactly what I said earlier in my speech. Some of the people who have briefed me have said that that is very much the case.

NOW: Pensions, the master trust backed by Denmark’s ATP, also introduced employer charges at the beginning of 2016, alongside a 0.3% management fee and a £1.50 administration fee. Morten Nilsson, the scheme’s chief executive, argued that the cost was a necessity if NOW: wished to continue serving as a scheme of last resort for any employer.

We all agree about the issues. Everyone now acknowledges that something must be done, and done with urgency, and the Secretary of State appears to be on board. The auto-enrolment process must not be jeopardised by hidden cost scandals that emerge down the line, when it is revealed that valuable small pots could have been so much more valuable. Our aim is to ensure that master trusts are obliged to report to members. We should set that out for employers that are considering using a master trust. That is the underlying reason for the amendment, which I commend to the Committee.

[The Chair]

Before I call any other Members or the Minister, let me say that I am minded not to have a broad debate on stand part, because we have already covered a lot of the ground. Perhaps the Minister in particular will reflect on that before he speaks.

--- Later in debate ---

In the light of that, I believe the amendment is not necessary. The Government already possess the necessary primary powers and are well on the way to achieving the hon. Gentleman’s stated purpose, which I laud. I urge him to withdraw the amendment.

[Alex Cunningham]

The challenge from the hon. Member for Ross, Skye and Lochaber is one I need to take back to those who advise me, to get an even greater understanding. I thought we would hear a few words of support from him on transparency, on which the Minister and I certainly agree.

I appreciate the Minister’s response. As he says, this is quite complex. I do not believe for one minute that the Government do not want to carry out the consultation exercise, but people out there in the industry are very keen that the Government get on with this, as are members. Members are keen to understand the costs and what they will be told about what their investments are costing them. I will reflect on the Minister’s answers in full, but in the light of what he said, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 ordered to stand part of the Bill.

Clause 13

Continuity strategy requirement

Question proposed, That the clause stand part of the Bill.

[Richard Harrington]

As I explained, there are criteria that a master trust must meet to be authorised by the regulator, one of which is that the scheme has an adequate continuity strategy. The clause sets out the requirements for that continuity strategy. It must set out how the interests of scheme members will be protected if the scheme experiences a triggering event—that is, an event that could put the scheme’s future at risk.

The aim behind the clause and the related measures is to ensure continuity of pension saving for the members of the scheme when that scheme experiences an event that could put its future at risk. That also benefits employers using the scheme, particularly those using it to meet their automatic enrolment legal obligations. An adequate continuity strategy would demonstrate that careful consideration had been given to what the scheme would do if it were at risk of failing. That should make the closure of master trusts more orderly and managed, which is good for members and employers. We all agree that chaotic and unplanned closures would likely be detrimental to them.

The reasons for and circumstances that could lead to a master trust failing may be different from more traditional occupational schemes. The risks for members and employers are different. That is of particular significance because master trusts tend to have a relatively high number of employers and members, and therefore tend to be less engaged than when an employer has a single scheme for their own employees.

That means that winding up a master trust may involve a lot of work and take a lot of time, and be complicated, difficult and expensive. Regulations under the clause will set out what the strategy should include and what actions the scheme will take to manage and protect the assets. The Government believe it essential that master trusts have adequate continuity strategies.

--- Later in debate ---

[Richard Harrington]

I will get back to my hon. Friend on that very technical point, but I do not believe that there is any intention for the definition to be different.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.

Clause 22 ordered to stand part of the Bill.

Clause 23

Notification requirements

[Alex Cunningham]

I beg to move amendment 28, in clause 23, page 16, line 19, after “employers” insert “and members”.

This amendment would mean that members must be told of any triggering events, not just the employers.

[The Chair]

With this it will be convenient to discuss amendment 29, in clause 26, page 19, line 10, at end insert

“and Trustees should then notify members to this effect”.

This requires Trustees of the Master Trust to notify members once TPR is satisfied that the triggering event has been resolved.

[Alex Cunningham]

I will continue to champion the members of master trusts this afternoon. The amendment would simply ensure that when triggering events happen, and if and when they are resolved, information on them flows right through the communication chain. As I said when I spoke on member engagement, it is important to understand that we need to put the member at the heart of the process. If members find out only at second hand about such events, which affect their hard-earned cash, it is bound to result in lower levels of trust—never mind all the anxiety and everything that goes with it. I pose the question: how would hon. Members feel if no one told them that there was an issue with their pension pot? I know that is rare for Members of Parliament, but if they had a separate pension pot and were not given that information, would they not be concerned? They would not be best chuffed, and they would want to know why they were not being informed.

Trust is vital, and it is at very low levels both in financial services and, more importantly, in us who make the law. How can we look our constituents in the eye if they ask us, “Why did you not put me first? It’s my money. It’s my retirement at risk”? There are those who claim that there are problems with reaching vast numbers of people, but this is the 21st century and it is not necessary to fell trees to make paper to send out hundreds of thousands of letters. It is a simple of chain of events, and if it can go to employers I believe it should also go to members.

[Richard Harrington]

Amendment 28 would require the trustees of a master trust that experiences a triggering event to notify all the members that the event has occurred and of other matters to be set out in regulations. The explanatory note to amendment 29 says that the intent is to require trustees to notify members once the regulator is satisfied that the triggering event has been resolved, but the effect of the amendment is a bit wider. It would require the trustees to inform members of the regulator’s decision—in other words, whether it is satisfied that the event had been resolved or not.

Clause 23 requires key people associated with the master trust to notify the Pensions Regulator if the scheme experiences a triggering event. Clause 26 sets out the framework for a scheme pursuing continuity option 2—in other words, the trustees aim to resolve the triggering event. The resolution is the important part of it. Once the trustees believe they have resolved the event, they submit evidence to that effect to the regulator. Having considered the evidence, the regulator notifies the trustees of whether it is satisfied that the event has been resolved. Our aim is for events to be resolved where possible. The scheme can then continue and members can keep saving in it. We have not required the trustees to notify members.

As the hon. Gentleman said, at the point that the triggering event happens, the trustees may be in discussions with the regulator and may not have reached a conclusion about whether the scheme will continue to operate or whether it will be wound up.

[Alex Cunningham]

I accept that the triggering is the actual start of the process, and that there may well be discussions. At what point does the Minister think the members ought to be told that a triggering event has in fact taken place and that their scheme is in some doubt?

[Richard Harrington]

To rebut that point—I emphasised the words “resolve” and “resolution”—we believe that the majority of triggering events will end up with a very satisfactory resolution. Remember, many members do not take an active decision to join; they join through their employer. They are not actively engaged in the scheme; their employer is the conduit, so providing incomplete information to members would cause undue distress and risk unintended consequences, such as members opting out of the scheme and stopping saving in a pension, when a resolution to the triggering event could very easily be agreed with the trustees or, indeed, opposed by the regulator.

If a scheme resolves its triggering event and continues to operate, I do not see why members should see any change. It is exactly the same for them: their pension saving will not be disrupted. I would not want them to be unduly alarmed or confused. The intervention of the regulator during the triggering event period, and the additional controls that are put in place during that period, will help to ensure the scheme gets back on track.

If the scheme is going to wind up—I believe this is the relevant point—members will be informed well ahead of anything directly impacting on them, and will be given the information and options.

[Alex Cunningham]

If the members are going to be told about the wind-up, where in the regulations is the requirement for the master trust to inform them?

[Richard Harrington]

The regulations have not yet been published, but the hon. Gentleman makes a valid point.

The aim behind these clauses is to ensure that members continue to save into a pension because they do not believe that the sky is falling in—the entire system is intended to ensure that that is not the case. To that end, members are not informed at such an early stage as is proposed in amendment 28, because of the adverse implications that could have and the absence of any practical advantage for members. What advantage would that provide to members, given that the matter will be resolved? There does not appear to be an obvious benefit.

However, I recognise how important it is that members are informed well ahead of something happening that might have a direct impact on them and—I think this is the core of the hon. Gentleman’s point—disrupt their pension saving. I am confident that the measures included in the Bill, and those proposed for inclusion in regulations, will achieve that outcome. I therefore ask the hon. Gentleman to withdraw his amendment.

[Alex Cunningham]

I am particularly interested to know what proposals there might be in regulations to ensure that the member is told, whether at the winding-up stage or when it first has an impact on them, and how that will be defined. I hope that the Minister will respond to that point before I sit down. I accept that it is particularly important that members are engaged throughout the process. Unfortunately, the Minister does not agree with me on that point. I believe that there is no more key a person in this chain than the member, but I accept that they should be informed when it is a significant thing affecting their lives. The Minister might like to intervene to explain what proposal there will be in regulations to ensure that members are informed when there is a material impact on their pension pot. Otherwise, at this stage I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 23 ordered to stand part of the Bill.

Clause 24

Continuity options

Question proposed, That the clause stand part of the Bill.

[Richard Harrington]

The clause sets out the two continuity options that must be pursued by the trustees when there has been a triggering event. Option 1 requires the scheme to transfer out all members’ accrued rights and benefits and then wind up. Option 2 is for the scheme to resolve the triggering event to the satisfaction of the Pensions Regulator. Trustees will have a choice under the regulator’s authority, and once the regulator has decided to withdraw authorisation, that is final, or there is a notification that the scheme is not authorised and then they have to pursue continuity option 1.

Our aim is that members should continue to save despite the master trust of which they are a member experiencing a triggering event. Therefore, where the scheme is able to resolve its issues, it should do so. However, where the issue could lead to the failure and closure of the scheme, the members should be transferred out, under the auspices of the regulator, hopefully to continue to save with as little disruption as possible.

If authorisation is withdrawn or refused by the regulator, or there is a notification that the scheme is not authorised, members will have to be transferred out and the scheme wound up. Irrespective of the option, we want the process to be as smooth and as managed as possible. The mismanagement of an issue or an unmanaged closure of a scheme would be bad for members and could be detrimental to confidence and lead to members opting out of pension saving, which is the last thing we all want.

Where a master trust experiences an event that could lead to its failure, there needs to be greater planning and control and more safeguards for members and employers. It is important that the scheme has done detailed planning so that what happens following a triggering event is thought through and organised and the process is orderly and managed. That should help to ensure ongoing automatic enrolment without disruption.

--- Later in debate ---

[Richard Harrington]

The amendments, which apply to clauses 25 and 34, continue with the continuity options. These apply when the trustees of a master trust are pursuing option 1. Clause 25 sets out the framework for continuity option 1. This is where the scheme transfers out all the members’ accrued rights and benefits, and winds up. The amendments would allow regulations to be made in future that would let the trustees in this situation choose a scheme that is not a master trust to receive their members’ rights and benefits.

The receiving scheme would have to have characteristics set out in the regulations. The non-master trust receiving scheme would be made subject to exactly the same restrictions on increasing or introducing the new charges as those to which master trust receiving schemes are subject. The amendments would enable the type of schemes that can be receiving schemes to be widened where a master trust is going to wind up and has to transfer all its members out.

In that situation, although members have the opportunity to make their own choice about where their accrued rights and benefits go, where they do not make a choice there needs to be provision for their rights and benefits to be transferred into a suitable pension scheme. At present that is restricted to another master trust. These measures permit this to be opened up by providing a regulation-making power to include other pension schemes, should that be appropriate. It may well not be appropriate, but in some cases it will be. Such schemes could include personal pensions and pension schemes that provide decumulation options, such as drawdown. This means we will be able to react appropriately to future innovations and developments in the pensions market. Indeed, the rise of master trusts shows how quickly markets change. This may be of particular use where members were using a decumulation option, as it leaves open the possibility that members could make use of new decumulation products in future.

Allowing other types of pension schemes to receive transferred members, as long as they meet specified requirements, could increase the options available to trustees, introduce extra flexibility and widen the market for potential schemes. This might be useful if trustees found that they were struggling to find somewhere appropriate for their members’ rights, which might particularly benefit members using decumulation options. Being able to increase the options in future might help reduce the risk that trustees of failing master trusts might not be able to find another master trust to take their members on.

As these amendments will mean that it is possible to widen the options available to the trustees of a master trust that was closing, and as that would be for the benefit of members, I commend them to the Committee.

[Alex Cunningham]

We give a general welcome to the amendments, some of which have been tabled in response to issues raised by my colleagues in the other place. The amendments are intended principally to ensure that scheme members are protected in the event of a winding up, and we certainly welcome that. We also wish to ensure that a master trust winding up does not disincentivise savers or negatively affect their rights and benefits.

Government amendment 5 means that if there is a triggering event and a master trust has to wind up and transfer members and their benefits, this can now be to a scheme other than another master trust scheme. This change, which has been made since the Bill left the House of Lords, invites three questions to which the answers are not clear. First, in the event of a failing master trust winding up, what conditions and regulatory standards must a receiving scheme that is not a master trust meet before the Pensions Regulator will authorise the transfer of members and their assets to it? Secondly, how will the concept of scheme funder in the Bill be applied to a receiving scheme that is not a master trust?

Thirdly, an essential provision in the Bill to protect master trust scheme members from bearing the costs of sorting out a scheme failure is in clause 34, which places a prohibition on increasing members’ charges during a triggering event, including wind-up and transfer. The prohibition is binding on both the transferring and receiving master trust scheme. Can the Minister give a categorical assurance that the prohibition on increasing member charges will, in the light of the amendment, apply to any receiving scheme in a triggering event? If the receiving scheme is not a trust-based scheme, which regulator will police adherence to that prohibition? Where is the line of vision in the Bill to show that all receiving schemes, master trusts or otherwise will be bound by the prohibition on increasing members’ charges?

We remain somewhat concerned that the Government have chosen to pursue their aim by introducing broad powers for the Secretary of State to make regulations in amendments 8, 10 and 12. We do not believe that approach provides a strong enough guarantee to scheme members that their benefits will not be eroded through the course of the transfer. Can the Minister guarantee to scheme members that that will never be the case? If he can, why not place such a guarantee in primary legislation? If he cannot, why not?

[Richard Harrington]

I have listened carefully to the hon. Gentleman’s points. This goes back to the core question of whether things should be in primary or secondary legislation and why. I repeat the argument, which I think is very reasonable, that part of the Bill is providing flexibility for the way things will change in the future. Whichever party happens to be in power, primary legislation is very difficult and takes a long period. The industry moves far more quickly. I know I keep repeating the same answer, but that flexibility is very much the principle of the whole Bill.

There is a difference in principle between us, but I hope the hon. Gentleman will agree that I have tried to be pragmatic with the arrangements, which provide the necessary practicality. I cannot therefore give him the undertakings that I would like to, because of the flexibility within the Bill, but I am convinced that this system will provide the most protection for members. As he knows, a lot of thought has gone into this. It is not a question of dispute based on an irresistible force and an immovable object; we have come up with a suitable compromise.

[Alex Cunningham]

I recognise the constraints and difficulties of trying to develop regulations on the hoof, as I was perhaps requesting of the Minister. If members started to understand this area, they would be really worried about it and want to understand it more, but I accept the Minister’s explanation.

Amendment 5 agreed to.

Amendments made: 6, in clause 25, page 17, line 23, leave out “subsection” and insert “subsections (1A)(b) and”.

This amendment is consequential on amendments 5 and 8.

Amendment 7, in clause 25, page 17, line 24, after “the” insert “Master Trust”.

This amendment is consequential on amendments 5 and 8.

Amendment 8, in clause 25, page 17, line 27, at end insert—

‘(1A) Each pension scheme proposed under subsection (1)(a) must be—

(a) a Master Trust scheme, or

(b) in such circumstances as may be specified in regulations made by the Secretary of State, a pension scheme that has characteristics specified in regulations made by the Secretary of State (“an alternative scheme”).”.

See Member’s explanatory statement for amendment 5.

Amendment 9, in clause 25, page 17, line 28, leave out “The notification” insert “Notification under subsection (1)(b)”.

This amendment is consequential on amendments 5 and 8.

Amendment 10, in clause 25, page 17, line 33, leave out subsection (3) and insert—

“(3) The Secretary of State—

(a) must make regulations about how continuity option 1 is to be pursued, in a case where a proposed transfer is to a Master Trust scheme;

(b) may make regulations about how continuity option 1 is to be pursued, in a case where a proposed transfer is to an alternative scheme;

(c) may make regulations for the purpose of otherwise giving effect to continuity option 1, in either case.”.

This amendment confers power on the Secretary of State to make regulations about how continuity option 1 is to be pursued, where a proposed transfer of members’ rights and benefits is to a pension scheme that is not a Master Trust scheme.

Amendment 11, in clause 25, page 18, line 29, leave out “receiving”.

This technical amendment removes an unnecessary word from clause 25(4)(l).

Amendment 12, in clause 25, page 18, line 37, at end insert—

“(4A) Regulations under subsection (3)(b) may include—

(a) any provision mentioned in subsection (4);

(b) provision deeming any member whose accrued rights or benefits are to be transferred to an alternative scheme to have entered into an agreement with a person of a description specified in the regulations.”.

This amendment makes it clear that regulations about how continuity option 1 is to be pursued in a case where a proposed transfer is to pension scheme that is not a Master Trust scheme may include any of the provision mentioned in clause 25(4) and also provision deeming a member to have entered into an agreement with a person (such as the provider under the new scheme).

Amendment 13, in clause 25, page 18, line 46, leave out “subsection” and insert “subsections (1A)(b) and”.—(Richard Harrington.)

This amendment makes regulations under the new subsection (1A)(b) (specifying alternative types of pension schemes to which transfers can be proposed) subject to the affirmative resolution procedure. (Regulations under the new paragraph (b) of subsection (3) (about bulk transfers to schemes other than Master Trust schemes) will also be subject to the affirmative procedure.)

Clause 25, as amended, ordered to stand part of the Bill.

Clause 26

Continuity option 2: resolving triggering event

Question proposed, That the clause stand part of the Bill.

[Richard Harrington]

The clause sets out the framework where a scheme pursues continuity option 2, which we have not mentioned in detail. The clause places a series of requirements on schemes and the regulator to ensure that a triggering event is resolved to the regulator’s satisfaction. Subsections (2) and (3) set out that once the trustees consider that they have resolved a triggering event, they must notify the Pensions Regulator, setting out how they consider that has been achieved. Subsection (4) provides for the time period for the notification to be prescribed in regulations. Subsection (5) requires the regulator, having considered a notification, to notify the trustees of whether it is satisfied that the event has been resolved.

Our aim is to ensure that where trustees decide to try to resolve a triggering event, they have the opportunity to do so, so that the scheme can continue and its members can continue to save in the scheme with as little disruption as possible. However, following a triggering event, the trustees must set out a comprehensive and detailed implementation strategy containing the steps that they plan to take. We consider a scheme that has had a triggering event to have increased risk—that really is part of the definition of a triggering event—so such schemes need greater and more in-depth planning, safeguards for members and employers, and greater protection for members. However, we want members to continue to save and employers to continue to comply with their legal automatic enrolment minimum obligations, and for there to be general confidence in the master trust market.

We do not want to restrict how trustees resolve a triggering event, but we want to encourage and facilitate the continuity of pension saving by members. The best way to achieve that is for schemes to have the freedom to resolve their specific issues in the most appropriate way, but under the supervision of the regulator. There has to be an external check that triggering events have been properly resolved, because otherwise we could not assure the protection of members’ savings, and the regulator provides that. We consider that to be the best way of ensuring the continuity and security that we want. We believe that the clause provides the framework for doing that, so I ask the Committee to support it.

Question put and agreed to.

Clause 26 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Steve Brine.)