Pension Schemes Bill [HL]

Lord Flight Excerpts

2nd reading (Hansard): House of Lords
Tuesday 1st November 2016 Lords Chamber

[Lord Flight (Con)]

My Lords, I am sure there is general support across the House for the Bill, and I congratulate my noble friend Lady Altmann on being very much its instigator. I take a slightly more positive view, in that it seems to be a case of the market actually responding rather successfully to a need. For auto-enrolment there needed to be relatively low-cost arrangements for managing money and for administration, along with an arrangement that would be suitable for a large number of small firms, and that is what has come up.

I wonder how many people even know what master trusts are. I suspect that if a survey was made of your Lordships’ House, we might find that only 20% of Members would know. They have arisen to meet a demand and in the main, they have done so rather successfully. I have seen different figures, but already between 4 million and 6 million members have £8 billion of funds under management, and about half of all employers are choosing master trusts for their auto-enrolment needs. As your Lordships are probably aware, there are four major players among a total of 84 master trusts, and it is clear that many of those will need to merge because they are of insufficient size to be viable in the long term.

There has been constructive dialogue between the Government, the Pensions Regulator and the emerged master trust industry on putting in regulation. I believe that, in the main, the regulation we are discussing today will address most of what is needed, although some areas still require work. However, I would have strongly opposed any form of levy to finance master trusts which get into trouble, because that is an unnecessary and hazardous path that should not be taken.

It is wise to leave the important territory of capital base to the Pensions Regulator to determine what sort of level of capital is adequate, but it is important that it be done on an ongoing basis. It is no good if it is done just initially when the master trust is setting up. It needs to be reviewed, probably annually. The concept of having minimal capital as six months’ operating costs is not suitable. When a master trust is small and setting up, those operating costs will be fairly small, but quite quickly they will be a lot larger. The capital base of just six months of initial costs would prove inadequate.

Importantly, in practice, when a master trust is failing it will not be difficult to sort it out because larger master trusts will be very keen to acquire the funds under management, for which they will charge their fees. It is also quite sensible to allow the regulator to act as some form of honest broker in putting together failing master trusts and suitable larger partners to absorb them.

There are some quite big issues. The first is whether the regulator should be the FCA or TPR. Group personal pension schemes, which are relatively similar—a lot of the larger providers provide both master trusts and group personal pension schemes—are regulated by the FCA. In general, the FCA is viewed as taking a tougher line than the Pensions Regulator. There certainly needs to be a level playing field between the two. While right now it is clearly more suitable for the Pensions Regulator to regulate master trusts, there are some slightly sensitive differences between the regulation of group personal pension schemes and master trusts.

There is also an issue with master trusts that attract members not connected to an employer. That may well increase in due course with self-employed individuals. They are regulated by the FCA, so there is another anomaly. The insurance industry has also made the point that where providers have both group personal pension schemes and master trusts, their capital adequacy is already determined under Solvency II, which requires them to hold sufficient capital for their master trusts. We have slight duplication, depending on the structure of the provider.

Historically, master trusts’ approval came from HMRC. It is now to be from the Pensions Regulator, but I repeat that there are some issues to be sorted out where insurance companies offer both. It is important that the regulator should not grant exemptions, as it has in the past, to NEST. Indeed, there is the argument that so to do is a breach of EU state aid rules. Also, to date there has been a voluntary process of accreditation for master trusts, the master trust assurance framework. That will need to be rolled into and absorbed into TPR regulation; but at present the larger master trusts meet the voluntary accreditation requirements and will now have to meet TPR’s requirements. Overall, there needs to be a full review of duplication areas, which can probably be dealt with after the legislation is enacted.

There is a second issue relevant to both master trusts and group personal pension schemes. If a member wants to leave a master trust and move to a new one, that master trust can require that whatever accumulated assets he has must move to his new master trust, but the new master trust cannot require it the other way around—that the assets the individual has with his old master trust are moved to them. I take the view that it is undesirable for people to have tiny amounts in different pension pots about the place, and that it is not an infringement of human liberty to require that amounts follow the individual into their new pension trust.

There is a similar situation with group personal pension schemes. Most people in such schemes—some 95% or more on average—opt for the default funds, I believe quite sensibly, as it happens. However, if a group personal pension scheme changes its managerial administrator, it cannot require that member similarly to move their money across from the old default fund to the new one, which would make life easier for everybody.

I came across a larger anomaly that rather surprised me. Generally, group personal pension schemes do not have trustees. That seems rather strange. It means that only the sponsor company can monitor how the pension is being managed—whether the administration is efficient and so forth. Master trusts have to have trustees, but the issue of group personal pension schemes and trustees needs to be thought about. At present it is left to someone called an independent governance officer to monitor and keep an eye on all group personal pension schemes managed by a particular manager. I take the view that there is insufficient time for one person, in many cases, to monitor all the schemes being managed.

I turn to two pension funds issues that are related but not in the Bill. The first is an income tax issue. Pension contributions are taxed in two ways. There is net PAYE, whereby the pension contribution is deducted from someone’s pay before PAYE is applied to it. The second route is pension trust relief at source—PTRAS—whereby PAYE is applied to gross income without deduction of pension contributions, but the pension scheme then recovers a 20% tax credit from HMRC.

The problem arises for individuals who do not pay tax, such as those employed part-time and earning less than £11,000. Under PTRAS they still get their 20% tax credit but under PAYE they do not. I believe this is worth somewhere between £5 and £10 per annum. Perhaps the easiest way to solve it would be to credit members under PAYE with that amount per annum to put them on to a level playing field. This is particularly relevant to those in part-time work. Also, I do not accept the logic of deducting £5,824 from all individuals’ pay for the purposes of calculating the amount to which employer, employee and government pension contributions should apply.

I strongly support the argument that a central advice scheme needs to be set up as soon as possible. It is a pity that the FCA has not admitted that RDR has been a disaster and resulted in no financial advice at all being available to the great majority of the population.

My final point was raised also by the noble Lord, Lord Naseby, and I very much agree with him. As a result of what was FRS 17, now FRS 102 or IAS 19, no one has any idea of the real scale of defined benefit scheme deficits. For the pension fund of which I am a trustee, my company’s old scheme, I worked out that the required FRS discount rate for discounting the value of future liabilities—the rate of interest applied—is roughly half what the pension fund has achieved in returns going back 10 or 15 years, and in good years and bad. Under the FRS rules, we are approximately in balance; the reality is that we have a huge surplus. We live in a world where some large established companies are putting off investment decisions because they allegedly have huge pension fund deficits to make good. The truth is that the FRS formula is completely out of date as a result of QE, which in turn has led to artificially low gilt yields.

When this issue has been raised with the Government, the answer has been, “Oh, we can’t interfere with accounting rules”. Well, my response to that is that Governments act in the interest of the nation. A serious issue is not being addressed. The US Congress had no trouble whatever in dealing with it. If the accounting industry is unwilling to see the sense of the argument that the FRS is now inappropriate, government should intervene. One reads of potential defined benefit deficits of £700 billion, £800 billion or more. I suspect that the reality in net terms is that there is hardly any deficit. We are starving the British economy of investment because of a piece of accounting/discounting which is wrong. I urge the Government to do something about this increasingly important issue.

Pension Schemes Bill [HL]

Lord Flight Excerpts

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

Moved by

[Lord Flight]

1: Clause 1, page 1, line 8, at end insert “and is not an AVC only scheme,”

[Lord Flight (Con)]

My Lords, the intent of my Amendments 1, 3, 5 and 6—and, I believe, similarly the intent of the Opposition’s Amendment 2—is to remove from the definition of master trust certain non-associated multi-employer schemes, known as NAMESs, that are supported by employers and are not run for profit. Such schemes are often industry-wide schemes set up to provide benefits for employees within a particular industry sector.

I have identified at least 12 of these schemes, with member numbers ranging from 900 to 340,000 and the value of assets ranging from £80 million to £48 billion. They include the Railways Pension Scheme, the Merchant Navy Officers Pension Fund, the Merchant Navy Ratings Pension Fund, the Plumbing & Mechanical Services (UK) Industry Pension Scheme, the Cheviot Trust, the ITB Pension Funds, the Industry-Wide Coal Staff Superannuation Scheme, the Industry Wide Mineworkers’ Pension Scheme, the Motor Industry Pension Plan, the Pilots’ National Pension Fund, the YMCA Pension and Assurance Plan, and the Registered Dock Workers’ Pension Scheme.

The concern is that, without my amendments or other ways in which the Government may choose to address the issue, these schemes will need to comply with the new regulations on master trusts, despite being subject already to a very comprehensive regulatory regime. I had always understood that the intent of the new Government was not to double up regulation but to streamline it. I believe the USS—the Universities Superannuation Scheme—has raised this point already with the Department for Work and Pensions. I sympathise with its argument that such not-for-profit hybrid schemes should be excluded. By inserting,

“is not a relevant centralised scheme”,

my Amendment 3 would create such an exclusion.

Mostly, the schemes are occupational pension schemes regulated by the Pensions Regulator. They do not have a commercial agenda and have not been established with a view to making a profit, unlike the commercial master trusts, which are surely the intended target of the Bill. The NAME schemes provide defined benefit—DB—pensions and so are subject to the scheme-specific funding requirements of the Pensions Act 2004. It is usual in schemes such as these for the participating employers to be liable for the expenses of running the scheme. When relying on employers to fund the scheme and to pay expenses, there is the risk of employer insolvency but this risk is faced by trustees of all occupational pension schemes, except where there is a government guarantee.

The reason many of these schemes will be caught by the definition of master trusts for the purposes of the Bill is that they give members the option to accrue money purchase benefits on top of their DB pensions by choosing to pay additional voluntary contributions. Having to comply with the requirements for master trusts would cause difficulties for many NAME schemes and result in additional expense for those employees and, ultimately, employees participating in such schemes. In particular, there will not usually be a person involved with a scheme who fits the requirements of being a “scheme funder”. The Bill requires that a scheme funder,

“must be constituted as a separate legal entity”,

and that the only activities it carries out relate directly to the master trust.

It is not entirely clear whether or not the drafting of my amendments in this technical area succeeds in excluding all NAME schemes that the Government might want to carve out of being a master trust, and it is impossible to know what different pension arrangements may be developed in the future. The amendments therefore include a regulation-making power to enable the Secretary of State to remove further schemes from the definition of master trust.

I have referred to the Universities Superannuation Scheme, which is a classic example. Its starting position is that it believes it is “unintended, unnecessary and burdensome” that,

“hybrid schemes such as USS, which provide pension benefits for multiple non-connected employers … will be caught by the new regulation”.

It would like to see the definition of master trusts clarified in secondary legislation to ensure that it targets only those schemes which are currently subject to inadequate regulation.

I feel sure that it is not the Government’s intent that these NAME schemes should be covered by the definition of master trusts. If the particular changes that my amendment proposes are not to the Government’s liking, or if they think that it does not work, I hope to hear that they have alternative proposals to deal with these issues.

--- Later in debate ---

[Lord Freud]

Yes, I think that we will come back to that issue—and, if we do not, I shall make sure to write to the noble Lord before the end of the Committee stage.

[Lord Flight]

My Lords, I am pleased to hear the Minister advise that Clause 39 will be used for further consultation, and that he is certainly minded to introduce a carve-out for AVCs. I would like to push the case for NAME as well, particularly as regards the arguments made by the university schemes. However, I understand the Government’s reservations here. Considerable further discussions with the industry are needed. On the basis of such constructive use of Clause 39, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

--- Later in debate ---

[Lord McKenzie of Luton]

My Lords, in moving Amendment 7 I shall also speak to Amendments 8 and 78. Amendment 7 would require that, for a master trust scheme to be operated, it must be authorised under all the provisions of Part 1. Part 1 covers provisions relating to authorisation, supervision, triggering events, continuity options, pause orders and withdrawal of authorisation—in others words, the totality of the Bill’s requirements apart from Part 2, which deals with administration charges.

We have already touched on the reason for the amendment with our reference to the Constitution Committee. In its letter of 11 November to the Minister, the noble Lord, Lord Freud, it drew specific attention to Clause 39, which we just debated, pointing out that it could be used not only to extend the master trust regime to schemes to which it might otherwise not apply, but to prevent a regime applying in whole or in part to schemes to which, according to the terms of the Bill, it would otherwise apply. We would counter this by deleting the authority of Clause 39(1)(b) with Amendment 78. As I said, we would require all the Bill’s provisions to apply if someone is to be authorised to operate a master trust.

Clause 39, as we have debated, is an extraordinarily wide power to allot to the Secretary of State, notwithstanding the proposed use of the affirmative resolution procedure. I suggest it is incumbent on the Minister to do much more to justify these powers. In what circumstances will it be envisaged that the provisions would be disapplied? We identified some areas, but which provisions do the Government have in mind? This gives the opportunity to disapply some or all of the provisions. Some might be taken out of the scheme entirely—AVCs, for example—but how would they be partially disapplied? Further, if the provisions are to be ignored, what authority might there be to make alternative arrangements? What other regulatory procedures would kick in? This legislation is important to protect the savings of millions of people. However, much still needs to be developed.

Amendment 8 would require that a scheme’s policies relating to systems and processes be added to the list of matters to be included as part of the application. While we acknowledge that the Secretary of State can, by regulation, add to the list of matters that have to be addressed as part of the application, it seems odd not to include in the Bill information regarding matters about which the Pensions Regulator should be satisfied pre-authorisation.

Amendment 8 would also require the application to set out the extent to which it proposes to adopt the master trust assurance framework. This is a probing amendment. As an at least interim response to the acknowledged poor standards of governance administration, in 2014 the Pensions Regulator and the ICAEW developed a master trust assurance framework to help improve governance for DC schemes. This is a voluntary framework that has been adopted by only a minority of master trust schemes to date—some 11 out of a current total of 84. It involves commissioning an independent reporting accountant to assess the design and operational effectiveness of the control procedures in place. As we know, there are two types of report: type 1 checks the design of a scheme’s control procedures; type 2 checks the operational effectiveness over a reporting year.

The point has been made to us that, other things being equal, accreditation will increasingly become a commercial imperative for providers so they can demonstrate that their scheme is well run. We agree with the Government that simply making the assurance framework compulsory is not a full response to the risk that such master trust schemes engender. In contrast to the Bill, it does not cover, for example, the financial stability of the provider and capital adequacy. Although it is not an alternative to the legislation, a question arises as to the future of the framework. This is particularly pertinent, as it appears that the regulations which will enable most of the Bill to come into force are some way off—possibly two years. Can the Minister give us the Government’s view on what should happen in the interim? We urge them to set out some analysis of the key areas of consistency between what the Bill requires, in so far as it can be determined, and the assurance framework, and to encourage schemes which have not obtained assurance to do so.

The FCA states that master trusts are expected to obtain independent master trust assurance to demonstrate the meeting of standards of governance and administration that meet the DC code and DC regulatory guidance. Clear indications from the Government are vital now so that schemes under the Pensions Regulator and the ICAEW can know where they stand. I am aware that the noble Lord, Lord Flight, has an amendment still to come. I will withhold my comments on that until we have heard from him. I beg to move.

[Lord Flight]

My Lords, I support Amendment 8. It is disappointing that reference to the master trust assurance framework was not already in the Bill, particularly given that the accreditation procedure confirms the rigour in the administrative procedures within the master trust. It is right that that should be added.

My Amendment 9 is a probing amendment to ask whether a continuity strategy not be the ongoing responsibility of the trustees rather than something which the regulator determines.

[Lord Young of Cookham (Con)]

My Lords, this group of amendments relates to the nature of the authorisation regime, the requirement to meet the criteria, the information provided in the application and the regulation-making powers to vary the scope of the regime in respect of specified characteristics.

Amendment 7, tabled by the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, would modify the central tenet of the authorisation regime: the prohibition on a person operating a master trust scheme unless the scheme is authorised. It would amend Clause 3(1) so that it read:

“A person may not operate a Master Trust scheme unless the scheme is authorised under all of the provisions of Part 1”.

The prohibition on operating a master trust scheme has been drafted so that a person may not operate a master trust unless it is authorised and that, to become authorised, the master trust must satisfy the Pensions Regulator that it meets the authorisation criteria. As is set out in the Bill, these are that the persons involved are fit and proper, that the scheme is financially sustainable, that the scheme funder meets certain requirements, that the scheme has sufficient systems and processes to run the scheme and that the scheme has an adequate continuity strategy.

All the criteria must be met in order for the master trust to be authorised. They must continue to be met on an ongoing basis, with the Pensions Regulator having the power to withdraw authorisation if it ceases to be satisfied that all the criteria are met. It is these criteria that are relevant for determining whether a master trust should be authorised. For that reason, I am happy to be able to reassure the noble Lord that all the authorisation criteria must be met for the scheme to be authorised and for the master trust to be allowed to operate. I hope that he will agree that the amendment is not necessary.

--- Later in debate ---

[Lord Flight]

My Lords, I wish to express some concern about Amendment 36. Surely trustees need discretion over the timing of communicating with members in a triggered event period so as not potentially to cause unnecessary scares and worries.

--- Later in debate ---

Moved by

[Lord Flight]

11: Clause 4, page 3, line 25, leave out first “the” and insert “any”

[Lord Flight]

My Lords, this is a very simple amendment. The use of the word “the” assumes that a fee will apply and that, effectively, this legislation is laying that down. Should not it be best left to the Secretary of State or the regulator to determine whether or not a fee will apply? Hence, I suggest that “any” is substituted for “the”.

[Lord McKenzie of Luton]

My Lords, we have Amendments 12 and 82 in this group. We are happy to support the amendment of the noble Lord, Lord Flight, on this occasion.

Amendment 12 requires a new clause to be inserted in the Bill requiring the Secretary of State to report to Parliament on the sufficiency of resources available to the Pensions Regulator for the purposes of the Bill. I think we can anticipate the specifics of the reply to that formulation but I stress that this is about trying to get something on the record today about resources, rather than it necessarily being dealt with on the basis of a clause in the Bill. We know from the impact assessment that there will be additional costs to business from funding the Pensions Regulator and an ongoing levy charge. However, like so much of this Bill, we have no further detail.

The Pensions Regulator has a very significant role in the new era of master trusts and it is vital that the regulator is resourced to play its part in full. When fully commenced, the Pensions Regulator will be responsible for applications for authorisation; judgments about fit and proper persons; decisions as to whether a scheme is financially sustainable, with all the calculations that that entails; a sound business strategy with sufficient financial resources; taking a view on whether the systems and processes used in running the scheme are sufficient to ensure that it is run effectively; and determining whether a master trust has an adequate continuity strategy. On an ongoing basis, the Pensions Regulator is the recipient of supervisory returns and scheme accounts, and must deal with significant events—whatever that may be, and we are going to come on to that—issue penalty notices where appropriate and withdraw authorisation where criteria are no longer met. Further, the Pensions Regulator has an important role as a consequence of a triggering event and winding-up. Not all these responsibilities will bite immediately. It looks as though it could be two years before the commencement of all the Bill takes effect. However, there are responsibilities before that under the transitional provisions of Schedule 2.

Currently, of course, the Pensions Regulator has a role in relation to master trusts, but it is more limited than that provided for in this legislation. The extent of resources required depends upon the volume of master trusts, now and in the future. Although aggregate amounts are expected to increase—that is both members and investments, largely through auto-enrolment—there is the prospect at least of some providers exiting the market. Clearly the workload of the Pensions Regulator is likely to be front-end loaded as the authorisation of existing master trusts is completed and the role becomes more one of supervision. Notwithstanding that, there is much detail still to be settled and we are entitled to seek comfort on the capability of the Pensions Regulator to play what is a central role in the new regime.

On funding, is it proposed that fees and levies will provide the totality of additional resources needed to meet the requirements of the Bill? What assessment has been made of any recruitment needs given the expanded role? In particular, what, if any, changes are considered necessary to the skills set of the Pensions Regulator employees and what planning is under way to meet this? This is inevitably a probing amendment, but one to focus on the operational position of the Pensions Regulator given the important additional tasks of the organisation, which we support, based on the Bill.

Amendment 82 reinforces the Government’s commitment in the impact assessment dated October 2016. This recites that the level of uncertainty currently is too great to provide a meaningful estimate of the net cost to business of the introduction of the authorisation and supervision regime. However, it promises a full assessment at the secondary legislation stage. Our amendment causes this to be before triggering the bringing into force of the main provisions of the Bill. We seek some further clarification on timing, as presumably all the secondary legislation will not arrive at the same time. Are we going to get the impact assessment piecemeal? The purpose of these amendments is to make sure that we get the information about the overall impact of these provisions.

[Lord Flight]

My Lords, should Amendment 12 be in the Act? Generally the Government and the Secretary of State have responsibility to see that something like TPR is funded and it is not solely a master trust issue. I question whether this should be in the Bill.

[Lord Freud]

My Lords, these amendments all concern the resources, financial or otherwise, which will be required to ensure that the Pensions Regulator can implement and operate the master trust authorisation regime.

Amendment 11, tabled by my noble friend Lord Flight, would change the wording of Clause 4 so that subsection (5)(b) reads:

“The Secretary of State may make regulations setting out … any application fee payable to the Pensions Regulator”,

instead of “the” application fee.

The current provision in the Bill does not require the Secretary of State to set an application fee but it is important for the Government to be clear to the industry about their intentions now—and the Government intend to make regulations that specify an application fee. It is also important for the Secretary of State to have the ability to change the application fee in the future. That is one reason for specifying this fee in regulations. The master trust industry is developing, and will continue to do so, as it adapts to the new requirements of this regime. As the industry changes, it is entirely feasible that the cost to the regulator of assessing applications for authorisation may change too.

The fee serves two key purposes. First, it ensures that the Pensions Regulator can recover the costs of processing applications from master trust authorisation without indirectly placing those costs on the wider pensions community it regulates. Without an authorisation fee it would have to recover these costs through the funding provided by the general levy, and this would not be fair given that a large number of the schemes which pay into this levy are not master trust schemes. Secondly, the fee ensures that schemes seeking to become authorised submit carefully considered applications by acting as a deterrent to submitting multiple applications.

As I hope I have explained, it is important to make provisions for regulations to specify an application fee and that the industry is clear that the Government intend to use this power. The Bill as it stands achieves this intent.

Both Amendments 12 and 82 require that a report on the subject of the Pensions Regulator’s resources is laid before the Houses of Parliament before the provisions within Part 1 of the Bill are commenced. Amendment 82 would additionally require that Parliament is presented with a report about the impacts of the master trust authorisation regime. The additional report required by Amendment 82 is described as,

“a comprehensive assessment of the impact of Part 1”.

The other report is,

“a report demonstrating that sufficient resources are available to the Pensions Regulator to carry out the requirements on the Regulator pursuant to”,

this Act. The focus of Amendment 12 is very similar, but it requires that the resources report should address the resources required to conduct the regulator’s functions under Clause 5.

--- Later in debate ---

[Lord McKenzie of Luton]

I am grateful to the noble Lord.

[Lord Flight]

My Lords, I am interested to note that my amendment has resulted in a clear statement by the Government that a fee will be charged and that it will be provided for in the Bill. I beg leave to withdraw the amendment.

Amendment 11 withdrawn.

Pension Schemes Bill [HL]

Lord Flight Excerpts

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

[Baroness Drake (Lab)]

My Lords, I will also speak to other amendments in this group. This amendment would require a continuity strategy should a triggering event occur to set a cap on the charges that can be applied to members’ savings. Amendment 42 sets a similar requirement on an implementation strategy when a triggering event has occurred, and Amendments 28, 39 and 54 introduce an explicit provision that members’ funds cannot be used in whole or in part to pay for the costs of any wind-up of a failing master trust. That provision is to apply to the continuity strategy when a transfer-out and wind-up is triggered, and when an unauthorised master trust, on or after 20 October 2016, is subject to a wind-up. Indeed, all the amendments in this group in my name and that of my noble friend Lord McKenzie are probing to test the strength of the scheme members’ protection when a master trust fails.

The key function of the Bill in addressing weaknesses in the regulation of master trusts is to protect members from bearing increased—indeed, potentially unlimited—costs, so draining their savings pots when a master trust fails. The Bill introduces a prohibition provision, Clause 33, to protect members from funding increased costs in the event of a scheme failure. The prohibition is on both master trusts and the receiving scheme increasing charges, introducing new charges or charging a member for transfer during a specific period in which the scheme is at risk.

However, Clause 33 does not make it clear how and on what premise the charges it will be prohibited from exceeding will be set or determined in the first instance. To use my own simple language, members are protected by a prohibition from the imposition of additional charges above a charges baseline, either by the master trust or the receiving scheme on transfer in a triggering event, but it is not at all clear what that baseline is, how it is set or, indeed, if it is fair value. The amendments in this group seek a cap on the charges that can be applied to members’ savings should a scheme fail, underpinned by the provision that members’ funds cannot be used in whole or in part to pay for the costs of wind-up and transfer occurring as a result of a trust failing.

The parameters and restrictions on the use of members’ funds to meet the cost when a master trust fails need to be set out more clearly in the Bill. Such a restriction is too fundamental to leave to regulations and/or the Pensions Regulator’s discretion. To illustrate my point, the protection for members against meeting additional charges on wind-up and transfer in a triggering event are referenced in three main clauses. Clause 12 provides for a master trust continuity strategy, which is a requirement of authorisation, to set out how members’ interests will be protected if a triggering event occurs, including the level of charges that can apply. Clause 27 requires a master trust to submit an implementation strategy, which must set out how members’ interests will be protected when a trigger event actually occurs, including the levels of administration charges that will apply. Clause 33 sets out how the prohibition on increasing member administration charges will operate during the trigger event period, and provides that the Secretary of State may make regulations about,

“how levels of administration charges are to be calculated”,

and,

“how to determine … the purposes for which charges are increased or imposed”.

There is plenty of process here but nothing in Clauses 12, 27 or 33 informs what the actual quantitative level of member protection will be against increased charges on scheme failure; nor does the Bill say whether members will be protected from bearing, or will have to bear, any wind-up or transfer costs. Indeed, the level of protection for the member against increased charges on scheme failure can be revisited on three important occasions under different provisions in the Bill relating to triggering events. What is the Government’s policy on the considerations that will be taken into account when the Pensions Regulator authorises the level of administrative charges to be borne by the member on scheme failure under Clauses 12 and 24 and Schedule 2? Are there any circumstances in which some of the administration charges or transfer costs arising as a result of a triggering event can be passed on to the member, and what will be the limit on the charges that can be passed on to them?

In the current drafting, there seems to be no join-up with the Occupational Pension Schemes (Charges and Governance) Regulations 2015, which incorporate the value-for-money assessment. There is nothing in the Bill to cover what happens if a scheme fails to comply with these regulations. Would it impact on the authorisation process or lead to the withdrawal of authorisation? It may be that these points will be covered off in new regulations, but it is unclear how regulations made under the powers in the Bill would knit together with the existing charges and governance regulations.

The regulations supporting Clause 12 on the continuity strategy, which sets out a requirement about the level of charges that will apply in a triggering event, are subject to the negative resolution procedure. I am conscious that we are bouncing this ball on negative and affirmative resolution procedure but, again, there is a prohibition on increasing charges and various incidents where the charges that cannot be exceeded are set out. Yet we have no sight of the draft regulations, so we do not know the Government’s thinking on this. Again, this is an appeal as to why, in the first instance, the regulations should not be subject to the affirmative procedure.

This is an important matter that is at the heart of the level of protection the Bill seeks to provide to members. It is one thing to say that there is a protection, but understanding what that protection is in quantitative and real terms is important. Because we have not seen the draft regulations and do not know the policy intention, that is difficult to assess. That is why Amendment 30 provides for the first regulations to be subject to the affirmative resolution procedure. Given the importance of this matter and the lack of detail before the Committee, why is it not appropriate to apply that procedure in the first instance?

[Lord Flight (Con)]

My Lords, Amendment 29 and 40 are amendments to opposition Amendments 28 and 39. They would both add after “members’ funds”,

“, beyond the normal capped pension scheme charges,”.

The point is really very simple: without this change, the opposition amendments would have the undesirable —and I think unintended—effect of hampering the orderly exit of the sponsor. I am sure that is not the intention behind them.

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

My Lords, Amendment 27 would require information on any charge cap to be included in a master trust’s continuity strategy. I am grateful to the noble Baroness, Lady Drake, for making it clear that this is a series of probing amendments. I think it makes sense for me to go through what the process is on the continuity strategy.

One of the criteria for a master trust to be authorised by the Pensions Regulator is that it must have an adequate continuity strategy. That strategy is then kept under review on an ongoing basis. A continuity strategy is a document that addresses how the interests of the scheme members will be protected if, in the future, the scheme experiences a triggering event—an event that could put the scheme at risk. The strategy must include a section on the scheme’s levels of administration charges in a manner that will be specified in regulations in due course, as well as any such other information as may be set out in those regulations. Our intention is that the regulations will set out the detail and manner of the information to be provided on the administration charges in the strategy. We want schemes to provide information such as the charge levels per arrangement or fund, any discounts they apply to charge levels and on what basis these discounts are made.