Lord McAvoy
Main Page: Lord McAvoy (Labour - Life peer)Pension Schemes Bill
Lord McAvoy Excerpts
Lord McAvoy
“( ) A statutory instrument containing regulations under this section which is the first exercise of such a power may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
Lord McAvoy (Lab)
My Lords, I shall speak to Amendments 5 and 6. They follow recommendations made by the Delegated Powers and Regulatory Reform Committee, which suggested that, on first use, the affirmative rather than the negative resolution process should be used. We agree. Despite the Government’s claim in the delegated powers memorandum that Clause 10 does not require affirmative resolution as the amendments would be “technical” and “procedural”, it would be good to hear further detail about the circumstances in which it could be used. Does the Minister see the power as a backstop that can be relied on in the event that a scheme manager is not considered to be acting in the best interests of the scheme members or has taken a decision that is likely to disadvantage them?
Clauses 10 and 11 are part of a larger group of clauses introduced on Report in the other place. As a result, on that and other points it is up to this Committee to ensure adequate scrutiny and ensure that there are no flaws in the drafting. In debating the provision, the Minister in another place said:
“We cannot do an impact assessment because we have not yet written the regulations”.—[Official Report, Commons, 25/11/14; col. 805.]
That is a slightly unsatisfactory way to legislate. Likewise, in explaining why so many amendments were produced late on, the Minister relied on the need to alter the Bill dramatically following the introduction of pension freedoms in Budget 2014. The fact that that was not anticipated suggests that something was left to be desired when it came to joined-up government thinking. We want parliamentary debate and scrutiny of the regulations published under the clauses following the conclusion of the Government’s consultation. On that basis, I beg to move.
Lord Bourne of Aberystwyth
My Lords, I thank the noble Lord, Lord McAvoy, for introducing the amendment. First, I confirm that the Government agree with the recommendations of the Delegated Powers and Regulatory Reform Committee. We will be tabling amendments on Report to make the powers in Clauses 10 and 11 subject to the affirmative procedure the first time that they are used. Regulations made under Clause 10 will require trustees or managers to set out and follow their policy for how the collective pool will provide collective benefits to individual members.
There is another high-level requirement on which we may wish to regulate for which we have set out powers in Clause 10, and that is the matter of how each benefit is determined. The effect of regulations under Clause 24, which we will come to later, will be that trustees or managers must use the funds held for the provision of collective benefits—less any specified scheme expenses—to provide collective benefits. How the amount paid to a member is determined is the issue to be addressed. We expect the scheme to set out the rules as to how it will operate. The way that the scheme manages certain matters will need to be clear.
Regulations made under Clause 10 will therefore require trustees or managers to set out and follow their policy for how the collective pool will provide collective benefits to members. That is because, although with a collective benefit there is no certainty about what a member will receive, we want to ensure that decisions about how benefits are calculated are transparent. Transparency is of the essence. That is not to determine benefit design but to recognise that with a collective benefit there may be redistribution of assets between members, smoothing of returns and so on, and we want that to be an open process.
The specific clause, however, focuses on policies applied to determine each benefit. Regulations made under the clause may set out matters that the trustees or managers must take into account, or principles they must follow, in formulating the policy. We might want to use this power, for example, to require that trustees or managers have regard to the level of contributions paid to the scheme by members. Although the level of contributions towards collective benefits made by an individual member is not the only factor that will determine what the level or amount of that member’s benefits will be once they come into payment, it is important that there is some link between the level of contributions made by or on behalf of the member and the level or amount of benefit that the member receives from the scheme. That is how we hope to address that point.
As with the other requirements for scheme policies outlined in Part 2, the regulations made under the clause may also require the trustees or managers to consult about the policy and make provision about the content of the policy and about reviewing and revising the policy. I hope that I have explained how the powers in Clause 10 will help to ensure consistency in how the scheme will operate and give clarity to members and prospective members about how their share of the collective pool will be calculated.
Lord McAvoy
My Lords, I thank the Minister for his lucid explanation of the clause and his response to my amendment. I very much welcome the pledge to move amendments at a later stage that will keep the spirit of these amendments.
This is the first time that I have moved an amendment to legislation from the Dispatch Box, and I feel that I should now just pack up and go home—I have done enough to escape without criticism. I appreciate the Minister’s attitude and flexibility on this and beg leave to withdraw the amendment.
Lord McAvoy
Lord McAvoy
My Lords, I shall also speak to Amendment 9. I do not have the reputation of having an unlimited supply of charm, so I shall use what I have left to try to work the oracle on these two amendments.
Clause 14 allows for regulations to be made requiring scheme trustees or managers to prepare an investment strategy. Specifically, the regulations may include requirements on the content of the statement and on the reviewing and revising of the statement. Clause 15 allows for regulations to be made requiring the trustees or managers of a pension scheme to prepare a report about the performance of collective benefit investments. The regulations may include how often these reports need to be obtained and who the reports should be obtained from.
The amendments to each of the clauses simply change the stipulation that the regulations “may” require this to a stipulation that the regulations “must” require this. In doing this, we inevitably return to the nature of the delegated powers in Part 2. The question is whether the Government can imagine leaving some of these powers unused when they come to issue regulations under this part of the Bill and, if so, which ones.
The investment strategy for collective benefits is obviously a crucial part of these schemes. We have already discussed the fact that collective defined contribution schemes have the potential to offer investment strategies that perform better than individual defined contribution schemes. It is also important because research on the subject by the Institute for Public Policy Research showed that the feeling that contributions might be invested badly on savers’ behalf, leaving savers with relatively smaller rewards than they were expecting, can serve to disincentivise savers. As with other aspects of governance, trust in investment strategies is essential.
Will the Minister say, first, whether the Government can imagine a circumstance under which they would not issue regulations requiring a statement of investment strategy to be prepared? Will he provide the Committee with any more detail on what the trustees or managers are likely to be required to do with the statement of investment strategy? Will it need to be made available to scheme members, for instance? The amendment to Clause 15 is in a similar vein. Can the Government imagine any reason why the regulations issued under this clause would not require an investment performance report to be produced by a trustee or scheme manager?
There is also considerable concern about the wider question of what kind of information is made available in investment reports. For instance, the Minister in the other place was usefully able to say that information was likely to be available on transaction costs, but, less usefully, was unable to give any details as to which transaction costs would be laid out in an investment report. Ideally, we would like trustees to have access to enough information to be able to judge whether the investment is being managed as efficiently as it should be. I hope the Minister is able to shed a bit more light on that aspect of the clause. I beg to move.
Baroness Drake
My Lords, I support Amendment 8, which would require trustees or managers of a collective benefits pension to prepare a statement of their investment strategy in connection with any of their investments. The issue here is not that they “may” be required but that they “must” be required—that is the straightforward proposition in the amendment.
The reason I came in when I read the amendment is that it seems to me pretty inconceivable that a collective benefits scheme would be allowed to operate without the preparation of such a statement, particularly given the way in which such a scheme is managing risk on a collective basis across and between different generations of savers, and where the individuals in the scheme do not have a well defined pot over which they have clear and individual ownership. I have to ask the Minister: when would one ever conceive of a situation where a statement of investment strategy was not required in a collective benefits scheme? An increased return on savings is not an automatic product of collective benefits schemes. Sound governance is the essential ingredient, which must include transparency and clarity on investment strategy.
Lord McAvoy
It is probably just a bit run down, but there we are. I am grateful to the Minister for that very full explanation. However, his response struck a chord in me and a note of concern when he indicated that he did not want the word “must” but rather wanted “may” after consultation with the industry. Assuming that they were asked whether the word should be “must” or “may”, they would say “may”, would they not? So there is a bit of concern that the Government have perhaps listened too much.
Lord Bourne of Aberystwyth
I am grateful to the Minister for giving way. As I indicated, the consultation is not just with the industry; it will also be with consumers, pensioner groups and so on. It is not limited to the industry.
Lord McAvoy
I am grateful for that clarification, but I still think that, although obviously I do not know how much weight was given to the industry’s point of view, the fact that the Minister kept some opinions in reserve and indicated that the Government would act at some point in future to change that suggests that there just might be something there. With that clarification, though, especially the clarification that the Government would be prepared to look at this again in the light of experience and circumstances, I beg leave to withdraw the amendment.
Lord McAvoy
“( ) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
Lord McAvoy
My Lords, Clause 25 gives the Secretary of State the power to require the trustees or managers of a pension scheme to have a policy concerning the cash equivalent of a pension within a collective scheme. It also requires the trustees or managers to consult on the matters and principles they need to follow when calculating and verifying the cash equivalent of a pension in a CDC scheme. This amendment would require the regulations issued under this section to be subject to the affirmative procedure. This clause was also a part of a very large group of amendments which the Government introduced at Report in the other place.
There remains a tension at the heart of this Bill. The Government have been forced—I do not think there is anything wrong in that—into making so many amendments in large part because of the introduction of freedoms and flexibility in the Budget of 2014. We support those freedoms as long as they can be introduced without harming middle and low earners and do not end up leaving people reliant on the state. But really, more should have been done to work out the effect that these policies would have on how the others would operate. As we have already shown, a large part of the benefit from a CDC scheme can lie in the intergenerational risk sharing that it makes possible. This is how the schemes operate elsewhere. However, if a large proportion of people opt out at 55 by choosing to get a product that enables them to access their money straight away, then that risk-sharing element ceases to be there to the same degree.
This raises the possibility of having knock-on effects on the probabilities of achieving certain targets within the scheme. My concern here is that further work needs to be done on the interaction between the changes in the Taxation of Pensions Bill—which being a money Bill has passed through its remaining stages here—and the changes in this Bill to enable collective schemes and risk sharing. A good start would be to require the affirmative procedure to be used for the regulations on cash equivalents. I therefore ask the Minister to respond to that point in as much detail as possible so that we can grasp the thinking behind the Government’s proposals. I beg to move.
Lord Bourne of Aberystwyth
My Lords, I thank the noble Lord for moving this amendment. Clause 25 contains a power to require in regulations that trustees or managers of schemes providing collective benefits must have, and follow, a policy for calculating and verifying the cash equivalents of a member’s collective benefits. Cash equivalents may be needed when a member transfers to another scheme or for the purpose of sharing a pension on divorce, for example. Clause 25 allows for regulations to be made requiring the trustees or managers of a scheme offering collective benefits to set up and follow a policy for the calculation and verification of cash equivalents for collective benefits. The regulations can, among other things, require the trustees or managers to consult about the policy, require that the policy is consistent with regulations about calculating transfer values and other relevant legislation, make provision about the content of the policy, set out matters that have to be taken into account when putting the policy together, and make provision about reviewing and revising the policy.
Delegating to secondary legislation will allow the department to consult on the views of the pension industry, in the wider sense of involving pension groups as well, to ensure that the provisions set out in regulations will capture potential future varieties of collective benefits. The regulations will need to include a fair amount of technical detail, and some of the requirements will be largely procedural in nature. We therefore consider that the negative resolution procedure is the most appropriate form of parliamentary scrutiny here. In the process of parliamentary scrutiny there needs to be a balance between legislative scrutiny and the need to produce secondary legislation in a responsive and speedy way when needed. The requirement for the affirmative procedure in every case as required by this amendment would make it harder to deliver and maintain the regulations that the industry and members need, and would not in our view be an appropriate use of parliamentary time.
It is significant that the 12th report of the Delegated Powers and Regulatory Reform Committee, which considered the Bill, did not make recommendations as regards Clause 25. I am not convinced that the arguments made elsewhere by the Delegated Powers and Regulatory Reform Committee—which we have largely, although admittedly not totally, accepted—apply in the same way here. The committee was rightly concerned about regulations that have shaped collective benefits. Regulations about policies on calculating cash equivalents are not about shaping collective benefits but about how to put a cash equivalent value on a collective benefit when a member asks for a transfer or, as I said, on such an issue as divorce. Those are important matters, but they are largely technical and procedural, and we believe that they are more appropriate for the negative procedure. On that basis, I hope I have dealt with the issues raised by the noble Lord, and I respectfully ask him to withdraw his amendment.
Lord McAvoy
My Lords, once again I thank the Minister for a very full exposition of what was envisaged in the Government’s approach to that. We have at least raised a cautionary note, which the Minister has responded to, and there is not much point in pursuing it further. I beg leave to withdraw the amendment.