Pension Schemes Bill

Public Bill Committee, 28 October 2014.

Linda Riordan (Labour, Halifax)

Before we begin, I should say that Members may remove their jackets because it is rather warm in here. It may be useful for those new to Public Bill Committees if I explain how the proceedings work. The selection list for today’s sittings is available in the room. It shows the amendments selected for debate and those that have been grouped together for debate. Amendments grouped together are generally on the same or a similar issue. The Member who tabled the amendment moves it and makes an opening speech. Any other Member is then able to speak to the amendments in the group. Once all Members who wish to speak, including the Minister if appropriate, have done so, I will again call the Member who moved the amendment, and it would be very useful if they could indicate whether they wish to withdraw it or to seek a decision. The same applies to any other amendment in the group. Amendments are voted upon in the order they come in the Bill, although they may have been debated in an earlier group. I hope that provides some clarity.

Clause 1 - Introduction

Linda Riordan (Labour, Halifax)

With this it will be convenient to consider clauses 2 to 4 stand part.

Steve Webb (Liberal Democrat, Thornbury and Yate)

It is a pleasure to serve under your chairmanship again, Mrs Riordan. I will tend to keep my remarks relatively brief, but I hope you will allow me at the start of our debates to set the context of the Bill. As I am running through four clauses, there will be a bit more material to get through so I hope the Committee will bear with me.

By way of context, taken together with the Taxation of Pensions Bill, which comes before the House tomorrow, the Pension Schemes Bill introduces a radical reform of pensions. Giving people greater choice is at the heart of the reforms in the Bill: greater choice for businesses on the pensions they offer by encouraging and enabling defined ambition or shared-risk pension schemes and collective benefits; and greater choice for individuals on how they can access their pension savings through the new flexibilities announced in the Budget.

This is the right time to make these fundamental and radical changes to private pensions legislation, building on the major progress we have already made on pensions reform. The new state pension will provide a simplified foundation, making it easier for people to know what pension they will receive from the state, and provide a platform on which individuals can build their own private pension saving according to their wants and needs in retirement. Secondly, the introduction of automatic enrolment means that millions more savers are joining workplace pension schemes.

The Government are also taking forward other changes so that future private pensions deliver high quality, value-for-money savings for consumers. For example, from 2015 there will be a charge cap on the default funds of qualifying schemes used for auto-enrolment, and new requirements on independent governance committees and trustees to report on costs and charges. So the market is growing and employers in the pensions industry are already thinking about future pension provision. The Bill will build on the reforms, seeking to encourage a flourishing, private pensions market that provides greater choice for employers and individual savers.

I turn now to defined ambition pensions and the different definitions covered by clauses 1 to 4. Current legislation is broadly based on a binary structure of money purchase or non-money purchase benefits. While both these types of pension can be the right product for many, the Bill seeks to encourage pension designs that share risks so that neither the individual saver nor the employer takes on the full financial risk. I should first say something on the terminology “defined benefit” and “defined contribution”. Salary-related pension schemes, sometimes known as defined benefit, have been in decline since the 1970s and the majority are now closed to new members. There has been a long-term shift to schemes commonly known as defined contribution, as many employers have found that the increase in costs and volatility of longevity and investment risk too heavy to bear. However, if defined-contributions schemes are the only alternative, outcomes for savers will be much less certain and more volatile than for earlier generations, making it much harder for future generations of savers to plan for later life.

The defined-ambition elements of the Bill are a reshaping of pensions legislation to ensure that it remains relevant for future generations, to reflect, recognise and reinvigorate innovation in consumer-focused product design and in shared-risk pensions.

The Bill introduces three new definitions; three categories of pensions scheme based on the type of promise that the scheme provides to savers during the saving phase about the benefits that will be available to them at retirement. This is in order to create a middle ground which we call defined ambition. It is described in the Bill as “shared risk”, commonly “known as defined ambition”, on the basis that shared risk is a slightly crisper explanation, but I am using defined ambition synonymously with shared risk. That is a middle ground between the more polarising money purchase and non-money purchase benefit definitions, to encourage innovation in pension design that provides for more certainty for individuals than DC pensions by sharing risks between employers, employees and third parties.

The Pension Schemes Bill will also enable collective benefits to operate in the UK. The collective benefit definition enables a new form of risk pooling. There is a distinction there between risk sharing between employer, employee and perhaps a third party such as an insurance company, and risk pooling among the members of the scheme. Risk pooling between scheme members provides greater stability in outcome for members. We have engaged extensively with stakeholders across the pensions industry and consumer groups, and found that there is appetite for legislation that allows for greater risk sharing and risk pooling.

The defined ambition and pensions flexibility reforms are about putting the saver first and addressing people’s desire for greater certainty about income in both the saving and paying out phases. I should add that the defined ambition legislation will not restrict individuals in accessing the new Budget pension tax flexibilities. There will often be more than one type of benefit arrangements within a defined-ambition scheme, and our policy intent is that members will be able to access those arrangements in line with the new flexibilities. The fact that they are contained in a particular category of scheme will not have any impact on that access.

Similarly, the policy intent is that members of schemes offering collective benefits will be able to cash out their collective benefits if they wish. Measures to provide for this will be considered in the future. While there may be different requirements on the scheme in terms of the advice or guidance that must be offered for different types of benefit arrangement within the scheme, the individual will have the choice of what to do with their savings. I hope that that is a helpful context to our debates.

Clause 1 introduces part 1 of the Bill, which provides a new framework for categories of pension schemes. It identifies the three categories defined in the subsequent clauses of part 1: defined benefit in clause 2; shared-risk or DA schemes in clause 3; and defined-contributions schemes in clause 4. It should be understood that the definitions of these categories apply only where legislation expressly states that they should, and do not apply, as clause 1 indicates, to public service pension scheme legislation.

Clearly, this whole reform agenda reflects our coalition commitment agreement to reinvigorate workplace pensions by providing for these new models. I stress that these categories, in the following three clauses, are scheme-level definitions. Existing benefit-level definitions still apply. To clarify, schemes are usually made up of particular benefit types, which are already defined in legislation. Part 1 does not change those benefit-level definitions or requirements that apply to benefit types. These scheme definitions are at a higher layer, above the benefit level.

Other parts of the Bill make sure that the current legislative requirements apply in the right way to the new categories and to new scheme designs that are possible within the shared risk space. These new definitions are necessary to support our vision for the future of private pension provision, to encourage innovation, customer-focused scheme categories and clarity for employers and providers. The definitions define the key characteristics of three mutually exclusive scheme categories at the highest level. These definitions do not prescribe new requirements on schemes or describe each and every specific benefit or scheme design.

Clause 2 covers what is meant by a defined-benefits scheme. Broadly speaking, under the terms of the Bill, such a scheme is one in which the member is promised—that is a key concept in the Bill—that all their benefits from the scheme relate to an income that is payable for life; that their income is predetermined from the outset, in so far as it is set at a rate that is calculated according to promised factors other than longevity, as stipulated in the scheme rules or other scheme documentation; that the scheme pension age cannot change, other than by a change to the scheme rules; and that the employer is, broadly, taking on all the risk in respect of provision for a promised pension in retirement. I stress that clauses 2, 3 and 4 contain three mutually exclusive definitions.

There is an important point about the impact on existing schemes. Our intention is that, taken along with other clauses in this part, the definition in clause 2 captures the majority of what are currently commonly referred to as final and average-salary DB schemes, but not those which share risks such as longevity, or which have other benefits in the scheme that share risk with the member. We will work with industry on any future regulations on disclosure and governance for shared-risk schemes to make sure there is no inappropriate application of any new requirements to existing schemes.

We are aware of augmentation powers and discretions in some such current schemes, which may mean they appear at first glance not to fulfil all the criteria. I will say a word when I speak to clause 5 about how we have taken account of that in order to enable those to be in the DB category.

Clause 3 deals with the new defined-ambition or shared-risk space. Our research found that more than a quarter of employers would be interested in offering a pension involving greater risk sharing between members and employer. That gives a sense of the demand. It is clearly not a model for everybody but it is an important addition to the spectrum of what is on offer.

Richard Graham (Conservative, Gloucester)

Does the Minister agree that, with the end of contracting out in 2016, it is important that any Government prepare ahead so that there is not a rush of final-salary or DB schemes charging into new individual schemes? Employers should have a range of options to enable them to provide better for their employees if they wish.

Steve Webb (Liberal Democrat, Thornbury and Yate)

My hon. Friend is quite right. With his deep knowledge of these issues, as chair of the all-party group on pensions, he puts his finger on a crucial timing issue. In April 2016 we end contracting out for DB pension schemes. That will be a further point at which many big employers will review the provisions of their schemes. We know that many have come closer and closer to closing those schemes over the years. It could be that that further trigger will lead more to close. The default option is often to go to individual DC, which, with a good employer contribution, can still provide decent pensions, but does transfer all the risk to the member. So we are very keen to ensure that there are alternatives available to such employers, so that they do not swing unnecessarily from one extreme to the other.

I want to be clear about the new shared-risk category of pension schemes. Clause 3 defines a shared-risk scheme, sometimes known as a defined-ambition scheme. A shared-risk scheme provides a pensions promise to each member of the scheme. The promise relates to at least some of the retirement benefits that members might receive, but it is not a defined-benefits scheme, as it says in clause 3(b). The promise must be offered to all members. Whether the member takes it up or not is not relevant; what is, is whether it is offered. That will ensure that schemes do not flip between different categories. The scheme does not qualify under the definition of shared risk if it offers a promise to only some of the membership of the scheme. So a scheme that closed a final-salary scheme and opened a new money purchase part without any promises, and in which only the new money purchase part is open to new members, would not be a shared-risk scheme. This is because there are members in that scheme who have no experience of certainty about what they will get from the scheme. That design is purposely excluded from the definition of shared risk and is catered for under the regulation-making powers in clause 6, to which I will speak later.

Let me say a word or two about what we mean by “pensions promise”, which is dealt with in clause 5. We have to be clear about a pensions promise. What we want to do is to encourage innovation that provides some certainty for the member during the accumulation phase, but this space does not include schemes that have closed their DB offering to new members or, for example, only offer a promise to the executive board.

It is clear that employers want new options. On the impact on existing schemes, the DA or shared-risk category under clause 3 will include some existing schemes, such as final salary schemes which share risk on longevity, cash balance schemes, and hybrid schemes. It is worth reflecting on the oral evidence that we heard last week, and whether this is an empty box or a category that no one would be interested in. In fact, shared risk schemes are out there now. One major supermarket chose the cash balance model for automatic enrolment. It said to its workers, “We will provide an amount of cash when you leave membership of the scheme. What pension that buys depends on annuity rates and how long you live. It depends on investment returns and inflation.” The risk post-retirement is on the individual, but the risk in the accrual phase is on the employer. That is a DA shared-risk scheme, so such schemes do exist. We are merely trying to regularise the regulatory framework. That gives a sense of what we broadly mean by the shared-risk category.

Finally, on the defined-contributions scheme—clause 4 —the defining characteristic of such schemes is that they give no promise during the accumulation phase in relation to any of the retirement benefits that may be provided to members. The new definition results in a DC scheme being defined more closely to what its common meaning is often taken to be, and on the experience of the vast majority of group personal pension members who save in a DC pot with no promise and get certainty about the income only at the point when they buy an annuity. This definition, unlike the old money purchase scheme definition, includes schemes that, although they offer no promise in the accumulation phase, do offer a promise once the decumulation point is reached; for example, occupational schemes offering money purchase benefits in accrual, but making a promise at the point of retirement about income, sometimes referred to as self-annuitising schemes. This definition, unlike the old money purchase definition, does not include schemes in which benefits are subject to third-party promises. These are shared-risk schemes.

I apologise for a rather lengthy introduction—I shall be briefer in future—but that sets out the first four clauses of the Bill: the three mutually exclusive categories of scheme, what is meant in each case, the hard promises of DB, the elements of promise in DA, and the no promise in DC. I hope that that is helpful to the Committee in sensing where we are going with the Bill. I commend clause 1 to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Before he went on to the specificities of clauses 1 to 4, the Minister set out a framework in which the Government see the Bill sitting. He mentioned various aspects of Government pension policy, including the Taxation of Pensions Bill whose introduction is, I think, imminent. Since he has drawn the two pieces of legislation together, may I ask the Minister whether the Treasury will be providing the Committee with a memorandum, as suggested by Mr Bone in the Chair last week? It emerged in the Committee last week that there were linkages between the two Bills, and the Minister has just confirmed those linkages, so it would be useful to find out when the Treasury memorandum will be placed before us.

There are wider issues around the Minister’s framing of the legislation. We would argue that some of the things the Minister mentioned are not quite as straightforward as he has suggested. Independent governance committees, for example, are neither independent nor are they governance committees, something that appeared to be confirmed by evidence last week from the Financial Conduct Authority, which confirmed under questioning from me that they are advisory, rather than governance committees. That is very important since governance is the absolute requisite of a well functioning pension scheme. As we go forward, we will pick the Minister up on such assertions, but I do not think a long discussion of those aspects is necessary at this stage.

If there are people watching this Committee—one is always surprised to find that people are tuning in—they will have been entirely nonplussed by the Minister’s explanation of clauses 1 to 4. That is not the Minister’s fault. Pensions can be complex, particularly around risk sharing, risk pooling, guarantees, targets and the like. They can be opaque to those outside and probably to some of us here, too. What does the Bill seek to achieve? As the Minister sets it out, there is an appetite among employers. He suggested that a quarter of employers surveyed by DWP are interested in at least some form of collective defined contribution.

There is a danger that, because we use so many different terms, it appears even more complicated to those outside. There is defined ambition, collective defined contribution, risk sharing and risk billing. The multiplicity of terms is an issue in itself. The Minister suggests that there is some appetite among employers for permissive legislation to allow collective defined-contributions schemes of some type—for there is more than one type—to be offered. The Opposition think that is sensible. The extent of the appetite among employers is limited at this stage; a quarter of those surveyed saying they are interested is not a huge number, given that saying one is interested does not mean there is an obligation. Given some of the issues around pension provision in the UK—most fundamentally, that defined-benefits schemes providing an absolute guarantee, inasmuch any guarantee can be absolute, of a guaranteed pension income have declined rapidly and, on the other hand, that individual defined-contributions schemes place all the risk on the individual—it seems sensible to try to find something that takes aspects of both those forms of pension schemes and offers something better.

There is an issue around savers’ interest in these schemes. The Minister rightly mentioned employers, who are critical of this. The DWP did research that asked savers whether they were interested in some kind of collective defined contribution, particularly in shared risk leading to a guarantee, in which there was significant interest. However, no questions were asked about who would bear the cost of such a guarantee. When the Institute for Public Policy Research asked people whether they were keen on guarantees if they had to pay the cost of the guarantee, the enthusiasm waned somewhat. I am not criticising the DWP, but that is an important point: who is paying for the guarantee and what do we mean by shared risk? The Minister set out very clearly the definitions in clauses 2 to 4 in particular. However, there is a question about the definition of shared risk in clause 3 around describing a product with a guarantee as “shared risk” if the cost of the guarantee is met only by the saver. We will probably come back to that issue. Can the Minister confirm to the Committee whether that is covered in what is admittedly a broad definition?

There is an economy to the Minister’s explanation of clauses 2 to 4 which is helpful. It might not seem economical to those outside the minutiae of pensions legislation, but the definitions in clauses 2, 3 and 4 seem economical to me. Inevitably, as always in pensions definitions, those outside this place may find that things are not encapsulated in those definitions. I have drawn attention to one point already. The Minister drew a distinction between risk sharing and risk pooling. It is very important—perhaps he can do a better job of this than me—to make that distinction clearer in Committee. My understanding of some of the difference is that risk pooling is where one tries to get a better return as an individual by paying into a larger pot, in terms of the investment fees, and that risk sharing is where everyone must take their share of the rewards or risks, but I am sure that the Minister has a more precise definition.

Again, in terms of signposting where some of the discussion in this Bill Committee might take place, the Minister very clearly said that there is no impediment to individuals taking advantage of the reforms coming through. That relates partly to the Taxation of Pensions Bill, but certainly to this Bill, because amendments have been laid referring to the guidance guarantee.

There are issues with collective defined-contributions schemes, which I think we will discuss in Committee. What do the pension freedom and flexibility options and reforms mean for the operation of CDC schemes? How will any tensions therein be reconciled? This was raised in the witness sessions: how would a CDC scheme deal with either adverse selection in entry—that is a bit of jargon, admittedly—or exit at 55-plus? That is easier to understand. If people go into a CDC scheme and then decide to exit at 55 to take advantage of the ability to get their hands on their pension cash, how does that affect the strategies that a CDC scheme can undertake? How does it fit the investment profile? How do we get shared risk when, by the age of 55, people could be leaving the scheme? At least one witness felt that that was not a problem. Again, that will have to be teased out.

More generally, the Opposition’s view of the Government’s permissive legislation allowing collective defined contributions is that it should be welcomed. Anything that encourages a discussion about the advantages of larger, more collective pension schemes is in our opinion a good thing, and not necessarily because we believe that collective action is in itself better in all circumstances and all spheres, but because in relation to pensions there really is a strong case for saying that well governed, larger pension schemes with the ability to share investment risk and involving the pooling of assets are likely to produce greater returns. That is not optimism based on sentiment. The evidence from around the world appears to be that those types of scheme do manage to produce better returns. Big really can be better in pensions. Again, some of that was evident in the witness sessions. It is in that spirit that we constructively approach the Bill

Richard Graham (Conservative, Gloucester)

Clearly, there are cases in which big is better and, generally speaking, costs can be driven down by having more people in a larger pension scheme. There is no doubt about that, but I would be interested to hear the shadow Minister’s evidence as to why investment returns are necessarily better from bigger organisations and how nimble, small investment management companies looking after pension schemes have performed relative to, say, some of the large insurance companies, where returns have in some cases been dismal, and to know what proof he can show in general that governance is necessarily better in a big scheme than in a small one.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The hon. Gentleman raises a very good point. That argument has to be teased out. No doubt there are examples of, as he put it, nimble, small and highly efficient investment management outfits. I do not think that there was any doubt about that. He raised the issue of governance. I was going to come to that finally. The governance is key. He is absolutely right. Big is not better per se if the other prerequisites are not there. Big can be, in these circumstances, better if the governance is right. That now has to be trust-based. There is no doubt that there will be examples of effective small investment management firms.

I do not want to stray too far from the clause, and perhaps we will discuss this at a later stage, but I will just say that we have to recognise where we are starting from. The UK private pensions market has generally been focused on the higher earning sections of the population, where a more active investment management approach can be justified if people have sufficient assets to allow more risk to be taken in the hope of getting a greater return. My view is that if we are trying to construct a mass pensions system in the workplace, a starting principle must be the recognition that low management charges and passive investment strategies will be a big part of the architecture.

Richard Graham (Conservative, Gloucester)

Where I think the shadow Minister and I—and perhaps others in the Committee—would agree is that as auto-enrolment moves forward, new small pension schemes will find huge advantages to grouping together under the National Employment Savings Trust and the other large providers. The shadow Minister might also agree that for existing pension schemes that are considering moving to a shared-risk concept, although they may not be huge, their own experience may mean that they do not necessarily benefit from going into a large scheme.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Again, that is a fair point. I guess that it depends on what we think is necessary to clear a space for a new mass pensions market. A better way to put it might be to ask: what are the principles on which that is built? In Australia, which is a classic example, there is now discussion about how a more active approach with higher charges follows from that investment strategy, because the system has a mature book with a large auto-enrolment asset base. Australia has won the argument on scale. The Australian system achieved scale and got to a place where charges were pretty low, but now there is a discussion about whether that must be complemented by the kind of approach that the hon. Gentleman is indicating has merit. That might be one way to see where there is a similarity or where our views meet. One is not better than t’other in all circumstances.

We are trying to construct a mass system, so we need a clear understanding of the advantages of scale—the hon. Gentleman suggested that those advantages exist—and as the system matures, there must be a conversation about the appropriate balance between passive and active, and between lower charges and higher charges but with potentially greater returns.

I think that that conversation will emerge, but the starting point has to be a system that encourages a passive investment approach, low charges, economies of scale and administration and the advantages that can be gained from master trusts. The hon. Gentleman suggested entirely fairly that there might be schemes that do not benefit from such arrangements, but as a rule—there are, of course, always exceptions to rules—the advantages of scale in pension schemes are pretty well evidenced. I remember speaking to the architect of the Australian reforms, who said that in Australia the argument about scale was over. The concern in the country is now that it does not have enough scale relative to Canada, which is the world leader in large-scale pension scheme arrangements.

Let me address the hon. Gentleman’s point, which was absolutely right. It does not matter what scale a scheme is pitched at; the governance has to be absolutely correct. That issue will emerge during our discussions. Permissive legislation is welcome, but unless we get the governance arrangements right for such reforms, even if there is an appetite among employers and employees, it is unlikely to succeed in the fashion that we all wish for.

Finally, the definitions in clauses 1 to 4 raise the question of who regulates what. I understand why the Minister did not mention this. We have two regulators, the Pensions Regulator, which deals with trust-based schemes, and the FCA which deals with contract-based pension schemes. Depending on where the balance lies in a risk-sharing scheme, it is not clear to me who regulates what. It would be useful for the Minister to clarify where he envisages the regulation of collective defined-contributions schemes to lie and whether he thinks, in the end, they will be trust-based—in which case with the Pensions Regulator—contract-based or a mixture of the two. Our view is very clear. The evidence, such as it is, is that trust-based, on the whole, is the better option. The Minister’s exchange with the head of the Pensions Policy Institute was interesting, where he was keen to get the witness to agree that, in some circumstances, contract-based might operate better. The head of the PPI, asked a leading question, gave that answer. However, he then reiterated that, in his view, the international evidence is that trust-based governance works better. That matter will also come into our discussions.

Nigel Mills (Conservative, Amber Valley)

Does the hon. Gentleman agree that the management, supervision and regulation of a shared-risk scheme may be harder than a defined-benefits scheme, because at least in a defined-benefits scheme we can work out what is owed and therefore what extra money we need? For shared-risk schemes, we have the variable of what we owe, what of that sum we reduce through our scheme members, or what we try to get from our scheme sponsors. That is a harder thing to manage and regulate.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

That is a fair point. The hon. Gentleman on this Committee and more widely makes very interesting and acute observations. This is where governance becomes so key, because the duties on those governing such pension schemes will be all the greater.

The hon. Gentleman’s point was that there will be pressure on those in charge of the pensions schemes not to take the tough the decisions that might be necessary—something that the Minister understandably did not mention. In one form of collective defined contributions scheme, we might be looking at cuts in pension payments—something that we have wide experience of in the UK—and the pressures on those governing the schemes will be even more acute than under current pension arrangements. That makes getting the governance right all the more important.

We look forward to discussing the Bill in a spirit of constructive engagement. It is a good thing that permissive legislation is coming forward in this regard. One cannot see that it does any harm. There are questions about the appetite, but we know that things can change. There are big questions about the relationship of this Bill to the pensions tax Bill, but they will emerge during our discussions. We have no objection to clauses 1 to 4.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Gentleman for his support for the principle of the Bill. He asked one or two questions, to which I hope that I can respond helpfully. He asked about the issue that arose during the oral evidence sessions on the implications for the Exchequer of the measures in the pensions tax Bill. While that is not specifically a matter for the Committee, Mr Bone, the co-Chair, indicated that he would find a memorandum to the Committee helpful. I have been in contact with colleagues at Her Majesty’s Treasury to see what further information they can supply on the fiscal implications of that Bill. I will forward that as soon as I have it.

The hon. Gentleman raised terminology, and he is quite right that it can be confusing. I find it helpful to think in terms of a rectangle with three columns and two rows. I am not sure anybody else will find this helpful, but I do.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

You have lost me already.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am going to persevere with this if it kills me. The three columns are DB, DA and DC—the three mutually exclusive categories of pension scheme—and the rows are collective and not collective. So every scheme will be DB, DA or DC. Within each of those categories, benefits can be collective or not. So, for example, there is individual DC, such as NEST, or there is collective DC, where risks are pooled. There is individual DA—individual shared-risk schemes—and there is collective DA. There is individual DB. What there is not, is collective DB, because the DB promise is hard-wired and does not depend on anyone else in the scheme. So there are three mutually exclusive columns and then the benefits can be collective or not, and in that language, shared risk is DA. It is the same thing. The Bill says, “shared risk, commonly known as DA”. It is not collective DC. That is in a different quadrant of the rectangle. I hope that that is extraordinarily transparent.

The hon. Gentleman asks a question about who pays for the risk and is it risk sharing or risk pooling and so on. Risk pooling is among the members of the scheme. The members of the scheme are pooling the risk among one another. It is not about pooling risk with an employer or an insurance company or somebody else. The idea is reduced volatility of outcome for the member. With risk pooling, there is no promise. There is only a target.

With risk sharing—for example, between the employer, the employee and perhaps a third party—the idea is that there is more certainty and more of a promise. I mention cash balance as an example where the employer promises the member that there will be a pot of money of a certain value when they leave the scheme, but the individual then has the risk, once they have that pot of money, on what they get with it. There is a hard-wired promise in a risk-sharing scheme, whereas in risk pooling, there is no hard promise. I hope that is a helpful clarification.

The hon. Gentleman asked whether the Budget freedoms were compatible with collective DC. I will say repeatedly in Committee that we have not simply cut and pasted another country’s model on to the UK. We will need—I hesitate to say this—British CDC schemes for British workers, as the famous soundbite goes. We will need a regulatory regime that works for us. Those who run CDC schemes in this country will know that people can cash out at 55. Many people may not do so, but those who run the schemes will need to allow for that. We actually think CDC could happen in decumulation. There is much to be said for being in with other people for potentially a 20-year or 30-year retirement, rather than buying an annuity. We see these two as entirely compatible.

We will come back to good governance and trust versus contract in the debate on a later amendment, but the hon. Gentleman said something very interesting: he suggested that, on the whole, trust-based is the better option. In his later amendments, however, he does not take that view. His later amendments say that CDC may not be run under anything other than trust. I agree that, on the whole, trust may well be better, but we should not preclude other models. So I agree with what he says now, but do not agree with what he will say later.

My hon. Friend the Member for Amber Valley made the interesting point about governance of shared-risk schemes. When you have a target, and not a promise, it certainly raises a whole raft of different issues, such as the communications and the way that is corrected when the target is not going to be hit. The only thing that I would say is slightly easier in a shared-risk scheme is that there is flexibility. In a DB scheme, there is a hard promise that must be met, and if it cannot be met, the employer might have to stump up more, or the scheme might close or close future accruals. The promise is hard-wired. At least with shared risk, those who govern on the interests of the scheme members have options and flexibilities that should make it more attractive to employers compared to a hard-wired DB scheme.

I hope that I have responded to the points made by my hon. Friend and others, and I commend clause 1 to the Committee.

Clause 5 - Meaning of “pensions promise” etc

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 41, in clause 5, page 3, line 4, after “circumstances” insert “and meets any other requirements that may be specified in regulations”

Under clause 5(6), discretions to vary the benefit which are only capable of being used for reasons related to a member’s individual circumstances are disregarded when establishing whether or not there is a full pensions promise. This amendment allows the Secretary of State to specify in regulations other requirements that must be met in order for these discretions to be disregarded.

I shall explain what clause 5 does, and I hope that we will not need a separate stand part debate. The clause’s heading—“Meaning of ‘pensions promise’ etc”—is a central concept in the definitions. It will astonish the Committee if I say that, in this section, “promise” carries its ordinary meaning. In other words, when a scheme contains a promise, it contains a commitment to the member that they will receive a certain pension from the scheme.

Our existing legislation operates to ensure that scheme funding and capital adequacy requirements will apply, so that such commitments are appropriately backed. There is the possibility, of course, of a funding shortfall, such as where the employer becomes insolvent in a DB scheme. In those cases, members may not receive the full amount that was promised to them and would instead have compensation from the PPF. It does not make it any less of a promise, even though there can be circumstances when that promise did not end up being delivered. So the word “promise” has been chosen with great care in drafting the Bill to convey that a commitment has been made that goes beyond an intention or an expectation on the part of the person or scheme making it. Although legislative protections are in place to minimise the risk of the promise not being met, it does not in itself provide a complete cast-iron guarantee to the member. I hope that what I mean is clear.

Subsection (1) specifies that for the purpose of a DB scheme definition there is a “full pensions promise” provided to members if

“at all times before the benefit comes into payment,”

there is a promise

“about the level of the benefit”

that will be received. I stress that

“the level of the benefit is to be determined wholly by reference to that promise in all circumstances.”

Subsection (2) states that for the purpose of shared risk in DC scheme definitions a pensions promise is provided if there is a promise to members at some point during the accumulation phase about the level of benefit that will be received. The level is the rate of income or the amount of the lump sum.

To be clear about what we mean by “pensions promise”, subsection (3) specifies what a reference to a promise about the level of a retirement pension does and does not include. Subsection (3)(a)

“ includes a promise about factors, other than longevity, that will be used to calculate the level of”

retirement benefit—for example, how long someone has been in the scheme or whether it is linked to a member’s salary—but the promise does not include longevity factors, because the effect would be to allow longevity risk sharing in a DB scheme, which is not our intention. To be clear, there are occupational pension schemes at the moment—big household name employers—where the pension age at which someone will draw the pension they are building up varies according to the latest data on life expectancy. That can change, obviously, as new data come forward. So we would regard that as a risk-sharing scheme, not a DB scheme, because of that element of risk sharing on longevity improvements between the employer and employee.

Subsection (4) makes provision for a promise if the scheme sets out the promise, or it is obtained from a third party. For example, an employer might pay an insurance company to underpin some of the scheme benefits. This enables a pension scheme to be defined on the basis of a pensions promise regardless of who pays for it, whether the accountability sits with the scheme itself, the employer, or a third party. The scheme categorisation therefore depends on what the scheme offers to members, not on whether individual members take that up.

Subsection (6) deals with what happens when there is discretion to vary the benefit. This is where amendment 41 comes in. Subsection (6) sets out certain discretions that may be present in schemes without affecting whether the scheme contains a full pensions promise. For example, many schemes allow ill health early retirement. That is a discretion, so it can mean that someone gets something different from what was expected at the start, but we do not regard that as undermining its being a DB scheme with a hard pensions promise. So the fact that the scheme has discretion to pay the money early would not be regarded as undermining its being a DB scheme. An example would be to make provision for ill health early retirement. Because those discretions are exercised only on an individual basis, they are different from discretions that are applied at the scheme level. We have therefore set out that the discretion for individual circumstances does not constitute a failure of the test in subsection (1)(a). In other words, it could still be a DB scheme.

I will say a word on Government amendment 41, and I hope that the Committee can see why I had to explain clause 5 before turning to it. The amendment will add a regulation-making power under which discretions that are capable of being used only for reasons relating to a member’s individual circumstance would have to meet any other requirements that might be specified in regulations. We have tabled the amendment as a result of conversations we have had with the industry on the definitions and how various scheme designs would be categorised. We will use the regulation-making power to prevent abuse of the discretion exclusion. It will allow us to prescribe in regulations that the exclusion of such discretions may apply only if certain other requirements are met. I hope that that clarifies the purpose of Government amendment 41 and clause 5.

Nigel Mills (Conservative, Amber Valley)

This is the nub of the question about how defined-ambition or shared-risk schemes work. I am trying to work out exactly how a scheme member knows the difference between a promise, a target, an intention, an aspiration, a hope and perhaps, in some cases, a dream. I might think that I have been given a promise that I will receive two thirds of my final salary, when I have actually been given a target of two thirds of my final salary. If that turns out not to be affordable, I might only receive 60%, and the employer might take some of the extra risk.

There may be many scenarios in which an employee has been given a promise through a defined benefit scheme, but if the promise looks to be wholly unaffordable for the employer, the scheme rules might be changed following consultation with members, who all agree, for example, to retire a year later or to receive a lower percentage of their final salary. At that point, what would happen? Would the employee still be in a defined-benefits scheme but with a new promise, or would they somehow have moved into a shared-risk scheme? It strikes me that the former would be true, because they would still have a promise; it would just not be the promise that they had had before. If, however, a scheme has to keep redoing that process and saying, “Sorry, that thing that we did last year is still unaffordable, so we need to do it again,” could it accidentally become a shared-risk scheme because the promise keeps changing? Or would an employee in such a situation always be in a defined-benefits scheme?

The other area of confusion is where defined contribution becomes shared risk. Last week, I received an annual pension statement that told me that if I kept going at the same rate, I would have £20,000 in my pot and my annual income would be, if I remember correctly, £536. That implies that I have some indication of what my annual income will be from that pot, but that is clearly not a promise or a target; it is simply a guide to what that £20,000 would provide. The problem is that if I did not know that, I might think that it was some kind of promise or target, and I might think that I had something.

If I were in a shared-risk scheme, what more would I have? I assume that I would have a set of complicated rules that would tell me that that £536 was not quite a promise but was more than a hope and a bit more than an expectation; it was what the scheme would try to deliver to me, and as long as the scheme could roughly afford it, I ought to get that. Perhaps the range on which I would not get that would be slightly protected, so if the scheme could only afford £500, I might still get £536. If the scheme could only afford £250, however, there might be a wholesale reconsideration.

It strikes me that there are real problems about how the system will work in practice. How will people know, in clear language, exactly what kind of scheme they are in? From the language used in the annual statement, it is quite hard to work out what is a promise and what is not, or what is a target and what is an indication. That must be clear to make the whole thing useful. I think that the regulator will have to put a lot of effort into working out exactly what flexibility shared-risk schemes are allowed when they give a promise that is not a promise, and exactly what ranges they will be allowed to operate under. Where would they be expected to meet a promise that is not a promise? Where would the pension scheme trustees or governance committee or whatever else be expected to say, “This promise we are making is not realistic. Even if it was a range of promise; even if we say you will get £450 to £550, we know that we cannot meet that now. Should we move the range down at this point?”

We really need to think through how much flexibility we will allow shared-risk schemes in working out what their promise is, how they communicate it, when they change and what assumptions they make. Otherwise I suspect we will end up in a horrible mess. We will not have any kind of promise in a shared-risk scheme. There will be a hope or a dream that will just fly around every year with changes and annuity rates or changes in stock market years or whatever else. It will not be quite as useful as we all hope this will be.

I think what we want is, “Look, Mr Mills, you will get two thirds of your final salary. We are working to get to that. The employer will fund the scheme on that basis. In reality it is only if we really, really cannot afford to get anywhere near that two thirds of your final salary that we will have to change that. Here are the situations where we would do that and this is how we would go about doing it.” I think that is what we are hoping for, but I am not totally sure that we quite achieve the clarity we need in these definitions.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend, who raises understandable concerns about promises that are not promises and whether they are really worth the paper they are written on. I hope that I can offer him some reassurance, but I want to take him back to my three columns and my two rows. Shared risk, which was a phrase he used a lot, is defined ambition. It is the one in the middle where there is a promise on an element of the provision. The example I have given is a big supermarket which has done a cash balance scheme and has promised that for each year an employee works they will get some percentage of their salary as a cash amount when they retire. The supermarket cannot change its mind about that. It is backed by law. It has to fund for it; it is a promise.

It is shared risk because nobody knows what pension someone will get for that pot of money; nobody knows how long they will live, what inflation will be in retirement and what annuity rates will be. There is some risk for the individual, but in general terms there is a bit that is promised and then there is the bit that is subject to uncertainty as faced by the individual. The shared risk space—the column in the middle—is exactly as we would expect it to be. The scheme is clear what it is promising and what it is not promising. My hon. Friend rightly said that good governance and good communication are vital to all of that. Scheme members need to know what it is they are being promised.

My strong suspicion is that someone in that sort of pension scheme—I described a cash balance, but that is just an example—will know what they have got. They will have a guaranteed pot that they have been promised. They will get a statement each year and what has already been promised cannot be taken away from them. It is there. I stress again that there are plenty of legal protections for pension promises which have already been made. The scheme can change things for the future but it cannot just say, “We promised you that last year but we have changed our mind.”

Nigel Mills (Conservative, Amber Valley)

I am not familiar with the scheme the Minister talks about, but I assume that for that promise to be meaningful annual contributions must go up by inflation. To be deliverable that promise must rely on investment returns keeping pace with what was expected so that when someone reaches retirement age their pot will be worth x. If investment returns fell through the floor the scheme might have to say, “Well, actually we cannot get near the cash target that we thought you would get” and so would have some flexibility in changing.

Steve Webb (Liberal Democrat, Thornbury and Yate)

No. The risk of that bit of the pension promise is on the employer. They have made a promise. They have promised a pot of money. They cannot come back a few years later and say, “Well, the stock market has not done very well so we have changed our mind.” It is a pension promise. Under the Bill, that sort of thing is a promise which has to be honoured. They can say, “Guys, we cannot afford this scheme for the future and therefore we will make a less generous promise or no promise at all for the future.” However, hard pension promises have to be kept. I think the sort of scheme my hon. Friend was more worried about was a collective defined-contributions scheme, which is my third column and the collective bit.

Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)

The Minister has suggested that if a company went into liquidation or something as drastic as that that promise could clearly not be kept even if it was for a previous year. Surely the hon. Member for Amber Valley has got a point.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I think that I have dealt with that point. We use the word “promise” in the Bill rather than “guarantee”, because if it was guaranteed, it would have to happen and, as the hon. Gentleman says, the one circumstance in which it does not happen is when a company goes into insolvency, because there is then no one to fulfil that promise. That is the only distinction. Funds go in, a promise is made and, for as long as the company exists, it is expected to honour its promise. It seems reasonable that promises can be kept only by things that exist, as it were.

However, CDCs are a different model. First, there are no promises. It is not that there is a promise that is not a promise; there ain’t no promise in the first place. There is, however, a target that the scheme will have a probability of reaching. I will come back to probabilities and ranges later on, but a scheme, for example, might fund with a 97.5% probability of meeting its target. Therefore, in one in 40 years it would not work, but it would do in 39 of 40 years. In general, the target will be met based on the funding levels going in but, in extremis, it might go outside that probability range or funding target. In such circumstances, a process will be in place in which either the firm or individual puts more money in, or the target or the pensions in payment are reduced. There will be a lot of flex when things go wrong, but no promise to begin with.

My hon. Friend the Member for Amber Valley is right that we must make clear to members of the scheme what is being promised, what is just a target and what happens when a target is not met. For example, if a target will not be met, will it be the workers or the retired members who bear that, or both, and what is the process for doing all of that? Arguably, what went wrong with the Dutch scheme was that while the employers knew—or their lawyers did—that a promise was not a hard promise but a target, the scheme members thought that they had a promise. That is why there has been conflict in the Netherlands: the members never had a promise, but that was not properly communicated to them. As we are starting this from scratch, we need to establish on day one what is a promise and what is not.

To reiterate, on the extreme example of DB that my hon. Friend gave, a DB pension promise cannot be ripped up. If the scheme has promised a DB, whether that is two thirds of final salary or whatever, that must be met; it cannot decide to pay, for example, 60% for past service. The scheme has to be funded and the regulator will require a recovery plan. Therefore, a promise really is a promise, but some schemes in the Bill will not offer promises and the members need to be told about that.

There will be targets, which are better than nothing. My hon. Friend’s DC pension will not have a target. It will have a guess, described as a forecast or an estimate, but next year he might get a piece of paper with a very different number on it. That is how DC works. With CDC, however, there will be a target, which people will be told about, and a specific effort will be made to aim for that target. I hope that that is a useful distinction.

Clause 6 - Treatment of a scheme as two or more separate schemes

Linda Riordan (Labour, Halifax)

With this it will be convenient to discuss clause 7 stand part.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The clause deals with a particular issue where, to give an example, a defined-benefits pension scheme—a final salary scheme of the type that we have been familiar with for decades—also has a pot-of-money section for additional voluntary contributions. The question is, where does that fit in the Bill? Bearing in mind that my columns are mutually exclusive, do we say it is DB, because it is a final salary-type scheme, or do we say it is DC, because there is a pot of money that will get whatever it gets? The short answer is clearly: “Or is it shared risk, because it is a bit of both?” When we talk about shared risk we do not mean schemes that have very clearly defined sections where one bit is DB and one bit is DC. Clause 6 allows for a scheme to be split for those purposes into two or more separate schemes. There is a set of DB regulations that applies to the final salary part and a set of DC regulations that applies to the ABC part. That is intuitive: everyone knows what the regulatory regime is for the DB part and the DC part. We are not trying to create some new category of regulation for schemes that have bits of both: we simply apply the right regulations to the right parts of the scheme.

Clause 6 provides for regulations so that a scheme can be treated as two or more separate schemes, first, to make sure that schemes that do not fall within the categories can be treated as more than one scheme for the purposes of categorisation, each of which fits into the categories, and secondly to enable regulations to be made to provide for other circumstances in which a scheme can be treated as if it were two or more separate schemes. The categories have been designed to be mutually exclusive and to provide full coverage across the current and potential new scheme designs. However, we are aware of schemes that make different offers to different members. We would not want such schemes to fall within the shared risk category. Instead, we have made provision in this clause to ensure that we treat such schemes as two separate schemes so that, in line with the policy, the member experience drives the definition.

That is the key throughout the Bill: how does the member experience it? The clause provides for any such scheme that falls outside the categories. As I say, we have created the categories taking the member experience as the starting point. For example, if new members go into a DC section and are bearing all the risk of saving for retirement, from their point of view the scheme they are in is not sharing risks, so categorising it as a shared-risk scheme, when the existing members are in DB, would be meaningless. What is going on here is fairly intuitive: that is, simply allowing schemes that have clear, separate types within them to be categorised as separate schemes.

Clause 7 provides definitions of the various terms that have been used. We have already dealt with the most important definition, which is the pensions promise. Helpfully, as clause 7 says, the pension promise is what it means in clause 5, which we have covered already. The rest is fairly standard.

Nigel Mills (Conservative, Amber Valley)

I have a question that risks being the most boring one of the day. In clause 7 there is a definition of “pension scheme” that goes back to the Pension Schemes Act 1993. When we get to the pensions guidance in new schedule 2, in proposed new section 333A(3) we see a definition of “pension scheme” as given by section 150(1) of the Finance Act 2004. Those definitions are subtly different. Can the Minister explain why we have two different definitions of pension scheme in the Bill?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I will have a punt, reserving the right to give the right answer later on. When we originally envisaged the Pension Schemes Bill it was about workplace pension schemes. The Budget freedoms are principally about DC and money purchase schemes. In general, the Finance Act and the Financial Services and Markets Act 2000, as amended by all the stuff about the Budget in the guidance, relates principally in that context to DC pensions, whereas here we are talking on the whole about occupational pension schemes. Obviously, with our three categorisations some of them can be DC but we are talking principally about occupational pension schemes, whereas the Budget freedoms are principally about DC money purchase schemes. I reserve the right to refine that response at a later stage.

Apart from that subtlety, I think that the definitions are relatively straightforward. If anyone has any questions I am happy to respond. Otherwise, I commend clauses 6 and 7 to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister used the word “intuitive” more than once, which I took to mean a way of trying to encourage us all to think that this is straightforward. However, it might not be straightforward to most of us and not necessarily intuitive.

I have a question for the Minister that goes back to the point I raised this morning about who regulates what. Clause 6(1), to which the Minister has already referred, states:

“Regulations must provide for a pension scheme that does not fit within any of the categories to be treated, for the purposes of this Part and any other specified legislation, as if it were two or more separate schemes each of which then fits within one of the categories.”

My reading of that is that there could be a pension scheme where one of the separate schemes as defined in this clause fitted into a form of pension scheme that was individual DC and another fitted into a category that was either collective DC or DB. Does that have any implications for regulation? In these circumstances or any other circumstances that emerge out of these definitions, could there be a pension scheme that was regulated by different regulators? Is that a problem; do issues arise out of that? That is one set of questions for the Minister.

Secondly, the hon. Member for Amber Valley made a very interesting point about the different definitions of a pension scheme. My sense of the Minister’s response was that it confirmed that the draft Taxation of Pensions Bill is indeed complicating this Bill in ways that have been indicated by me and others. I took the Minister to be saying, “Well, we would have done this Bill with the definition set down in the Pension Schemes Act 1993, but with the Taxation of Pensions Bill and the implications for this legislation, we now have more than one definition of a pension scheme.” I am keen for the Minister to elaborate on his explanation to the hon. Gentleman. I know the Minister said that he would take a punt at it and if that punt was not correct, he would come back, having consulted his officials. Alternatively, can he just elaborate on whether it is the case that the Taxation of Pensions Bill, according to the answer that he has given, has complicated the definitions for this Bill?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Let me respond first to the hon. Gentleman’s question on clause 6 and the business about treating two different parts of a scheme as separate schemes. To be clear, not all sectionalised schemes have to be split. What is crucial is whether some members are not experiencing the certainty of a promise and others are. That is the criterion, so just because a scheme is sectionalised does not mean that it has to be split under clause 6. The example that I have given is of where there is DB for older members and additional voluntary contributions or a DC scheme for new members. The hon. Gentleman asked whether the end result would be a different regulator. In general, what would happen in big firms, as he knows, would be this. If, for example, they had a DB scheme, a DC section for new members or whatever, it would in general be under trust governance. The trustees would have had some DB arrangement and perhaps some DC arrangement for new members, and all of that is regulated by the Pensions Regulator because it is that kind of pension scheme. I suppose that in extremis they could go off and set up some group personal pension over here that is regulated by the FCA in the normal way, because it is a different pension scheme, but I do not think that this creates particular complexity.

The hon. Gentleman asked about my response to my hon. Friend the Member for Amber Valley. In a way, we could have had two separate Bills. We could have had our pension scheme Bill providing for DA and then we could have had the DWP legislative changes necessary to facilitate the Treasury Budget measures. We have put them in one Bill. That does not mean that it is complicated; it just means that it is easier to do this in one Bill than two. But let me clarify my response to my hon. Friend. I think that I was in the right ball park, but I shall refine what I said ever so slightly. As I indicated, we have different definitions in different places for different purposes. The pension schemes regulation relates to the running of the schemes and member protections, and that is what is in the Pension Schemes Act 1993, whereas the reference that he spotted to the Finance Act and related legislation has to do with tax. He will understand that the Budget changes on pensions freedom were actually about changing tax legislation. That is why there is reference to the Finance Acts. We are matching the changes to the type of legislation; in one case it is tax legislation, in another case it is pensions scheme legislation.

We already have elements of pensions schemes regulated by more than one regulator. The Pensions Regulator has objectives related to protecting members’ benefits; FCA has an interest in the firms and individuals delivering the investment activities in the schemes. The new categories do not change that. We have two regulators, which raises issues—it came up in the oral evidence sessions last week, but we are not adding to the complexity with the measures contained in clause 6. I hope that that is helpful and I commend clauses 6 and 7 to Committee.

Clause 8 - Amendments to do with Part 1

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 6, in clause 8, page 4, line 23, leave out “that use expressions defined by this Part” and insert “to do with Parts 1 and 3”.

Linda Riordan (Labour, Halifax)

With this it will be convenient to discuss the following:

Government amendments 29, 30 and 31 to 36.

Government motions to transfer clause 8, schedule 1 and clauses 9 to 18.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful for the Committee’s perseverance. Having skipped at a high level through the broad sweeping uplands of this legislation, we are now down—if I may mix my metaphors—in the bowels of the legislation, and I apologise for a rather lengthy trip. As before, to understand Government amendments 6, 29, 30, 31, 36 and the motions to transfer, it is necessary to explain the purpose of clause 8.

Clause 8 simply says that there is a schedule and everything interesting is in the schedule. Schedule 1 makes amendments to existing legislation necessary as a result of provisions in the Bill. A lot of schedule 1 is going through lots of other legislation and making sure that the references are compatible and consistent with what we are doing.

The changes to existing legislation in schedule 1 are necessary to ensure that the Bill and existing legislation work together. They ensure that the provisions made by this Bill and the new scheme categories are taken into account and work coherently with existing pensions legislation. In particular, schedule 1 replaces existing references to money purchase schemes. I make the distinction between money purchase schemes and money purchase benefits. We are not getting rid of the concept of money purchase benefits, but we are getting rid of the concept of money purchase schemes, because we now have three new categories of pension scheme. If we retain the term “money purchase scheme” there would be an overlap across the new DC and DA scheme definitions. It is therefore important that we clearly identify what requirements bite and in what places. Essentially, schedule 1 is a tidying up of the consequences of bringing in the new definitions.

Many of these changes do not alter the meaning. References in existing legislation to a money purchase scheme are generally replaced by references to

“a scheme under which all the benefits that may be provided are money purchase benefits”.

This does not change the effect of the legislation; the changes are technical to avoid confusion over scheme categorisation. In other cases, the new scheme categories are substituted for existing definition. To reiterate: the term “money purchase benefit” retains its existing, current meaning.

Some changes, however, have an impact on the effect of existing legislation. First, regarding the duty on the Secretary of State to pay unpaid contributions to schemes in the event of employer insolvency, the current provision is expanded to apply to collective benefits and DC schemes which provide a scheme pension to ensure equivalent and appropriate application of existing policy to the new landscape.

Secondly, on indexation, the schedule applies the exemption from indexation to DC schemes and thereby explicitly incorporates collective benefits and scheme pensions from a DC scheme to update the references and ensure that the requirement is applied appropriately in the new environment. This has no practical effect on current schemes.

Thirdly, on freezing orders, schedule 1 extends the provision to cover schemes where all the benefits are money purchase benefits and where there is also a third-party promise to ensure equivalent protection for all promised benefits under the provision.

Fourthly, on automatic enrolment, schedule 1 amends current references to scheme types to refer instead to the new scheme categories to ensure that the legislation is consistent in its use of the terms. We are basically ensuring that the new set of definitions fits into the existing legislative framework and continues our policy intent as appropriate.

Clause 8 needs to be amended to describe its purpose correctly following the restructuring of the Bill to make it work better. We need to restructure in light of the various amendments that we are making and, as part of that, we are moving provisions currently in schedule 4 so that they sit alongside other amendments to existing legislation currently in schedule 1. Amendment 29 changes the description of schedule 1 in clause 8 as a result. Amendments 30, 33 and 36 insert definitions of terms used in the Bill into existing legislation and are purely technical. Amendments 31 and 35 make clear how the new scheme categories work in relation to the new scheme categories and collective benefits. Amendment 35 and the first part of amendment 31 makes changes to existing legislation to make it clear how the new categories in part 1 of the Bill will apply. They make it clear how existing provisions apply under the new categories for wind-up, employer debt, contribution notices for the avoidance of employer debt, financial support directions and so on. In other words, we have had to sit down and think about what the new definitions imply for all the familiar things in the pensions world, such as what happens when an employer becomes insolvent, in order to get everything updated. Amendments 32 and 34 import text from schedule 4 that is being removed by amendment 40.

Although all that is rather technical, the general point is that we are trying to restructure the Bill into a more logical order, to put things in schedule 1 that belong there and to ensure that previous references to money purchase schemes are removed, but that we retain the concept of money purchase benefits. The amendments make the Bill more rational and clause 8, which enables schedule 1, will help to ensure that the Bill sits well with existing pensions legislation.

Schedule 1 - Amendments to do with Part 1

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 55, in schedule 1, page 19, line 13, at end insert—

“9A In section 37 (payment of surplus to employer), in subsection (1A)—

(a) after “does not apply in the case of” insert “—

(a) ”;

(b) at the end insert—

“(b) any payments out of funds held for the purposes of providing collective benefits under the scheme (but see section (Payment of amounts out of collective benefit funds) of the Pension Schemes Act 2014).””

Linda Riordan (Labour, Halifax)

With this it will be convenient to discuss Government new clause 10—Payment of amounts out of collective benefit funds. .

Steve Webb (Liberal Democrat, Thornbury and Yate)

We now move on to further amendments to schedule 1. Government amendment 55 relates to section 37 of the Pensions Act 1995, which makes provision for payments to employers when a trust-based occupational scheme is in surplus. The purpose of amendment 55 is to disapply section 37 of the 1995 Act in relation to funds held for the purposes of collective benefits. New clause 10 requires the Secretary of State to make regulations to prohibit payments from collective benefit funds except in prescribed circumstances. Taken together, amendment 55 and new clause 10 carve out collective benefits from the provisions relating to employers receiving surpluses and create a requirement for regulations to prevent payments being made out of funds held for the purposes of providing collective benefits subject to specified exceptions.

We are in slightly unfamiliar territory. We are talking about collective schemes and surpluses, and what happens when a collective scheme is funded in excess of the level needed to meet the probability of the target. The question is, what happens then. An employer’s liability to a scheme in respect of collective benefits will be limited to the contributions. If a scheme provides collective benefits, it should not normally be possible for any surplus in a collective benefits fund to be paid to the employer. That is because the employer’s only liability to the scheme is to pay the employer contributions. The fund exists to pay benefits to members.

To help to make that clear, amendment 55 seeks to remove funds held for the purpose of providing collective benefits from existing provisions in the Pensions Act 1995, which sets out when trustees may pay to the employer funds held for the purposes of the scheme. New clause 10 makes it clear that regulations will require that funds held to pay collective benefits can be paid only to members except in limited circumstances. Under the new clause, regulations will specify that funds held to pay collective benefits can be paid only to members except in limited circumstances, because the employer has no automatic right to any surplus. We want to ensure that members have confidence that the funds in the scheme will be available to pay their benefits. However, limited exceptions will be set out in regulations.

We have made it clear that the employer has no automatic call on any surplus, but we are conscious that there may be limited circumstances when it may be appropriate for an employer or some other party to be entitled to some share of any surplus. For example, it is possible that an employer may want to assist a scheme with collective benefits that falls into difficulty. We want to encourage such action and it might be more likely to happen if employers could arrange for the possibility of full or partial repayment if the scheme has a future surplus. We may therefore want to make regulations expressly allowing for that possibility. We would provide for that only after careful consideration of the implications and consultation with stakeholders. It is about a specific case of a collective scheme with a surplus and an employer getting money out of the scheme. That would certainly not be automatic, and in general it would not happen, but we would allow it to happen by regulation in specific cases such as those I have given. I hope that clarification is helpful.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 56, page 22, line 10, in schedule 1, at end insert—

‘( ) In subsection (3)—

(a) in paragraph (a), after sub-paragraph (vii) insert—

“(viii) regulations made under Part 3 of the Pension Schemes Act 2014;”;

(b) in paragraph (b), after sub-paragraph (v) insert—

“(vi) regulations made under section (Regulations under Part 3: overriding requirements) of the Pension Schemes Act 2014.””

Linda Riordan (Labour, Halifax)

With this it will be convenient to discuss the following:

Government amendments 57 and 42.

Government new clause 11—Regulations under Part 3: overriding requirements.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Again, it may be helpful if I explain the purpose of new clause 11 and the associated amendments in this group, which I will do briefly. Under new clause 11, any regulations made under part 3 of the Bill can override a provision in scheme rules to the extent that they conflict with them. That is an override power. It is important that schemes are clear when legislation overrides scheme rules. That means that, for example, we can be sure that regulations providing important member protection will always take precedence over scheme rules that say something different. This is a fairly common provision in existing pensions legislation and ensures that trustees and managers of pension schemes are clear about their responsibilities where legislation and scheme rules appear to conflict.

There are some consequences for existing legislation. There are other provisions in pensions legislation that make reference to scheme rules being overridden by relevant legislation, for example, provisions relating to the modification of subsisting rights and transfers. Amendments 42, 56 and 57 would add into the definition of relevant legislation reference to the overriding regulations made under part 3 of the Pension Schemes Act 2014.

I imagine that that is as clear as mud. The idea is to mirror, for these new types of pension schemes, something that we currently do routinely, which is to make clear that legislation dominates, whatever the pension scheme rules may contain. I hope that, on that basis the Committee will be happy to accept amendment 56.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister went through that quite quickly and I am sure with every justification, but can he think of any scenario where there would be a genuine tension between scheme rules and legislation as it pertains to the three categories of schemes in the Bill? Are there circumstances in which there would be a real issue that has to be resolved in this manner?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Gentleman. One of the things that we have discovered over the years is just how different scheme rules can be. We deal here with legislation and we think it is all fairly standard, and then we encounter a pension scheme. I am not saying that every scheme is different, but there is massive variation in the rules on how pension schemes operate. That could be in terms of the legislative or cultural environment when they were set up or the type of pension scheme. As a result, pension schemes can sometimes be silent on some of the issues on which we legislate, or can have different practices in the event of certain scenarios arising.

So, Parliament could decide that in all cases members should have such and such a protection, and the pension scheme rule might either be silent, which is straightforward or might provide something inconsistent, because the rules were all written at different times in different contexts. This is a backstop provision to make it clear beyond doubt, as we currently do with existing pension scheme rules, that where we put overriding legislation in place, the legislation dominates, whatever the scheme rules say.

Without going through the vast multiplicity of individual sets of pension scheme rules, it is hard to give you a specific example, but we know that pension scheme rules are very diverse. Here is one example that came up a few years ago, when we were debating the move from the retail prices index to the consumer prices index. We found that some pension scheme rules said the words “retail prices index” in the rules, some said “the rate of inflation”, and some said “whatever the Government say”. They were all different. What we had to make clear was that it did not matter what the scheme rules were; this was how we were measuring inflation from now on. That is the sort of thing that might be an example. I hope that that is helpful and I commend the amendment to the Committee.

Clause 9 - Pensions promise obtained from third party

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 7, in clause 9, page 4, line 36, leave out paragraph (b).

Linda Riordan (Labour, Halifax)

With this it will be convenient to discuss Government amendment 25.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Again, I will set out a little bit about what clause 9 does before explaining how Government amendments 7 and 25 relate to that. The key point is that clause 9 contains a regulation-making power to enable the Secretary of State to prohibit trustees or managers of a scheme from obtaining a pensions promise from a third party unless specified conditions are met. The concept of pensions promises obtained from a third party is important, because one of the ways in which risk-sharing may be delivered in our DA world is not where either the employer or the scheme member takes on the risk directly but where a third party is involved, such as an insurance company. Clause 9 relates to the rules around, for example, buying in a pensions promise from an insurance company or someone like that. It allows for safeguards to be put in place where the pensions promise in a scheme is secured through the scheme from a third party.

The regulations may also make provision overriding scheme rules and provide for the regulator to impose a financial penalty for non-compliance. The clause amends section 34(7) of the Pensions Act 1995 to ensure that regulations made under clause 9 cannot be overridden by section 34 of that Act. It also allows for regulations to confer functions on a specified person to enforce compliance with the conditions set out in regulations.

Amendment 7 removes the power to confer functions on a specified person in connection with the enforcement of regulations made under clause 9. That is because we now believe there are existing powers that are considered sufficient and appropriate to deal with enforcement in relation to any breaches of those regulations. When we first drafted clause 9 we thought that we might need this additional power; but on further reflection we think that we already have the powers we need about having a specified person who is responsible for enforcing these regulations. Amendment 7 therefore takes out that provision.

Amendment 25 amends clause 35 and is similar to amendment 7. Clause 35 relates to the enforcement of regulations made under part 3, which is the collective benefits section. It allows regulations to confer functions on a specified person—that is, a power to enable an appropriate body to regulate schemes offering collective benefits. It also allows regulations made under part 3 to provide for section 10 of the Pensions Act 1995, on civil penalties, to apply where there is non-compliance. Amendment 25 impacts on clause 35 and removes the power to confer functions in exactly the same way that I described just now in the context of shared risk schemes. Later in the Bill we do the same for collective schemes: it made sense to deal with that issue once and here. The amendments are required because sufficient and appropriate powers already exist to deal with enforcement in relation to any breaches of regulations made under clause 9 and part 3 on collectives. The Pensions Regulator and the Financial Conduct Authority already have the necessary powers and authority, under the Pensions Act 2004 and the Financial Services and Markets Act 2000, to enforce the conditions that will be required.

The current regulatory structure will remain; that is, the appropriate regulator for these requirements will be determined by the current structure and remits. There is no intention to change the current roles or remits of the current regulators. As a general rule, this means that the Pensions Regulator will regulate occupational schemes and the FCA will regulate personal pension schemes. However, there is of course a crossover of interests for workplace pension schemes and on some particular matters, such as investment.

The intention is that the Secretary of State will make any regulations in respect of occupational pension schemes, which the Pensions Regulator will regulate. Personal pension schemes will be governed by any rules developed by the FCA. Government and regulators will continue to work closely together to make sure that rules and regulations deliver consistent protections and outcomes for members.

I hope that is helpful to the Committee. I commend amendment 7.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I think this is an appropriate moment to raise again with the Minister the issue of regulation. I found it striking, although understandable and expected, in the sense that the Minister referred there to the Secretary of State, in concert with the Pensions Regulator, setting the rules regarding occupational pensions under the TPR. At the same time, the Minister went on to say that those other types of schemes would be under the regulation of the FCA. Does he have any observations on whether the route that the Bill takes us down raises questions about whether it remains appropriate to have two regulators? What about the issues around the benefits and potential costs of a two-regulator system in pensions? Does the Bill begin to eliminate some of those issues? Would he like to have these pension schemes under the ambit of one regulator? I know he will not commit to that in any deliberate sense, but does he think there are issues around the fact that we have two regulators in pensions, and does the Bill eliminate some of those issues?

Steve Webb (Liberal Democrat, Thornbury and Yate)

These are clearly big issues that have been raised by, among others, the Select Committee, and they were raised on Second Reading. It is a perfectly sensible discussion to have. Is it the appropriate regulatory framework, and do we need two or one? Where we have two regulators there are two issues. There is overlap, duplication and gaps. We work very hard—the two regulators work very hard—to co-ordinate. In all the work we have been doing on charge caps, for example, we have needed DWP legislation to deal with trust-based occupational schemes and we have needed mirroring FCA activity to deal with contract-based schemes. As I think I observed on Second Reading, it would have been easier to deal with one body rather than two, and that is not surprising.

My consistent view has been that now is not the time to start reorganising regulators again. The FCA was set up only a couple of years ago. We are in the middle of the roll-out of automatic enrolment. In my judgment, throwing all that up in the air and coming up with a new regulatory framework right now would not feel right. There is a process of triennial reviews of arm’s-length bodies in our Department. We have just concluded the review of TPR. There were some minor operational things, but broadly the status quo was fine for now. As the roll-out of auto-enrolment concludes when the next three-yearly review is up, that would be a logical point to look at this again.

My only hesitation is that, whether we have one brand or two, or one building or two, most of the same issues are still there. In other words, we still need a regulator that understands employers and the issues for sponsoring employers, and understands funding and the implications of recovery plans for the sustainable growth of the employer and so on. We need a regulator that can do compliance on, for example, auto-enrolment—like minimum wage compliance—and can make sure that that happens. We also need a regulator that can do the things the FCA does, which regulates the sale of financial products in the insurance industry. That whole range of skills will still be needed. Indeed, we would still need a set of rules for trust-based schemes and contract-based schemes, because they are different types of thing.

Even if it was one organisation doing it, we would still be amending different bits of legislation. Whether we did it under one Government Department or two, it would be up for grabs. From a co-ordination point of view, I can see the potential benefits of having one organisation and not two, but I do not think it is a silver bullet. There would still be issues of overlap and gaps, and the different skill sets would still be needed. I know our deliberations may be followed by those who work for one of the regulators. My message to them would be that each, regardless of the banner under which they operate, has a vital role to play, and in any future structure one would envisage that they still played it. Certainly, for now, I would not envisage any change, but I think it is something that the next Government will probably want to look at. I hope that that is a constructive response to the hon. Gentleman.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 8, in clause 9, page 4, line 43, at end insert—

““trustees or managers” means—

(a) in relation to a scheme established under a trust, the trustees, and

(b) in relation to any other scheme, the managers.”

Linda Riordan (Labour, Halifax)

With this it will be convenient to discuss Government amendment 26.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The purpose of amendment 8 is to clarify that regulations made under clause 9 may impose requirements on trustees in the context of a trust-based scheme, and on managers in the context of a scheme not established under trust. Clause 9 includes a regulation-making power which provides that the trustees or managers of a DB scheme or a shared-risk scheme must not obtain a pensions promise from a third party unless conditions specified in the regulations are met.

The amendment inserts a definition of “trustees or managers” into subsection (3) of clause 9 which confirms that

“trustees or managers means… in relation to a scheme established under a trust, the trustees, and… in relation to any other scheme, the managers.”

Amendment 26 inserts the same definition of “trustees or managers” into clause 36 to clarify that regulations made under part 3 may impose obligations on trustees in the context of a trust-based scheme, and on managers in the context of a scheme not established under trust. That is a bit like we did in the last group. We are doing it here and, to save us coming back to it when we get to the collectives bit, we are doing exactly the same thing with clause 36.

Amendment 26 clarifies how the regulatory requirements should apply in schemes offering collective benefits where there may be both trustees and managers. The amendment makes it clear that regulations made under part 3 may impose obligations on trustees in the context of a trust-based scheme, and on managers in the context of a scheme not established under trust.

We have used the term “trustees or managers” in various parts of the Bill. Our main aim in inserting a definition for the term “trustees or managers” is to make it clear that where either an occupational or a personal pension scheme is established under trust, any regulatory requirement on “trustees or managers” will fall on the trustees even if there are other people, other managers effectively. But if the scheme is not established under trust we want the requirements to bite on the person responsible for the management of the scheme.

There is a kind of hierarchy going on here. If it is a trust-based pension scheme where we use the phrase “trustees or managers” in the legislation, we do not mean managers if there is a trustee knocking around, or if there is no trustee, because it is not a trust-based scheme, then we mean the person responsible for the management of the scheme. I hope that has helped with what I hope are relatively uncontentious amendments. I commend them to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I want to make an observation. It is very clear what a trustee is. It is someone who has an obligation under trust law. In this case it is to manage a pension scheme. It seems less clear to me what a manager is. It seems, to put it politely, a more capacious definition and, impolitely, open to a number of interpretations. While it is clear what a trustee is, could the Minister elaborate on who can fill the role of a manager? What sort of agents are we talking about in this context? We know what a trustee is but who is a manager? There are a number of different definitions of a manager contained in the terminology.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Gentleman. We are not inventing these concepts for the purpose of the Bill. He will know that the phrase “trustees or managers” that we are using here is defined in the Pensions Act 1995 and “managers” is defined under the Pensions Act 2004. I hesitate to say, “You’d know it when you saw it”, but essentially we are talking about the person responsible for the management of the scheme. Clearly one of the things about primary legislation is that we cannot be too descriptive as we end up missing people out and not covering certain sorts of circumstance. Just as we used the phrase “pension promise” earlier in the Bill to mean what everybody knows a promise is, we are using the term “manager” here simply to refer to the person responsible for the management of the scheme. This is a familiar concept to those who run pension schemes and has not caused any problems in the past.

Clause 10 - Disclosure of information about schemes

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clause 10 relates to what we know in the jargon as disclosure requirements. That is an important concept because it ensures that people know what is going on and refers back to the conversations we had earlier. The clause amends the existing legislation about disclosure requirements but only in so far as it reframes it to take account of changes in the pensions landscape, including automatic enrolment. It also inserts a new requirement to have regard to guidance issued by the Secretary of State when complying with the requirements.

The changes allow the Secretary of State to ensure that information about schemes is made available to those who need it. Section 113 of the Pension Schemes Act 1993 sets out a power for the Secretary of State to make regulations in relation to occupation and personal pension schemes, setting out requirements to keep certain persons informed of various matters, including the scheme’s constitution, its administration and finances and

“the rights and obligations that arise under it”.

The clause amends that section, removing the list of persons to be kept informed, and instead referring to “persons of prescribed descriptions”. That change allows the Secretary of State to ensure that information about schemes is made available to those who need it.

There are a few key points of clarification. We anticipate that shared risk and collective benefits might require specific forms of disclosure. That comes back to the conversation that I had with my hon. Friend the Member for Amber Valley. We will use the regulation-making power in section 113 of the 1993 Act to require schemes to provide the necessary information to members, prospective members and others with an interest in the scheme, such as employers.

Because shared-risk schemes and schemes containing collective benefits may be more complex and will have distinct features, we want to ensure that the disclosure provisions are updated if necessary, to take account of what key information should be provided by this type of scheme. For shared-risk schemes, for example, that information might include what is promised under the scheme and who stands behind the promise. For schemes containing collective benefits, that might include a statement of how risk is shared between members.

Stephen Hammond (Conservative, Wimbledon)

The Minister will remember that in the evidence sessions there was a lot of discussion about transparency and what information was provided, in order to ensure that information—not only about the promise but what underlies it in the form of the investment portfolio and associated decisions—be available to members as well as to scheme trustees and managers. Will the Minister clarify that under this clause that will happen?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend. My view is that we should get the right information to the right people. Therefore, the trustees or managers of the scheme might need quite sophisticated, complex, high-level data. To use a cliché, scheme members need news they can use. In other words, they do not need reams of paperwork that they cannot understand because that is worse than useless. We need to ensure, through these regulations, that scheme members get in plain English an explanation of what is hard-wired, what is a promise, what is the target and how things have been going. It is important that they know who stands behind the promise. If the employer is paying an insurance company to guarantee certain levels of benefits, they need to know that. They do not need to be bombarded with information they cannot use. That is the balance we are trying to strike.

Stephen Hammond (Conservative, Wimbledon)

The Minister will be aware that in many cases at the moment scheme members are provided with a small information pack, quarterly, half-yearly or annually. That summarises the promise and what lies behind it. Trustees will obviously need much more detail but scheme members need to be assured that they will at least get that continuing level of transparency.

Steve Webb (Liberal Democrat, Thornbury and Yate)

In many ways, the need for transparency will be greater in collective DC schemes where people will be less familiar with the concepts. I will not make any undertakings on frequency; that is a case-by-case judgment. People clearly need to know what is going on, what happens when things do not turn out as planned and who is accountable. I take my hon. Friend’s point on that.

We anticipate that the new models may require specific forms of disclosure.

Angela Watkinson (Conservative, Hornchurch and Upminster)

Given the increased complexity of the spectrum of pensions and the new shared-risk schemes, will sufficient information be available to pension savers about what will happen under certain circumstances, such as their wanting to exit a scheme and join a different one or their deciding to retire early and remove their savings from a scheme? Will that information be included in the terms and conditions, so that people know what to expect if such things happen?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend. I would distinguish between two different things here: there are the rules of the scheme, which should be made clear to someone when they join the scheme; and then there is the ongoing performance of the scheme. People have the right to know when they join a scheme the terms of early exit and so on, as she suggested. That information would not be repeated, but what people would receive on an ongoing basis is, for example, information about how the funds are doing, what the latest target is and that kind of thing. However, I entirely agree that people need clarity.

In a world where automatic enrolment will increasingly govern workplace pension provision, on the whole individuals themselves will not be making these choices. It will not be, “How do I have a clue whether I want to be in a shared risk, or a CDC, or whatever?” I will not be choosing; in general, it will be my employer, who will decide what they want to provide for the work force; I will be automatically enrolled into it. The vast majority of workers will stay in what they have been enrolled into. They will not have to make complicated choices between this whole array of pension schemes. They will be placed in one; there will be an employer contribution; on the whole, they will stay in it; and at that point, as my hon. Friend quite rightly said, they need to know what the rules of the game are, and I take that point.

To clarify matters, for some existing schemes, where they fall within the shared-risk definition they may already fulfil these basic requirements, but we intend to consult on any changes and, of course, we will be mindful of the impacts on existing schemes.

We also want to ensure—not unreasonably—that, if the Secretary of State issues guidance to schemes, they take account of it. We will want to support schemes in providing members of shared-risk schemes and schemes that contain collective benefits with information that presents options and materials to them in a clear and comprehensive manner. This support may include guidance issued by the Secretary of State. Obviously, if such guidance is issued, we want schemes to pay regard to it. Making the communication of information work for schemes, individuals and employers is important, to ensure transparency in risk-sharing schemes and collective benefits.

We anticipate that there will be a longer list of those parties who must be kept informed. Placing the list of persons who must be kept informed in regulations, rather than in primary legislation, is appropriate for this kind of detail. It also enables consultation on additions to the list as the landscape evolves. To give the Committee an example, we may require schemes to provide the necessary information to members, prospective members and others with an interest in the scheme, such as employers.

Just to clarify matters further, the reference in the clause to trade unions and employment tribunals is simply to retain the current provision in the primary legislation, in a way that makes sense once we have removed from it the list of persons to whom information must be given.

The mood of the whole Committee, as far as I can see, is that we all want to ensure that scheme members, prospective members, employers and others receive a good flow of clear information, and the clause gives the Government greater flexibility in specifying who has a right to information and how it should be provided.

Nigel Mills (Conservative, Amber Valley)

The Minister will know that it has not always been easy to get details from some schemes—mainly, defined contribution schemes—about exactly what charges they are incurring, such as management fees, transaction fees or other hidden costs. Will these rules allow those details to be flushed out of schemes, so that we can all know what we are spending?

Steve Webb (Liberal Democrat, Thornbury and Yate)

My hon. Friend is quite right that these various charges and deductions have all too often been opaque. The measures that we are already introducing, under previous legislation, should deliver what he seeks. So, the Command Paper that we have just published—here is one that we prepared earlier, as it were—will provide for next April, first, obviously the cap on charges and the banning of certain categories of charges during subsequent years, and, secondly, a duty on the trustees and managers of schemes to find out the sort of hidden charges that my hon. Friend refers to, report on them and then—potentially in the next Parliament—we will be in a position to consider how far those hidden charges should be included in charge caps.

What we are trying to do is to ensure that people do not face unfair charges, and that the people who can do something with the information—the trustees and managers—receive that information and act on it. Clearly, scheme members should receive a basic level of information about those costs, but we have a programme of work contained in this document and other regulations that should deliver what he seeks.

I hope that has been helpful and I commend the clause to the Committee.

Clause 11 - Extension of preservation of benefit under occupational pension schemes

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 9, in clause 11, page 5, line 42, leave out “non-salary related benefit,”.” and insert

“benefit falling within subsection (1A),”;

(b) after subsection (1) insert—

“(1A) The following fall within this subsection—

(a) collective benefits;

(b) benefits calculated otherwise than by reference to the member’s salary.””

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss Government amendments 10 and 11.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Good afternoon, Mr Bone. It is pleasure to have you rejoin our proceedings. As I did on several occasions this morning, I will explain the purpose of the clause and then how the amendments improve it. I hope that will avoid the need for a separate clause stand part debate.

Clause 11 amends part 4 of the Pension Schemes Act 1993, which concerns what is known in pensions jargon as the preservation of benefit for early leavers of occupational pension schemes. What happens to the rights that people who leave a scheme leave behind? At the moment, members of occupational pension schemes who leave the scheme early are entitled to payment of the benefit accrued up to that point when they reach normal pension age, provided they have two years’ qualifying service or have previously transferred their rights into the scheme from a personal pension.

Members who leave with more than three months but less than two years’ service are entitled to transfer the value of the benefits they have accrued or receive a refund of their own contributions. The preserved benefit to which deferred members are entitled—termed “short service benefit”—has to be calculated in the same way as it would have been had they remained in pensionable service in the scheme until pension age. The Pensions Act 2014 introduces a requirement that where all the benefits are money purchase benefits, a preserved pension must be provided after 30 days’ qualifying service.

The clause provides that schemes must provide a short service benefit where leavers have at least 30 days’ qualifying service and all the pension benefit is not salary related—that is, not calculated by reference to the member’s salary. If any of the pension benefit is salary related, the two-year rule still applies. Collective benefits will also be subject to a 30-day preservation period. Where a benefit may be calculated on a salary-related basis in some circumstances and a non-salary-related basis in others—for example an underpin benefit, which pays the higher of the two calculations—it will be treated as salary related for these purposes and the two-year period will apply. If a member’s pensionable service began before the amendments came into force, the previous requirements for preservation of benefits will continue to apply.

Just to explain what is going on here, we have these new types of pension schemes and categories of benefit and we have had to ask, throughout the Bill, what they mean for the features of pension schemes. What do they mean for people who get divorced? What do they mean for people who leave schemes early? What do they mean for companies that wind up? We have had to deal with each one of those different categories. We are dealing here with preservation of benefits.

The clause ensures that the preservation requirements apply appropriately when the new scheme definitions are introduced. Amendments to the Pensions Bill 2014 reduce the period after which the member is entitled to a preserved pension from two years to 30 days in the case of money purchase benefits. The purpose of the clause is to preserve the position that money purchase benefits in an occupational pension scheme should be subject to 30-day preservation and to extend that 30-day period to cover all benefits that are not salary related. That will include all benefits under DC schemes, collective benefits and some benefits in shared-risk schemes.

Shared-risk schemes potentially cover a wide variety of benefit types. Without further amending existing legislation, benefits in shared-risk schemes would be subject to the two-year preservation rule, apart from any benefits arising out of transfers from personal pensions. A two-year preservation period is appropriate for benefits calculated by reference to salary under the current rules. A 30-day preservation period is appropriate for other benefits. It does not impose any additional administrative burdens, and is consistent with Government policy on automatic transfers, automatic enrolment and the contractual rights that apply to members of personal pension schemes.

The amendments put beyond doubt the treatment of collective benefits under the preservation requirements. In part 3 of the Bill we set out a framework for collective benefits. The framework creates the opportunity for a number of different models, and there is the possibility that some collective benefits could arguably fall within the strict legal definition of “salary related” that we drafted for the purpose of the preservation benefits. This would mean the two-year preservation rule might apply with all that goes with it, and that is not appropriate for collective benefits. Collective benefits are not salary related as there is not a promise or benefit related directly to the member’s salary.

Amendments 9 and 10 add a separate reference to collective benefits that puts it beyond doubt that a 30-day rule will apply to collective benefits. The uniform accrual rules are intended to ensure that early leavers are not unfairly treated where the benefit accrues at different rates at different times. For example, if the accrual rate in a salary-related scheme increases after a specified period of time, someone leaving early may not get the benefit. Those rules were crafted for a defined-benefits world and have no relevance to the world of collective benefits. The usual rule should apply to collective benefits, that is, that short service benefit should be computed on the same basis as long service benefit. Amendment 11 ensures that the uniform accrual rules will not apply to collective benefits.

I hope that is helpful in setting out the purpose of the amendments and of clause 11, and I commend amendment 9 to the Committee.

Clause 12 - Revaluation of accrued benefits

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clause 12 itself is relatively uncontentious. It says only:

“Schedule 2 contains amendments about the revaluation of benefits.”.

It sets up the long, detailed schedule 2, which deals with the issue of bringing pension rights built up in the past up to present day values. There are a range of ways in which that can be done. The Bill has to work out the right mechanism for revaluation in this new world of pension schemes.

When a member stops being an active member of a scheme prior to retirement, the accrued benefits are required to be revalued, so that when the member reaches the scheme’s normal pension age, the value of those benefits has a measure of inflation protection over the period of the deferral. Sections 83 to 86 of and schedule 3 to the Pension Schemes Act 1993 set out the procedure for revaluation based on benefit type. Clause 12 and schedule 2 of the Bill contain amendments about the revaluation of benefits, to ensure the appropriate revaluation method applies to collective benefits and to benefits accruing after the new scheme categories in part 1 of the Bill come into force. The key point to bear in mind is that existing methods of revaluation will still apply. With the introduction of the new scheme categories in part 1 of the Bill, it is important that everyone is clear how the revaluation requirements apply to the benefits they provide. Revaluation requirements apply to benefits in both occupational and personal pension schemes. I am tempted to indulge in a short quiz at this point, because currently there are four methods for revaluation set out in schedule 3 to the 1993 Act. I will take any interventions from anybody who wishes to name any of them. I will come back to that later.

Following commencement of the new definition of money purchase benefits in the Pensions Act 2011, we introduced another one, a cash balance method, which may be used for cash balance benefits where the available sum is not calculated by reference to final salary. To reveal the answer to my quiz, the four different methods of revaluation are the final salary method, the average salary method, the flat rate method, and the money purchase method, which is a favourite of mine.

The average salary, flat rate and cash balance methods essentially aim to ensure that those who leave the scheme prior to retirement—deferred members—are treated in the same way as those who remain in the scheme until retirement. The revaluation method to be applied in the case of any benefit depends on the benefit type and not the scheme category. As I noted this morning, the Bill sets up categories of schemes—DB, DA and DC—but some of these measures relate to benefit types, not scheme types.

In terms of revaluation, the final salary method will no longer be the default. The clause and schedule change the revaluation provisions so that they work with the new scheme categories and take account of collective benefits. They update provisions written in a world of final salary schemes, and enable revaluation to apply to new scheme types in a more appropriate way. The requirements will continue to apply at benefit level, and will require little or no change for current schemes.

A default revaluation will apply, to ensure that deferred members’ benefits are revalued in any way in which they would have been revalued had they not left the scheme. The default revaluation method will apply except in the following cases: for money purchase benefits, which will continue to be revalued—surprisingly enough—by the money purchase method; salary-related benefits, which will be revalued by the final salary method, unless they are average salary benefits, in which case trustees and managers will continue to have the option of revaluing by the average salary method; and flat-rate benefits, unless the trustees or managers of the scheme decide that the final salary method is more appropriate. Personal pension schemes, which include non-money purchase benefits, will be required to apply the relevant revaluation method to those benefits.

This approach is a change from the current provision, whereby the default for non-money purchase benefits is the final salary method, with the ability for trustees and managers to use a different method in certain cases, if the trustees consider it appropriate to do so.

Just to clarify, existing schemes can carry on as they are now, so this change better reflects the greater variety of benefits and pension scheme structures that exist now and will continue to develop in the future, but it will not have an adverse impact on existing schemes, which will continue to be able to carry out revaluation as they currently do.

Finally, there will no longer be any need for a separate revaluation method for cash balance benefits. Amendments that a revaluation requirement made by the 2011 Act and the Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014 introduce a new method of revaluation for certain cash balance benefits. The changes introduced by the clause mean that we will no longer need a separate method for cash balance benefits. The default method will apply unless the trustees or managers think that the final salary method is more appropriate for a salary-related cash balance benefit. A transitional provision ensures that any trustees or managers using the cash balance method can continue to do so.

I hope that that has been helpful in setting out the thinking behind clause 12, and I commend the clause to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for setting out the Government’s position. Let us get down to brass tacks. For a member of the public thinking about, or perhaps in the future becoming a member of one of the schemes as defined in this Bill, what does clause 12 mean in reality?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I thank the hon. Gentleman for his question. Essentially, what it means is that in many cases the status quo will continue to prevail. For example, if someone is already in a defined-benefits final salary pension scheme, the way that their existing rights are revalued will be the same way that they are currently revalued. However, where a brand new scheme is invented—a scheme with collective benefits—the default will not be the indexation or revaluation method used for final salary pensions. It will be the default method set out in schedule 2.

I must admit that when I saw there were four different methods of revaluation, my first question was, “What are they?” If it would be helpful, I will just explain what the four different methods are.

The final salary method says that where the amount you have built up is salary-related—that is to say, raised to your final salary—and where an amount in this case is added to the deferred pension to take account of inflation between leaving pensionable service and retirement in line with the annual revaluation order, which is something we will debate each year, potentially as an annual regulation that affects inflation.

The average salary method is where salaries have to be revalued in the same way for active and deferred members. Then, there is the flat-rate method, whereby benefits, as opposed to salaries, for active and deferred members have to be revalued in the same way. Finally, there is the money purchase method, where investment, yield and any bonuses have to be applied in the same way for active and deferred members.

There are all those different ways, and as I said earlier we introduced a fifth one for cash balance and we no longer think we will need a separate one. But the basic idea is that there is a rational method whereby if someone is a member of these new types of pensions and they leave, their money is not only left purely to be devalued by inflation but there is a method appropriate to that kind of pension scheme to bring it up to date, to the point at which someone draws it.

I did not get terribly close to lay terms there, did I? However, I hope that that response gives the hon. Gentleman a sense of what we are trying to achieve with this clause.

Schedule 2 - Early leavers: revaluation of accrued benefits

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 4, in schedule 2, page 26, line 12, at end insert—

“( ) Where this Chapter applies in relation to a benefit payable by virtue of a pension credit right, then—

(a) if entitlement to the relevant pension credit arose before the 2014 Act commencement date, the benefit is to be treated for the purposes of sections 84(1) and 84B(1) as attributable to pensionable service before that date;

(b) if entitlement to the relevant pension credit arose on or after the 2014 Act commencement date, the benefit is to be treated for the purposes of sections 84(1) and 84B(1) as attributable to pensionable service on or after that date.”

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss Government amendments 37 to 39.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I will explain what schedule does before indicating why we want to change it. I will use the jargon term of pension credit. In this context that does not mean state pension credit, the benefits that people claim when they are on a low income. A pension credit relates to what happens when someone is divorced and acquires a pension right—or credit—in respect of their former partner. For the avoidance of doubt, where I use the term pension credit, I am talking about the situation after a divorce.

When a member stops being an active member of a scheme prior to retirement, benefits have to be revalued. I have described in detail how all of that is done. We then have to ensure that we have amended it correctly to take account of some of the things brought to our attention since we published the Bill.

One thing we tried to do was ensure that, although we had published the Bill, we had an ongoing process of dialogue with people such as the Association of Pension Lawyers who are expert in these matters and make a living out of pensions law. Sometimes we will publish a Bill and, although we have consulted extensively, we continue with those conversations and bring forward amendments.

Amendment 4 is to ensure that the new revaluation provisions that I just described work in the limited situations where they apply to pension credit benefits after a divorce. Amendments 37 to 39 are to make it clear that the default method of revaluation will apply to collective benefits and remove any chance of the final salary method applying.

To some extent I dealt with the content of amendment 4 in my remarks on clause 12, so unless there are further questions, I commend the amendment to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I seek further clarity on the explanatory statement attached to amendment 4. Will the Minister elaborate on what it means to say

“when the pension was shared rather than when the pensionable service took place.”?

Steve Webb (Liberal Democrat, Thornbury and Yate)

If a man and a woman are married, let us assume we are talking about the man’s pension, although that will not always be the case. He has a period of pensionable service that comes to an end when he leaves the company. Revaluation of that pension happens beyond the point where the pensionable service ends, but the provisions we are talking about for revaluation start after divorce when the pension-sharing happens. We are simply making clear that we are revaluing the value of the pension at the point of divorce, or more precisely, the pension-sharing process. We are not talking about revaluation from the point when the pensionable service ended.

Clause 13 - Transfer values

Steve Webb (Liberal Democrat, Thornbury and Yate)

To keep things in a logical order, clause 13 is on the subject of transfer values. It links us to schedule 3, to which an amendment has been tabled. I commend the clause to the Committee.

Schedule 3 - Early leavers: transfer values

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 5, in schedule 3, page 32, line 29, at end insert—

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for that explanation. I want to pick up one point. He referred to some models that might not be appropriate and excluded under the terms of schedule 3. Can the Minister elaborate on what sort of models he was thinking of and why they might be excluded?

Steve Webb (Liberal Democrat, Thornbury and Yate)

As the hon. Gentleman observed earlier, this is permissive legislation. I hesitate to use the cliché of letting a thousand flowers bloom; but, if in doubt, one reaches for cliché. The point is that we do not know what models people will come up with. It is fairly obvious, if we have a kind of vanilla DB scheme, what the right transfer arrangements should be to mirror the current regime of a vanilla DC scheme. We have seen cash balance and know what that looks like. However, it is hard to sit down in advance and specify in the Bill exactly how we should do transfers in some type of scheme we have never thought of.

I will give the hon. Gentleman a sense of the complexity of some of this. He will be familiar with the Bridge case and the definition of money-purchase schemes. We talk about little else over our tea table at home. In that case we found out that there are many different permutations—for example, things that look like money purchase but have an underpinning, so that it is money that is invested and if things go well that is what you get, but if things go badly you get something else, such as a floor amount. What is the right transfer value in those cases? The point about giving ourselves regulation-making power is simply to say that we have not thought of every possible scheme that might arise; we have set out a general approach that we think is right for the categories we have come up with. However, in the event that someone invents something else and what is in the Bill does not seem appropriate, we are reserving the right to say, “Although technically this belongs to this category, it looks more like that, so we will have a different set of transfer rules”. I cannot give you an example, because to do so would be trying to anticipate things that have not been invented yet.

Clause 15 - Regulatory own fund schemes exempt from indexation

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss clauses 16 and 17 stand part.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clauses 15 and 16 relate to indexation. Clause 17 is a somewhat different issue, which is a deregulatory measure relating to the register of independent trustees.

Clause 15 amends the provisions in the 1995 Pensions Act so that schemes set up as regulatory own funds, or ROFs, will be exempt from the requirement to index benefits. Specifically, clause 15(3) inserts a definition of a regulatory own fund that refers directly to article 17 of the relevant European Council directive, 2003/41, so as to link with the relevant legislative requirements. Clause 15(3) also inserts a regulation-making power to amend the reference to any provision of an EU instrument that may replace it. It is a simple power to allow the Government to amend this piece of UK legislation if any further EU legislation overrides the current definition.

The reason we have the concept here of a ROF is that many Dutch pension schemes are established as regulatory own funds that stand separately from an employer. It is quite an important concept in terms of delivering shared risk schemes. Regulatory own funds are an attractive option for an employer wanting to set up a scheme that offers the pension income builder-style benefit design without putting a liability on their balance sheet. That concept means that slices of the pension get locked in over time. Employers might want to deliver that for their employees, but they do not want a volatile number on their balance sheets.

The regulatory own funds structure is arm’s length from the employer and underwrites its own promise by holding a higher level of technical provisions. We want to exempt schemes in the UK offering a promised benefit within a ROF from the requirement to index benefits. That does not mean that they could not do it but we would not require it.

In practice, a ROF will apply part of the member’s contributions towards the buffer fund to meet its funding requirement. As such, the members are effectively directly bearing the cost of funding the promise. Given the direct impact on member benefits, we do not think it is appropriate to constrain the benefit design in terms of what must be contained in the promise. If members only want to underwrite a nominal promise benefit, they should be allowed to do so.

In that sense, the benefits have some similarity with money-purchase benefits, where indexation is also not required by law. While ROFs are recognised in UK legislation, the Pensions Regulator has advised that currently it does not regulate any schemes as ROFs, so the amendments would not affect any existing rights to indexation. To be clear, we are not changing anyone’s existing rights.

Clause 16 provides a regulation-making power to create exemptions from the indexation provisions subject to limitations. Under clause 16 regulations can exclude pensions of prescribed description from the requirement to increase pensions in payment set out in the Pensions Act 1995. Regulations cannot be made in respect of a pension, or any part of a pension, that came into payment before the regulations came into force that is attributable to pensionable service before the day on which the regulations came into force or that is payable under a defined-benefit scheme.

That is a power to remove indexation requirements but not the DB benefits or for past service. Any regulations may not be made unless a draft has been laid before and approved by resolution of both Houses of Parliament, therefore subject to affirmative procedure.

We need to ensure that the statutory requirement to increase pensions in payment applies appropriately within the new scheme categories, especially for benefits in shared-risk schemes. Because this is a framework Bill that creates space for innovation, we hope to see a broad range of benefit designs emerge. Legislation already exists on indexation and currently works on the basis of a clear line between the traditional salary-related and money-purchase benefit split. That might not work so clearly for shared-risk schemes.

Clause 16 introduces a new power enabling regulations to be made to exclude a specified type of pension from the indexation requirements. That will allow the Government to consider whether further exclusions from the indexation provisions might be required as a result of the different type of pension arrangements made possible by the Bill. That comes back to my point on intervention to the hon. Gentleman. We are setting out the framework we think is right for what we can envisage but, if new models come up, we will have to work out whether there should be any indexation requirements on them.

In particular, we will need to see what sort of benefit designs populate the shared-risk space before deciding whether they would be covered by the indexation requirements and whether it would be appropriate to change that. It is always a relief when I say what I think I have just said and then read a paragraph that reiterates what I have just said. That is always a bonus.

The power is restricted and makes it clear that the Government do not intend to interfere either with rights already accrued or with benefits under a defined-benefit scheme. To be clear we do not intend to use the regulation-making power to remove indexation requirements where they currently apply.

Those are clauses 15 and 16 on indexation. Clause 17 covers a different set of issues. The Government have a red tape challenge. We are constantly told there is too much red tape and bureaucracy in the world of pensions. I have mixed feelings when people say that; I ask them to name three and it goes a bit quiet. However, we recognise that unnecessary bureaucracy and red tape is a cost to scheme members. If we require schemes to do something pointless or that does not add value, a cost comes out somewhere, ultimately in reduced pensions for members.

Stephen Hammond (Conservative, Wimbledon)

I sympathise absolutely with the Minister. He and I have sat on at least one Cabinet Committee when we have struggled with this in the past. Might it not have been better to put the clause the other way round by doing away with section 7? The cost is going to come from having those flexible procurement panels. The Minister could have kept the independent register of trustees. That would have gone to some of the issues being raised at the evidence session last week. Did we think about doing this the other way around? I suspect that there would be an even greater saving to be had from getting rid of flexible procurement panels.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful and heartened that the hon. Gentleman is still with me at this point in the day. Section 7 of the 1995 Act allows the regulator to appoint trustees to replace a person who is found not to be fit and proper. We will discuss later the importance of good governance, and we want to retain the section 7 power for the regulator to appoint a fit and proper person if there is a problem. Clause 17 will simply remove the burdensome requirement to have a register of independent trustees. The Committee will recall that we took oral evidence from the interim chief executive and the chair of the Pensions Regulator, who said that they felt that there was no added value to that process. I will briefly explain why that is.

To rewind, the red tape challenge is an initiative that has taken place across Departments, in which the Government have invited those whom we regulate to identify regulations that do not deliver. As my hon. Friend mentioned, he and I have served on the Reducing Regulation Sub-Committee, a particularly gripping Cabinet Sub-Committee that tries to evaluate the cost to business of almost every regulation that we introduce. The Government initially had “one in, one out”, under which for every £1 million of regulatory burden that I or another Minister put on business, we had to find £1 million to take off. As the Parliament progressed, it was felt that that was not ambitious enough, because it would simply leave the aggregate level of regulation where we started. We now have something called “one in, two out”, whereby for every £1 million of regulatory cost we want to impose on business, we have to find £2 million of regulatory savings. That has been quite an effective discipline on Departments such as my own. Of course, everybody thinks that the regulations that they want to introduce are good, but cumulatively they have a cost. The requirement to find ways to deregulate has become more pronounced as a result of the “one in, two out” process.

Clause 17 fulfils a red tape challenge commitment to remove the statutory requirement that regulations must provide for the Pensions Regulator to compile and maintain a register of independent trustees. As my hon. Friend has observed, the provision was originally included in the Pensions Act 1995, with the aim of having a register of independent trustees whom the regulator could place in schemes to ensure their effective running. As has been observed, the regulator already has a general power to appoint trustees to replace persons who are not fit and proper. The regulator appoints such trustees, as we have just heard, using flexible procurement panels. That process can cover the appointment of independent trustees as well, and it is less burdensome and costly for the regulator and trustees. We feel that the legislative requirement for a register of independent trustees is unnecessary.

Andrew Love (Labour, Edmonton)

I understand the need for “one in, two out” cost savings, but, as I understand it, appointment from the trustee register takes place where an employer has suffered an insolvency event. In those circumstances, trustees may require additional expertise and experience, and an element of speed of appointment may be necessary. Has the Minister assured himself that although we will save money in the short term, the policy will not cost us in the long term?

Steve Webb (Liberal Democrat, Thornbury and Yate)

We certainly want to make sure that trustees who are appointed in the event of insolvency have the expertise that they need to do their job effectively. The Pensions Regulator advises us that the process of flexible procurement panels finding such people works perfectly well. That process is already in place for other purposes, such as replacing someone who is no good. The regulator uses and is familiar with that process, and it can be used equally in the circumstances we are talking about to find an independent trustee. The regulator’s view is that it works already in parallel circumstances, so there will be no loss.

I stress this point about any extra costs. The Pensions Regulator’s costs do not come from the taxpayer, generally; they come from pension schemes. Pension schemes’ costs do not come, on the whole, from pension schemes; they come from members or employers, depending on the type of scheme, and they come out of people’s pensions. Therefore, anything that we can do to avoid unnecessary cost will simply lead to better pensions, as long as we are satisfied that the job can be done. In this case, we are satisfied.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Starting with clause 17, I would be interested in the Minister’s definition of a flexible procurement panel because I have no idea what it means. It sounds like jargon, which is often unavoidable in this space, but it would be useful for the Committee to have a definition of a flexible procurement panel. The Minister’s argument in favour of removing the register is that the flexible procurement panel is in place and that is the way in which the Pensions Regulator can and will exercise its obligations as they pertain to this clause. For us to judge that in Committee, knowing what a flexible procurement panel is would be useful.

On clauses 15 and 16, I thank the Minister for bringing the term “ROF” to our attention. More widely, indexation is a very thorny issue in pensions for obvious reasons. It is the way in which one’s pension retains its value relative to inflation. The Minister made it clear that the Government were reserving the right to change indexation requirements in the future, if there emerged forms of schemes which at the moment the Government were not anticipating. Could the Minister say a little more about the space in which that sort of reserved power is likely to function, not necessarily the Government’s view of what they would do, but what the options are around indexation requirements and the different sorts of schemes which might emerge through collective defined contribution? It is also worth having on the table something which we have not yet covered, which is that there are a number of different types of collective defined contribution.

First, then, what is a flexible procurement panel and why does it work better than an independent register? Secondly, it is worth pointing out that the Pensions Regulator is looking for new management. The search for a new chief executive has been going on for a considerable period. Is it possible that a new chief executive would have a different view from the current caretaker? Thirdly, could the Minister talk a little more widely about reserving the right to change indexation?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Gentleman for his questions. Let me explain as far as I am able what a flexible procurement panel is. I am very happy to ask the regulator to write to him with further details.

The basic idea, as I said to the hon. Member for Edmonton a moment ago, is this. The regulator sometimes finds himself in a position where a trustee has to be found, for example where someone is disqualified or, as in the case discussed, where there is an insolvency event and a trustee needs to be put in. We have to make sure that a scheme is still being well run. What the Pensions Regulator can do is get somebody in flexibly, without going through the processes that a scheme might go through. It is a more light-touch framework for putting trustees in place. Whereas a pension scheme will have a set of rules about how trustees can be appointed, for example, with rules on member-nominated trustees and so on, the regulator can be much more flexible because the priority is to get someone in who can do the job. That is what we mean by flexible, that they are not subject to rules in the same way that the scheme would have been. If that is something the hon. Gentleman is keen to hear more about, I am very happy to get the regulator to write to him with further details.

As the hon. Gentleman says, we have an interim chief executive at the Pensions Regulator. We had a change of chair earlier this year, and the new chair, Mark Boyle, has made a very good start in his role. We took the view that we have to try and co-ordinate these things, and having the new chair oversee the recruitment process of the chief executive seemed a logical structure. I can tell the hon. Gentleman that the recruitment process is now at an advanced stage. I hope that we will be able to make a permanent appointment before too long. I have no reason to think that the new appointee, whoever that may be, and I do not know, will take a different view on these issues.

The hon. Gentleman asks about the power to amend indexation. I can give an interesting example, or as interesting as it gets. We had to decide whether cash balance schemes should have mandatory indexation. It could be argued that those schemes are really DC—they are like pots of money—and, therefore, why would there be mandatory indexation? Or it could be argued that they are salary related and, as in the supermarket example which I gave, the amount of cash which someone builds up in a cash balance scheme depends on their salary. It is a percentage of their salary. So which is it? Is it salary related and therefore indexed, or is it cash and therefore not indexed?

We took the view some years ago that we would not require indexation of cash balance benefits, because what most people were actually doing was taking the cash and buying an un-indexed annuity. It therefore seemed a bit odd to say that there had to be mandatory indexation of the benefits of cash balance schemes. When other people building up pots of money were buying un-indexed annuities and that was the norm or the default, why would we say that if someone has a cash balance scheme the only annuity which that could provide had to be an indexed one? That is an example where the case could be argued both ways. Should it be mandatory indexation, or should it not? We concluded by analogy that it should not but, as you can see, whether it looks more like it is salary-related and DB, or whether it does not, depends on whether you think indexation is appropriate for consistency.

That is really all that we mean by these powers. We have set out our general approach and we are not touching existing indexation or DB more generally. However, if in future a type of scheme comes up that is in a bit of a grey area, we would reserve the power to make a judgment on whether indexation applied.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for those responses, which were illuminating. I look forward to hearing from the Pensions Regulator on the flexible procurement powers. There is a danger: the Government are clearly very keen to meet their obligations under their red tape challenge, but it seems that a lack of transparency is possible. Everyone can see who is on a register of trustees and who has been accredited, for want of a better word. It depends on what we find out about the flexible procurement panel, but there could be concerns about a lack of transparency of the procedure for appointing a trustee to do the job regarding insolvency.

Of course, time is often of the essence in these matters, and I am not insensitive to the importance of giving the regulator the power to act quickly and decisively in an insolvency event. However, some questions remain about this issue. I thought the Minister was going to give me a tautological explanation of a flexible procurement panel when he described it as “flexible” but, to his credit, I must say that he did significantly better than that. However, further clarity on this issue would be welcome.

Clause 18 - Rules about modification of schemes

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 12, in clause 18, page 8, line 35, at end insert—

‘( ) In section 67 (the subsisting rights provisions)—

(a) in subsection (3), omit paragraph (b) and the “or” before it;

(b) after subsection (3) insert—

(3A) Regulations may provide for cases in which the subsisting rights provisions do not apply.””

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss Government amendments 13 to 17.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I shall explain the purpose of clause 18 before explaining the changes we have made since Second Reading. We have gone through transfers, early leavers, indexation and trustees. We come now to the issue of how schemes are modified, and what the provisions are for the modification of pensions schemes.

First, let me explain what the clause does. Sections 67 to 67L of the Pensions Act 1995 contain provisions to protect members against modifications to what are called their subsisting rights. They protect members by placing restrictions on modifications to schemes, where the change would or might have an impact on the members’ subsisting rights. Some changes can be made only if the member agrees, and these are called protected modifications. Section 67A sets out the circumstances in which a modification to members’ rights is a protected modification.

Currently, section 67A states that

“a change must be considered as a ‘protected modification’ where money purchase benefits would replace non-money purchase benefits, or where the change would result in a reduction to a pension in payment. This clause amends section 67A to include a proposed modification where a right to benefits that include a pensions promise is to be replaced by a right to benefits where there is no pensions promise.”

This comes back to the question asked by my hon. Friend the Member for Amber Valley: where you have an existing right, can it be changed? Just to reassure him, we are extending earlier legislation to make sure that where a pension promise is replaced by a right to benefits where there is no pensions promise, that is regarded as a protected modification, in other words, one that requires member consent.

The definition is extended to take account of the changes in part 1. The pensions promise has the meaning given in clause 5 and it can be made only if the member consents. We have added another protected modification to ensure that there is a similar level of member protection as exists now.

The first part of amendment 13 adds another protected modification to section 67A. On reflection, we had some concerns that we had not gone quite far enough to reflect the breadth of shared risk schemes. Making modifications that take a benefit from a pensions promise to no pensions promise is clear cut, but there may be other benefits where the nature of the promise changes. So we have added another protected modification, which applies where the proposed modification would take accrued rights where there is a right to an income, subject to a pensions promise and change them to a non-income benefit. Amendments 16 and 17 add a definition of retirement income for this purpose by cross-referencing to clause 7. We have also made a technical amendment to facilitate the restructuring of the Bill.

The second part of amendments 13 and 14 import existing text from schedule 4. We will be discussing amendment 40 in due course which seeks to remove schedule 4 as part of a restructuring of the Bill. The second part of amendment 13 ensures that any modification that would or might result in a subsisting right of a member, or survivor of a member, being replaced with a right or entitlement to collective benefits is a protected modification. Amendment 14 ensures that collective benefits are carved out of the ambit of one of the existing protected modifications, which applies where the modification would or might result in the prevailing rate of pension in payment being reduced.

Stephen Hammond (Conservative, Wimbledon)

I am sure that everyone on the Committee will support efforts to ensure that there are proper rights and that they are protected. Can the Minister set out whether, if there is a change to collective benefits, any one member can veto those changes, or do a majority of people within the collective scheme have to support the change? If one member does not support the change, can they stop it going through?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend. To clarify, the types of changes we are talking about in section 18 relate to pensions promises, which get changed. In a collective scheme, there are no pensions promises, so we are talking about shared risk schemes, in particular. In answer to his general question—in a collective scheme, who gets to decide—there will be trustees or a governance committee. For shorthand, let us say trustees. They are there to represent the generality of the interests of the members as a whole. Therefore, there is a set of scheme rules, which govern how they have to act. They are put in place to act on behalf of scheme members. For example, where there is a shortfall, relative to a target, there will be scheme rules which indicate what should happen. Obviously, those scheme rules can be amended in certain circumstances and there will be rules about that. There will be a whole structure of governance, of people looking out for the generality of members across the board. Different members will have different interests, so there will be a conflict of interest. For example, if you are short of money, do you take money off the pensions or the workers? When the scheme is set up there will be a set of principles that govern what should happen in those circumstances. They are not set in stone; they can be changed. The manner in which they can be changed will differ from scheme to scheme. I hope that gives my hon. Friend some explanation.

If I may clarify what is in the clause, this idea of protected pension rights is down to a matter of individual consent. In the sorts of schemes I am talking about these changes are subject to the consent of the individual member.

Finally, we have also inserted a new regulation-making power to enable us to disapply the subsisting rights provisions where appropriate. We need to make sure that the subsisting rights provisions do not put obstacles in the way of collective benefits operating as we intended. There could be circumstances where it might be appropriate to disapply subsisting rights provisions in relation to collective benefits. That is not to say that protecting the rights of members with collective benefits is not important, but as we will discuss later, those benefits are different and the way we protect the interests of members is different —so we will be coming back to my hon. Friend’s point.

There is a regulation-making power in section 67(3)(a) of the Pensions Act 1995 to disapply the subsisting rights provisions in relation to the exercise of a power in a “prescribed manner”. We do not think that the wording of the existing regulation-making power is quite wide enough to let us do this. That is why this amendment replaces the existing power with a new, slightly wider power.

I hope that that explains what we are trying to achieve. Again, there is a set of rules already out there for the modification of schemes. We are saying, “What about shared risk schemes, for example, or schemes where there is a pension promise and a proposal to replace that with something else, whether that is a different promise or no promise at all?” In general terms, we are saying that that sort of situation would be covered by similar provisions. I commend amendment 12 to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I have an observation to do with something that I think clause 18 eliminates and it applies to a number of other clauses as well. The Government lack a prescriptive definition of what constitutes a shared risk scheme, so they are having to try to cover a lot of ground in drafting these clauses. At the end of his explanation the Minister alluded to the breadth of shared risk schemes, and to the variety of promises therein that are possible under this legislation. Can the Minister elaborate a little on what he thinks that breadth amounts to? Where are different sorts of risk-sharing scheme likely to emerge? He mentioned no-promise, a bit of a promise and a significant promise. Can he elaborate on his sense of how the powers in the clause are likely to end up being applied to the various shared risk schemes?

Steve Webb (Liberal Democrat, Thornbury and Yate)

A variety of shared-risk schemes is possible, some of which provide quite a high level of guarantee and some of which put a lot of risk on the individual, although with a limited underpin. There is a whole spectrum.

We envisage one model of shared risk that we call the pension income builder, whereby people lock in a bit of guaranteed pension for each year that they serve. That might be provided by an annuity provider, an insurance company or someone like that. Clearly, there is a cost. Therefore, with that scheme, if someone is the sort of person who wants some certainty on their retirement income, they might find, as they get through their working life and nearer to pension age, that they have been building up more and more certainty each year. That is a progressively harder pensions promise—those things cannot be ripped up.

I mentioned cash balance, where the promise is a pot of money but what someone gets for it depends on how life is at the time—inflation, interest rates, annuity rates and so on. Essentially, the nature of the promise could entail a pot of money but with some sort of guaranteed underpin and, therefore, a downside risk protection. Some schemes pool longevity risk, which look like an old-style DB scheme. For example, the Tesco shared-risk scheme—although I would not want any lawyer watching to say that I am decrying that scheme—is set up so that each year someone serves with Tesco, the age at which they draw their pension relates to any change in longevity since a year ago. If longevity is improved, the date at which they can draw the pension they have earned potentially goes up. That is risk sharing of a sort: it is still a final salary or salary-related pension, but there is some risk sharing on longevity.

Therefore, people will share risk in different ways: investment risk, inflation risk, longevity risk and so on. We do not know the combination, whether that risk sharing is between the employer and employee or with a third party, or whether it is a ROF. There will be all those different combinations, which is why we cannot be too prescriptive in the Bill about the rules that will apply. We have tried to set out general principles and give examples, but we cannot in primary legislation deliberately cover every eventuality, because we want to see creativity.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

That is very interesting. The Minister mentioned Tesco and he is not an expert on Tesco’s scheme. He said that the risk sharing lay in the fact that, if longevity increased every year, the date on which someone could draw their pension would go up. Is that correct?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Rather than describe Tesco’s scheme, let us take a hypothetical scheme that looks like that. Let us say that the normal pension age was 65 before this process sets in. Longevity implies that 66 is the answer to the question. They would say that the person had acquired their sixtieth at the age of 66. We will then devalue it back to 65. It is not that someone has to wait until they are 66 to get it; it becomes available at 66. If someone still wants to draw it at 65, they will get a slightly reduced value equivalent. That is how it works. It is not that someone gets a little bit of their pension every year until they are 90. It can all be drawn on a given date, but it is all converted into a common numerator.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

In that hypothetical scheme, it sounds to me that the risk is all taken by the scheme member not the employer. How is that a shared risk?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Because an awful lot of the final pension is still promised; it is still a sixtieth, or whatever, of the final salary and it still has statutory indexation. For example, if inflation went mad, there would still be statutory indexation, so the inflation risk is being borne by the scheme up to the statutory limits. If wage growth went crazy, the member would still get a pension as a percentage of their wage whatever it happened to be. If the stock market crashed, the scheme would have to fill the hole in the pension fund; the member would not have to do so. That is what we mean by shared risk. Future changes might mean that the pension scheme member gets something different from what they expected, but many other changes mean that the employer still bears the risk and has to deal with it.

I have a couple of other examples of a shared-risk scheme to offer the hon. Gentleman: hybrid schemes under which all members are entitled to both DB and money purchase benefits; and schemes that offer indexation additional to that required by statute but on a discretionary basis. A scheme could offer statutory indexation but say that, as long as things go well with the fund, it would meet inflation up to a higher figure. I hope that I have given a flavour of those different models. There are a lot of permutations and, no doubt, many we have not yet thought of. That is why we are keeping a degree of flexibility in the legislation.

Peter Bone (Conservative, Wellingborough)

It may be of interest to the Committee to know that I intend to allow a stand part debate on clause 18.

Stephen Hammond (Conservative, Wimbledon)

I will try not to delay the Committee for too long in what I hope will be a short stand part debate. In the light of the contribution that I am about to make, the Minister will recognise why I posed my earlier question. Public sector schemes fall into two basic categories: those provided principally to civil servants, and those provided to other public sector bodies such as the BBC, the Bank of England and Transport for London. I want to address that second group of schemes in my short contribution. It seems to me that this is an appropriate time to raise, using the example of TfL, some of the problems that those schemes have and to test the Minister on a couple of things.

The TfL scheme is a public sector scheme that is not specifically provided for in legislation, although a lot of public service pension schemes are provided for in legislation, and TfL makes the rules of the scheme. That is done in a similar way to many private sector organisations. The scheme was established under a trust arrangement with a corporate trustee, and it is governed by a trust deed and rules. For accounting purposes, however, the TfL scheme is treated as a local authority scheme. In addition to the members of the TfL public service pension scheme, a small number of TfL employees are still members of a local government scheme. The scheme must still follow all the usual HMRC rules.

Although there is a great deal of commonality between public sector pension schemes, not least because they have rightly been subject to generally applicable legislation, there are still significant differences between the governance and benefit arrangements of some schemes. Those arrangements have evolved over time, and if they cannot be changed as working practices change, the sustainability of the scheme may be undermined. Unusually, the TfL scheme is governed by a restrictive trust deed, and its requirements are not all reflected in other public sector schemes by any means. The TfL scheme is not the only such scheme; a small group of schemes are structured in a similar way. The TfL scheme, almost uniquely, allows any individual member to veto any rule that might change benefits in any way. Effectively, they can block changes of any sort to the scheme, even those that might allow the scheme to provide better benefits or to benefit from the Bill. Even if the trustees might find proposed changes in benefits agreeable, the trust deeds of the TfL scheme and several other public sector schemes allow one member to veto the whole thing.

The Bill does not quite catch those unique arrangements, and that has important consequences for the sustainability of some public service schemes. At least one of the schemes has considered closing to future accruals, which would be highly undesirable. There is potential, either in the Bill or afterwards, for the Government to look at a small, technical piece of legislation that will allow such schemes to bring their trust deed and governance into line with common practice in the public and private sector, which will allow scheme changes such that the scheme becomes sustainable on both a cost and benefit basis on the future.

I recognise that I am talking about a small and technical situation. The Minister may not necessarily want to address the TfL scheme individually, so he may find it difficult during the passage of the Bill to meet me and the commissioner for TfL, but I hope that he will agree after the Bill receives Royal Assent to meet the commissioner and me to discuss the problem that affects this group of schemes, and to discuss whether we might find a small piece of pretty minor secondary legislation to address that point. It is hugely important to people who have pensions with such organisations, because it affects their sustainability into the future.

I understand the Minister’s point about not making too many overall commitments in the Bill, but the situation is serious. I would be grateful for his recognition of that seriousness, and I hope that he will agree to meet me afterwards.

Richard Graham (Conservative, Gloucester)

May I add to my hon. Friend’s points about Transport for London? Although it is not strictly part of the Bill, my memory of the TfL scheme is that it was paying out pensions to many people who were no longer alive. That is not unique, but a fairly frequent problem with large pension schemes. Given that the taxpayer in general is the person paying—

Peter Bone (Conservative, Wellingborough)

Order. I am sorry to interrupt the hon. Gentleman. The Minister must not pass notes to his officials directly, or I will remove his officials from the room.

Richard Graham (Conservative, Gloucester)

If the Minister responds to my hon. Friend the Member for Wimbledon on the TfL scheme, will he touch briefly on whether paying pensions to people who are no longer alive, but whom the pension scheme is unable to trace, could be tackled at the same time?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend the Member for Wimbledon for raising this issue. I appreciate that when pension schemes are governed by trust deeds or rules that are restrictive, it can be a challenge for them. The rules of the TfL scheme are that pensions must be uprated in line with the retail prices index, and the Government generally use the consumer prices index for indexation. When we made that change to the basis on which we stipulate the minimum indexation requirements, we did so allowing schemes whose own rules allow them to change to switch to CPI. We then had to make a decision on whether to override scheme rules to allow, in the circumstances that my hon. Friend described, schemes to say that, although their trust deeds say RPI, today’s Government say CPI and that dominates what the scheme rules say in the statutory override.

We consulted and thought long and hard about that and on balance—it was a balanced judgment after thinking about it for a long time—we decided not to have a statutory override. It was some years ago when we looked at this for the first time. The challenge is that schemes are set up on a particular basis for a particular reason. For example, it may be far-fetched, but RPI or high inflation protection might have been part of the deal, not with reference to a particular scheme but in general terms. When the rules are written, they often reflect a deal, a conversation or a bargaining process. For example, a scheme might have had hard-wired generous indexation in return for scheme members accepting something else that was less generous. If one bit of that deal is allowed to be unpicked some years later, there is a danger of creating unfairness.

Sponsoring employers often say to us—I appreciate that in this case the sponsoring employers want to make the change—that they make rules and Governments then come along and change them and that it is hard to plan and to have certainly about pensions if people change the rules and when they have decided a package and a future Government comes along and says they do not like one element of the package so they change it without looking at the issues in the round.

We looked hard at a statutory override. My hon. Friend the Member for Wimbledon said that this is a minor and technical matter but, sadly, I beg to differ. Our survey research shows that 47% of schemes have RPI indexation hard-wired and cannot change their rules. If changes were made that applied just to TfL, we would have a queue at the door and 47% of schemes would say, “What about us?” It would have a far-reaching impact.

Stephen Hammond (Conservative, Wimbledon)

I am following carefully what the Minister is saying. He will recognise that I did not actually talk about indexation. I made the point that this was not just about indexation, but about any change to the rules in these groups of scheme. The point is that any change to the rules can be vetoed. The essence of the Bill is to make changes so that we can create particular types of scheme that are sustainable in the future. I understand his point that indexation is not necessarily a minor technical matter, but allowing a change in the rules such that the trustees could vote for something would seem to be simply what the Bill is trying to achieve.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend; going forward, schemes can be set up on that basis. The challenge we face is that we are dealing with a set of promises that were agreed, in some cases decades ago, as part of a package. It may be that the participants were told, when the deal was offered, that the pension scheme would look like this and part of the reassurance when many people signed up to it was that there was no need to worry. There would have been a concern that a future employer could “renege”, though that is a value-laden term, or could have made a deal and then five years later would want to change that. If members did not have a right of veto, it could have been imposed on them. Coming back some decades later and saying, “Well, we can all see that it is reasonable that this should be allowed to be changed”, makes it much harder to agree these deals in the first place, because people are given reassurance that things will not change by the rules of the scheme. That is part of the basis on which they accept the rules of the scheme. I appreciate that this constrains trustees and schemes, but we did look very hard at this earlier in the Parliament in the particular case of indexation. We took the view that it was a significant change and we would not override what schemes themselves had decided.

It is worth adding that we came back for a second bite at this when we looked at the position of protected persons. Where people have worked in the nationalised industry in the past and they now work for a privatised company, part of that deal was, and I oversimplify, that their pension rights would be protected and a future Government would not come along and change those protected pension rights. There will be some long-serving TfL workers who are protected persons. When we considered the 2013 Act, we looked at whether we should have a statutory override for protected persons because their employers would not be able to recover the loss of the national insurance rebate through changes to the scheme. On balance, we decided not to override the pension promises given in the past. As my hon. Friend will know, having been a Minister in the Department for Transport, the promise was given in that case by Transport Ministers to scheme members that their scheme rights would not be overridden. I have to be honest, Governments do change pensions, and state pensions in particular, but I feel that there has to be a very high bar before Governments override scheme rules.

My hon. Friend makes an important and valid case. There has been correspondence between the Secretary of State in my Department and the Mayor of London on this issue. There has been correspondence at official level. I can assure him that we have tried to respond fully to the concerns that have been raised. We hope that the Bill will receive Royal Assent around March. In the event that I am still in post after that period, I will be very happy to meet him.

Clause 19 - Introduction and definition

Steve Webb (Liberal Democrat, Thornbury and Yate)

We have arrived at the sunlit uplands of part 3 of the Bill, which deals with collective benefits. We have dealt with scheme definitions: DB, DA or risk sharing, and DC. We are now talking about benefit-level definitions and the distinction between individual benefits and collective benefits, which is a relatively new concept in British pensions law. Clause 19 is introductory and sets out some definitions of collective benefits.

Why are we interested in that? If we look around the world at the most highly respected pension schemes—many are in Denmark, the Netherlands and Canada—very often, the schemes that are well regarded have collective elements to them. For example, in the Netherlands, around 350 collective schemes are operating. The Danish pensions scheme, which has collective elements in parts of it, was ranked No. 1 in the world in a survey for the integrity, adequacy and sustainability of its provision. In a sense, the question we asked ourselves in the UK is if these kinds of models can work well in other parts of the world, are they things that we could learn from, and is there something that we can do in this country? This part of the Bill—clause 19 begins that process—establishes the concept of collective pensions. It says what it is and what it is not, and enables us to have a discussion about this exciting new form of pension provision.

To be clear, as part of reinvigorating the private pensions landscape, we want to enable people to access a wide range of pensions. We are not saying that this is the right model for everybody, but we think it should be part of the mix, and as I have said, some of the best pension schemes in the world offer collective pensions. Although we tend to get fixated on the Netherlands, in Canada there are a number of very interesting—well, relatively interesting—new forms of pension provision that are of a collective nature. We take the view that we have a lot to learn from high-quality pension systems of the sort that are viewed as the best around the world.

One reason why we are keen to allow for this sort of provision is that collective benefits can potentially provide more stability in outcomes, compared with individual DC schemes. As a Government, we are not making grand claims that collective schemes will always be a vastly bigger. They may be, depending on the circumstances, but that is not the claim we are making. However, our modelling suggests pretty clearly that in general, they will provide more stability of outcome and our consumer research shows us that that is what consumers want.

The Bill will mean that collective benefits in the UK cannot attract a funding deficit for an employer, which will limit the employer’s liability and reduce risk. From an employer’s point of view, a nice thing about CDC is that it might offer greater stability than an individual DC scheme, but without all the risks associated with having a DB pension scheme on their balance sheet. There is also the potential in future to develop sector-wide schemes that provide collective benefits that could allow people to build a pension in one scheme over their whole career, even if they move employers. On one of my visits to the Netherlands, I recall being introduced to the Dutch tulip growers’ scheme; if someone spends their entire life growing tulips, even with a range of employers, they will remain a member of the tulip growers’ scheme. I do not know how many tulip growers there are in the Netherlands, but the principle is that for larger industries, that could deliver on a large scale that could further boost members’ pensions by enabling more efficient operation.

We have evidence of demand and interest from employers. As we heard in oral evidence, although it is difficult for employers who are interested to say so publicly, we know that there is interest—indeed, a witness said that one of his clients was looking at this model, and I think that as we get nearer to 2016, as we discussed this morning, the level of interest will grow. For example, the Ford Motor Company said in its response to our consultation that it thought that collective DC plans could provide a successful addition to current pension scheme models. As the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said this morning, the Institute for Public Policy Research conducted research with employers and consumers, finding that

“there would be strong public support for a collective pension…it appealed across different income levels, life-stages and ages.”,

and that

“participants in our research preferred a Dutch-style collective scheme that shares the risk among all members and removes the need for an annuity, and that incorporates some form of smoothing into the accumulation phase.”

Given the attractiveness of the model, we think it is crucial that we have a fresh definition and separate provision for collective benefits, because they are different from the current pervading models. To reiterate, collective benefits and shared risk schemes have different identities. Part 1 of the Bill defines three categories of scheme. Part 3 introduces a new legal definition of “collective benefits” and contains powers to enable us to create a governance framework for schemes to the extent that they offer collective benefits.

Clause 19 defines a collective benefit as a benefit where, in all circumstances, the rate or amount payable depends entirely on the amount available to pay that member’s and other members’ benefits and the factors used to determine what proportion of that amount is available for the provision of a particular benefit. To state the blindingly obvious, it is not a collective benefit if it is a straight money purchase benefit, or of a description specified in regulations. We will be able, as new models emerge, to clarify what is and is not a collective benefit.

This is a building block. It provides for key legal requirements to be applied or disapplied, and that definition is used throughout part 3 for schemes to the extent that they provide collective benefits. They are distinct to the nature of collective benefits. That is why we have a distinct definition and why they are not merely defined at scheme level or synonymous with the shared risk scheme definition. The new benefit definition is also used in the context of existing legislative requirements so that certain elements of current requirements are applied or disapplied as appropriate.

We talked this morning about the concept of a pensions promise, but to be clear, collective benefits cannot contain a promise. Promised benefits are excluded by the definition of “collective benefits”, as such benefits will not depend entirely on the amount available to pay that member’s and other members’ benefits and the factors used to determine what proportion of that amount is available for the provision of a particular benefit. Collective benefits are provided on the basis of investing members’ assets on a pooled basis in a way that shares risk across the scheme’s membership.

There are a number of concepts that we will come to in this clause and the succeeding clauses. Clause 20 refers to targets, so I will say a word about those. There will always be a target attached to collective benefits. That target must be achievable within a specified probability range, in order to provide all scheme members with some confidence about the indication of what they might receive from the scheme, but it is not the same as promising members that they will receive a benefit at a specified level or amount. Collective benefits are not the same as the definition of a shared risk scheme. There could be collective benefits in a shared risk scheme if there is also another form of non-collective benefits that offer a promise, for example. Alternatively, there could be collective benefits in a DC scheme, either as the sole type of benefit or in conjunction with money purchase benefits.

Another attraction from an employer’s point of view is that there is no employer liability to stand behind or guarantee a target offered in relation to a collective benefit, because there can be no promise attached to a collective benefit. We have chosen the definition so that there can be no liability on an employer’s balance sheet, as well as to allow the scheme to pool the available assets and distribute them among members so as to provide the benefits on a collective basis.

To be clear, collective benefits and money purchase benefits are mutually exclusive, as is specifically mentioned in clause 19. That is due to the unique nature of collective benefits. They need a different set of governance requirements and involve a different approach to the distribution of assets among members compared with a money purchase scheme. The rights to a collective benefit are different from the rights in a money purchase scheme. For example, there can be redistribution of assets among members in respect of a collective benefit in a way that is not possible for a money purchase benefit. That feature is also reflected in the definition of a collective benefit in clause 19, such that in all circumstances, the rate or amount of benefit must depend on the amount available for the provision of benefits to or in respect of a member and one or more other members collectively.

Finally, regulations allow us to make exceptions from the definition to ensure that we can attach the right requirements to the right types of benefit. The power will be used in situations where it would be more appropriate for the provision of those benefits to be subject to a different regulatory regime. For example—I know that the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East likes to ask me for examples—the Government might wish to exclude certain with-profits pensions arrangements, which currently exist and are regulated by the Financial Conduct Authority, from the definition of collective benefits to ensure that they are not regulated twice: once by the Pensions Regulator and once by the FCA. The power to exclude benefits of a certain description from the definition of collective benefits is delegated to secondary legislation to allow the Department to react flexibly—there is that word again—and responsibly.

Nigel Mills (Conservative, Amber Valley)

We heard in oral evidence that probably the most difficult part of the schemes is getting from zero members to a critical mass. Does the Minister have any thoughts on what approach the regulator ought to take to ensure that early movers do not join a scheme that is insufficiently resourced and not capable of providing collective benefits? That would leave them in a bit of a mess.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Yes, we have given a lot of thought to that. There are various ways to do that. At the start, a solvency buffer might be needed. Because there is a target, in order to be reasonably confident of reaching it, the scheme must put some money aside that is not invested aggressively. Although that helps to achieve the target, it does not give people as big a pension as they might otherwise get. One potential way around that is for the target-setting to take account of the stream of future contributions that we know are going to come. Because we know that money is coming in future years, we can take account of that on day one when modelling a scheme’s ability to reach its targets. We do not say, “Well it might not be there in a few years’ time, so we have to hoard the money now and not invest it aggressively.” That is one example.

A lot depends on where such collective schemes come from. For example, if a former DB scheme, which could potentially have tens of thousands of members, decides to become a collective DC scheme, it could quickly build up scale and volume of assets, so that might be another route in. I am not speaking for the National Employment Savings Trust at this point, but one could imagine scenarios in which NEST has a role to play. I have not discussed that at length with NEST, but I can see immediately that that is a scheme with scale. Some of the master trusts that exist at scale could come into this space. Although there is a blank sheet of paper problems, I regard those problems as opportunities because they mean that we can learn from the mistakes of others. Of course, auto-enrolment has a great advantage. Due to very low opt-out rates, if an employer uses a CDC scheme for auto-enrolment, people would, on the whole, stay in and volume would potentially build up relatively quickly. My hon. Friend raises an important issue, but there are ways in which we can seek to mitigate it.

There are obviously a lot of detailed issues to discuss on collective benefits in this part, and clause 19 gives us some introductory concepts and definitions.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister is right that this is an important part of the Bill. We are discussing what we mean by “collective defined contribution.” The Minister made an admirable stab at it, but at this stage it might be useful to try to get a sense of what we are talking about in language that is intelligible to people who are not pension experts like us.

This came up in the witness sessions, so it might be useful for the Minister to say what he thinks is the big advantage of collective defined contribution vis-à-vis individual defined contribution. I know that it is implicit, and to some ears it may be explicit, in what he says about smoothing, targets, stability and outcome, but it might be useful to bear down on that language. We are constantly searching for more straightforward language on pensions.

It would be equally useful to be honest about the potential downsides of collective defined contribution. Most things have upsides and downsides. The Minister used the term “balance” a moment ago, and it would be useful to have a sense of where he sees the potential downsides. There is an issue with one scheme potentially cutting pensions in payment, which he is concerned about. He has tried to do this, but he should explain it simply at a general level. He said that collective benefits cannot contain a promise. There will be people who do not understand what that means, so it is important that, as we begin discussing these clauses, we have a common vocabulary on these issues.

The Minister talked about the fixation on the Netherlands, and he also mentioned Canada. I suspect that the Department for Work and Pensions has been looking at New Brunswick as an example. He quoted the IPPR, which has done some research on this subject. This morning I asked whether there is a danger in defining something as shared risk if all the risk is being borne by the employee, the scheme member, rather than by the scheme. Are there forms of collective defined contribution that would fail that test?

Another issue, which we have not yet discussed, is the best form of collective defined contribution and whether it should be at an industry level. The Minister mentioned master trusts—does he have a sense of whether we are talking about master trust level or company level? It might even be on a national basis, which is certainly how some schemes operate, admittedly in smaller places.

There are a number of issues with the language. The Minister did not create that language, and it is a constant issue for all of us. This is a cliché, but it has struck me that the communication challenge with this will be significant. The governance challenge will also be significant, and I will say more about that. If we can find a common vocabulary and agree on the terms we use and what they mean, we can hopefully make some useful progress. Those are not the easiest questions—if they are questions—but they are my observations on a common vocabulary as we proceed into the collective benefits part of the debate.

Nigel Mills (Conservative, Amber Valley)

It is a pleasure to serve under your chairmanship, Mr Bone. I entirely welcome the move to create collective pension schemes. That has to be the right way forward. The headline figure of the potential increase in pensions—the idea that someone could get a 30% higher pension than they would with an ordinary defined-contribution scheme—must make these schemes worth pursuing. I suspect that a lot of that is down to the fact that someone would not have to have their investments de-risked towards their retirement date and would not be locked into a particular day when they have to cash in their pension scheme. The scheme could take a longer-term view of the investment risk, and that has to be an attractive way forward.

I agree with the Minister that we want to let a thousand flowers bloom and see what grows up in this market. At some point, however, we have to plant some seeds in the right place if we want to see certain sorts of flower bloom. I wonder if, at some point, these schemes will come to fruition and provide the very real advantages that are often cited. There perhaps needs to be a duty for the regulator or the Department to help employers, trade unions or others to start creating these schemes so that we can get from where we are—zero people in these schemes—to having some top-quality, well managed schemes around and get those higher pension returns. Even as someone who prefers the free market, I think we perhaps ought to look at how we get over that first hurdle, get these schemes into existence and realise their great advantages. I suspect that it will be very hard for the first person to make that move.

I can see a defined-benefits scheme trying to move into a collective scheme, but at that point the employer promise is lost. I suppose that any of the pre-existing fund could be moved, because that is when the promise was pledged, so a whole collection of employees and their contributions would be moved over. I sense that we need to be very careful with employees who are going from having a pension that is promised by their employer as a certain amount to being told, “I’m moving you into a collective scheme where not only am I not guaranteeing it but your contributions could be used to fund other people’s pensions or top them up, and you may end up getting less than you paid in for.” I suspect that move would not be easy to convince people of.

There are a range of risks in how these schemes are managed and how people understand what they have. The key risk is what happens if we have to reduce pension payments. A retired person might think they have £12,000 coming in a year, but something could go wrong in the investment market or the fund, meaning that that pension then has to be cut. That has to be the right thing for these schemes because we cannot have future savers taking all the risks. Otherwise we will have no future savers left or a sort of Ponzi scheme with no one paying in and everyone trying to draw out but having no money left. That has to be the right answer, but it is a real change in risk for the UK pension market. It involves moving to a situation where what we thought was safe could be reduced overnight by quite a large amount. People need to understand that fully, because that is the risk: someone could sign up for a scheme and start to contribute when they are 25, but almost up until the point when they die their pension will be at risk. There will be no point at which they have an absolutely safe pension income, whereas now if someone buys an annuity they at least have some certainty at that point about what they will get in retirement. These schemes will not provide that.

It may be that losing that certainty is a trade-off for a better pension. I can see the advantages of mixed schemes, in which a certain level is completely safe in retirement but some of the money is not. However, we must be very careful that, before schemes are registered, we know what communications about them should look like, so that when people first start saving into the schemes they are certain that they understand the risks they are taking and the advantages. Perhaps the regulator should undertake a long consultation on those details before it gives approval to any of those schemes to start taking cash.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I am sorry to stop the hon. Gentleman in the middle of his interesting contribution. Listening to him talk about the challenge of communicating with savers, it strikes me—it is probably clear to all of us—that this approach to pensions could well have significant advantages in terms of actual retirement income, but it is clearly a form of building up such income that depends on a lot of expertise. Individuals will have to accept that a lot of complicated decisions about smoothing, targets and management of assets will have to be placed in the hands of actuaries, investment experts, and either trustees or managers, as the Bill describes them.

It also struck me, listening to the hon. Gentleman’s contribution and our debate so far today, that that is somewhat in tension with the approach the pensions tax Bill—and this Bill, to some extent—brings in, in which the idea is that individuals themselves will take control of their retirement income. Does he think that that is a potential issue, as pension flexibilities come into play that encourage an approach and a cultural change that focuses on—

Peter Bone (Conservative, Wellingborough)

Order. I am in a generous mood, but that was rather a long intervention.

Nigel Mills (Conservative, Amber Valley)

Thank you, Mr Bone. The shadow Minister has raised an interesting point. It is right that people have choice and that we do not have a regime that punishes them for making certain choices, but equally we want a pension market in which people can choose the best quality schemes that provide the best quality return. The issue is how we end up with informed customers and scheme members at that early point, and how we make sure that people understand that this sort of scheme is not a simple one. It is not like a defined-benefits scheme, in which people have a chance of understanding what the final benefit might be. Even in a defined-contribution scheme people effectively get what they pay in and pray that it works at the end. This scheme has a completely different set of risks.

Richard Graham (Conservative, Gloucester)

There is a danger of confusion about who will make what decisions and who will be responsible for them. One concern that my hon. Friend flagged up was that those currently in DB schemes would suddenly be plunged into a CDC scheme and so on. The point of the offer of defined ambitions in the Bill is that a risk-sharing offer can be available to people who are currently running DB schemes but may be thinking of closing them when contracting out comes to an end. For the individuals in DC schemes, those schemes will continue and they will have control over their own pensions.

The third category—the 100,000 new schemes that are likely to be created at the beginning of 2016—will come into auto-enrolment and the employer will make the decision. That is the opportunity for CDC, with organisations such as NEST, the People’s Pension and the Danish scheme offering a collective vehicle that might suit very small employers really well. I hope my hon. Friend agrees that that is a way of summarising the three different situations.

Nigel Mills (Conservative, Amber Valley)

I do agree. When I mentioned moving defined-benefits schemes into CDC, I was responding to the Minister’s response to me about large CDC schemes starting. I was expressing concern that if I were in a DB scheme, I would not fancy that change in my situation. It is an interesting question. When relatively small employers start creating new pension schemes in 2016, I imagine that trying to create a collective one may be a little ambitious for them. I wonder whether the ideal situation would be to have industry-wide schemes, or ways of aggregating schemes, so that people would have the chance, through their employer, to sign up to a collective scheme that was not the employer’s own. The idea of the proposal is to ensure that employers are not on the hook for anything other than their annual contributions, so it would strike me as a great opportunity for them.

Before any of the schemes can register and start inviting members and signing up employees, I suspect that we need the regulator to implement a framework to make clear the requirements for communication, scheme rules, quality standards and management. Otherwise, we may end up with some pretty bad collective schemes, run by people who do not know what they are doing. If that happened, some members might end up in collective schemes that had huge downsides, when they did not really want to do that and did not understand what they were doing. They could find themselves with a large amount of their savings trapped in such schemes.

I do not want us to have a mis-selling nightmare in 10 years’ time where people who are in these schemes are all underwater and will never receive what they were aiming for, and companies have to start worrying about paying out to people who have already retired with certain promises. If we get the system right at the start, it could be really powerful, but if we get it wrong, we could end up with the next mis-selling nightmare.

Dave Watts (Labour, St Helens North)

Is the hon. Gentleman as concerned as I am about risk? I think that is what he is talking about. If someone takes their pension assets out and sticks them in the bank, they will have some guarantee of return on those assets, and they will have a guarantee on their cash lump sum. Alternatively, if they take their assets out and buy a house, they will probably have some security there. It seems to me that what is being proposed is a pension scheme that does not give its members a great deal of safety that the assets that they have worked for years to build up will be protected, or that their income will be protected.

Nigel Mills (Conservative, Amber Valley)

I think there is a point, once someone has retired, at which they have little chance to replace income that they lose. If they are absolutely reliant on the £12,000 that they think they will receive for life from their collective DC scheme and that is cut to £10,000, they have no way of replacing that lost £2,000. They really are exposed. Until they retire, however, they have the scope to extend their working life or whatever else. I think that that is the right situation.

I suspect that none of us fancies being Pensions Minister the first time one of the schemes has to reduce in-payment pensions. There will be a huge outcry, and everyone will be saying, “What on earth is this? How can you reduce payments in retirement? I never thought that would happen. Surely the taxpayer must ride in to the rescue and protect all those whose pensions have been slashed.” We need to get this right from the start so that if and when that happens—the experience in Holland was that that had to happen—people either know that it is a risk, or the material that they should have read made it clear that it would be a risk. I do not think that we can ever say that people will ever read or understand everything. We need to get the system right from the start and move slowly into it, so that we do not end up with a load of poor-quality schemes coming into existence for people who simply do not understand what is happening.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

This time I will make a speech rather than the longest intervention on record, Mr Bone.

The hon. Gentleman has raised some interesting points. I was going to ask, but he caught me napping by sitting down, what he thought was the way to achieve the right outcome. There is a view, rightly or wrongly—I hope rightly—that the advertising campaign around auto-enrolment has been very successful, but we do not know whether that is the case. We know that auto-enrolment has been successful so far, but we do not know whether the campaign has been part of that. It is quite hard to assess. [Interruption.] The Minister says that we do, and that is good news.

Communicating to individuals that their pension in payment could be cut, which has never really happened in the UK system, is a big challenge. Most people will not know what a pension in payment is, to start with. That language will not make sense to them. However, they will soon work it out if we say that their pension when they retire could, in the worst circumstances, be cut.

I was trying to say at great length earlier something that can be said quite simply. The Government are going down the path of saying to individuals “This is your money,” and they are on the side of people turning their pension pots into an income. The language is very much, “You will have savings that, from the age of 55, you can do what you want with.” That potentially increases the difficulty of selling a form of pension that involves smoothing the process and gives a retirement income, rather than one that allows people to buy something for themselves. The challenge is perhaps significant to begin with, but the way in which the budget reforms interact with the Minister’s desire to promote CDC might well not work to the advantage of those who favour it. That question needs to be asked. There cannot be a definitive answer, but I am concerned about getting people to believe on the one hand that CDC is the way to go and, on the other hand, putting powerful emphasis on “This is your money, you can access it whenever you want.”

There is obviously a specific question: what impact will the possibility of exit at 55 have on CDC? We heard from one witness who thought that it could be overcome, but that depends on the design of the scheme. To be fair to the witness, they seemed to give a rounded explanation, but it was not one that we could communicate to a member of the public in any clear fashion, and that is a significant challenge.

Richard Graham (Conservative, Gloucester)

The only point worth adding is that we do not need to take too seriously the contribution from one witness that the presence of a CDC pension necessarily means that the people in it are going to get pensions that are 30% to 40% better than those who are not in it. I do not think the witness presented any credible evidence to substantiate that suggestion. The reasons for having a CDC pension are much more to do with administration, simplicity, governance and making life easy for small employers who are going to do the right thing under auto-enrolment and put their employees into a pension scheme. They are not going to be able to offer all the trappings and substance of a large trust-based scheme that has been around for the past 50 years. I see that as the main role of the CDC, and it will save money on the cost side. We all hope that the investment returns will be better, but I do no think there is any evidence to substantiate that at the moment.

Nigel Mills (Conservative, Amber Valley)

It strikes me that some of those advantages could be achieved by some big consolidated scheme whereby people are allowed to enrol members in a big, defined-contribution scheme rather than having any collective angle to it. Is that perhaps what my hon. Friend is envisaging?

Richard Graham (Conservative, Gloucester)

Where my hon. Friend is right is that if someone has a big company with a significant number of employees, they can get economies of scale from their own scheme. The 100,000-plus businesses that are going to come into the scheme after January 2016 are small companies with fewer than 10 employees. For them, there are no such options available. If NEST and the other entities that I mentioned set up CDC options, they will be incredibly appealing to small employers.