Pension Schemes Bill [HL] - Committee (1st Day) (Continued)

House of Lords, 21 November 2016.

Lord McKenzie of Luton (Labour)

My Lords, I shall speak also to Amendments 14 and 15. I shall be brief. Clause 7 deals with the fit and proper persons regime and sets out which persons the Pensions Regulator must assess. It provides that regulation should set out matters which must be taken into account.

Clause 7(2)(e) identifies as one of the persons who must be assessed as fit and proper,

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

By way of a probe, Amendment 13 would delete the reference to a scheme not established under trust. We ask the Government to spell out the type of arrangement they envisage would not be established under a trust and, where responsibilities are placed on trustees in the Bill—for example, in Clauses 14 and 15—by whom they would be discharged. Amendment 14 would ensure that the Pensions Regulator was subject to an ongoing requirement to ensure that specified persons remained fit and proper. Can the Minister advise whether and how such a requirement is envisaged to be met? Amendment 15 would change the nature of the resolution from negative to affirmative. I trust that the amendments will receive the same favourable response as those raised previously. I beg to move.

Lord Young of Cookham (Conservative)

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

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

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

by removing the words,

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

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

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

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

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

Lord Hutton of Furness (Labour)

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

Lord Young of Cookham (Conservative)

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

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

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

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

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

Lord McKenzie of Luton (Labour)

I am grateful to the Minister for his response to those amendments, and am certainly grateful to my noble friend Lord Hutton for that important point about how, in the circumstances, it is better to have an express provision than an implied one. I will work through the record of what the Minister said to see how close we got to that express provision, or whether it is still essentially an implied power. I understand what the noble Lord said about the nature of the regulations. That will run through this Bill.

I return briefly to this question of when master trusts are set up but not under a trust. I think the noble Lord said that would be a rare or unusual occasion. I do not know whether he can say a bit more about that. Particularly, the raft of the Bill focuses on the obligations for the trustee or trustees who set up master trusts, but where it is not set up under trust, does it evolve into something that becomes a trust and therefore you get trustees in the normal way or does it continue with some other existence? If the latter, what is the nature of the person who would be a trustee were it set up under trust? That puzzled me a little. If the noble Lord felt it would be better to write to me, I would be happy with that, but if we could deal with it now that would be helpful.

Lord Young of Cookham (Conservative)

The noble Lord is very generous in suggesting that this matter might be addressed better in a letter than in an exchange across the Dispatch Boxes. I made inquiries and it is indeed the case that some are established other than under trusts. Obviously, we do not want a loophole that people can use because they are not formally constituted as a trust. However, I accept the noble Lord’s generous offer and will write to him giving a more detailed response to the issues he raised.

Lord McKenzie of Luton (Labour)

I am grateful to the noble Lord. Just to be clear, in the follow-up I would like to try and see what the role or nature of that person would be who would be a trustee if set up under a trust. Are they something else under a regime that is not set up in that way? Having said that, I beg leave to withdraw the amendment.

Amendment 13 withdrawn.

Amendments 14 and 15 not moved.

Clause 7 agreed.

Clause 8: Financial sustainability requirement

Amendments 16 and 17 not moved.

Clause 8 agreed.

Baroness Drake (Labour)

My Lords, Amendment 18 proposes a new clause that, put at its simplest, seeks a compensation fund or provider of last resort when a master trust fails and there are not enough resources to meet the costs of wind-up and transfer. It is the in extremis protection, ensuring a last line of defence for members’ funds if the capital buffer required under Clause 8 or the proposed continuity option provisions in Clause 24 fail.

Setting regulatory operational capital requirements for master trusts is important but does not guarantee the security of members’ benefits or rights. I am sure the Minister will reassure us that the Government intend to be robust. The trouble is that we are not sighted on the robustness of the capital adequacy or transfer-out regimes—indeed, neither is he at this point—because so much of it is still left to further policy decisions and regulations. Concepts such as “sustainable”, “sound” and “sufficient financial resources” are undefined in the financial sustainability requirement in Clause 8. There are no draft regulations for us to consider. There is no provision in the Bill for what happens if the regulatory regime fails to ensure that sufficient financial resources are available in the event of a master trust failure.

The Constitution Committee points out in its letter to the Government of 11 November that Clause 24, dealing with wind-ups and transfers-out, is an example of the Bill delegating the power to make regulations that will determine substantial policy issues when a draft of the regulations is not available and the Government have yet to determine their policy. This regulatory regime will be applied to an existing market that has developed in a variety of ways. The Government cannot guarantee that they will have time before its introduction to create and hold the benign behaviours needed to protect scheme members. The impact assessment acknowledged uncertainty about the Bill’s impact because substantive policy decisions will not be taken until the secondary legislation stage. Indeed, such is the amount of further work to be done that the authorisation regime will not come into effect until 2018. The Bill does not make clear what happens if no potential receiving scheme is able or willing to accept the benefits of the members on transfer. The scheme records may be in disarray. The actual costs of wind-up and transfer will not be known or knowable in advance.

Under Clause 33, there are prohibitions on the charges the master trust and the receiving scheme can impose on the members transferring, or on imposing any new charges to meet costs for which a receiving scheme is liable but which were originally incurred by the transferring scheme or as a result of the transfer. If the actual costs of wind-up are very high, the terms of the clause may deter other suitable master trusts from accepting a transfer in whole or in part.

The impact assessment explains that the prohibition on increasing member charges during wind-up and transfer will work because the money to pay for these costs will be met by the access to funding or capital reserves held in accordance with the new financial stability reserve requirements in Clause 8. Yet no regulator can guarantee that those will always be sufficient. Indeed, the impact assessment reasoning is restated by the noble Lord, Lord Freud, in his letter of 14 November. However, neither the Bill, the impact assessment nor the Minister’s letter inform us what would happen if, in a particular failing master trust, the capital reserve requirements proved insufficient for whatever reason. The Bill proposes no contingency plan for the failure of a master trust the records of which are in disarray, which has insufficient financial resources to comply with its duty when a triggering event occurs, and for which no master trust is willing to accept transfer of members’ benefits. What will happen in those circumstances? How will all the members’ funds be protected against increased charges? What liability for or immunity from the past provider’s mistakes will a receiving scheme have? What plans do the Government have for ensuring that bulk transfers between master trusts can legally proceed in an efficient and timely manner to ensure continuity of coverage for members of failed master trusts?

The suggested timetable in the Bill indicates that the new regime will come into full effect in 2018, after most remaining employees have auto-enrolled, so it will be some time before it is in place. However, the retrospective casting of the Bill—which I support—means that for existing unauthorised schemes, the scheme funder is liable for wind-up and transfer costs when a triggering event occurs on or after 20 October 2016. What if that funder has insufficient resources, is a limited liability company or is insolvent? Where would wind-up and transfer costs be recovered from?

In his letter of 14 November, the noble Lord, Lord Freud, comments that in such a situation,

“we would expect the normal considerations in terms of insolvency and court proceedings to apply to this financial debt as to any other”.

That prompts a series of questions for the Minister. What does that mean? Who would bring the proceedings and how would they be financed? If the members of such a master trust were transferred, would the receiving master trust be covered by the prohibition in Clause 33 on increasing charges? The noble Lord, Lord Freud, further comments in that letter:

“We do not expect the number of trusts who will find themselves in this position … without solutions for their members to be high. We anticipate that the market will wish to consolidate”.

That leads to a more general question: how exactly is it to be determined which is the appropriate master trust to be the receiving scheme in a wind-up under Clause 24? How will a potential receiving scheme be identified? Presumably, the regulator will not leave it to other schemes to do some self-organised divvying up. It could be problematic under competition law for a panel of providers to self-organise the divvying up of schemes. Will there be a formal regulatory allocation process, and if so, what will it be?

People need to be reassured that the Bill will provide them with protection in practice. At the moment, that ultimate reassurance is not there. The amendment does not prescribe the model but it fixes the principle of a last resort provision. I recognise that work needs to be done. There are matters to be considered—how to protect against moral hazard; how to ensure that market players do not game the process to cream off the best members; the need to look behind a triggering event to identify evidence of cherry-picking; and the funding underpin for a last resort provision—but there is a compelling need for a compensation or last resort provision, as proposed in the amendment. Without it, the Government cannot credibly assert that the Bill will do what is claimed in the opening line of the Explanatory Notes: protect all savers. I beg to move.

Lord Flight (Conservative)

My Lords, it is actually extremely unlikely—in fact, virtually impossible—that members will suffer if the manager of a master trust gets into difficulties. The assets attributable to the pension fund members are segregated from the assets of the manager. How valuable or otherwise they are will depend upon how well they have been managed and, if there is more than one fund choice, which fund people have chosen.

Secondly, it is clear that the Pensions Regulator will and is intended to play the brokerage role. If it perceives that a master trust manager is in trouble, it will quickly sort out who is going to take over that business. It has value because fees are attached to managing the money, which other master trusts will happily pay. There is even some source of revenue coming back to the master trust in trouble as it is bailed out.

I am afraid that this sort of plaintive request for a compensation fund does not have my support. I thought we had collectively agreed that we did not want another compensation fund. Adding it at the end, almost out of principle, when the chances of it ever being used are virtually zero, is not particularly constructive.

Baroness Bakewell of Hardington Mandeville (Liberal Democrat)

My Lords, I support this amendment, to which my noble friend Lord Stoneham has put his name. The noble Baroness, Lady Drake, has set out the arguments in depth and there is very little left to say. Some means to guarantee the solvency of master trusts is needed, and will be fair. It is essential that it be fair.

If regulation is working well, it is to be hoped that the costs will be minimised and insured against. The regulator should have an incentive to merge schemes where resources look likely to be insufficient, and means to tide them over should be provided for. In other with benefit schemes, guarantees of last resort are provided and the liability risk is much greater. Confidence in pension schemes is essential. It would be very serious indeed if trusts became insolvent. As has already been said, protection as a last resort should be a rare occurrence. I support the amendment.

Baroness Altmann (Conservative)

My Lords, I, too, support the amendment. I am concerned that there are well-intentioned measures in the Bill designed to ensure that there is capital adequacy in these schemes. One hopes that they will work but how will any regulator know in advance what capital is actually adequate? The circumstances in which wind-up could take away people’s pensions, even if the assets are ring-fenced and protected for the members, are those in which there is no other mechanism for covering the wind-up costs. That is where the members’ pensions would be at risk.

Indeed, we saw this a number of years ago with defined benefit pension schemes, which is precisely why we ended up with the Pension Protection Fund. The Government put in well-meaning legislation that required minimum funding standards for defined benefit schemes which were supposed to ensure that members’ pensions were safe even if the scheme or the employer failed. Unfortunately, the situation with the schemes—due to lack of competent administration in some cases but not all; sometimes due to market movements as well—led to members losing their pensions, and the only real protection that ended up being available was this backstop insurance in the form of the Pension Protection Fund.

Yes, we need capital adequacy. Yes, the Bill is really important. But I would be really grateful if my noble friends the Ministers explained why the Government do not feel this is necessary, or how proper protection for members in extremis can be provided. For example, will NEST guarantee to take over these liabilities? Is there some other plan? I would be grateful for some reassurance from my noble friends.

Lord Freud (Conservative)

Amendment 18 requires the Secretary of State to,

“make provision for a compensation fund or for the funding to be provided by another source as a last resort”,

in circumstances where the scheme has had a triggering event and has insufficient resources to pay the costs referred to in Clause 8(3)(b)—that is, the costs of complying with duties imposed under the Bill during a trigger event, and the costs of continuing to run the scheme for a period of six months to two years—and a prohibition on increasing charges during the trigger period applies.

The amendment speaks to the heart of what the Bill is about: protecting members. Along with a number of other amendments, it seeks to add further protections and, perhaps, test us a little on the extent of the measures the Government has provided for in the Bill as introduced. I welcome both the focus on member protection and the opportunity to explore the specific measures in the Bill which provide the members with security should the scheme decide to close or start to fail. The amendment would mean that if a scheme experienced a triggering event and had insufficient money to pay for the costs associated with the options the scheme may pursue following a triggering event, other funds must be provided. It also goes further to say that it is the Secretary of State who must provide a compensation fund or for the funding to be provided by another source.

In responding, I will touch on a few areas. I will outline, first, the measures which provide that sufficient funds must be held; secondly, some of the costs and complexities that would be introduced into the system should a compensation fund or other funding be required; and, thirdly, the compatibility with the regime provided for in the Bill.

I turn to the measures which provide that sufficient funds will be held. First, the main provisions in the Bill requiring schemes to hold certain funds are in Clause 8, which provides that for the scheme to be authorised it must satisfy the regulator that it has sufficient resources to meet certain costs. This includes the costs of complying with the requirements under the Bill once the scheme experiences a triggering event and those of running the scheme for a period of between six months to two years, in the event of a triggering event occurring. The Government believe that these measures are sufficient and that this is an appropriate regime for the types of funding in question here. Further, members’ savings are protected via the restrictions on using members’ pots to pay for these costs provided at Clause 33. We therefore consider that the amendment is unnecessary.

However, it would be helpful to explore the counterarguments or challenges as to whether this is adequate risk mitigation—in particular, to explore any suggestions that there is still some risk in relation to: the period before the authorisation regime is up and running; the calculation of those funds to ensure they are sufficient at the point of need; the availability of the funds at the point of need; and the funds diminishing over time. Finally, what happens if the lack of these funds leads to the regulator withdrawing authorisation and creating a triggering event? Let me set out how those risks are addressed within the regime.

In respect of the period before the regime is up and running, paragraph 7 of Schedule 2 provides that the scheme funder is liable for these costs. It places this liability on the scheme funder when a triggering event has occurred in an existing scheme and the liability for those costs does not lie elsewhere. The prohibition in relation to increasing members’ charges applies during this period, so members are protected. If the funder should be in financial difficulty, the matter should be pursued via the normal court channels or insolvency processes. It is not the members’ money which is at risk in these scenarios; it is the running costs of the scheme and payment for activities during the triggering event period.

We also know that other schemes may well rescue the failing scheme, as has happened before, to protect the reputation of the industry. This is a different dynamic from what would be the case in non-money purchase schemes, where the debt is about money needed to pay member benefits and where funding obligations to pay for the promised benefits would attach if another entity took over the scheme. The master trust industry can support the movement of members—some trusts are willing to do so—or take over failing master trusts, so government intervention is less warranted where an industry solution may be possible. This might be an appropriate point to deal with the question from the noble Baroness, Lady Drake, about the identification of receiving schemes. They will be on a list kept by the Pensions Regulator, and some industry players may wish to step in and identify themselves.

On whether the funds available to the scheme will be sufficient, regulations will set out matters that the regulator must take into account when deciding whether it is satisfied that those funds are sufficient. We anticipate that these will include matters that will support the establishing of the assets needed to cover these specific costs, such as the business plan, the size of schemes, the costs of contracts and the value of assets, the nature and level of assumptions made in that business plan, the security of the scheme funder and the state of the scheme administration. Also covered will be the range of potential assumptions that may be used in arriving at the figure required.

Regulations may also specify the information that the regulator must take into account and requirements relating to the financing of the scheme or funder, such as requirements relating to assets, capital or liquidity. We anticipate that these will include matters such as how the funds are to be held to ensure that they may be accessed for specific purposes only, so that they are safe in the event of the funder becoming insolvent. In this way the Bill provides that to be authorised, a scheme must hold sufficient funds for those costs and that these funds must be held appropriately.

The supervision part of the regime focuses on ensuring that the funds remain sufficient and are not eroded over time, and that the Pensions Regulator can act swiftly should a drop occur in the funds held. There are measures in the Bill that work together to provide that this requirement to hold funds to cover the costs of the triggering period is an ongoing requirement, and one that the regulator will be able to supervise. Clause 19 states that if the regulator stops being satisfied that an authorised scheme meets the authorisation criteria, it may decide to withdraw the scheme’s authorisation.

Further, alongside the information-gathering powers that the regulator has under the Pensions Act 2004, Clause 14 requires the scheme and funder to submit annual accounts, while Clause 15 gives the regulator the power to require schemes to submit a “supervisory return” and Clause 16 places a requirement on certain persons to report “significant events”. We anticipate that these significant events will include matters in relation to the funds held under Clause 8. Through these means, the Pensions Regulator will have a stream of data in relation to which it can make further inquiries to ensure that it remains satisfied that the criteria continue to be met, and it can take action if that ceases to be so.

If the regulator becomes concerned that the assets are no longer sufficient to satisfy it that the criteria are met, it may issue a warning notice to withdraw authorisation, which is a triggering event, and will have access to the pause power and direction-making powers under the triggering-events part of the Bill. In this way, the Pensions Regulator can act quickly and decisively as soon as any risk arises, to diminish risk and prevent the situation deteriorating any further. On the question from the noble Baroness, Lady Drake, about which liabilities the receiving scheme will have for debt in the existing scheme, the Bill imposes no liabilities on the receiving scheme for debt in the existing scheme.

This approach caters for a number of different structures under which the master trust schemes have been set up. It ensures that the regulator can make a scheme-specific assessment of the funds that must be held to cover the requirements. It helps ensure that the risk of the scheme not holding these funds, or of the funds being eroded, is minimised.

In addition to the consideration that this risk is already dealt with via the Bill’s provisions, I will turn to a second matter: the costs and complexity that this amendment could introduce into the regime. As soon as compensation is added to the regime—based on the concept that where the funds are insufficient, someone else will step in—an element of moral hazard creeps in, as the noble Baroness, Lady Drake, acknowledged. Master trusts are businesses set up to provide a service to a number of employers. Many are set up to make a profit; some are not-for-profit, but all are selling or marketing their services to employers and must take responsibility for providing protection to their members. I would also be concerned about the added cost of delivering a compensation fund. Noble Lords have left it for regulations to establish whether this fund or requirement would be a government-funded compensation scheme or a levy-funded compensation scheme, or on whom any additional sourcing requirement would be placed. So this would be a broad regulation-making power.

In terms of what type of compensation may be envisaged, if it was levy-based there would be additional administrative costs to consider, as well as additional costs to the schemes that would presumably need to contribute to it as well as holding funds for their own scheme for a very low risk, as my noble friend Lord Flight pointed out. These would be funds that the scheme could not use for its own risk mitigation. The type of risk we are looking at here does not warrant the introduction of a compensation scheme. Members’ pots or promised benefits are not at risk. Clause 33 provides protection when a trigger event occurs, as it prevents charges being increased or new ones being introduced. It is about the risk of the scheme being unable to meet costs related to paying for activities under the trigger events such as wind-up, bulk transfers, finding a new funder or suchlike. The cost and complexity of a new compensation fund is not warranted.

A third matter is that I am not convinced that the amendment is compatible with the wider regime provided for in the Bill. There would be some significant challenge in ensuring that this provision did not lead to unintended effects: if, for example, the other source of funding was to place a requirement on a specific person to provide the costs as a last resort. The regime has been specifically crafted to ensure that all types and structures of master trusts can comply with the requirement. This has been specifically designed to ensure sufficient flexibility in enabling schemes to comply with the obligation.

We place a funding obligation on a specific party in only one place in the Bill: for existing schemes during the period until they become authorised. At that point the scheme will hold the funds as part of meeting the authorisation criteria. Introducing ongoing funding accountability on a particular party external to the scheme would be an alternative rather than a complementary measure to the approach taken in the Bill. The Bill specifically focuses on identifying funds and requiring the scheme to hold such funds, so placing a funding responsibility on another party cuts across these measures.

I hope I have answered my noble friend’s questions. The Government’s view is that the measures during the period before existing schemes are authorised are appropriate and that the schemes once authorised will hold the funds. Clause 33 provides that members’ pots are protected by the restrictions imposed on increasing charges. The issue is simply not the same as for defined benefit schemes. The risks and the costs are different.

Baroness Altmann (Conservative)

Will my noble friend write to me with some clarification on how costs would be covered? If a scheme fails and records are in disarray, how would the costs of wind-up be covered? I accept that they cannot come out of the members’ pots. If the company running the scheme or the employer has failed, where will the money come from to make sure that members’ current pension funds are transferred over and the costs of administering the transfer, executing the bulk transfer and clarifying the records are met? Currently it would seem that the members’ pots will be in limbo. The money cannot come out of their pots, but there is no one else to pay.

Lord Freud (Conservative)

The money cannot come out of their pots, but the Pensions Regulator will be looking to transfer those pots to another master trust. The protection that this amendment and my noble friend are suggesting is almost conditioned by what we watch in the defined benefit market. This is a different situation, where there are protected pots. There may be costs in a catastrophic situation, but they will not fall on members, and it is not the job of government to protect non-members from getting into a mess.

Lord Flight (Conservative)

Is it not very simple? The manager of the master trust would go bust just like any other business can go bust. It would go into liquidation and, to the extent that it owed debts to the suppliers of electricity or other such things, they would suffer.

Lord Freud (Conservative)

My noble friend has put very bluntly what I was trying to say in a subtle and gentle way. If the landlord or another supplier to the scheme finds itself out of pocket, for instance, that is what will happen. It will go through the normal insolvency process, but it is not the job of the Pensions Regulator or the Government to be concerned about that. Our concern is purely with the members’ pots. Are they protected and is there a process to transfer them to someone who can look after them properly? I hope that is what I have been able to explain in an overlengthy reply. I hope it has enabled the noble Baroness to withdraw the amendment.

Baroness Drake (Labour)

I shall try to pick up some of the Minister’s points. There was a lot of detail in his reply. I am conscious of the time. I shall start with the risks that we are trying to mitigate; there seems to be a lot of confusion about them. The risk this Bill is trying to mitigate is that the costs associated with managing scheme failure and winding up the scheme fall on the members, so their pots are drained to pay for them. Their pots are not protected. We are talking not about the equivalent of a DB benefit provision or a Financial Services Compensation Scheme provision on an annuity, but about the specific risk that the Explanatory Notes and all the associated documents from the Government in support of the Bill identify that it is seeking to mitigate. Members’ pots should not be raided to pay for a master trust failure.

The Minister set out in great detail how the authorisation regime, the supervision regime and the scheme failure resolution regime will work very effectively to protect the members against that risk. That was very clearly laid out. I complimented the Explanatory Notes and other documents at Second Reading. It is possible to clearly follow the regime proposed. However, the regulatory regime cannot ensure that the capital adequacy and supervision regime will always ensure sufficient resources in the scheme to finance the cost of failure in respect of wind-up and transfer costs. That is the risk we are trying to deal with. It is not the function of a regulator, whether it is the PRA, the FCA or anything else, to eliminate all risk. It cannot possibly do so, unless there is an unlimited guarantee from the taxpayer always to remove risk in a regulated system.

This amendment seeks to address what happens when the regulatory system around capital adequacy or resolution through transfer of another scheme does not work. As the noble Baroness, Lady Altmann, said, at the moment there is only one place to go, which is back to the members’ pots, which will be drained.

If I heard the Minister correctly, he said that there would be no liability for debt placed on the receiving scheme in a transfer situation, so he is saying that if there are insufficient resources in the failing master trust they cannot be offloaded on to the receiving scheme on transfer. They are still floating around to be paid for, so we cannot put them there and we cannot put them on the financial resources in the capital adequacy regime because that has failed, so we are still waiting for someone to pick up these costs because the only thing exposed at the moment is the members’ pots. In that situation, no regulator can guarantee whether there is a suitable master trust that will pick up all the members. It may want to cherry pick some and leave a rump behind. We do not know how this will play out. What has to be possible is that the capital adequacy and supervision regime does not always work and, if there is any one occasion when it does not work, the prohibition clause—Clause 33—cannot work because prohibition on increasing member charges when a failure takes place can operate only if someone provides the resources to fund that prohibition on increasing the charges.

There is no provision in the Bill or in any other policy document from the Government that states that, if a scheme fails in extremis and there are not the resources in place, there is no one to fund the prohibition order on increasing charges as a result of managing that failure other than the members’ pots.

Lord Freud (Conservative)

I want to be very clear. There was a useful dialogue between me and my noble friend Lord Flight. I would like to repeat what I said. I am not saying that no one will lose money if something goes wrong; what I am saying is that it will not be the members because their pots are protected.

We have bankruptcy or insolvency proceedings for other people when they get into financial trouble, but that is a separate matter. The members are protected. What we are worried about in this Chamber is the position of the members, and Clause 33 provides that fundamental protection. It is not open to the failing scheme funder to raid those pots; that is prohibited, and we have a regime to prevent it happening.

Just because someone somewhere loses money around this process does not mean that we need a compensation regime. I want to make that utterly clear, because there seems to be a concern to see that nobody can lose money. If people mess things up, they may lose money—but members will not lose money.

Baroness Drake (Labour)

I accept the clarification from the noble Lord. The amendment—which at this stage is partly probing, although underlying it is a principle that is a matter of substance—was not intended to prescribe the model. It does not say it has to be a compensation fund—it could be a provider of last resort—but there needs to be an explicit provision in the Bill that makes it clear what happens to protect the members’ pots when the supervisory and capital adequacy regime fail in a failing master trust. I do not believe that the Bill addresses that at the moment. I am not arguing for a particular model; I am arguing for a principle of absolute clarity as to how members’ protection against exposure to meeting the cost that I described—the risk that the Bill seeks to mitigate—will be addressed in an in extremis position.

It is not a plaintive request—I say to the noble Lord, Lord Flight, that I am not a plaintive request person. I am standing here quite firmly because potentially 7 million people are going to be affected and, over time, there will be trillions of pounds under management. This matter is worthy of interrogation, rather than us simply hoping.

Lord Flight (Conservative)

The issue is an administrative one, in that you have people’s pension fund money, and the manager has got into trouble and, let us say, gone into liquidation. What administration would make sure that a new manager takes over and continues to investment-manage those pots of money? There have been suggestions that the Pensions Regulator himself should be empowered, or maybe required, to act as a broker with regard to such arrangements, but that problem has not yet been solved. That, surely, is the practical issue, not people losing money out of their pension pots.

Baroness Altmann (Conservative)

The issue that we are dealing with is indeed an administrative issue, but saying members’ pots are protected does not protect members’ pots. In a scheme which has failed and is winding up, and whose administration is in disarray, it will take some time and money to decide and assess how much each member’s pot is actually worth, for example in the cases of a big master trust whose systems fail or of a smaller master trust whose systems simply were never up to scratch. We have 80 or so master trusts out there at the moment and have had no protection regime at all, no capital adequacy rules and no proper assessment of the quality of the trusts. We have so many members’ pension funds growing for them, and there is the possibility that more than one of these schemes will fail and need to wind up. There will be costs associated with assessing what the value of those members’ pots actually is. I do not hear anything at the moment that explains how the costs of administering and sorting out the records of that scheme, so that we know what each member’s pot is worth, are going to be funded. If the Pensions Regulator finds a way to pick up the cost, if NEST has to pick up the cost or if there is some insurance regime for industry-wide assessment of those costs, that is fine, but I just feel that we are assuming that this will be a wind-up of a scheme whose records are fine and it will be shipped off to another scheme, which will want to earn money for those members. That is not the case that is necessarily going to arise.

Baroness Drake (Labour)

I thank noble Lords for the supportive argument on the point that I am trying to make. I should pull this to a close. It is not that the proposals in the Bill around authorisation, supervision and resolution on failure are, of themselves, something one would want to challenge—although there is the issue of how they and some of the policy will work in practice—it is what happens in the situation that the noble Baroness, Lady Altmann, set out, when one has a failure, costs are incurred in dealing with that failure and insufficient financial resources are available. How are the members’ pots protected in those situations? The reasoning in the impact assessment is that the prohibition in Clause 33 works because there will always be financial resources to fund it, but it is not clear, in the terms of the Bill, that there will always be financial resources outside of accessing the members’ pots. However, I beg leave to withdraw the amendment.

Amendment 18 withdrawn.

Clause 9 agreed.

Clause 10: Scheme funder requirements

Lord McKenzie of Luton (Labour)

My Lords, in moving Amendment 19, I will also speak to Amendment 20, which is grouped with it. Amendment 19 would remove the requirement that the scheme funder is constituted as a separate legal entity and, as an alternative proposition, would require it to be approved by the Pensions Regulator. Amendment 20 would remove the requirement that the scheme funder can carry out only activities that relate directly to the master trust scheme.

Taken together, it has been raised with us that, although it seems to be the intention that each scheme should have a scheme funder, the Bill does not actually require that. A variety of different structures are used for current master trusts, and the definition in the Bill does not fit easily with many of them. In particular, the requirement for a scheme funder to operate only a single master trust would require a number of existing schemes to move from being supported by an FCA-regulated entity with significant financial resources to being supported by a single-purpose vehicle set up just to run the master trust. The policy rationale for this is unclear, and perhaps the Minister would clarify whether that really is the intention.

Clause 10(3) would also prevent a single provider supporting more than one master trust, and it has again been put to us that this is likely to inhibit consolidation and the ability to rescue failing schemes, which we have just been discussing. It has been suggested by the ABI that, where the scheme funder is an FCA-authorised insurer, the requirements of Clause 10 should not apply. Alternatively, as our amendment suggests, that flexibility could be achieved by requiring the scheme funder to be approved by the Pensions Regulator. When it comes to submission of accounts, the insurer would not typically split out master-trust lines of business, and might have to rely on the PRA’s work to assess the strength of relevant firms. As suggested under Solvency II, firms must hold capital against pension scheme risks. These capital requirements are onerous and it does not seem reasonable to require the holding of additional capital on top of them.

If an existing body corporate conducts activities that relate directly to more than one master trust scheme, what do the Government actually want it to do? Splitting an existing operation into separate companies, even within a group structure, may not be without cost, including taxation. Further, how is this meant to work where a master trust provides money purchase benefits as well as other benefits? Clause 10 treats a scheme funder as a separate legal entity if, inter alia, it carries out activities only relating directly to the master trust scheme if it is a master trust scheme, as distinguished from a master trust, only to the extent that it provides money purchase benefits. So how can Clause 10 (3)(b) be satisfied where a master trust provides money purchase and other benefits? I beg to move.

Lord Flight (Conservative)

My Lords, I believe this clause has aroused most concern in the industry, particularly the insurance industry. A number of organisations, particularly life offices, undertake a range of business activities in addition to simply sponsoring a master trust. The clause suggests that the scheme funder or sponsor must set itself up as a separate legal entity and undertake no other activity beyond sponsoring the master trust. Given that the whole purpose of the Bill is to ensure that funds are available to see through the orderly exit of the scheme’s sponsor, the provisions of Clause 10 as it stands are surely counterintuitive. One wants the sponsor to be as strong financially as possible, but the clause as it stands could well invoke the very thing that the Government are trying to avoid.

More specifically, as the noble Lord has pointed out, the insurance industry typically will have master trusts side by side with group personal pension schemes. As matters now stand, they are regulated by the FCA and PRA, and there would be a considerable duplication of regulation under the arrangements as proposed. I am sure the Government have focused on this, but I certainly feel that Amendments 19 and 20 are appropriate to address the problem that stands.

Baroness Altmann (Conservative)

My Lords, I echo the comments made by my noble friend Lord Flight. Why do the draftsmen of the Bill think that having a separate legal entity is definitely a good thing? What are the risks that this approach tries to close down? Perhaps if we could understand those risks better, we might be able to address the issue in a slightly different way. Is the aim somehow to ring-fence the DC covenant of the scheme funder and prevent them from having other financial obligations that might take away from the support for this master trust, or to minimise the burden on checking accounts? Obviously, it is easier to review the accounts of a stand-alone entity than of a much broader group. Hopefully, if we could better understand what the rationale is, it might be possible to address some of the very important concerns that have been expressed by some of our major insurance companies.

Lord Young of Cookham (Conservative)

I am grateful to the noble Lord, Lord McKenzie, for his amendment. I gently point out that there is a spelling mistake in it, but there are other reasons for resisting it.

Amendments 19 and 20, tabled by the noble Lord and the noble Baroness, Lady Drake, deal with Clause 10, which sets out the requirements that a scheme funder must meet in order for a master trust to be authorised. I hope to explain to noble Lords, particularly my noble friend, the thinking behind insisting that there is a separate legal entity behind each scheme. A scheme funder by definition is key to the master trust’s financial sustainability. By “scheme funder” we mean a person who is liable to provide funds in relation to the scheme when the administration charges paid by and in respect of members are not sufficient to cover the scheme’s costs, or someone who is entitled to receive profits when the scheme’s charges exceed its costs.

Amendment 19 would remove the requirement for the scheme funder to be a separate legal entity that carries on business activities only directly related to the master trust, and would replace it with a requirement for the scheme funder to be approved by the Pensions Regulator. I listened with interest to the points that noble Lords made in respect of that amendment. Amendment 20 would similarly remove the requirement for a master trust’s scheme funder to be a separate legal entity that carries on only the master trust business. The effect of both amendments would be to allow the same legal entity that acts as scheme funder to engage in business activities not directly related to the master trust, making it more difficult for the Pensions Regulator to identify matters relevant to the master trust and therefore to assess the financial sustainability of the scheme.

To enable the regulator to assess the financial position of the scheme with certainty when deciding whether the master trust should be authorised or remain authorised, the scheme funder must be set up as a separate legal entity. This is defined in the Bill as meaning, in effect, a legal person whose only business activities are in relation to the master trust. Requiring scheme funders to be separate legal entities will make their financial position, and the financial arrangements between them and the master trust, more transparent to the regulator and provide greater clarity regarding the assets, liabilities, costs and income in relation to the master trust business. This will greatly assist the regulator in carrying out its assessment of schemes’ financial sustainability.

There will be greater transparency regarding any additional funding streams coming into the scheme funder entity, and the level of commitment of those funds for the purposes of running the master trust, should the scheme funder be in receipt of income generated from other lines of business carried on by connected entities. The amendments would remove that transparency by making it possible for the scheme funder to carry on business activities not related to the master trust under the same corporate entity. It would therefore be difficult for the regulator to identify the financial sustainability or otherwise of the master trust.

One of the other authorisation criteria of which the regulator needs to be satisfied is that the people involved in the master trust scheme are fit and proper. Clause 7 specifies people that the regulator must assess for this purpose, including the scheme funder. It is not clear to what extent Amendment 19, requiring the scheme funder to be approved by the regulator, would differ from the assessment that the regulator is already required to carry out under Clause 7. Requiring the regulator to approve the scheme funder in general terms, rather than setting out requirements in the primary legislation requiring the scheme funder to be set up as a separate legal entity, would not only potentially make the financial sustainability of the scheme less clear to the regulator but would also give master trusts and scheme funders less certainty about the conditions that must be met for authorisation.

To turn back to the requirement for the scheme funder to be set up as a separate legal entity, I am aware that a number of concerns have been raised about the impact that this will have on existing businesses, such as the removal of protection and cross-subsidy through diversified lines of business supporting the master trust, restrictions on the use of shared services and the disruption of existing business. I shall come to each of these in turn, but I reassure the House that this authorisation criterion is not designed to prevent funds from flowing from one business to another, nor is it our intention to disrupt existing arrangements unnecessarily. The overarching aim of the requirements is transparency in the cash flows to and from the master trust business, and the assets and liabilities related to it, so that the regulator can readily ascertain the financial position of the scheme funder and the financial arrangements between the funder and the scheme. I think that paragraph answers the question asked by my noble friend Lady Altmann.

The requirements in Clause 10 do not prevent the master trust benefitting from the support of other businesses. Support can be offered from the scheme funder’s wider group explicitly through the provision of a legally enforceable guarantee or other formal arrangement from another group company of sufficient financial strength. Where the scheme funder currently conducts other businesses, a degree of cross-subsidy may already take place, and there is no intention to prevent this.

However, we consider that it is in the interests of master trust operators and potential users to have a full understanding of the financial sustainability, or otherwise, of the master trust operation in isolation. If the operation is not financially sustainable and requires the support of the wider group to operate, we consider that the most appropriate way is for that support to be provided transparently and explicitly, rather than through the implied support offered as being one element of a company with multiple lines of business.

Requiring scheme funders to be set up as separate legal entities is not intended to require the unpicking of any shared service arrangements. Many financial services companies—indeed, many other companies—will use staff, systems and premises for multiple business lines, and usually allocate those costs as accurately as possible across the relevant activities. We expect any costs allocated to the master trust to be transparent to the regulator through the business plan, accounts and other related documents.

Groups of companies are used to restructuring their statutory accounting arrangements to reflect changes in focus, and master trust schemes in operation when the authorisation regime commences will be given a transitional period to comply with the requirements and apply for authorisation. If the scheme funder wants to pursue other business activities not related to the master trust, it may do so through another vehicle, or establish the master trust element as a separate entity.

I hope that that somewhat detailed explanation in relation to Amendments 19 and 20 reassures the noble Lord and the noble Baroness that the guiding principle behind requiring the scheme funder to be a separate legal entity whose business activities solely relate to the master trust is transparency. I also hope that I have set out why it would not be appropriate to substitute the requirements proposed in the Bill for a responsibility that would sit with the regulator to assess whether a safe and appropriate degree of separation between the master trust and the scheme funder’s other business has been achieved. That would provide an inferior level of protection to members. On that basis, I ask the noble Lord to withdraw the amendment.

Lord McKenzie of Luton (Labour)

My Lords, I thank the Minister for that detailed explanation. Again, we will need to read the record to make sure that we have fully understood the proposition. Incidentally, I should thank him for pointing out the spelling error, but offer even greater thanks to those who did not.

The nub of the issue is that this is to help the regulator establish financial sustainability and make it easier to interpret the data before it. One can readily see that there will be a range of circumstances where it will be quite appropriate for a separately constituted legal person to be the sole funder, but, as we have discussed, the issue is wider than that.

The Minister said that it is unnecessary to unpick shared service arrangements. I question how that is consistent with what is in the Bill. Clause 10(3)(b) states:

“the only activities carried out by the body corporate or partnership are activities that relate directly to the Master Trust scheme”.

Where a scheme funder provides, on a transparent basis, services to a group company and charges for them without affecting the master trust scheme, how is that possibly consistent with the requirement that the only activities carried out by the body corporate are those that relate directly to the master trust scheme? I really do not see that it is. Perhaps the Minister will reflect on that and write further in due course.

There is also an issue about how this is all consistent with arrangements for non-money purchase benefits. I think that the structure of the Bill is that you take them out of the picture—they are not considered in all this—but, again, if those are the arrangements in a single funder which is supporting both of those lines of business, it seems to me that you cannot simply ignore that for the purposes of interpreting Clause 10(3).

This requires a rethink. I understand the Minister to say that there will be some period upfront when existing arrangements will be unpicked and restructured, and that may help, but how is an FCA-regulated entity, which is stringent in its capital requirements but covers a range of group entities, to be restructured? Do they have to be moved out? Does the single entity left, which is dealing with the master trust, have to go through an equivalent FCA approval process to ensure an equivalent position at the end of the day? It does not make sense. We understand the benefits of transparency, and there may well be a range of circumstances where it is better to have a separate body corporate, a legal person with a clearly identified, separate funding stream. However, if that is to be the only way it can be done, that creates enormous problems, particularly for funds operational now.

Like the noble Baroness, Lady Altmann, and the noble Lord, Lord Flight, we have continuing concerns which, with respect, have not been answered tonight. I do not know whether the Minister wants to have another go, but if he does not, I beg leave to withdraw the amendment.

Amendment 19 withdrawn.

Amendment 20 not moved.

Clause 10 agreed.

Clause 11: Systems and processes requirements

Lord Fowler (Non-affiliated)

My Lords, there is an error in the Marshalled List. Amendment 20A should read: “page 7, line 19, leave out ‘may’ and insert ‘must’”.

Baroness Bakewell of Hardington Mandeville (Liberal Democrat)

My Lords, I thank the noble Lord the Lord Speaker for putting the House right on that; the error was pointed out to me this morning. I shall speak briefly to the amendment.

All the information requirements relating to scheme processes as set out in Clause 11(4) are integral to a thorough assessment of a master trust’s capacity to run a scheme effectively. Therefore, it should be mandatory for regulations to include provision about the regulations. Master trusts must be effectively run so that members can be sure that their money and futures are secure. Security around master trusts is key to their success. It is much too important to be left to possible regulation; it needs to be enshrined in the Bill. I look forward to hearing what the Minister has to say about the amendment, and I support all the other amendments in the group.

Baroness Drake (Labour)

My Lords, I shall speak to Amendment 21 and other amendments in the group. Amendment 21 would make it a process requirement under Clause 11 on authorised master trusts when making investment decisions to consider,

“environmental, social and governance risks”,

Most investments in master trust schemes will be longer term and therefore exposed to longer-term risks. Consideration of those risks, which include such factors as climate change, unsustainable business practice and unsound corporate governance, is integral to the long-term sustainability of the investments held. The assessment of these risks should not be seen as an ethical extra but, rather, potential vulnerabilities to the sustainability of the scheme which should be properly understood.

The Pensions Regulator code of practice strengthened guidance for trustees on consideration of ESG risks, but it is not legally binding and there is no direct penalty for failing to comply. At a recent pensions conference, Andrew Warwick-Thompson, the executive director of the regulator, warned trustees against complacency when assessing ESG issues within portfolios. He commented that the regulator expects trustees to take ESG issues into account, saying,

“I would urge any trustee or asset manager out there who still thinks these things don’t matter to wake up and smell the coffee”.

He referred to research by Professional Pensions which showed that only 18% of responses from trustees, fee managers and pensions professionals thought trustees should be obliged to take ESG issues into account.

If many in the industry are reluctant to make an assessment of ESG risks, it is hardly an auspicious basis for optimism that a voluntary code will work. As the regulator himself commented:

“We need to guard against complacency here”.

There is increasing evidence showing that companies which perform well on ESG produce better returns for investors. Poor corporate practice has a real effect.

Master trusts have already grown exponentially against the background of a regulator having insufficient powers, relying instead on exhortations to trusts to embrace the voluntary master trust assurance framework. That did not work. With this Bill the Government are trying to put things right. The regulator expects ESG risk to be assessed. The amendment moves beyond expectation to a process requirement that trustees actually consider these risks. I ask the Minister: will the requirements under Clause 11(4)(d) include a specific requirement to assess ESG risks?

Amendment 22 requires an authorised master trust to have processes in place for the identification, reporting, managing and minimising of any conflict of interest. How to manage conflicts of interest in a master trust is an, as yet, unresolved problem. It is difficult to assess how this Bill will resolve it because of the policies still to be decided. In 2012 the Pensions Regulator, when investigating potential conflicts of interest in master trusts, commented:

“It is very hard to understand how and when they are acting as agents of the provider and when they are acting in the best interests of the member”.

In 2013 the then Office of Fair Trading raised concerns that some trustee boards were not sufficiently independent of the master trust provider to avoid conflicts of interest and always act in beneficiaries’ best interests. The Occupational Pension Schemes (Charges and Governance) Regulations 2015 introduced stricter requirements on master trusts and although welcome, they are not sufficient to address potential conflicts of interest. Trustees of occupational pension schemes are required to have a process in place to identify and manage any conflicts of interest and there is a regulatory DC code which recommends minimum controls. But they do not meet the conflict of interest challenges in a master trust.

Market pressure, combined with sound regulation, are important tools in the fight against conflicts of interest. The only trouble is that in the pensions market there is little pressure coming from the supply side, the scheme member—a proposition we have rehearsed so many times in debates in this Chamber and in the other place.

The Government’s impact assessment identifies the particular risks that master trusts pose, which compellingly support specific regulation for identifying, reporting and managing conflicts of interest. Master trusts develop new types of business structures which alter the relationships between members, employers, trustees and providers, on which occupational pension law and regulation is largely based. There is no requirement to include member or employer representatives on the board, and providers have a significant influence over who they appoint.

Many master trusts have been set up with a profit motive—something that existing occupational pensions’ regulation does not cater for. As the OFT observed, this is a concern and a complex area as these companies have obligations to their shareholders and other stakeholders and, as with any company, seek to make a profit. IFAs and fund managers may be part of the provider group that set up that master trust.

The trust deed in a master trust can inhibit the trustees from acting in the best interests of members if the rules fetter their powers. The master trust multiemployer characteristic can increase complexity and, with it, the potential for conflicts of interest. The products they provide are not covered by ECA regulation.

I ran through the list because, taken together, every one of those risks identified by the Government in the impact assessment compellingly supports a requirement for identifying, reporting and managing conflicts of interest in an authorised master trust. Given all the particular risks that the Government’s own impact assessment identifies, will the requirements under Clause 11 include a conflict management obligation? All of the requirements which master trusts meet under Clause 11 are important, so I ask the Minister whether there will be a set of minimum requirements that all master trusts must meet.

Finally, Amendment 27 in the group provides for regulations on systems and processes requirements—the key authorisation criteria in this Bill—to be subject to affirmative resolution. I accept that it is not unusual in pension legislation for detail to be delegated to regulation. I am not seeking to row against that. However, I believe the circumstances in this instance are different. These requirements go to the heart of how these master trusts are to be run. This is a new regime. There are no draft regulations before the House and policy matters are still to be resolved. This is a new regime of protection for what could be 6 or 7 million savers, or more. It is not a trivial matter. When the noble Lord is balancing whether they believe the Government have it right in terms of negative and affirmative resolution, I ask that the Minister focuses on these requirements and the regulations, certainly in the first instance.

Lord Young of Cookham (Conservative)

My Lords, I am grateful to those who have spoken to this group of amendments to Clause 11, which sets out one of the authorisation criteria, namely,

“that the systems and processes used in running the scheme are sufficient to ensure that it is run effectively”.

Amendment 21, tabled by the noble Lords, Lord McKenzie and Lord Monks, and the noble Baroness, Lady Drake, would amend Clause 11(4)(d) by making it clear that regulations on the matters that the regulator must take into account in deciding whether the schemes, systems and processes are sufficient to ensure that it is run effectively may include provisions about the processes that master trusts are required to follow in relation to environmental, social and governance risks. I think the intention behind the amendment is to do it in relation to the transactions and investment decisions of the scheme, rather than across the range of systems and processes that a scheme may operate on a day-to-day basis, such as staffing and travel. I see the noble Baroness nodding in assent.

Given that this amendment adds environmental, social and governance risks to subsection (4)(d), alongside processes relating to transactions and investment decisions, I am responding on the basis of that first interpretation. Clause 11 sets out specific areas that the Secretary of State may include in regulations and that the Pensions Regulator must take into account when deciding whether it is satisfied that the systems and processes adopted by schemes are sufficient to ensure that they are run effectively.

I have enormous sympathy with the case made by the noble Baroness that environmental, social and governance risks should feature in the way she described, but I remain to be persuaded that it needs to be included in the Bill. There are a number of reasons why. The current regulatory framework allows for ESG—environmental, social and governance—issues to be taken into account. TPR guidance makes it clear that trustees should take into account long-term financial sustainability in their investment strategies and new requirements can be inserted without primary legislation.

Environmental, social and governance issues are already, broadly, taken account of through the existing regulatory arrangements which apply to trustees of pension schemes with 100 or more members, including the statement of investment principles for their scheme, as set out in the investment regulations. The statement must include details of the extent to which the trustees take environmental, social and other factors into account in selecting, retaining and realising investments. These principles have been further supported by the Law Commission’s review of fiduciary duty, which confirmed that trustees should take these factors into account when they are financially material.

The Pensions Regulator has incorporated the Law Commission’s conclusions into its guidance for trustees and its code of practice on “Governance and administration of occupational trust-based schemes providing money purchase benefits”, which gives practical guidelines on how to comply with the legal requirements of pensions regulation. This guidance sets out the regulator’s expectation that when setting investment strategies, trustees will,

“take account of risks affecting the long-term financial sustainability of the investments”.

In addition, Regulation 4 of the investment regulations supplements trustees’ fiduciary duties under trust law by requiring that the assets of all pension schemes must be properly diversified in such a way as to avoid excessive reliance on any particular assets, and to avoid accumulations of risk in the portfolio as a whole. Should the Government subsequently decide to make regulations about the adequacy of the processes that master trusts are required to take into account in relation to environmental, social and governance risks in relation to investments, I can assure noble Lords and the noble Baroness that regulations would be able to cover this even if it was not specified on the face of the Bill, as is done by the amendment. I hope I have said enough to explain why I am not of the view that the amendment should form part of the Bill.

Amendment 22 seeks to insert a new subsection into Clause 11 (4)(g) to make it clear that regulations about the processes used in running the scheme, which the regulator must judge are sufficient to ensure that the scheme is run effectively, may include provision about identifying, reporting, managing and minimising conflicts of interest relating to the work of trustees. The noble Baroness spoke about some of the risks involved here. The objective of Clause 11 is solely to ensure that the schemes are run effectively. It is not directly concerned about the conduct of the trustees undertaking their duties in relation to the pension scheme.

The Government recognised the potential for trustees’ conflicts of interest to arise in some multi-employer schemes and addressed this by introducing additional governance requirements for multi-employer schemes. These provisions were introduced in the Occupational Pension Scheme (Charges and Governance) Regulations 2015, which amended the Occupational Pension Schemes (Scheme Administration) Regulations 1996 to require, first, that there should be a minimum of three trustees, and that a majority of these three or more trustees, including the chair, must be independent of the scheme’s service providers. Furthermore, the trustees must be subject to fixed-term appointment and appointed via an open and transparent recruitment process. The trustees must make arrangements to encourage members to make their views known to trustees on matters concerning the scheme. When establishing whether a trustee is independent of the scheme’s service provider, various matters must be taken into account, which are set out at Regulation 28(3) of the scheme administration regulations 1996 as inserted by Regulation 22 of the charges and governance regulations. An example is whether the trustee is a director, partner, or employee of an undertaking which provides advisory, administration, investment or other services in respect of the scheme.

In addition to these requirements that are currently placed on trustees, Clause 7(2)(c) places a requirement on the Pensions Regulator to assess whether a trustee of a master trust scheme is a fit and proper person as part of the decision on the application to establish a master trust, as set out in Clause 5(3)(a). Clause 7(4)(b) provides for the Pensions Regulator to take into account any matters it considers appropriate that are not covered by regulation when assessing whether a person is a fit and proper person to act.

When the Pensions Regulator is no longer satisfied that an authorised master trust scheme meets the authorisation criteria, including whether a trustee of the scheme is a fit and proper person, Clause 19(1) allows for the authorisation to be withdrawn. Clause 19(2) and (3) provide the process that the Pensions Regulator must follow once a decision has been made to withdraw authorisation. So, in light of existing legislative requirements setting out the required propriety and conduct of trustees of pension funds, and the clear role of the Pensions Regulator set out in the Bill to ensure that trustees of master trust schemes are fit and proper persons, I believe that this amendment is not necessary.

Amendment 23 requires the Secretary of State to make regulations that set a minimum requirement for each of the processes listed in subsection (4)(a) to (g) of Clause 11. I agree in principle that the question of minimum standards is a key one, but I reassure noble Lords that the clause as drafted enables the Secretary of State to set out in regulations factors and standards to which the Pensions Regulator must have regard when deciding whether it is satisfied that a scheme’s systems and processes are sufficient. However, the key difference between the drafting of the Bill now, compared to how the amendment would alter its meaning, is that the amendment states that regulations “must” make minimum requirements.

There are two closely related reasons why I shall ask the noble Baroness not to press her amendment. Both my points flow from the principle that the regime has been designed to ensure that we do not mistakenly apply a one-size-fits-all requirement to schemes. A minimum requirement, as something that necessarily has to be set out in regulations, may have some unintended consequences. First, were a minimum requirement to be applied, there is a risk that the one-size-fits-all approach could cause some schemes to fail to meet the criteria and therefore fail to achieve authorisation, despite having systems and processes which are sufficient to ensure that the scheme is run effectively.

Secondly, not all of the specified processes easily lend themselves to a minimum requirement. This brings a similar practical consequence to the point that I have just mentioned. Further, addition of the “must” in this amendment may result in finding the Secretary of State in a position where he cannot comply with his regulatory duties because there is no one-size-fits-all requirement in that case. An example for both these scenarios would be resource planning, where flexibility would be needed to cater for different scheme requirements. Another would be in relation to records management or administration, where flexibility would be needed to cater for different scheme requirements, sizes and structures.

For example, we would want to ensure that administrative systems must be adequate to support current operations; regularly monitored to ensure capacity; and adequate to support the anticipated growth of the scheme. This is more flexible than a minimum standard and tailored to a scheme’s own strategy for achieving sufficient scale. I hope that I have said enough for noble Lords to concur that the question of minimum standards is a key one, and that we will seek to use the regulation-making power in this way when appropriate, taking account of considerations to which I have just referred.

Finally, Amendment 20A stipulates that regulations about the processes must include provision about the areas listed under subsection (4) of the clause. As I have noted previously, we want to consult industry and other interested parties on the content of regulations made under Parts 1 and 2. The list provided at subsection (4) has been included in the Bill to provide clarity to industry now about the areas that the Government believe such regulations are likely to cover. However, the Government do not intend to stipulate the areas that must be included in the regulations made under this clause without consulting on those regulations. I hope that I have made the right assumption about what the amendment is aimed at and explained why the change would not be appropriate.

Finally, we have our old friends, negative and affirmative. I can only repeat what I have said on earlier occasions, and what my noble friend has said before—namely, that we would like to reflect on the balance of affirmative and negative in the Bill as a whole and come up with a balanced assessment of what we believe to be appropriate. On that basis, I hope that the amendments will not be pressed.

Lord Kirkwood of Kirkhope (Liberal Democrat)

My Lords, I support the case that the noble Baroness made for Amendment 22. I am very worried about conflicts of interest. The Minister was very generous and set out a detailed explanation that will repay careful study by us all tomorrow. I will certainly do that. What happens to trust deeds in all this? My experience as a defined benefit trustee is that the trustees have control, responsibilities and duties and are able to effect measures through the trust deed. We seem to be leaving all that to one side in this legislation. There may well be a case for not including measures such as Amendment 22 in the Bill. However, fundamentally different conflicts of interest face trustees in a profit-making master trust situation when they have members on the one hand and providers on the other. I am sure that the noble Baroness, Lady Drake, who knows a lot more about this than I do, makes an important point here. I am willing to discuss how we resolve this issue and whether we include the relevant measure in the Bill, but I will be following it very carefully as this legislation goes through.

Lord Young of Cookham (Conservative)

I take the noble Lord’s point. Under the authorisation criteria, the Pensions Regulator has to assess,

“whether each of the following is a fit and proper person”,

and one of them is a trustee. However, I take on board what the noble Lord says, which echoes what he said in an earlier debate—namely, that we should not lose sight of the responsibilities of trustees when we focus on the Pensions Regulator and everybody else. I should like to reflect on the point he has made and, indeed, the other point made about potential conflicts of interest and master trusts.

Baroness Bakewell of Hardington Mandeville (Liberal Democrat)

I thank the Minister for his very full response on all the amendments in this group. I agree that long-term financial sustainability is very important. I noted that when he talked about the responsibilities of trustees, he said that they “must” do certain things, not “may”, yet the Bill says “may” and not “must”. I will look in detail at what the Minister has said and I will be looking for clarity in the Bill. However, given the hour, I beg leave to withdraw the amendment.

Amendment 20A withdrawn.

Amendments 21 to 25 not moved.

Clause 11 agreed.

House resumed. Committee to begin again not before 8.32 pm.

Baroness Drake (Labour)

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

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

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

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

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

and,

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

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

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

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

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

Lord Flight (Conservative)

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

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

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

Lord Freud (Conservative)

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

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

The need for this information to be in the continuity strategy is driven by the requirements that will apply to the scheme at any later point in time if it experiences a triggering event. Following a triggering event the scheme must submit an implementation strategy to the regulator that sets out how it will implement its continuity strategy. The scheme will also be subject to new charge restrictions, including that member charges must not be increased after a triggering event has occurred. The information to be provided in the continuity strategy is therefore closely related to information on administration charge levels to be included in the implementation strategy under Clause 27(3), which in turn becomes relevant to the prohibition on increases in charges during a triggering event period under Clause 33.

Amendment 27 would mean that, as well as setting out the levels of administration charges in the continuity strategy, the strategy would specifically need to include information on any cap on those charges. While I concur that it is important for it to be clear whether any charge cap applies, I am concerned that this amendment duplicates provision elsewhere and as such is unnecessary.

The cap is an annual one at 0.75% or an equivalent combination charge on the value of the member’s rights in the default arrangement. Let me confirm, just in case any question remains on this matter, that this charge cap applies to master trust schemes in the same way that it applies to other occupational pension schemes. In addition, the existing regulations also place requirements on trustees relating to the assessment and reporting of charge levels. The statement must be made available and can be requested by members. Taken together, these existing regulations specify the charge cap requirements and enable the reporting of information about charges.

The provision in the Bill at Clause 12 is different from the legislation providing for the cap and for the reporting of charges in the annual report—and it has different objectives. The requirement about charges in the continuity strategy is specifically focused on enabling the charges to be articulated in a manner and form which will work for the later requirements on master trusts that have experienced a triggering event. Stating the charge cap in Clause 12 would seem to be seeking to meet a different objective. It is the information on charges in the implementation strategy that is essential for the regulator. This information means that the regulator is able to check that members are not being charged more than they should be if the scheme enters a triggering-event period. Adding a requirement to state the charge cap would seem to be aiming at a different objective.

Amendment 28 would require a scheme’s continuity strategy to demonstrate that members’ funds in a scheme cannot be used in whole or part payment of the cost of winding up the scheme. Amendment 29, tabled by my noble friend Lord Flight, would seek to limit that amendment to members’ funds that were available through charges in excess of the existing legislative cap. The Government have sympathy with the noble Lords’ objectives; members’ funds should be protected, as far as possible, in the event that a scheme has to wind up. That is why we have made provision in the Bill to protect members from excessive charges when a triggering event happens. In summary, Clause 33 prohibits trustees imposing administration charges at levels above those set out in the implementation strategy during a triggering-event period.

In relation to how we see this prohibition under Clause 33 working with the existing legislative cap under the Occupational Pension Schemes (Charges and Governance) Regulations 2015, the situation is essentially the same. In relation to a default arrangement in an automatic enrolment master trust scheme, the normal charge levels would have to be at or under the cap of 0.75% and could not be increased during a triggering-event period. Once a triggering event happens, the prohibition under Clause 33 kicks in and effectively supersedes the requirement to stay at or under the cap during a triggering-event period. The levels of charges, whether a member is invested in the default arrangement or not, cannot be increased. For this reason, we consider that Clause 33 works to provide proportionate and effective protection.

As my noble friend said, Amendment 29 seeks to build on Amendment 27 by limiting it. We consider that the Bill, particularly Clause 33, already provides effective and proportionate protection for scheme members. Amendment 30 would require the first regulations to be made under Clause 12, on the continuity strategy, to be subject to the affirmative resolution procedure. As I have already said, we will go away and consider our strategy on putting out those regulations. Amendment 39 seeks to make an addition to what will be covered in the regulations that must be made under Clause 24 by requiring them to prohibit the use of member funds to pay for the costs of transferring the members out of the master trust and winding it up. Amendment 40, in the name of my noble friend Lord Flight, takes a similar position but makes an adjustment to that addition.

I turn to Amendment 37, in the names of the noble Lord, Lord McKenzie of Luton, and the noble Baroness, Lady Drake. Clause 24, and the regulations to be made under it, set out the detail of continuity option 1 and the requirements in relation to it. Continuity option 1 is where a master trust has to transfer its members out and wind up. To protect the rights that members have accrued in the scheme it is necessary that these rights are transferred to alternative schemes or pension arrangements. Clause 24 therefore requires the trustees of the scheme to identify a master trust to which members’ rights and benefits can be transferred. Our aim in Clause 24, and related clauses, is that members will continue to save in a pension, despite the master trust of which they are a member experiencing a triggering event which results in the scheme having to wind up. In this situation, the Bill requires that members are transferred out to an authorised master trust, and continue to save with as little disruption as possible. That is clearly important for their retirement.

Amendment 39 seeks to require the regulations that will be made under Clause 24 to include additional provision to prohibit the use of member funds to pay for the costs of transferring the members out of the master trust and winding it up. We have expressed sympathy with the aim of protecting members’ funds, so far as possible, in the event that members’ accrued rights and benefits are transferred out of the scheme. Indeed, to some extent, the Bill already makes provision for a prohibition to cover this. However, the mechanics of how this works are slightly different, so I will explain them.

When we discussed Clause 8 I explained how it provides that in order to be satisfied that a master trust is financially sustainable, the Pensions Regulator must be satisfied that the scheme has sufficient financial resources to meet the costs of complying with the duties in Clauses 20 to 33. That includes, among other things, the costs of transferring members’ rights and benefits out and winding up the scheme. Clause 33 already puts in place protection which has a similar objective to this amendment. Once a triggering event has happened, the trustees are prohibited from increasing charges above certain levels, and these will need to be set out in a section in the implementation strategy. As for what those levels are exactly, as I mentioned in relation to Clause 12, Clauses 27 and 33 enable the Secretary of State to make regulations in relation to these administration charges. Clause 27(4) allows regulations to set out the manner and a specific date for those levels. Clause 33(4)(a) allows regulations to set out how to calculate the administration charge levels for the purposes of the prohibition under Clause 33, including those levels set out in the implementation strategy.

We intend for these levels in the implementation strategy to be scheme-specific and calculated in relation to each investment arrangement in the scheme by looking back over a certain period of time and taking into account any discounts in each arrangement. The intention is that these levels will be set according to existing charge levels in the scheme before the triggering event happened and will be based on the charges that members were paying towards the normal running of their scheme in previous years. The levels will need to be calculated in a manner specified in the regulations. In this way, the existing levels in the scheme will effectively be fixed once a triggering event happens and cannot then be increased. The intention is that members will not pay any more than they did when the scheme was operating normally.

Under Clause 33(1)(c) there is a specific prohibition in relation to charges being imposed on or in respect of a member in consequence of leaving the scheme. That covers the members who are transferred by the trustees to the scheme that the trustees have identified under continuity option 1. It is worth noting also that these protections under Clause 33 are in place for the duration of the triggering event period—and so in the context of continuity option 1—until the scheme is wound up.

Amendment 40 seeks to make an adjustment to the additional prohibition. As described when I talked about Amendment 39, the intention is that members will not pay any more than they did when the scheme was operating normally so the amendment is not required.

Amendment 42 would require information on any charge cap to be included in a master trust’s implementation strategy. The implementation strategy must include a section on the scheme’s levels of administration charges in a manner that will be specified in regulations in due course, as well as any such other information as will be set out in regulations. Again, I shall not repeat how Clause 33 will work.

The amendment would mean that as well as setting out the levels of administration charges in the implementation strategy, the strategy would specifically need to include information on any cap on those charges. While it is important for it to be clear whether any charge cap applies, I am concerned that the amendment duplicates provision elsewhere and as such is unnecessary. Existing regulations specify the charge cap requirements and enable the reporting of information about charges.

Amendment 54 seeks to provide that, in certain circumstances, costs incurred by the scheme should not be borne by the members. These circumstances are where a master trust that has not been authorised by the Pensions Regulator experiences a triggering event and the trustees either decide to wind up the scheme or are required to do so. Paragraph 7 of Schedule 2 provides that in those circumstances, where no other party is liable for the costs that the scheme incurs during the triggering event period, which includes taking into account the prohibition under Clause 33, the scheme funder is liable. It is appropriate that the scheme funder is made liable for the costs that the scheme incurs during the triggering event period where no other party is liable, as they are the person liable to provide funds for the scheme and entitled to receive profits from it.

Once the new authorisation regime for master trusts comes into effect, in order to be authorised, schemes will need sufficient financial resources to be able to pay for the running of the scheme for at least six months and for the costs of winding up the scheme and associated costs. The intention is that the charge levels in the implementation strategy, the detail of which will be set out in regulations in due course, will look backwards over a period of time before the triggering event happened, as I have already described. We believe that by preventing an increase in charges if there is a triggering event, there will be effective and proportionate protection for scheme members.

If there are any points that I have not dealt with, I shall pick them up. On charges on Governments, the 2015 regulations set out a requirement on trustees to ensure that members are getting value for money on charges. With that, I think I have dealt with all the issues raised by the noble Baroness. I accept that that was a probing amendment and I am grateful for this opportunity for discussion. On that basis, I hope I have given noble Lords comfort and invite the noble Baroness to withdraw her amendment.

Baroness Drake (Labour)

I thank the Minister for his detailed reply. I should be honest and say that I do not think that I have absorbed all the detail that he presented, and I will read the Hansard in detail to follow it through. In my defence, as one would expect in preparation for a Bill such as this, I spoke to pension lawyers, and there was a clear view that the parameters and restrictions on the use of members’ funds to meet the costs when a master trust fails were unclear and needed to be set out more clearly, so I am not alone in not understanding exactly how the prohibition clause works, and therefore what quality of protection is afforded. I simply say that others are unclear what the Bill provides.

I took one or two things from what the Minister said. The information charges provided on the implementation strategy are key. They are the driver against which it is assessed. It is on additional charges that one applies the prohibition; it identifies the charges in the implementation strategy which it is prohibited from exceeding. That needs some reflection.

I was a little confused by one point in the Minister’s response. He referred to default funds. Of course, the cap on default funds is 75 basis points, but the nature of his reply was that if the scheme was running a default fund on 50 basis points, one could rise to the cap to fund the administration charges. Reassurance on that point would be really helpful.

Lord Freud (Conservative)

I hope that I made it absolutely clear that we will look back at what was actually being charged to ensure that it was an annual effective rate of 0.5%. There is no space to try to get the next 0.25% once a triggering event has happened. You are left at the level at which you have been charging historically, and there will be a way of assessing that rate, which means that both the original amendment and my noble friend’s amendment to it fall away, because there is another method of maintaining the level of charges.

Baroness Drake (Labour)

I thank the Minister for that clarity; that is quite reassuring in respect of one point, but I think that my noble friend and I will probably want to reflect on the detail of the Minister’s statement. It is also helpful that he has confirmed that the implementation strategy information charges are key in deciding the charges and the prohibition that applies. We will reflect on what is in Hansard, but I beg leave to withdraw my amendment.

Amendment 27 withdrawn.

Amendment 28 not moved.

Viscount Ullswater (Conservative)

I cannot call Amendment 29, as it is an amendment to Amendment 28.

Amendment 30 not moved.

Clause 12 agreed.

Clause 13 agreed.

Amendment 31 withdrawn.

Clause 14: Requirement to submit annual accounts

Lord McKenzie of Luton (Labour)

My Lords, I beg to move Amendment 32 and shall speak also to Amendments 33 and 34. I shall be brief. We have dealt earlier with amendments relating to communicating and engaging with members. These amendments deal specifically with the requirements to ensure that an annual statement must be submitted to the Pensions Regulator, together with the scheme accounts. The annual statement for these purposes is that required by the 2015 DC regulations, with particular reference to relevant multi-employer schemes.

The requirement to produce an annual statement—the chair’s annual statement—although supported by the trustee board, is part of the Pensions Regulator’s DC code. The clause is designed to ensure that the Pensions Regulator has sufficient information about the master trust scheme to know when a scheme should be required to submit a supervisory return. I beg to move.

Lord Young of Cookham (Conservative)

My Lords, after some five hours of debate there is now a glimmer of hope for one of the amendments moved by the noble Lord, Lord McKenzie. Its intention appears to require the trustees of an authorised master trust scheme to submit the scheme’s annual governance statement to the Pensions Regulator each year.

The annual governance statement, sometimes known as the chairman’s statement, which trustees of most money-purchase occupational pension schemes are required to produce, provides information on the scheme’s compliance with governance measures such as the charge cap. It sets out, among other things, the level of charges in the scheme and the trustees’ assessment of the extent to which these represent good value for members.

I understand why this amendment may have been tabled, and I agree that it is important for schemes to operate transparently and demonstrate that they represent good value for money for members. This information would indeed be valuable to the regulator in its assessment of the master trust against the authorisation criteria. However, I have reservations about whether the approach, as drafted, represents the best way of achieving this. From a drafting perspective, there is a risk in making a provision of this kind in primary legislation which relies on a reference to a provision in regulations—in this case the Occupational Pension Schemes (Charges and Governance) Regulations 2015. Should those particular regulations be amended in the future—for example, so that the statement is no longer required under the same specific provision—there is a risk that this provision of the Bill would no longer have the desired effect.

A safer approach is to make use of the existing provision in the Bill, which enables regulations to specify that the regulator may require that further information is submitted to it. That provision is in Clause 15(2). I can confirm that it is intended that the provision of the annual governance statement to the regulator will be dealt with in these regulations by enabling the regulator to require the statement to be included in master trusts’ supervisory returns. We will of course consult on these regulations and we cannot confirm the final content until the consultation is concluded. I hope that I have explained to noble Lords that I resist the amendment not because I disagree with it but because there is a better way of getting there. The Bill already allows equivalent provision to be made in a manner more likely to secure the desired outcome in the long run. Against that background, I hope that the noble Lord will withdraw his amendment.

Lord McKenzie of Luton (Labour)

My Lords, I am grateful to the Minister for that response. I thought for a moment that the glimmer of hope was going to be completely snuffed out, but I am pleased to know that it has not been. I accept the point about drafting and will forward in due course to seeing this in the regulations. Having said that, I beg leave to withdraw the amendment.

Amendment 32 withdrawn.

Amendments 33 and 34 not moved.

Clause 14 agreed.

Clause 15 agreed.

Clause 16: Duty to notify Regulator of significant events

Lord McKenzie of Luton (Labour)

My Lords, I shall speak also against Clause 16 standing part of the Bill. The amendment is an alternative formulation that requires the affirmative procedure to operate for the regulations. We touched on this issue earlier this evening. The clause imposes a duty on a range of persons involved in running a master trust to give notice of the fact that a “significant event” has occurred. Civil penalties can be applied to anybody failing to comply. The only hint of what might constitute a significant event is what the Secretary of State sets out in regulations. No hint is given in the Explanatory Notes to the Bill. The information provided to the Delegated Powers Committee simply refers to a significant event being one that might affect the ability of the scheme to meet the authorisation criteria, such as a change of trustee or scheme administrator.

As the Delegated Powers and Regulatory Reform Committee pointed out, the delegated power confirmed by Clause 16(3) is a very wide one. It emphasised that the definition of what constitutes a significant event is fundamental to determining the duty imposed by Clause 16. It says that the width of the power appears to be needed because the Government have not yet decided on the policy or purposes for which the power is to be used. Its conclusion is that the power is inappropriate in the absence of any convincing reasons to justify its scope. We agree that as things stand the Government have more work to do to justify the change in the clause. I beg to move.

Lord Freud (Conservative)

I will begin by explaining why it is important that the clause stands part of the Bill, and then I shall set out my thoughts on the proposed change in the parliamentary scrutiny procedure.

Clause 16 addresses one of the one of the requirements that will be placed on a master trust scheme once it has been authorised. One of the great strengths of the authorisation regime is that it is an ongoing system. This means that, in order to continue operating in the market, the Pensions Regulator must remain satisfied that the master trust continues to meet the authorisation criteria. This makes it particularly important for the Pensions Regulator to remain informed about the scheme. Indeed, I hark back to our discussion a little earlier about whether there should be someone to compensate as a last resort. It is really important that we make sure that the Pensions Regulator knows what is happening in schemes. That is one of the key ways in which to make that happen.

The regulator will collect information from authorised master trust schemes on a regular basis through a combination of existing requirements on occupational pension schemes and new requirements on authorised master trust schemes, introduced as part of the Bill. For example, all occupational pension schemes are already required to submit an annual scheme return to the Pensions Regulator and, under Clause 15, master trusts will be required to submit a supervisory return as well. In addition, Clause 14 introduces a requirement on the trustees of master trust schemes to submit the scheme’s annual accounts, and on the scheme funder to submit its accounts to the Pensions Regulator. These returns allow the Pensions Regulator to collect information from schemes on a regular basis in order to determine whether they still meet the authorisation criteria.

This clause provides that the Pensions Regulator must be notified in writing if significant events occur in relation to an authorised master trust scheme. The Secretary of State, following consultation with the industry, will set out in regulations what constitutes “significant events” for the purposes of this clause. These might include, for example, change of scheme trustee, change of scheme administrator, changes to the continuity strategy or changes to the business plan. The Government intend that the events which will be prescribed as significant events will be events of the type which the regulator would need to be made aware of promptly due to the potential impact on the scheme’s authorised status or because they are indicators that support or intervention may be required.

To be clear, the occurrence of a significant event in a master trust scheme will not necessarily affect the ability of the scheme to meet the authorisation criteria. It just may have such an effect or it may be a warning sign. For example, a scheme may have a change of trustee. As the fitness and propriety of a trustee is linked to the authorisation criteria, the Pensions Regulator must be informed of this change so that the new trustee may be assessed against the relevant standards. The new trustee may well meet the required standards, in which case the scheme’s authorisation status will not be affected—but there could be an impact. A civil penalty will apply to a person who fails to comply with this reporting requirement. For that reason, it is important to be as clear as possible about who will be subject to this requirement in the Bill. This clause therefore lists the persons subject to this requirement in subsection (2). Further persons may be listed in regulations.

There is a precedent for this requirement. Section 69 of the Pensions Act 2004 provides that key persons involved in the running of defined benefit occupational pension schemes must report the occurrence of certain events to the Pensions Regulator. That provision was made to warn the Pensions Regulator that such a scheme may require the support of the Pension Protection Fund. The provision in this Bill is made to warn the Pensions Regulator that an authorised master trust scheme may need support or intervention or be at risk of not meeting the authorisation criteria. This provision will protect scheme members and it will assist the Pensions Regulator to carry out its functions. That is why it is important that this clause stands part of the Bill.

Amendment 35 concerns the affirmative as opposed to the negative procedure. We have discussed that and we will also consider it in this context. On that basis, I hope that the noble Lord will see fit to withdraw both his opposition to the clause and his amendment. I hope that I have provided clarity on the wider purpose of Clause 16 and I commend it to the Committee.

Lord McKenzie of Luton (Labour)

I thank the Minister for that response. I think we understand what the intent of this provision is. Obviously, the persons to whom this obligation applies are listed in detail in the Bill. Why, therefore, is it not possible to list at least some examples in the Bill—for example, a change of scheme trustees—as one of the significant events which might require action? There is silence on that side of the equation. However, there is a list of persons who are subject to this provision.

Lord Freud (Conservative)

I think the reason is that it is pretty odd to have a hybrid approach to a list of requirements some of which are in the Bill and some in regulations. We are looking to put them all together in a coherent way in regulations, which we will consider how best to introduce to the House.

Lord Kirkwood of Kirkhope (Liberal Democrat)

My Lords, has any consideration been given to a right of appeal against a civil penalty of this kind, which looks like a substantial potential fine? Who is to judge this? For example, whose duty is it to say that the trustees have changed? It could be any of the other trustees and the administrative fine could be imposed on any one of them at random. There needs to be some kind of due process about substantial fees of this kind landing out of the blue on people who may not bear the main brunt of the significant event over which they are being arraigned.

Lord Freud (Conservative)

The noble Lord has opened himself up to a letter from me.

Lord McKenzie of Luton (Labour)

My Lords, I think we need to read the record. In the meantime, I beg leave to withdraw the amendment.

Amendment 35 withdrawn.

Clause 16 agreed.

Clauses 17 to 21 agreed.

Clause 22: Notification requirements

Amendment 36 not moved.

Clause 22 agreed.

Clause 23 agreed.

Clause 24: Continuity option 1: transfer out and winding up

Lord McKenzie of Luton (Labour)

I shall speak also to Amendment 38. Amendment 37 seeks to probe an additional route to continuity. As the Bill stands, where trustees have chosen, or are required, to pursue continuity option 1, they must identify one or more master trust schemes to which members’ accrued rights and benefits are proposed to be transferred. Continuity option 2—an attempt to resolve the triggering event—is a route to be determined by the trustees, and not, seemingly, the Pensions Regulator. It is understood that in some circumstances a route to achieving continuity would be to change the scheme funder at the initiation of the Pensions Regulator as an alternative to transferring out or winding up a scheme. On the face of it, the regulation-making powers of Clause 24(3)(a) and (b) do not seem to cover the position, but perhaps the Minister will tell us how, or indeed whether, this outcome can be accomplished.

Transferring the responsibility for a master trust to a new scheme funder could provide a quick answer to a collapsing master trust and would fit in with what happens with standard occupational schemes where it is wished to avoid having to wind up the whole scheme if a scheme sponsor becomes insolvent. Changing the scheme funder could be an easier solution that costs less and helps members because it keeps the scheme intact and avoids unnecessary investment transition costs and expenses for the members. Does the Minister agree that this opportunity should be available and, if so, can he put on the record how it might be accomplished?

The purpose of Amendment 38 is to highlight circumstances under continuity option 1 which require a transfer out and winding up and for members’ accrued rights and benefits to be transferred. Notwithstanding regulations which might require transfers to alternative schemes or the right of employers or members to opt out of a proposed transfer, what is the position if the trustees simply cannot identify a transferee scheme? How is continuity option 1 to proceed? It is accepted that the focus of the Bill is just the money purchase component of a master trust but, if other benefits are provided, what is the position regarding these and how are they to be covered by other legislation and regulations? I beg to move.

Baroness Altmann (Conservative)

My Lords, I want to raise an issue which is very relevant to this point. As the Bill will, rightly, require continuity strategies for the event of failing master trusts, I ask the Minister to consider introducing measures that will facilitate bulk defined contribution pension transfers. At the moment, the bulk transfers are governed in a way that would be suitable for defined benefit schemes rather than defined contribution schemes. It seems that we have an opportunity to disapply Regulation 12 of the 1991 preservation regulations and to introduce measures in this Bill to directly facilitate defined contribution pension transfers, which could also cut the costs of transferring across.

Lord Young of Cookham (Conservative)

My Lords, I am grateful to the noble Lord, Lord McKenzie, for proposing his amendment. I am afraid that I am back in the default mode of resisting.

Before I address the amendments, I say to my noble friend Lady Altmann that I would like to reflect on what she said about the transferability of defined contribution pots and perhaps write to her, because I am not sure that it directly arises from the two amendments before us.

Clause 24, and the regulations to be made under it, sets out the detail of continuity option 1 and the requirements relating to it—where a master trust chooses or is required to transfer out its members and wind up. This option would be pursued where a master trust scheme could no longer satisfy the regulator that it met the authorisation criteria and had its authorisation withdrawn or refused, or where, for any other reason, it could no longer continue to operate and the trustees chose to pursue continuity option 1 rather than resolve the triggering event and keep the scheme running.

To protect the rights that members have accrued in the scheme, it is necessary that these rights be transferred to alternative schemes or pension arrangements. Clause 24 therefore requires that under option 1, the trustees of the scheme must identify a master trust to which members’ rights and benefits can be transferred. Then the trustees have to notify members and employers of the transfer, as well as of other information that will be set out in regulations.

The aim of Clause 24 and the related clauses is that members will continue to save in a pension despite the master trust of which they are a member experiencing a triggering event that results in the scheme having to wind up. In this situation members should be transferred out to an authorised master trust and continue to save with as little disruption as possible. We want to encourage and facilitate the continuity of pension saving. Therefore, when a master trust is going to close, the provisions in the Bill will mean that members have the reassurance that, if they do not make an active decision to go elsewhere, they will become a member of an alternative master trust that has been authorised by the Pensions Regulator.

Amendment 37 provides that where the trustees have the choice, and have decided to pursue continuity option 1, they can do so, except where the Pensions Regulator decides that continuity of saving for members would be best achieved by the substitution of a new scheme funder. I think that the noble Lord, Lord McKenzie, was seeking to give the regulator some sort of power to require the trustees to follow continuity option 2 instead of continuity option 1, where the trustees had chosen the latter. However, in effect the amendment would give the regulator the power to exempt a scheme from fulfilling the requirements under continuity option 1 where the trustees have decided or are required to pursue this option and where the regulator is satisfied that continuity is best achieved by the substitution of a new scheme funder. I see real difficulties in what the noble Lord has proposed.

Trustees are responsible for running and managing their scheme and making decisions in relation to it. They have a fiduciary duty to act in the best interests of the members of their scheme—a point that the noble Lord, Lord Kirkwood, made during our discussions. This amendment would effectively allow the regulator to second-guess and overrule trustees and to make a decision about a pension scheme. This would be a fundamental change to the principle that trustees have responsibility for managing their scheme. We do not think such an intervention by the regulator would be appropriate.

The option of finding a new scheme funder, as proposed by the noble Lord, is already open to trustees as a means of resolving the triggering event and continuing. Depending on what triggering event the scheme experienced, there could be a variety of ways of resolving it. We consider it important not to limit these, but to give trustees the freedom to resolve the event and the regulator the power to decide whether it is satisfied that the triggering event has been resolved. Where the sourcing of a new scheme funder is the most appropriate resolution of a triggering event, as suggested by the noble Lord, it should be up to the trustees to identify this funder. It should not be the Pensions Regulator’s responsibility to decide what the resolution method should be, that the method should be a new scheme funder or to source that funder. That is not the regulator’s role and it would be overruling the trustees, who rightly have ultimate responsibility for the scheme and its members.

We consider it important that any resolution of the triggering event and continuation of the scheme be subject to the full requirements of option 2. These requirements include the preparation of a comprehensive and detailed implementation strategy by the trustees, having certain safeguards in place for members and employers, additional support and assistance for them, and greater protection for members. Further, there is oversight of the adequacy of the strategy by the regulator.

We agree that where a master trust has experienced a triggering event, a new scheme funder could be identified and could be the most appropriate resolution of a triggering event. However, the Government believe that it is the trustees’ responsibility to make decisions for the scheme, and that if they want to resolve the triggering event by finding a new scheme funder, they should go down the route of continuity option 2.

Amendment 38 makes two additions to what will be covered by the regulations. The first part of the amendment would require the regulations made under this clause to set out what happens where the trustees have not been able to identify a master trust into which their members will be transferred. As the Bill makes clear, there will be a comprehensive set of regulations under Clause 24 that will cover many areas. These regulations will cover members’ right to transfer to a scheme of their own choosing, if they do not wish to transfer to the trustees’ choice of scheme. Members could also take up other pension options open to them, where relevant. Where a member is in receipt of a pension from the failing master trust, they will have the right to transfer their benefits to an alternative appropriate arrangement. For example, this could include a draw-down arrangement or the purchase of an annuity.

Where members do not exercise this right, employers can choose an alternative authorised master trust from that selected by scheme trustees for their current employees to be transferred to. It is intended that the regulations will impose a duty on employers and the trustees to inform members where employers select an alternative master trust. This will ensure that members are kept informed, know where their rights have been transferred and which scheme they will be saving in in the future. The regulations will also set out that if members and employers do not make alternative arrangements, members will be transferred to the master trust selected by the trustees.

From our engagement with the master trust market we are aware that a number of schemes will be interested in taking on the members of other master trusts that fail. Many master trusts operate on a model that is based on scale. In some cases this is to generate a level of income which makes them profitable. It means that where there are a number of members that the scheme has not actively had to source itself, schemes are particularly interested in taking them on. Also, from our discussions with master trusts, we are aware that they are keen to demonstrate the reliability of master trusts and for members to have confidence in them as a vehicle for pension saving. There may be other motivations as well which mean that master trusts are eager to take on other schemes’ members. While we cannot guarantee that several master trusts would be looking to take on the members of any particular trust that has failed or decided to exit the market, we are confident that there is adequate provision within the market overall.

We think it is essential that any members who are being transferred should go into a scheme that has been authorised by the regulator, and when the regulator comes to implement the authorisation regime it will be conscious of the need for there to be schemes available that have been authorised into which members can be transferred. We anticipate that master trusts believe that they will pass the authorisation requirements relatively easily and will want to apply for authorisation as soon as they are able. While I appreciate the concerns, our interaction with the master trust market leads us to believe that there will be suitable schemes available into which members can be transferred when their schemes fail.

The second part of Amendment 38 would require the regulations to set out what would happen to any non-money purchase benefits where a master trust which has mixed benefits is going to transfer the money purchase benefits out of the scheme and cease to operate in respect of those benefits. We have had some discussion relating to our approach in relation to non-money purchase benefits in master trusts, and there is already extensive legislation in relation to non-money purchase benefits covering areas such as scheme funding, transfer and wind-up. This legislation will continue to apply to non-money purchase benefits in master trusts. We do not want to duplicate or create complications in relation to that existing legislative framework. For that reason, we do not think it is appropriate that the continuity strategy should make provision about what is to happen to the non-money purchase benefits in the scheme.

Perhaps I may have another shot at responding to my noble friend Lady Altmann. There will be specific bulk transfer provision for master trusts that are following continuity option 1. That will be made by regulations under Clause 24. It will not have the normal requirements on defined benefit schemes, such as an employer link between the two schemes. I hope that is of some help to my noble friend, and that the noble Lord will consider withdrawing his amendment.

Lord McKenzie of Luton (Labour)

I thank the Minister for his response. Working backwards through our amendments, I think that in referring to the second paragraph of Amendment 38,

“dealing with benefits other than money purchase benefits”,

he said that there is legislation in place which in a sense covers those situations. Can we be clear—perhaps he would care to write to me and to my noble friend Lady Drake—that there is a perfect fit of that regulation in those circumstances where there is a master trust with money purchase benefits and other benefits, just to make sure that it fits those precise circumstances? I think that we remain to be convinced on that point.

On the point about continuity under option 1 or option 2 and who should initiate that, the amendment talks about the Pensions Regulator being,

“satisfied that continuity is best achieved by the substitution of a new funder”.

It does not itself say that the Pensions Regulator effectively has to initiate it. I am not sure if we are on the same page on that one, although perhaps there is more than a glimmer of light. But I think that there is an issue here. We understand what the Minister has said about the role of the trustees as opposed to the Pensions Regulator, but what we were seeking was that the Pensions Regulator could perhaps have some influence, or focus on nudging, to get people to accept a situation where there is a new funder rather than go through one of the other courses—we accept that, obviously, that would involve the trustees having to sign up at some stage, and this would not necessarily be something done over their heads. Again, we will read the record, but it is something to which we will return on Report, among some other things. In the meantime, I beg leave to withdraw the amendment.

Amendment 37 withdrawn.

Amendment 38 not moved.

Amendment 39 not moved.

Viscount Ullswater (Conservative)

I cannot call Amendment 40, as it is an amendment to Amendment 39.

Clause 24 agreed.

Clause 25: Continuity option 2: resolving triggering event

Amendment 41 not moved.

Clause 25 agreed.

House resumed.

House adjourned at 9.37 pm.