Pension Schemes Bill [Lords]

Public Bill Committee, 9 February 2017.

Content of implementation strategy

Alex Cunningham (Labour, Stockton North)

I beg to move amendment 30, in clause 28, page 20, line 14, after “charges” insert

“, including any caps on these charges,”.

This requires members to be informed about caps on charges.

Good morning, Mr Rosindell. The amendment is straightforward: it would ensure that members are given accurate information, particularly where caps have been placed on the charges alluded to in the clause. As the Secretary of State has yet to determine costs and charges throughout a pension scheme—not just administration but investment and transaction costs—we have yet another delay in ensuring that scheme members are delivered the efficiencies that they deserve. We are also dependent on the Secretary of State bringing forward secondary legislation on the continuity strategy, which means yet more delay.

I am in danger of repeating myself, but scheme members really ought to get more information about the issues that affect their pensions. We have to start somewhere, and I maintain that the Bill remains a good place to do that. As I have said elsewhere, the Government support a cost-collection template in the local government pension scheme, which prompts the question: why do they not use that for master trusts instead of going down the road of yet more consultation?

I know from experience this week that the Minister is unlikely to be sympathetic to the amendment. Assuming that we are in that place again, what consultation is he planning with scheme members on the need for greater transparency and how they think they ought to be informed and given the opportunity to be active rather than passive scheme members?

The Secretary of State said last week:

“We plan to consult later in the year on the publication and onward disclosure of information about costs and charges to members. In addition to the Bill, other things are clearly required to give greater confidence in the pensions system.”—[Official Report, 30 January 2017; Vol. 620, c. 756.]

I had hoped that we could go some way to implementing at least some measures to help to fill the communication deficit, but now we will have to wait even longer. Trust members would have a little more confidence in this Government if they took this opportunity to take action on costs and charges and the need to share information about issues such as caps.

I conclude with a final question for the Minister. The review is under way. Is he satisfied that he will have the powers under the Bill or any other piece of legislation to accelerate the drive for greater transparency, or will we have to wait for another pensions Bill, which I understand is unlikely during this Parliament?

Richard Harrington (Conservative, Watford)

I can do no better than to echo the sentiments of the Opposition spokesman in welcoming you back to the Chair, Mr Rosindell, which is a pleasure indeed. I wish that I could accept the amendment with such enthusiasm—

Alex Cunningham (Labour, Stockton North)

Go on. Give us one!

Richard Harrington (Conservative, Watford)

—but we support the sentiments behind it. As with many things in the Bill, both sides want the same thing; the question is how things are achieved. The explanatory note to the amendment says that it

“requires members to be informed about caps on charges”,

which I understand, but the Government argue that that would duplicate provision elsewhere, so it is unnecessary.

I have said before that the Government agree with the principle that members should be able to see the costs and charges that affect their pension pot. Since April 2015, regulations have required trustees to report information about costs and charges in a chair’s statement, which must be shared with members, so that provision is there. Those regulations impose a charge cap where a scheme is used for automatic enrolment and contributions are invested in a default arrangement, as defined in the charges and governance regulations. To be clear, the cap is an annual one of 0.75%, or an equivalent combination charge, of the value of the member’s rights. That applies to master trusts in exactly the same way as it applies to other pension schemes.

The Government recognise that more needs to be done to increase transparency. We will be making regulations requiring charges and transaction costs for money purchase benefits in occupational pension schemes to be given to members and to be published. We have to get it right, and we are consulting. The hon. Member for Stockton North said that he thinks it is just another consultation, but it will happen this calendar year.

The purpose of the implementation strategy is for the Pensions Regulator to have scrutiny as part of the approval process.

Alex Cunningham (Labour, Stockton North)

Before the Minister draws to a conclusion, I would be interested to know whether the regulations will outline exactly what chairs will be required to do to report on issues such as the cap.

Richard Harrington (Conservative, Watford)

Sorry—I was distracted when the hon. Gentleman asked his question.

Alex Cunningham (Labour, Stockton North)

I will repeat it; we all get distracted at times. Will regulations outline what will be required within a chair’s statement to ensure that such things as caps are properly reported on?

Richard Harrington (Conservative, Watford)

I will answer that question in the same way as I have up to now: the consultation is looking at the way to disclose. I cannot give the hon. Gentleman the undertaking he seeks, but I fully expect that to be the case.

In answer to the other question, about whether the results of the consultation will require primary legislation, I can clearly say that they will not require another Bill. As to whether there will be another pensions Bill, the hon. Gentleman obviously has access to information on the Queen’s Speech that I do not have. I certainly do not think it is the position—it may be, but I do not think anyone knows at this stage.

I ask the hon. Gentleman to withdraw his amendment. That is not because I believe it is silly or anything, but because it is not needed. The charges in the scheme will be tethered to any cap that applied, and that information is already available to members.

Alex Cunningham (Labour, Stockton North)

The Minister teases me a little with the idea that we might have a second pensions Bill this Parliament. I do not think he really believes that will be the case.

I recognise what the Minister has said. The very fact that he believes that the information will be included in regulations is a positive response, and for that I am grateful, but again we are back to the issue raised originally by the Constitution Committee. It said that there was a tremendous reliance by the Government on secondary legislation in the entire Bill.

Richard Harrington (Conservative, Watford)

I remind the hon. Gentleman of the affirmative nature of the regulations. That will allow scrutiny and discussion.

Alex Cunningham (Labour, Stockton North)

Indeed. That is exactly why I am confident that what the Minister is saying will come to pass. I beg to ask leave to withdraw the amendment.

Pause orders

Alex Cunningham (Labour, Stockton North)

I beg to move amendment 31, in clause 32, page 22, line 33, leave out paragraph (d).

This removes the provision that gives the Master Trust the ability to stop making payments to members of the scheme.

Alex Cunningham (Labour, Stockton North)

Our amendment 31 would remove the provision that gives the master trust the ability to stop making payments to scheme members in the event of a pause order following a triggering event. Our biggest concern with the clause is that, while the pause order is in place, there is a significant impact on the members of the scheme through no fault of their own. We understand that there may be circumstances in which a master trust should no longer collect contributions from an employer, but it is unacceptable that elderly, vulnerable people who are dependent on their pension do not receive it. It is our duty to ensure that pensioners do not pay the price for a problematic situation arising in a master trust, and that their quality of life is not adversely affected.

I think of the 80-year-old lady who trusted that her workplace pension would be safe and would look after her in retirement, but whose payments do not arrive when she expects. She is concerned, but decides that it must be an administrative error and that the payment will probably arrive the next day—but it does not. She does not have a computer to check the company website, and she may have spent hours on the phone waiting in a queue to inquire as to why she has not received her pension.

Amendment 28 called for not just employers but members to be told of triggering events. When we debated that amendment, the Minister said we could create unnecessary anxiety for scheme members before their lives were impacted. I accepted that point, and listened carefully to what he said about communication with a member when they were affected. A pause order resulting in the halting of payments is extremely significant. That woman may no longer have a workplace to go to; maybe the employer has ceased to exist and bears no responsibility to communicate with previous employees. She has not been informed about the triggering event that caused the pause order that has led to her not receiving the money she relies on to get by. The Minister knows the financial impact on such a person; I wonder what he would say to her.

The primary function of a master trust is to facilitate the collection of contributions and the payment of pensions. If a pause order has been issued, why can the master trust not still pay out? It may well be that the pause order lasts for only 48 hours, or even a week. Perhaps it is not unreasonable to expect people to be able to get by for a short amount of time, but pensioners could have no warning that they may not receive payments for an unspecified period. As it is, the Bill allows a pause order period of up to six months, and includes powers to extend that period.

What will happen to people and their livelihoods if they cannot access their pension? What provisions do the Government plan to put in place to ensure that those affected by a pause order will not face difficult and testing financial circumstances? We could have a widespread crisis on our hands—especially if it is a large master trust—that could impact on countless people and their families. I do not believe the Government have properly considered what would happen in those particular circumstances. I appreciate that requiring a master trust to pay out when there may be concerns about accuracy and record keeping could be problematic, but if the pensioners’ pot is protected, surely the income stream can continue?

That was also debated in the other place, without resolution. There was mention of exceptions, such as for ill health, but I am interested to hear the Minister’s view on continuing payments. If there has to be exceptions for some groups, who would be protected in those circumstances? I understand that a pause order allows the regulator to go in and make sure that the situation is sorted, but that is a difficult situation, and there will remain much uncertainty among members who see their incomes dry up.

We are back to communications again. Will the Minister advise the Committee on what information he believes should be shared with members, and when? Is it at the point of impact—when payments stop? Members must be at the heart of auto-enrolment, and they must trust that the system actually delivers for them. Stopping their payments will discredit the entire process. Opt-out rates could soar and trusts could be undermined.

Turning to the amendments tabled by the Scottish National party, we firmly believe that the Government need a plan to ensure that pensioners do not miss out on receiving their pension for an unspecified period, but we also believe that payments into schemes should not simply be halted. As a result, we welcome the SNP amendments that make way for a separate fund for contributions to be paid into during the period of a pause order, thus protecting the long-term interests of the member who had contributed.

Richard Harrington (Conservative, Watford)

I wish to make it clear, without punning too many times on the word “pause”, that we did pause after the intelligent discussion in the other place, so I will go into some detail on why we will not be accepting the amendments, two of which were tabled by the hon. Member for Stockton North and the third by the SNP.

First, amendment 31 would remove an important provision that allows the regulator to issue a pause order, which temporarily prevents benefits from being paid out from a master trust scheme to scheme members. Such an order can be made only in very limited and specific circumstances. I will briefly set out what those are.

Alex Cunningham (Labour, Stockton North)

I appreciate the Minister allowing me to intervene so quickly. He says that pause orders can be made only in very specific circumstances, which he is about to outline. Will he acknowledge that they could last for up to six months, and perhaps be extended even beyond that?

Richard Harrington (Conservative, Watford)

The hon. Gentleman is correct, but of course it is at the discretion of the regulator, which will be dealing with all the circumstances. It could also be a very short period—that is the intention. I hope he agrees that the regulator has to have flexibility to deal with the specific circumstances of a particular case.

The scheme would have to be in a triggering event period, which means that one of the key risk events, which I explained previously, has occurred in relation to the scheme, the obvious one being that the scheme funder has become insolvent. Alternatively, the order could be made in relation to an existing scheme if it has submitted its application for authorisation and the decision on that application is not yet final. To satisfy the criteria, further conditions must be met. The regulator has to be satisfied that if a pause order is not made, there is or is likely to be an immediate risk to the interests of members in the scheme or the assets of the scheme.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

I am listening carefully to the Minister. We all understand the circumstances that would end up with a triggering event and what he describes as the potential insolvency of the scheme funder, but we have all been keen to make sure that in those circumstances the assets of the plan holders are protected. I want to tease out with him that scenario where we believe that the funds are protected. On the basis of the fear and alarm that could be spread when people see that their pensions are not being paid, I have a predilection for making sure that both payments into funds, whether it is a new fund that is created in the short term, or payments out of funds are maintained. There is a threat to confidence in master trusts and auto-enrolment if there is a pause in payments being made. On the basis that it always should be the case that the fund assets are protected, although I understand that there are certain circumstances where the regulator may want to take particular action, we have to be careful to scope out exactly what those circumstances might be.

Richard Harrington (Conservative, Watford)

The hon. Gentleman tries to tease things out from me and I am afraid I have to tease him back by saying that it is impossible to state the particular circumstances of every case. I was going to say later, in response to SNP amendment in this group, that no one wants to cause panic among members. There are many triggering events and there will be cases where the regulator might need to issue one of these pause orders, but they will be sorted out hopefully quite quickly; that is the idea. I do not see how, in those circumstances, writing thousands of letters to people would not cause precisely the kind of panic and lack of confidence that we are all trying to prevent.

I will return to that point. As with everything in the Bill, this is not a question of one side making stupid points and the other making sensible points. This is about trying to envisage different circumstances that might arise. It is my duty and my job to make sure that the regulator has flexibility, although I quite understand the hon. Gentleman’s point of view.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

I absolutely understand and have no reason in principle to believe that the regulator may not have to have such a power. However, I am trying to understand what kind of event might lead to such action taking place if it is the case that plan holders’ assets are protected. Is it to do with any particular costs of administration for delivering all this? I am not clear what kind of event might lead to such action having to be taken.

Richard Harrington (Conservative, Watford)

It has been mentioned that, for example, suspicions of fraudulent activity might, in extremis, be such an event. Alternatively, the regulator might not yet be satisfied with respect to the administration of the scheme. The pause order clause is intended to apply in extremis. I am certain that most things will be taken care of in the normal course of things, but we felt that, the regulator needed that power in extremis. That does not necessarily mean that the sky has to be falling in. A pause order might be used to concentrate people’s minds on resolving the situation quickly. Nevertheless, the power is there. It can be used

“during a triggering event period…if…the Pensions Regulator is satisfied that making a pause order will help the trustees to carry out the implementation strategy.”

The order is designed for quite particular and limited circumstances. I know that we keep using sledgehammer and nut analogies—on Tuesday I mentioned kernels— but I really believe that if it did trigger the kind of communication that the Opposition referred to, it might cause a major panic, which is something that we have to avoid and that the system exists to resolve.

Alex Cunningham (Labour, Stockton North)

To extend the nut analogy, for a pensioner who may be losing £40 a week from their pension for up to six months, a pause order is not a tiny nut; it is a large coconut. It has a major impact on their lives.

Richard Harrington (Conservative, Watford)

I quite agree, and of course there are checks and balances within the system: the pause order can be exercised only on a determination by the determinations panel, and then there is a higher level of scrutiny. In a small administrative matter, it would be totally irresponsible for the regulator to suddenly decide on a pause order with the exact effect that the hon. Gentleman alludes to, either on pensioners receiving benefits or on people working as normal and paying contributions that come out of their weekly or monthly statements.

I totally agree with the hon. Gentleman’s intent, but I think it is important to look beyond the general definition of a pause order and into the specifics, which I hope I have explained, albeit briefly. I ask him to withdraw the amendment; he makes an important point, but I think we have attended to the detail necessary to ensure that what he fears, and we all fear, does not take place.

Craig Mackinlay (Conservative, South Thanet)

On that point, may I ask what the sponsoring employer’s position would be under a pause order? Would the sponsoring employer be in contravention of his auto-enrolment obligations, having been forced to stop paying towards a master trust that is set up or is part of the employees’ contributions arrangements?

What would happen to the employer in terms of his obligations under auto-enrolment? Is it envisaged, if a pause order is in place, that he would have to keep the money within the business until the situation is resolved, and then that money be passed over to the same fund, if it is cleared to continue in operation, or to a new fund that stands in its place?

Richard Harrington (Conservative, Watford)

My hon. Friend raises a very good point that we have considered. Having been an employer for many years and supervised payroll systems, I understand that that would be the obvious thing to do: simply hold on to the money. Provided it was kept within a business but earmarked for that, I do not think anyone could say that the employer would be in breach of their legal duties for auto-enrolment.

Of course, then a problem arises. It sounds appallingly administrative and technical, but it is the sort of thing that lawyers make a lot of money out of. If it were paid into a non-pension fund emergency account, which I believe could be an unintended consequence of the honourable amendment tabled by the hon. Member for Ross, Skye and Lochaber, it could mean that the money is not being paid into a pension fund. What happens to its legal status, the tax and everything else? It is very much in extremis and complicated.

I am not regarded within the pensions trade as a great voice for employers, as I think everybody in the House would agree, but this would represent a significant burden for employers. I ask hon. Members to bear in mind that employers will not typically have been responsible for this problem. They will not typically have been responsible for the events leading to the pause order being made. From their point of view, they have simply been complying with their duties under auto-enrolment, as my hon. Friend the Member for South Thanet said.

I do not believe we can place them in a situation where they risk being unable to comply with their legal duties or where compliance becomes a significant burden. As I have said, this is very complicated and the tax and payroll implications are not certain. I think we would all agree that in these rare and very limited circumstances, the solution presented in the Bill is the most simple for employers to comply with. Given the very limited impact on scheme members and the low likelihood of this situation arising, I believe that is the right solution.

Alex Cunningham (Labour, Stockton North)

The Minister keeps talking about short periods of time when there might be an impact. Has the Department given any consideration to the impact of loss of income on members of the scheme and on the social security system? What would happen to ensure that people affected by the loss of income due to a pause order are compensated by social security in the event of their qualifying for benefits because they no longer have a pension income?

Richard Harrington (Conservative, Watford)

The hon. Gentleman makes a very good point about social security implications. I cannot answer that question. I will have to give it some thought and I am happy to correspond with him on that subject. I think it is interesting and, although not directly relevant to this point, it is an important implication.

Hon. Members will be delighted to know that I have just remembered that employers are excused from AE duties during the pause order period. From the hundreds of pages of the Bill it had to get to the front of my mind, and it has. I thank the hon. Gentleman for triggering that recollection. I do think that everything has been taken into consideration. I hope that my explanation has been sufficiently comprehensive for the amendment to be withdrawn.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

It is a pleasure to see you back in the Chair, Mr Rosindell. I know that, in the interests of brevity, we are considering this slightly the wrong way round, in that I will speak to the amendment that the Minister has already responded to.

We all share the desire to ensure that the plan holders’ funds are protected in both the accumulation and decumulation phases. We are concerned about the impact of a pause order on a member’s savings, as there are no mechanisms in place that allow ongoing contributions to be collected and held on behalf of the saver. I know that the Minister has said that there are issues about where the funds would go and what kind of protection would be given, but those are exactly the kind of things that we have to resolve in this Committee. It is clear that any additional contributions that savers make at a time of a pause order have to be protected properly, but surely it is within our gift to architect that properly.

It is unacceptable that a member should be penalised, and in effect lose wages in the form of employer contributions, due to events that are out of their control. The Society of Pension Professionals has also said that it will be necessary to ensure that the period of effect of a pause order cannot start before the trustees receive notification of the pause order. That would mean that any contravention could only occur after the trustees are in receipt of the order. The society argues that without that notification, the trustees could be in breach of a pause order through no fault of their own if a direction is not complied with during the period between the date the regulator makes the order and the date the regulator notifies the trustees of it. That could happen, for example, if new members joined the scheme in that period contrary to a direction under clause 32(5)(a). The Government should clarify whether they intend to take action to protect savers.

Richard Harrington (Conservative, Watford)

Mr Rosindell, before we end our debates on this clause, I would like to make a point of clarification regarding an error on my part. In previous sittings, when I was referring to the regulations generally, I said that they are subject to the affirmative procedure. However, I made a mistake in referring to clause 28 in that context, because the negative procedure applies there. I apologise for that. Obviously, it was not done on purpose. I hope that Members will forgive me.

Regarding the amendment itself, I have adequately covered the points that have been raised, and I reiterate the Government’s position that we reject the amendment.

Alex Cunningham (Labour, Stockton North)

It is quite heartening in some ways that we can all make mistakes.

The Minister has talked several times during his response to the amendment about the short period that the pause order will probably apply. I remind him again that that period could be six months, during which a scheme member may not receive their income.

Richard Harrington (Conservative, Watford)

I reiterate that that is a maximum period. There will be very few cases of this type and the regulator will be on it every minute of every day; it is not the case that it will be forgotten about for five months and then dealt with in the final month. It is for the Government and the regulator to put in a long stop and to answer the questions “What if this happens? What if that happens?” and so on. However, I am absolutely certain that if we were to be in front of a Committee such as this one in years to come, I would be amazed if the process took anything like six months.

Alex Cunningham (Labour, Stockton North)

I certainly understand the Minister’s point of view, but in the event of one of the large master trusts failing—perhaps one that has a million members—in 10 years’ time, a considerable amount of could pass before any resolution could be found. For that reason, we must take some action in this area.

The Minister also said that the regulator needs flexibility. Well, that does not offer any financial flexibility to the scheme member. The hon. Member for Ross, Skye and Lochaber—I nearly messed up as well and I should not mess up that constituency name, should I?—repeated the point I made in my original speech. If the pot is protected and is safe, why on earth can the benefits not still be paid out to the member in these circumstances? The Minister spoke about checks and balances, but checks and balances do not deliver income for the person who depends very specifically on what is probably a small amount of income. I have talked about the impact that that could have on the social security system.

Therefore, because resolution could take up to six months and that it could be a major master trust that is affected, with the impact felt by many people, I intend to press the amendment.

Richard Harrington (Conservative, Watford)

It is absolutely true that the pause order can be extended, but the regulator closely supervises the scheme in this period. If the hon. Gentleman accepts that the role of the regulator in this matter is, in effect, to take it over, it is very hard to envisage this taking longer and longer. I certainly cannot see it happening with no one even bothering to communicate with the members, even in the case of a disaster happening, such as the hon. Gentleman mentioned, which I obviously do not think will happen, to the administrators of such a scheme. We have given the matter considerable thought and I ask him to withdraw his amendment.

Alex Cunningham (Labour, Stockton North)

I am afraid I have to disappoint the Minister. I am not going to withdraw the amendment. The bottom line is that there is always a real possibility—a quite long word with an extremely long meaning—that there could be a failure in the system, and that failure could result in a loss of income to some of the most vulnerable people in our society. For that reason, I intend to press the amendment to a Division.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

I will support the amendment. We have to feel satisfied that there are reasoned arguments why a pause order should be made and why payments should not be paid to pensioners. I am certainly willing to listen to further arguments, but I do not think a clear case has been put for why it should be made, except in very extreme cases of fraud and so on, and that case has not been made. Equally, in terms of retaining confidence, I wish to press our own amendment on the basis that it is important that plan holders continue to make payments, even in a triggering event. I want to test the will of the Committee and press our amendment to a Division as well.

Prohibition on increasing charges etc during triggering event period

Richard Harrington (Conservative, Watford)

Clause 34 provides for a prohibition relating to member charges during a triggering event period. Trustees must not increase charges above the level set out in the implementation strategy, introduce new charges on members or impose charges as a consequence of a member leaving or deciding to leave the scheme during a triggering period.

Regulations under clause 34 will set out how the charge levels in the implementation strategy are to be calculated. The Government intend that those levels will reflect what members paid towards the normal running of the scheme before the event happened. The charge levels will be calculated by looking back at previous charges in the scheme, and controls will be built in to protect against cases in which schemes increase charges shortly before a triggering event, so a scheme would not be able to get away with that one before the extra scrutiny.

The effect of these measures is that members will not pay any more during a triggering event period than when the scheme was operating normally. That will protect the members; even though a scheme itself is likely to incur additional costs, the money to pay them will not come from members’ pension pots. I hope that everyone will agree that that is most important. It will preserve the value of members’ rights during a triggering event.

The clause also restricts the charges that can be imposed by a master trust, proposed by trustees or employers, to receive members under the continuity option 1. Such a receiving scheme—a new scheme—will be prevented from increasing charges above the levels set out in a statement that it will give the regulator before the transfer happens, or from imposing new charges to meet the costs incurred by the transferring scheme. That means that members can join another scheme and continue to save in another pension without their pot being depleted to pay for costs incurred as a result of that happening. The clause keeps normality of charges and prevents schemes from taking advantage of a triggering event, and protect members’ pots and maintains their value.

Alex Cunningham (Labour, Stockton North)

I wish to ask a couple of question on clause 34 as I again return to the theme of transparency. The Minister outlined the purpose of the clause, and we welcome the protection of members from administration charges beyond those set out in the implementation strategy during a triggering event period. The clause makes clear the responsibilities of both trusts transferring members out and those receiving them.

The Minister listened carefully to my previous contributions on costs. With regard to this clause, I would like a better understanding of what those administration costs actually cover. Do they cover investment transactions, for example? Assuming that they do, will the Minister confirm that subsections (1)(c) and (2)(a) afford members protection from additional transaction costs as a result of the transfer of their funds out of a master trust and into a new one?

I know that the devil will be in the detail, and I look forward to a comprehensive debate about this issue when the Minister produces the regulations, but I am sure that scheme members would welcome any clarification that he can give now. Given that we have discussed transparency at great length and the Minister has nailed his colours to the mast on that issue, I have no doubt that savers would very much welcome his assurance that he will always act in their best interests.

Richard Harrington (Conservative, Watford)

I thank the hon. Gentleman for his constructive comments. I can do no better than remind him of what I have already said: our whole purpose is to ensure that everything remains the same so far as all charges are concerned. He is right about the regulations and the devil being in the detail. That is precisely because we do not want the kinds of loopholes that could exist. If I may mix metaphors briefly, we do not want a chink of light that people can drive a coach and horses through. It is clear that—to be a bit pompous and draw on my O-level Latin from 1973—ceteris paribus, they have to remain as they were.

Interpretation of Part 1

Regulations modifying application of Part 1

Alex Cunningham (Labour, Stockton North)

The clause allows the Secretary of State to adjust the range of pension schemes to which part 1 of the Bill applies, either to extend the regime or to disapply it in whole or in part. As it stands, the clause is an extraordinarily wide provision. This almost turns on its head the normal approach, which is to determine policy first and then to legislate. We accept the importance of having flexibility to deal with the changing models that an agile sector might bring forward, but in scrutinising this legislation we need to have the opportunity to test the boundaries of that flexibility.

It appears that we will not now get further details of the regulations before the Bill leaves the House, despite what the Constitution Committee has said to the Government. As I mentioned earlier, that is a real shame. I therefore have a few questions for the Minister. The Minister in the other place suggested that the clause would be used to disapply some or all of the provisions for a mixed benefit master scheme. Given the amendments tabled in this place in relation to mixed benefit schemes, can the Government outline how exactly this clause will be used? Which schemes will be carved out of the regulation, to borrow a phrase from the Minister?

I know that additional voluntary contributions and non-associated multi-employer schemes were raised in the other place, but can the Government also confirm whether they plan to carve out schemes on an individual scheme basis or exclude them on a broad scheme basis through the application of more general principles?

Richard Harrington (Conservative, Watford)

I thank the hon. Gentleman for his comments, which I will answer. The overall principle is to allow the flexibility that accepts that master trusts, which have grown tremendously over the past couple of years, do not fit into a one-size-fits-all formula. It is certainly not a case of saying this is the scheme’s rule; it is basically optional whether someone is in it or not, because it can be carved out. I know that the hon. Gentleman understands that and respects the principle. Again, it comes down to how it will be applied. We want to make it specific. We have had some useful consultations with master trusts and others on this subject. The regulations will give us the flexibility to ensure that we can deal with the existing situation and see what examples have been thrown up. More importantly, there will be the flexibility to change. The clause makes provisions to modify part 1 where it applies.

We have tried hard in a complex area to ensure that all relevant master trusts are in the scope of the authorisation regime. That is the point of the part of the Bill that we have been discussing up to now. As I have said, things change and the industry moves quickly. That is why we are calling for a type of flexibility that would not on the face of it seem necessary because the Bill regulates master trusts, which we all agree is the right thing to do—there is no question about that. The industry has shown that it is very flexible and can change. The provisions will be designed so that the regulations can be disapplied if they are not relevant. We intend to ensure that the whole system for authorisation, which we have discussed at length, applies in a proportionate way.

The scope of the power was discussed extensively in the other place. We have made it clear—this is the critical point, if the hon. Gentleman will bear with me—that we intend to continue discussions with the industry and also with the regulator to develop secondary legislation. It is not as though civil servants, however good they are, have sat in a room and just designed regulations. We have asked for time after the Bill to make sure they reflect the way in which the industry has developed. The passage of the Bill, from concept to now, could be near equivalent to the time that master trusts have grown in the first place. I hope that the hon. Gentleman will bear with me. We have indicated that we intend to consult on regulations under clause 41(1)(b) in relation to mixed master trust schemes, where the only money purchase benefits are those related to the additional voluntary contributions. It is technical and much of it is common sense, but it has to be done right, otherwise there will be unintended consequences of institutions and members of schemes being caught when it is perfectly well dealt with elsewhere. I know that the hon. Gentleman would not want that to happen.

Another example would be the provisions in clause 41 for regulations

“which provide for two or more pension schemes to be treated as a single Master Trust”.

Again, that is in certain circumstances. Those circumstances would be common control, common rules or schemes provided by the same service provider. It is easy to say that common sense will prevail but we need the flexibility to ensure that the framework is there for those specific, albeit exceptional, cases.

I believe strongly in the clause and think it necessary that the significant regulatory powers included in it have the potential to alter the scope of the regime. Members will want to debate and approve the making of such regulations. That is why, as I have mentioned several times—albeit once incorrectly—that these are subject to the affirmative procedure; they will not be done on new year’s eve at five minutes to twelve without anybody noticing. The purpose is not to hide this from Parliament or anybody else, but to ensure that we get this important provision in the Bill absolutely right.

Power to override contract terms

Alex Cunningham (Labour, Stockton North)

On Second Reading, the Secretary of State, in answer to the hon. Member for Tonbridge and Malling (Tom Tugendhat), nailed his colours to the mast on transparency and pension freedoms, not that we have seen much of the former displayed in recent days. He said:

“Transparency is a key area. Hidden costs and charges often erode savers’ pensions. We are committed to giving members sight of all the costs that affect their pension savings. He asks for more detail. We plan to consult later in the year on the publication and onward disclosure of information about costs and charges to members. In addition to the Bill, other things are clearly required to give greater confidence in the pensions system. Greater transparency is clearly one of the steps forward. I completely agree with him on that.”

I agree completely with the Secretary of State on that. He also said that he was determined

“to remove some of the barriers that might prevent people from accessing pension freedoms”.

He said:

“The Financial Conduct Authority and the Pensions Regulator indicate that significant numbers of people have pensions to which an early exit charge is applicable. The Bill amends the Pensions Act 2014 to allow us to make regulations to restrict charges or impose governance requirements on pension schemes. We intend to use that power alongside existing powers to make regulations to introduce a cap that will prevent early exit charges from creating a barrier for members of occupational pension schemes who are eligible to access their pension savings.”

We remain disappointed that this grand commitment to transparency has not yet found its way into the Bill but we are reassured that the Government seek to protect scheme members from prohibitive costs and exit charges.

The Secretary of State said that he had consulted the industry on the issue.

“The measures proposed in the Bill have been developed in constructive consultation with the industry and other stakeholders, so we have confidence that they are proportionate to the specific risks in master trusts and will provide that necessary protection.”—[Official Report, 30 January 2017; Vol. 620, c. 756.]

In the light of that statement, we seek assurance from the Minister that legislation proposed in subsection (2) allowing breach of contract in that way will not leave the Government open to challenge from the industry, something that would cause unnecessary upheaval for both schemes and members. With that in mind, will the Government tell us what consultation took place with providers and advisers and confirm that they are content that this part of the Bill is not open to challenge? If a legal case is brought against a master trust for breach of contract, is the Minister satisfied that it will have a defence under the clause?

Finally, what consideration have the Government given to the interests of members who, in the event of a legal challenge, will be unable to draw down money from their pots?

Richard Harrington (Conservative, Watford)

As hon. Members will be aware, what we are now discussing is not restricted only to master trusts; the rest of our discussions today have been. It is a bit of a change. We are now talking about all occupational pension schemes.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

rose—

Richard Harrington (Conservative, Watford)

If the hon. Gentleman would bear with me, I will answer the question asked by the hon. Member for Stockton North before giving way, unless it is really urgent.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

My point is in relation to new clause 8, which I have tabled. I want to be clear that the Minister is saying that there will be no exit charges for anyone exiting a master trust, whether a new saver or someone who is currently in a master trust plan. If the answer is in the affirmative, I would be happy not to press new clause 8, because it would be superfluous.

Richard Harrington (Conservative, Watford)

I will come to that point in a minute, if I may first respond to the question from the hon. Member for Stockton North—I am not ignoring what the hon. Gentleman has just said, but I think that the answer will become apparent.

There was public consultation in 2015 that concluded in August. Since then we have had various discussions with providers and other industry bodies; we are really trying to get everyone involved. Again, we do not want to be unfair to one side or to create loopholes that should have been anticipated. I think that the hon. Member for Stockton North will accept that this area is complex.

Alex Cunningham (Labour, Stockton North)

I appreciate the Minister’s answer to my question. I also asked for the Government to confirm that the people they have consulted are content that this part of the Bill is not open to legal challenge.

Richard Harrington (Conservative, Watford)

It is very hard to talk about legal challenge because the legal profession in the United Kingdom has provided that itself in many cases where legal challenge was not intended by the Government. All that I can say is that we do not expect legal challenge on this issue.

Legislation introduced to challenge capping contract schemes has already been passed, so it is creating parity. I hope that I am not misleading anyone by saying that we do not expect that. We have done our due diligence and no one thinks that there will be a legal challenge, but I am afraid that I cannot give the hon. Gentleman a categorical assurance, because that is what the legal system exists for. I am sure that very clever counsel might read this one day and think, “Ah, ha! I’ve thought of something.” There is nothing that we know of.

Alex Cunningham (Labour, Stockton North)

With those considerable caveats, I assume the same applies to any legal case brought against a master trust for breach of contract and that they would have a defence under this clause.

Richard Harrington (Conservative, Watford)

If I may, I will answer the question from the hon. Member for Ross, Skye and Lochaber concerning new clause 8 and the point about no exit charges from a master trust. I confirm that when a master trust is closing the scheme cannot levy a charge for leaving. I believe that responds to his question, unless I misunderstood it.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

No, I do not think it does. To be absolutely specific: in any circumstances of any exit of an individual from the master trust there would be no exit fee. If the Minister is responding to that statement in the affirmative, I would happily withdraw new clause 8, if that is permissible.

Richard Harrington (Conservative, Watford)

When the master trust is closing it cannot levy a charge. That is as clear as I can be. Perhaps we can discuss the point in more detail. I am not trying to mislead the hon. Gentleman and he knows that, I hope.

The pensions market is continuously evolving and modernising and that extends to charging practices. It may be necessary to alter the charges requirements at pace to reflect any changes in the pensions market that may disadvantage members. I revert to the point I made to the hon. Member for Stockton North: that is the purpose of the whole exercise; we are doing it for that reason. That is why we intend to consult on the draft regulations later this year. I am aware that people outside the House, and sometimes hon. Members, groan when a further consultation is announced, as though the Government are doing it to kick the can down the road. I can assure them that that is not the case. We intend to get it right and public consultation is very important.

The regulations would also be subject to parliamentary scrutiny, as I have explained, through the negative procedure. The Delegated Powers and Regulatory Reform Committee was content with that approach because it would allow future legislation to be amended quickly to provide the member protection that the hon. Gentleman and I both want.

Before I conclude on this clause, I will address the point made by the hon. Member for Ross, Skye and Lochaber. I have learned the name of his constituency now and look forward to visiting. He was satisfied by my answer to his earlier question but he wants to know what happens if the master trust is not closing. In that case, the normal exit charge protections apply; there is no difference. I believe that is a clear answer to his question.

Alex Cunningham (Labour, Stockton North)

There is one area that the Minister has not addressed. As he said, we are all here to champion the member, but Opposition Members might just go a bit further in some of those protections. I did pose the question about elected members and what consideration the Government had given to the interests of members in the event of a legal challenge who would not be able to draw down their benefits.

Richard Harrington (Conservative, Watford)

I have already made it clear that the Government do not expect legal challenges. It is a bit of a circular argument but in the legislation the regulator exists to protect members, so I cannot accept his point on this matter.

Short title

Membership of Master Trust Schemes: Member Trustees

Alex Cunningham (Labour, Stockton North)

I beg to move, That the clause be read a Second time.

Alex Cunningham (Labour, Stockton North)

New clauses 1 and 6 take me back to my central theme for the Bill, which is putting members first by introducing member-nominated trustees and directors for master trusts, or member governance of their money. I remind the Committee that all the investment risk lies with the members and not with the sponsor or the provider; they should therefore have representation at the decision-making level.

The Pensions Act 1995 introduced the requirement for company pension schemes to have member-nominated trustees, or MNTs. If the scheme’s sole trustee is a company including the employer, rather than individuals, scheme members will have the right to nominate directors of that company, who will be member-nominated directors, or MNDs. In those circumstances, my references to MNTs apply equally to MNDs. Member-nominated trustees of pension schemes have been a part of UK pensions since the emergence of occupational pension plans in the middle of the last century.

Under the Pensions Act 1995, following the Goode report, a rule was introduced that a third of trustees had to be nominated, although companies could opt out of that rule. The Goode report came out of a series of scandals and corporate collapses in the late 1980s and early 1990s that led to losses to occupational pension funds. In particular, Robert Maxwell, the proprietor of the Mirror Group Newspapers, was subsequently exposed as having stolen millions of pounds from his employees’ pension schemes. In the Pensions Act 2004, the rule was made compulsory. The Secretary of State has the power to raise the threshold from one third to one half, and Labour is committed to implementing that. Many pension funds already have one half of trustees nominated, even though the law requires less.

Given the steady growth in numbers and the formalisation and establishment of member trustees in our pension system, the Association of Member Nominated Trustees emerged in September 2010 to provide support for member trustees. It is adamant that master trusts must be obliged to have member representation on their boards. It is no surprise that master trusts are lobbying against that, but they are mostly profit-making entities, so it is in their own best interest that they have member representation in order to win the confidence of scheme members.

After the Robert Maxwell scandal, the Government legislated to ensure member representation on pension scheme trust boards because they recognised that that would be a powerful way to prevent unscrupulous scheme sponsors from repeating Maxwell’s behaviour. That argument is no less relevant to master trusts. DC schemes managed by master trusts owe fiduciary and other duties to their beneficiaries, and trustees are required to act in the best interests of their members. Trust-based schemes are subject to trust law and regulated largely by the Pensions Regulator. If the scheme’s sole trustee is a company rather than individuals, scheme members would have the right to nominate directors of that company.

Ensuring effective governance for pension schemes remains a challenge. While trust-based schemes benefit from a clear governing body in the form of the trustees, there is a clear absence of member-nominated trustees in the majority of master trusts. Improved governance must include MNTs, packaged with improved training and facility time to dedicate time to the job. Master trusts and independent governance committees lack scheme member input into the investment process, and they need an overhaul. Since the pot belongs to the member and the scheme-sponsoring employers bear no investment risk, there is an argument to be made that governance by scheme members should prevail in number terms over employers.

While some companies choose to operate a trust-based defined-contribution scheme, most new auto-enrolled members will not be saving into one; instead, the vast majority will be saving into a master trust or a group personal pension arrangement. In such schemes, member representation on governance boards is far more rare. With one or two exceptions, we are not aware of any master trust or independent governance committee that has taken the step of putting in a member or finding a mechanism for electing members or appointing members to governance boards.

The benefits of member representation in the trust-based world have been examined. One benefit is the increased diversity that MNTs can bring. Having a member perspective adds diversity, and diversity prevents the risk of group-think within boards. That is because of a range of different member perspectives, experiences and areas of interest. It is also comforting for members to feel that they have some stake in the management and stewardship of a pension scheme. Ian Pittaway, chair of the Association of Professional Pension Trustees, said:

“They’re brilliant in so many areas, they ask difficult questions that other people might be frightened to ask, they’re great on member issues, whether it’s changing benefits or a death-in-service case or something like that. Every board I chair is enriched by having members on it and it would be a very sad day if we sat there with just professionals running the scheme in a very arm’s-length way.”

The AMNT’s 700 members are trustees of about 500 pension schemes with collective assets worth approximately £700 billion. It stated:

“We believe that member representation is crucial in the governance of Master Trusts. It will give greater assurance that these trusts operate, and are seen to operate, in the members’ interests and that the scheme members can have confidence in them. The importance of giving members representation on the trustee board has been borne out by research by The Pensions Regulator and Share Action, which demonstrate that diversity is a key benefit of the trustee model. This view is widely supported in the pensions industry.”

In the DB world, as long as a scheme was well governed and well administered, the member would end up with a reasonable replacement ratio. In the DC world, however, a member’s outcome depends on a host of factors that are beyond members’ control. Most members do not have a say in which scheme they are enrolled into, and even if they believe a scheme is not the best possible fit for them, they are unlikely to be able to transfer without losing their employer contributions. A worrying feature of the UK is that people who bear the risk are not freely able to exercise choice.

Better member representation could help to reassure members that they are enrolled in schemes that are well governed by boards that have their best interests at heart. That would also help solve the thorny issue of getting people to save more. The figures for auto-enrolment show low levels of contributions, and we need members to feel willing to increase their contributions.

Member representation may face some resistance. For a master trust with 20,000 clients and 900,000 members, running an election could be challenging. Some master trusts, however, have had success with elections. The Pensions Trust, which started life as a DB master trust but has now expanded into DC, has a board made up of 50% member-nominated trustees and 50% employer-nominated trustees. Those representatives are elected from the pool of companies that use the trust. The AMNT believes that employer support is necessary to enable member trustees to fulfil their roles with appropriate time off. There are clear issues with governance in both trust-based and contract-based DC workplace pensions. In the past the Office of Fair Trading has highlighted a lack of member engagement, along with higher charges and a lack of review, as the main challenges for the DC schemes. As auto-enrolment is extended to smaller employers, the need to address those challenges is becoming more pressing.

We need a clear route into better member representation. Most in the sector agree in principle that it can only be beneficial to the DC landscape. The Bill has nothing on a mandatory requirement for MNTs, but seems like a logical place in which to include them. To place an emphasis on member representation and perhaps change some of the barriers to an effective system, therefore, the Government should act now.

Some say that as larger master trusts cater for thousands of employees, the vast majority of them would not be represented on the trustee board. Others say that democracy is too expensive, but the scale of the master trusts should not be a barrier. USS, the universities superannuation scheme, has more than 250,000 members and nearly 400 employers. The plumbers and mechanical services (UK) industry pension scheme has more than 36,000 members and more than 400 employers. RPMI has more than 500,000 members and more than 100 employers. All those have member-nominated directors nominated by representatives of the members and pensioners of the schemes. If schemes on that scale can do it, so can master trusts.

Richard Harrington (Conservative, Watford)

I would like to make the point that, in the trustee system that has evolved, trustees have a duty to act in the best interests of all members, as the hon. Gentleman stated. I certainly agree that one of the strengths of the trust-based system for occupational pensions is that there are different sorts of trustees. I have been a trustee of a pension scheme myself, so I accept that argument.

The hon. Gentleman’s mention of Robert Maxwell and that scheme is very relevant to my life now, because many of my constituents in Watford call themselves the Maxwell pensioners. Most of the system of regulation, including this Bill, came about because of that and other examples.

I respectfully remind the hon. Gentleman that in many of the cases that the Pensions Regulator has dealt with, there have been plenty of member trustees, and they have been ignored, not listened to, not felt to be relevant or just bamboozled, so it is not a perfect system anyway. As he knows, the whole reason for the Bill is that master trusts, which are hugely complex, have evolved over a very short period in a very sophisticated way. They are not the same as individual trust-based pension schemes, which is why we need this extra legislation.

Alex Cunningham (Labour, Stockton North)

I accept the Minister’s explanation that member trustees are being ignored, or that their views are simply being set aside, but I would suggest that is why we need proper procedures in place, whether for master trusts or other pension schemes, to ensure that member trustees are given the proper training and understanding and the time to do their job to the best of their ability, so that they are not ignored.

Richard Harrington (Conservative, Watford)

I agree. That relates to a general regulatory issue, as well as the specific ones we are talking about today. I remind the hon. Gentleman that master trusts are subject to scheme administration regulations, which require that schemes used by multiple employers must have three trustees. The majority of those trustees have to be independent of anyone who provides services to the scheme. We are not just saying, “Forget member trustees; they should all be representatives of the scheme.” All trustees, whoever they are, have got the same fiduciary duty to all members. I am sure that the hon. Gentleman is aware of that, but I think that is very relevant in resisting his new clauses. It is very important that all trustees know that, and I believe they do.

Although master trusts are exempt from the existing requirements for member-nominated trustees, they are subject to all other regulatory obligations. As I said, the scheme administration regulations ensure that the majority of trustees are non-affiliated trustees. The authorisation criteria in the Bill subject all trustees to a fit and proper person tests assessed by the regulator. Facts to be considered in that test include how the people running the scheme are connected with other companies or people.

The new clause appears very attractive on the surface, because it appears that it is just saying, “Members are great and can stop all bad things from happening. They need to be represented, and the way to do that is by making sure they are directors or trustees.” I would not want the hon. Gentleman to think that we are against member-nominated trustees, because we are not, or that we think that member-nominated directors are inappropriate in master trust schemes. He mentioned the universities superannuation scheme, which is very complex and sophisticated, and certain things work for it. I have met staff of that scheme. I believe that the Bill will address the points he made.

I hope that hon. Members are sufficiently reassured that we are ensuring that trustees act in the best interest of members. I have explained why the Government are of the view that the new clause is unnecessary, and I respectfully urge the hon. Gentleman to withdraw it.

Alex Cunningham (Labour, Stockton North)

The Minister appeared to agree in part of his speech that member-nominated trustees are a good idea, even if he feels that in many cases their views have been ignored in the past. He has left me a little confused as to whether he supports member trustees, though certainly not in the context of master trusts. Well, I do, and I referred in my speech to organisations that also support the idea of empowering members and ensuring that they have the time and training to fulfil that role. Therefore, I will not withdraw the new clause and will press it to a vote.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

The proposed new clause contains a principle that I think we would all like to encourage concerning member engagement. There is the issue of democracy and the fact that these are members’ funds, and I think that we all get that point. The salient point for me is that addressed by other hon. Members: trustees are to act in the best interests of their members. We all recognise the duty and obligations that trustees must have. It is important, whether they are independent or member trustees, that they are aware of their responsibilities.

The key matter, in what is becoming a very complex world, rightly with increasing regulation, for which we understand the reasons, is that trustees can discharge their obligations and duties. Although I would encourage member trustees to be involved, and it is important that they are given adequate training, I would find it difficult to support the compulsion in the proposed new clause that member trustees must make up 50% of the board. That would be the case in an ideal world.

Alex Cunningham (Labour, Stockton North)

I did not say 50%. That was an example. We would need a situation in which we can have some member trustees.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

Reference has been made to member trustees making up 50% of the board, which is something I could not support. I can support the general principle that member trustees should be represented, that there should be elections and that they should be able to take the time they need to devote to this and get proper training, but I cannot support at this stage having compulsion as part of that, on the basis of the responsibilities that trustees have to represent all member interests.

Craig Mackinlay (Conservative, South Thanet)

I can understand the laudable aims of the hon. Member for Stockton North, but where such boards have had member participation, the reality has not always been a fantastic success. I had an oblique interest in the Maxwell pensions fiasco because I belonged to a firm of chartered accountants appointed to look into that big mess, so I have some experience of that. I was also a member of the Joint Committee that looked into the BHS pension schemes, which also had member participation. That really did not come out as a great success. There was no issue of fraud, but were those employee members really tough enough to stand up to an overpowering sponsoring employer?

What we have is different from the occupational pension scheme arrangement, for which I think it is good, right and proper for its members to participate. We are considering master trusts, in which thousands of employers may be involved. I am sure that there may be only a few hundred master trusts that would bother to adhere to the new clause’s regulations after they come into place. The National Employment Savings Trust is probably going to be the biggest master trust for some time to come, with possibly millions of employees involved, and I cannot understand how on earth we could have an election process involving millions of people and different employers.

Alex Cunningham (Labour, Stockton North)

Legal & General, one of the largest insurance companies, manages to do that in order to communicate properly with its members. While I am on my feet, I also make the point that the hon. Gentleman says that having member trustees has not been a fantastic success. Does he therefore believe that the views of members should be excluded? I remind him that in master trusts it is the members who bear all the financial risk—no one else—so why should they not have some control or some say over their funds?

Craig Mackinlay (Conservative, South Thanet)

I do not disagree with what the hon. Gentleman says; ultimately, it is the employees’ funds, and it is important that they should take the greatest interest in them. I think that employee involvement in occupational schemes has generally been worthy and a great success, but I am more concerned about the practicalities of how the form of democracy he advocates could possibly work when there will be millions of employees in a single master trust.

Julian Knight (Conservative, Solihull)

With regard to the potential for an administrative nightmare, is it not also true that companies will switch between different master trusts? If the requirement of having elections and so on is put upon them, that will make administration even more difficult, if not impossible.

Craig Mackinlay (Conservative, South Thanet)

I thank my hon. Friend for outlining further the complexities of what the hon. Member for Stockton North is proposing. What we are looking for from master trusts is that they are well run, safe and that they actually perform for the pensioners of the future. With the greatest respect, the administrative costs of what he is proposing could actually outweigh any positive parts that he thinks will come out of it, so I cannot support his new clause.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

I know that the hon. Member for Stockton North has stated that he is not asking for a majority of trustees to be elected, but that is exactly what new clause 1 calls for—it calls for at least half of the trustees of a scheme to be member trustees. I just wanted to clarify that point. For that reason, I cannot support the new clause.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

That is correct.

New Clause 11

Asset protection for unincorporated businesses

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

I beg to move, That the clause be read a Second time.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

It is a pleasure to serve under your chairmanship, Ms Buck. I thank the Committee for its assistance in taking new clauses 11 to 13 earlier than planned.

New clause 11 would help to deal with an issue facing plumbers in Scotland. Plumbing Pensions (UK) Ltd was established in 1975 to provide pensions for the plumbing and heating industry UK-wide. The scheme is managed by a group of trustee directors appointed from nominees of the Association of Plumbing and Heating Contractors in England and Wales, the Scottish and Northern Ireland Plumbing Employers Federation and Unite the union. The scheme has more than 36,000 members and assets in excess of £1.5 billion.

Under section 75 of the Pensions Act 1995, employers may, in certain circumstances, become liable for what is known as a section 75 employer debt. That debt is calculated on a buy-out basis, which tests whether there would be sufficient assets in a scheme to secure all members’ benefits by buying annuity contracts from an insurance company. Legislation specifies that a section 75 employer debt becomes payable when an employer becomes insolvent, winds up, changes its legal status or ceases to have any active members in the scheme. Although we must be mindful that the purpose of those rules is to protect pension benefits, the way they are currently framed creates problems for some stakeholders, and we are sympathetic to SNIPEF’s concerns, which I know it has also raised directly with the Minister.

The solution is not clearcut. There are several options for the Government to consider, but each has complications for pension schemes, employers and scheme members. We urge the Government to balance employers’ interests with the need to protect benefits for scheme members. The previous Pensions Minister, who sits in the House of Lords, indicated that she would look closely at how a solution to this complex issue could be reached. We need the same assurances from the current Minister that the Government will work to find a solution for the industry. They could use the Bill to bring forward such a solution.

SNIPEF aims to achieve an amendment to the section 75 debt legislation. Its main concern is for unincorporated businesses where people risk losing their personal assets, including their homes. It wants the Government to review the actuarial methods that are used to value pension scheme liabilities, as it believes that given the current economic conditions, the calculation of section 75 employer debt on a full annuity buy-out basis is inappropriate and detrimental to non-associated multi-employer schemes.

SNIPEF argues that orphan debt in any non-associated multi-employer scheme should be excluded from the calculation of section 75 employer debt. It also suggests that, provided that schemes are deemed to be prudently funded, the Pension Protection Fund should act as guarantor of last resort for orphan liabilities. SNIPEF believes that any changes in legislation should apply retrospectively to all employers from 2005. It would be helpful to hear the Government’s view on that request.

As I mentioned, SNIPEF recently met the Minister, and it has advised several MPs that he confirmed that those objectives could be incorporated in a Green Paper, but I want to use the opportunity of the Bill to address these matters. We are eager to hear whether the Government intend to include a solution in the Bill, and I look forward to the Minister’s comments.

Richard Harrington (Conservative, Watford)

It is appropriate, given the temperature in which we are working, that plumbers are mentioned. I only wish that some of them were in the Public Gallery to make repairs so that hon. Members would not have to wear their coats.

I joke about that, but I accept that this is a serious matter. When it was brought to my attention, it was my duty and pleasure to meet representatives of not just the plumbers but others. The Government are not ignoring the issue. Although some stakeholders have run an effective public campaign, as is their right, it was the job of the Department for Work and Pensions anyway to get to grips with this, despite the fact that MPs have contacted us individually, such as the hon. Member for Ross, Skye and Lochaber—

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

Well done!

Richard Harrington (Conservative, Watford)

Thank you. I have finally got it. I shall provide tuition for other hon. Members.

This issue is important. For the record, I should remind hon. Members who are not as familiar with it as the hon. Member for Ross, Skye and Lochaber why the employer debt legislation is in place. It is to help ensure that members of salary-related occupational pension schemes receive the pensions they worked for and have been promised when their own employer cannot provide them. I think everyone would agree that that is a noble aim. Were that not a rule, it would have led to even more difficulties.

When I see representatives of those in such positions, I try to think about this key question: if they are not responsible for the debt, who is? Someone has to be responsible for it. As hon. Members will have picked up from the hon. Gentleman’s speech, people who have been working quite properly and, typically in this field, running their own businesses find themselves with—I do not know what the legal term is—a contingent liability that could be called upon. It is not as though they have received an invoice or a demand, or people have been banging on the door to repossess something, but it is understandably on their minds that that could and might happen, which is a serious matter.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

That is exactly the point. We are talking about often small businesses that have done the right things in making sure their employees are protected and have adequate pension provision, but there is a sword of Damocles hanging over them with the worry and uncertainty, caused purely by this debt, that they may lose their businesses and houses.

Richard Harrington (Conservative, Watford)

I accept the hon. Gentleman’s point. We all agree there is a problem. I do not see how anyone could disagree with that. These people are simply in an unfortunate position, but the Government have to decide, “If not this, what?” and “What are the alternatives?” The hon. Gentleman said, as the groups involved have, that the debt should be passed to the Pension Protection Fund, which everyone would agree has been a very successful mechanism. We mentioned the Maxwell case before lunch. The PPF was intended to deal with failing schemes. It is paid for by the levy payer—by all the successful pension schemes—and I am sure they complain because it is a significant amount of money, but everyone would agree that it has been successful.

In this case, we would place an unfair burden on the PPF, because we are not talking about failing schemes. Many of them are successful and proper. That is why I mentioned a contingent liability. If it is your liability— I do not mean yours, Ms Buck, but anyone’s—it is real to you. It is not quite as real as having an invoice or a demand, but it is there all the time. I do not deny that. However, passing the debt to the PPF would place an unfair burden on the PPF and its levy payers.

Like so many issues facing defined-benefit schemes, the problem is complex and finding a solution is difficult. I accept that it is for the Government to address it. That is what we are elected and paid for. But like everything else in government, there is not an instant, easy solution. It is worth highlighting the fact that the Government have already made significant changes to the legislation in response to representations made by some employers. A number of mechanisms have been made available in employer debt regulations whereby only part of the debt or none may be payable. There are eight such mechanisms in legislation. A wide variety of circumstances can arise, because there are a lot of diverse scheme structures. The best example, which has been discussed with the plumbers and those making similar representations, is flexible apportionment arrangements, which permit an employer debt attributable to the departing employer to be shared among the remaining employers. That sounds attractive, but it is part of a triangle of previous employers, remaining employers and the PPF—it is about which of them gets kicked with this liability. Each group is obviously going to be in favour of the others getting it. I say that not to cast any aspersions or to make a value judgment, but it has to go somewhere, and in the end that is for Government to decide. On the face of it, however, that would be such a solution.

New clause 11 calls specifically for a change by regulations to the employer debt legislation in the Pensions Act 1995. It is aimed at providing protection for the owners of unincorporated businesses. Many of the plumbers who have made representations happen to be self-employed because that is the structure of their business, but they are not self-employed and running a large business. They just happen to be a business owner who is self-employed. A mandatory provision to protect one group of employers from their responsibility for an employer debt, for which there may be personal liability, again boils down to that debt needing to be met in some way by others in order to safeguard members’ pensions. It is true to say that such an approach would also conflict with existing employer debt provision that recognises the wide range of employers who participate in occupational pension schemes. It does not differentiate between different types of business structure in relation to employer debt duties.

Secondary legislation, in the form of the 2005 employer debt regulations, already includes a range of mechanisms to facilitate the management of an employer debt when an employer ceases to employ active members of a pension scheme. The regulations operate so that in some circumstances, only part of the debt or no debt may be payable. Those regulations are currently under review. We had a call for evidence about the operation of employer debt legislation in non-associated multi-employer schemes. We needed to call for evidence because there are losers and winners. It is the role of Government to try to assess interests, and some form of judgment has to be made. This area of legislation is extremely complex, and we have to check and consider things carefully.

I reiterate that we are not kicking the can down the road—it is not that we do not want to make a decision. It is a complex issue, and we are looking to consult on specific proposals in the very near future. In any case, a whole range of new proposals might come about in our Green Paper on defined-benefit schemes. If I say the release of that Green Paper is imminent, that could mean anything from tomorrow onwards, but it will be very soon.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

I think the Minister will accept that I am trying to be helpful to the Government in trying to find a resolution to this situation. Let us look at the wording of new clause 11 again:

“The Secretary of State must, by regulations, make provision to amend section 75 of the Pensions Act 1995 in order to protect unincorporated businesses at risk of losing their personal assets including their homes.”

I would be content if we could get an assurance that the Government are willing to work together with us to solve this problem. The Green Paper will be coming forward, and I appreciate that the Minister has said he is prepared to look at this matter and see whether there is a resolution that can be found that would not have any unintended consequences,. I seek assurance from the Government that that will be the case. I know the Minister cannot be too prescriptive about the Green Paper at this stage, but I hope there is willingness to ensure that these issues of actuarial valuations will be taken into account in it.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

Sorry, Ms Buck; I will sum up. I am trying to get to a consensus, so that we can work together on this.

Richard Harrington (Conservative, Watford)

I think I understand the hon. Gentleman’s intervention; I accept that he did not mean it to become a speech, but I think it did. He knows, because I have told him privately, that it is the Government’s intention to resolve this issue. I have stated many times that I cannot go into what will be in the Green Paper. I also cannot accept that the new clause should be included in the Bill, because we are not ready for it. We do not have a solution; there is no simple solution.

The hon. Gentleman has been involved, not actually in this issue but in many others to do with asset management and financial services, and knows that everything is more complex than it first appears. I have accepted that there is a problem, I have mentioned that there are different entities that have to deal with it, and I have accepted that we have to try to reach a solution—by consensus, I hope. However, I cannot give him that good news today; I have to resist the new clause being added to the Bill.

Craig Mackinlay (Conservative, South Thanet)

It is a pleasure to see you in the Chair and to serve under your chairmanship, Ms Buck. The experience of the hon. Member for Ross, Skye and Lochaber comes through very clearly.

I hope I can offer some help to the Committee. I realise that this is a complex area, but the hon. Gentleman’s new clause does not actually encompass the extent of the problem, which goes further. Under the old rules—extra-statutory concession C16 on the winding-up of companies, which was used widely until 2012—a group of directors or owners could wind up a company using a very informal method, but that did not cease their liabilities to that company. That liability extended for 20 years afterwards. That was then formalised under section 1030A of the Corporation Tax Act 2010, which gave a statutory basis to the informal winding up of companies with assets of less than £25,000. That provision is still used very widely. Directors or owners of such companies being wound up under that statutory method could still face 20 years of future liabilities, so although the hon. Gentleman has identified a problem in the system, it does not just apply to unincorporated associations.

The effect of the section 1030A of the 2010 Act, which came into force on 1 March 2012, is that directors and owners of slightly larger companies are going down the route of a formal liquidation, which terminates their liabilities for ever more. However, hundreds—if not thousands—of old, smaller companies using the old extra-statutory concession will still be caught by a section 75 notice. This is a very wide issue that does not apply only to unincorporated associations, so I do not think the hon. Gentleman’s new clause is enough to close down his concerns on future liabilities. Personally, I accept the Minister’s assurances, but I think this is the start of a wider debate as to how those liabilities can be cut down.

In the hon. Gentleman’s new clause 12, there is a problem with determining the proper value of a pension liability. It is not as sharp as just the transfer value that is often given, and we will need in future to be a little bit cleverer in how we actuarially assess pension liabilities.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

On the basis of the Minister’s response, I will certainly not push the new clause to a vote. We have received assurances that the Government will look at these issues; I hope they will not only be addressed in the Green Paper, but that there is the possibility of legislation as a result of that. I think we all recognise—there is a consensus on this—that we have to make sure we can resolve this problem for the benefit or incorporated and unincorporated businesses. On that basis, I will happily leave things as they are for now. I beg to ask leave to withdraw the motion.

Investment Strategy

Alex Cunningham (Labour, Stockton North)

I beg to move, That the clause be read a Second time.

Welcome to our walk-in fridge, Ms Buck. I had a discussion with the Government Whip, the hon. Member for Winchester.

Richard Harrington (Conservative, Watford)

On a point of order, Ms Buck. Actually, I do not know whether it is a point of order or a point of clarification. Before we come to the hon. Gentleman’s new clause, am I correct in saying that new clauses 11, 12 and 13 were all withdrawn?

Alex Cunningham (Labour, Stockton North)

I was talking about the conversation that I had with the Government Whip about whether we should invoke the Factories Act. He reminded me that, unhelpfully, said law does not apply to the Palace of Westminster. The Minister mentioned kicking a can, and I remember playing kick the can in the street as a young boy. Perhaps you can provide us with a can, Ms Buck, and we can have a game after we debate the next new clause to warm ourselves up.

New clause 2 continues our theme of transparency and member engagement. It is designed to improve the way that master trusts consult their members about their investment strategies and ensure that members are aware of the guidelines that trustees establish for the management of members’ assets. The new clause would modernise the approach to fiduciary—I find that word even more difficult to say than “Lochaber”—management of savers’ assets and update the statement of investment principles approach currently required of master trusts. A master trust would have to have an investment strategy and consult scheme members about that strategy and about socially responsible investment—commonly known as environmental, social and governance issues.

Until now, every occupational pension scheme has been legally required to prepare and maintain a statement of investment principles, which is expected to cover the trustees’ plans for securing compliance with their statutory duties, their policies on investments, risks and returns, and how they will exercise their voting rights. In short, it allows trustees to consider factors that they believe will influence the financial performance of their investments and consult members about those issues. As long as pension funds can show that any investment or policy decision was made on a fiduciary basis and members were consulted, they can avoid the charge that they have not considered members’ best interests.

Public opinion tends to position the average citizen as a helpless bystander in this drama, but in fact it is their money that underpins the entire system. Anyone with a pension is, indirectly, an owner of Britain’s biggest companies. The new clause seeks to create a world in which people feel that their savings give them a positive stake in the economy and a voice in how the companies in which they invest are run. Although we may hope or even expect that scheme members have a say, the reverse is true: power has become increasingly concentrated in the hands of a relatively small number of opaque and unaccountable financial institutions. As the Kay report showed, those institutions often face systematic pressures to act in ways that may not serve savers’ interests. Direct accountability to savers is a vital component of a healthy economic and financial system. As millions more savers are about to enter the capital markets through pensions auto-enrolment, now is the right time to build a more accountable system.

In June 2011, the Government invited Professor John Kay to conduct a review of UK equity markets and long-term decision making. The Kay review considered how well equity markets were achieving their core purposes—to enhance the performance of UK companies and enable savers to benefit from the activity of those businesses through returns to direct and indirect ownership of shares in UK companies. The review identified that short-termism is a problem in UK equity markets. Professor Kay recommended that company directors, asset managers and asset holders should adopt measures to promote both stewardship and long-term decision making. He stressed in particular:

“Asset managers can contribute more to the performance of British business (and in consequence to overall returns to their savers) through greater involvement with the companies in which they invest.”

He concluded that adopting such responsible investment practices would prove beneficial for investors and markets alike. In practice, responsible investment could involve making long-term investment decisions, as well as playing an active role in corporate governance by exercising shareholder voting rights.

I hope that master trusts will want to consider the Kay review’s findings when developing their proposals, including what governance procedures and mechanisms are needed to facilitate long-term responsible investing and stewardship through the funds that they choose for members to save into. The UK stewardship code published by the Financial Reporting Council also provides master trusts with guidance on good practice in monitoring and engaging with the companies in which they invest. The new clause would ensure sure that trustees are guided by the members of the scheme whose money they invest.

In recent decades, efforts to improve the way companies are run have focused heavily on making directors more accountable to their shareholders—for example, the recent introduction of a binding “say on pay”—but the job is only half done. Ownership rights are exercised largely by institutions that are themselves intermediaries. Accountability to the underlying savers who provide the capital remains weak. The logical next step must be for institutional investors to extend the same accountability they expect from companies to the savers they represent.

The UK stewardship code was introduced in the aftermath of the financial crisis to address concerns that shareholders were behaving as absentee landlords. Rather than being enforced by regulators, it is a voluntary code that relies on scrutiny from below to promote compliance, mirroring the corporate governance code for companies. The investment regulations currently require master trusts to set out within the statement of investment principles the extent to which social, environmental or corporate governance considerations are taken into account in the selection, retention and realisation of investments, but savers are left out of the loop. Just as I have argued for greater engagement with members on other issues, I believe it is needed here too.

In addition, accountability should build trust in the system even among those who do not choose to engage, thus encouraging people to keep saving. That is an important consideration in a market where just 7% of retail investors trust investment firms to do the right thing and consumers cite lack of trust as the No. 1 reason for opting out of private pension saving. Practical objections on the grounds that savers are not interested or not capable of engaging with their money simply perpetuate a vicious circle of disengagement. Savers may be put off by the language of investment, but that does not mean they are not interested in where their money goes. The onus must be on the master trusts and the wider investment sector to communicate with savers in a way they find meaningful. Likewise, savers may lack understanding of the technicalities of investment, but there are many matters on which they are qualified to comment, including the way their scheme behaves as an owner of major companies or its policy on social, environment and governance issues.

Transparency is necessary, but not sufficient for a more accountable investment system. Savers must also have the right to engage directly with decisions about their money, in the same way that shareholders engage with companies. Of course, we are not suggesting that all savers should be consulted on every decision. In our view, engagement with savers has three key elements. Savers should have the right to be consulted about investment policies, particularly those that should be firmly grounded in the views of savers, such as socially responsible investment policies. It is sometimes argued that since savers will inevitably disagree, acting on their views can prove difficult, but that objection can be refuted by example: schemes such as the National Employment Savings Trust demonstrate the possibilities of using face-to-face engagement with savers to inform the development of policy. Savers should be able to subject decisions made on their behalf to healthy scrutiny and challenge. While companies are obliged to hold annual meetings at which the board accounts to their shareholders, no such requirement extends to pension schemes.

Making capital markets more answerable to the individuals whose money they invest offers a potential lever for rebuilding trust in the City and for promoting more responsible and long-termist corporate behaviour. Such accountability must be nurtured over time by institutional investors such as master trusts, other pension savers and civil society in general. As Mark Carney said back in 2013, if it is

“finance that becomes disconnected from the economy, from society, finance that only talks to itself and deals with each other, that becomes socially useless.”

We have an opportunity here to change the landscape that sees pension savers as passive uninterested participants by engaging with them on decisions that affect their lives. When I started this speech, I said I was continuing the theme of member engagement. The new clause would extend what currently happens in relation to investment decisions, and I commend it to the Committee.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

Before the hon. Gentleman concludes his speech, I wanted to ask about subsections (3) and (4) of the new clause, which state:

“The Trust must review the strategy at least once a year…The Trust must revise the strategy at any time if there is any significant change to the information”.

Can he explain what form that review would take and what role investment advisers would have, if any, in that review?

Alex Cunningham (Labour, Stockton North)

That is an extremely difficult question to answer. [Interruption.] Everyone can laugh, but the Government talk about regulations and laying down guidance, and I hope that they would be able to provide the necessary guidance.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

This is actually a very serious point. The hon. Gentleman’s new clause would require an annual review, so it is pertinent to ask how that would be conducted and what role, if any, investment advisers would have.

Alex Cunningham (Labour, Stockton North)

There has to be a role for investment advisers, but the crux of my point is that members should have some say in the investment decisions that affect them.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

Can I deduce from that that the hon. Gentleman actually has no idea how such reviews should be conducted?

Alex Cunningham (Labour, Stockton North)

That is not exactly the case. It is clear that we need a set of circumstances in which members are properly engaged, equipped and informed. If they are, they will be able to contribute.

Craig Mackinlay (Conservative, South Thanet)

I oppose new clause 2 just as I opposed new clause 1, not least because of practicality. Let us go back to the example of NEST, which could have millions and millions of members—and I envisage that it probably will. How on earth could an investment strategy be decided by 3 million members? That would probably lead to three million and one different investment strategies.

I do not see anything in the Bill that would prevent a scheme such as the one the hon. Gentleman proposes from coming to the market if there was demand for it from several employers and members in those employers. The market could then decide, “I like the look of that scheme, with its huge member involvement.” I see no reason why such a scheme could not evolve if one was called for.

The hon. Gentleman speaks about an ethical investment policy. That is all very well, but I remind him that the Co-op bank took a similar route, and it is not exactly in great shape. I put it to him that when I go to a doctor, I like to see the doctor; I do not particularly want to see the lay members of the NHS trust as well. I feel comfortable leaving this with investment professionals, because they will be judged on their performance. If they do not achieve, employers may look at an alternative master trust.

Julian Knight (Conservative, Solihull)

Surely when picking a pension fund employers interact with funds and many of these issues are raised in those interactions.

Craig Mackinlay (Conservative, South Thanet)

As my hon. Friend says quite clearly, the results will speak for themselves. I come back to the principles that I mentioned earlier: the fund has to have good returns and be well run and focused, because it has one function—to deliver good pensions. Again, I do not see that the new clause would achieve any of those principles, and if nothing else, it is unworkable because of the size of funds.

Richard Harrington (Conservative, Watford)

I absolutely agree with my hon. Friend; member engagement and involvement sounds very good—it is a laudable objective—but I have been around for nearly 60 years, of which I was in business for nearly 30, and I do not feel qualified to assess an investment strategy. I say that not to insult the vast majority of people, but because, although independent financial advisers and accountants may be able to do that, it is almost impossible for an individual to do so. We have to look at a way of ensuring that the investment strategy is the correct one for the majority of members, and that the regulatory system, the supervisory system and so on are in place. Hon. Members mentioned NEST, which already has more than 4 million members and 230,000 employers. This idea is very interesting but not at all practical.

I remind hon. Members that trustees play a key role in managing assets. They have overall accountability for the investment strategy. They have a legal duty; the hon. Members for Stockton North and for Ross, Skye and Lochaber—I can just about manage to say that now—used the expression “fiduciary duty,” and the trustees have a fiduciary duty to the members.

Laudable as new clause 2 is, pensions legislation already includes requirements for investment decisions to be transparent and in the best interests of members. The Government fully recognise the possible impact of investment decisions on members’ retirement outcomes. Even without the new clause, the Bill will add to those requirements. Clause 12(4)(d) already sets out that regulations made by the Secretary of State

“may include provision about…processes relating to transactions and investment decisions”,

while clause 12(2) states:

“In deciding whether it is satisfied that the systems and processes used in running the scheme are sufficient…the Pensions Regulator must take into account any matters specified in regulations”.

The new amendment would duplicate the provisions for master trust schemes that already exist under the Occupational Pension Schemes (Investment) Regulations 2005. The regulations require trustees of all schemes with 100 or more members to set out a statement of investment principles for their scheme. That statement must be made available to members on request and

“must cover…their policies in relation to…the kinds of investments to be held…the balance between different kinds of investments…risks, including the ways in which risks are to be measured”

and other key issues. The trustees must ensure

“that the statement of investment principles…is reviewed at least every three years…and without delay after any significant change in investment policy.”

Most people who are automatically enrolled into pension schemes are likely to remain in their scheme’s default fund and will not actively engage themselves in the governance of the scheme. That is why legislation makes requirements about governance and oversight of these matters, and why most schemes, including master trust schemes, need to provide a default strategy that covers similar areas.

Finally, multi-employer schemes have a legal duty under the Occupational Pension Schemes (Scheme Administration) Regulations 1996 to make arrangements to encourage members of the scheme or their representatives to report their views on matters that relate to the scheme, including areas about which the new clause proposes that the trustees should consult scheme members.

Ian Blackford (Scottish National Party, Ross, Skye and Lochaber)

I am listening carefully to the Minister, and I broadly agree with him. Obviously there will be ongoing reviews of investment strategy, which should be communicated to members where appropriate. One way in which that could be done, as a matter of best practice for these schemes, would be for a statement of investment principles to be mailed to members as part of the annual report. That would give more clarity on the direction of travel of the fund’s investments.

Richard Harrington (Conservative, Watford)

As usual, the hon. Gentleman makes a very sensible suggestion, which should be considered. However, I believe that everything in the new clause is already included in legislation and that it is therefore unnecessary, so I urge the hon. Member for Stockton North to withdraw it.

Alex Cunningham (Labour, Stockton North)

Let me first address the point about size and the ability to organise communications in this sort of situation. If Legal & General can do it, so can others.

The Minister described lots of ideas raised today as laudable. Sadly, all the ideas he supports exclude members. He rejects the idea of members being represented among trustees and the idea of member-nominated directors. His position is that everything should be left to professionals and to the marketplace, and that members may not be able to take part in or understand investment decisions. He admitted that he might not understand those decisions, but there are members out there who do, and it would be helpful if at least some of them could represent their fellow members and challenge some of the things that their trustees are doing.

One further point concerns me. An employer may opt for a particular trust but become dissatisfied with it and move. There are a very large number of employers, and I fear that a large number of them are disengaged. I wonder whether they are acting in the best interests of their employees. I will come to that during the debate on a later amendment. I beg to ask leave to withdraw the motion.

Annual Member Meeting

Alex Cunningham (Labour, Stockton North)

I beg to move, That the clause be read a Second time.

This new clause takes us back to our member engagement theme. It would require master trusts to hold an annual member meeting, and it sets out ways to ensure that members are properly given the opportunity to be involved in that. It is now common practice for pension funds to hold an annual member meeting. Good member communications, provided at the right time and in an accessible format, are vital if members are to engage and make decisions that lead to good outcomes during their retirements. An annual member meeting ensures that trustees and administrators can be made human and accountable.

A Legal & General master trust annual report states:

“In September last year we hosted a Members’ Forum at Legal & General’s office in London. It wasn’t just a first for us, it was the first ever for any scheme like ours. We got a lot out of that meeting, and we hope that those members who attended did so too. Our aim was to get a better understanding of the things that matter most to members, to help inform our plans for the future. We believe we achieved our aim, and the feedback we got from those members was encouraging.”

I am not here to promote Legal & General, but I commend its attitude and its work in this arena.

Trustee boards should regularly review member communications, and when deciding on the format of those communications, should take account of innovations of technology that may be available to them and appropriate for their members. That would allow the more engaged members to hear a presentation from trustees and senior executives about how the scheme has managed their retirement assets over the previous year and what plans the scheme has to deliver a strategy and manage risk into the future on their behalf. If Legal & General can organise such an event, I think others can too—even if they have vast numbers of members.

If others do not do what Legal & General did, how could they have an annual forum? We must not forget that there is no necessity to fill a hall with thousands of people in this technological age. It is possible to reach more people perhaps by combining a live meeting with an online platform, or indeed to hold the whole meeting online. A recording of the meeting could then be made available on the trust’s website, with an opportunity to give feedback.

The Pensions Regulator’s guidance accompanying its new defined-contribution schemes code of practice highlights AMMs as one way that multi-employer schemes can stay close to members. The new clause would bring master trusts into line with the normal practice in the corporate sector and among the growing number of pension schemes.

Richard Harrington (Conservative, Watford)

Again, I find myself having to disagree, not with the hon. Gentleman’s intention, but that this is a practical solution to what he wants to achieve. The new clause would require the trustees of an authorised master trust—it would not be there if it was not authorised—to hold an annual meeting open to all members, even if they cannot attend in person. It is clear what the hon. Gentleman wants.

As I have said—I know it is a bit of standard response, but I reiterate it—we are doing everything in the Bill to encourage member engagement and communication, especially now that the pension freedoms have been implemented. People must have the ability to assess their choice, and part of that is communication with what goes on. As we know, the Bill works alongside the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 and the Financial Conduct Authority rules that set out minimum standards for communication. Those ensure that members have access to appropriate information to make decisions about their pension saving, including an annual benefit statement and, for most people, a statutory money purchase illustration, which gives members a projection of their pension in retirement.

Documents relating to the governance of a scheme, such as the trustees’ annual report, the chair’s statement and the statement of investment principles, have to be provided on request. In addition, the Government have committed to ensuring that the pensions industry builds and launches a pensions dashboard, which is very important and would allow members to see their pension rights with different providers across the pension landscape.

Schemes are also developing their own methods of communicating with members. The hon. Gentleman has mentioned Legal & General several times and I endorse what he said, with the caveat that it is not the only company that communicates with its members. I have seen a big television campaign at the moment that shows people how to assess Aviva, and I have seen Standard Life’s app. Technology has really helped that kind of engagement. Regarding the new clause, I question whether an annual general meeting is the right way to improve matters. We have already established, for example, that NEST has millions of members from 230,000 employers—and will have a lot more in future. The hon. Gentleman also mentioned Legal & General’s members’ forum. Many firms have such a body. NEST has a members’ panel; the name is different, but it is effectively the same thing—a forum for scheme members to give their views on the scheme to trustees. NOW: Pensions, which is one of several competitors to NEST, is embracing digital communication and has a mobile-enabled website, which I have seen.

Some employers, such as Kingfisher and Tesco, are using mobile apps and games to interest members in their scheme. Those are far more interesting than an invitation to an annual general meeting, which apart from the impracticality of organising it for millions of people, is quite dull, I am sure, compared with the modern and user-friendly way of finding out what is going on. In addition to that, the Pensions Regulator provides detailed guidance for trustees about the standards it expects schemes’ communications strategies to meet to ensure that they communicate transparently with their members. The details of that are on the regulator’s website and are quite extensive.

I sympathise with the drive for member engagement and accept that the hon. Gentleman has not tried to turn this debate into a goodie and baddie thing, implying that he is in favour of member engagement and we are not. I think we all agree on the objective; it is a question of how to achieve it. I do not believe that making AGMs mandatory is the answer. Some schemes may want to do that, and that is perfectly acceptable, but complex and expensive logistics will need to be thought out. I agree that some may do it and may use technology very well. It may be that future generations will be able to tap their app and get such a meeting or institution—I do not mean an institution as in a pension fund; I mean the institution of such a meeting. I do not have the technological jargon. That sort of thing would have seemed impossible to do on a screen 10 years ago that we now can.

I want to avoid the situation that the hon. Gentleman wants in which a scheme is obliged to hold an AGM, because the cost will be passed on to the membership and I cannot see that it will achieve the noble objective that the hon. Gentleman wants. I hope the points I have made sufficiently explain why the Government are of the view that the new clause is not appropriate, and I sincerely urge the hon. Gentleman to withdraw it.

Alex Cunningham (Labour, Stockton North)

I do not have the app jargon either, as the Minister will probably realise. We have talked much about engagement and communication over the past two or three sittings. I remain concerned that there is still no real requirement on the trustees of any of the master trusts to communicate with the people whose money they are responsible for managing. We need to make communications much more practical, and I believe that if member meetings work well for some organisations, they could also work well for master trusts.

I hope that master trusts out there will learn from NEST and from Legal & General, and will understand that member meetings can happen and that they can derive tremendous benefits from their members being much more engaged. I would prefer to see a situation in which it is enshrined in the law and there is a compulsion for people to build on what is already happening out there, to repeat some of it and to see a level of engagement that we have so far not seen, but I do not intend to press the clause to vote at this stage. I beg to ask leave to withdraw the motion.

Master Trust Schemes: Review of Participation

Alex Cunningham (Labour, Stockton North)

I beg to move, That the clause be read a Second time.

I was pleased to table this vital new clause, which attempts to widen access to master trust saving for those whom this Government have left excluded for too long. As it stands, the Bill does little to build on the success of Labour’s auto-enrolment policy and ensure that saving into master trusts is accessible and encouraged for the number of groups that evidence suggests are not saving adequately for their retirement.

I recognise that the Government have announced a review of the operation of auto-enrolment into master trust saving, but its scope is broad, with few specifics in the terms of reference published yesterday. It is vital that the review specifically addresses the question of how we can improve master trust saving among the groups specified in the new clause. That will ensure that the Bill delivers plans that strengthen security and dignity in retirement. The Minister may already be wondering why I am pursuing the new clause when it appears he has the matter in hand. He may have it in hand, but there is merit in naming some of the very specific groups who most need change and in implementing the recommended changes.

It is a testament to the last Labour Government that 10 million additional workers are estimated to be newly saving or saving more as a result of auto-enrolment into master trusts. It has led to an additional £17 billion of pension saving being put away, mostly by low-income workers. Nevertheless, many excluded groups remain, in part due to the actions of this Government, who increased the triggering threshold at which workers were automatically enrolled into a master trust saving scheme. According to the latest Department for Work and Pensions statistics, 37% of female workers, 33% of workers with a disability and 28% of black and minority ethnic workers are not eligible for master trust saving through auto-enrolment. Critically, those groups are over-represented among low earners, the self-employed, those with multiple jobs and carers—the areas we believe that the Government should focus on in their review, as set out in the new clause. I hope they will.

At the end of last year, the Pensions Policy Institute published a report assessing future trends in defined-contribution pension saving. It is worth quoting the following section of the report in full, as it clarifies the current situation. It states that

“the evidence so far suggests that many households will be unable to maintain their current standard of living when they reach retirement. The advent of auto-enrolment has increased the number of workers saving for retirement, with more active savers now in defined contribution (DC) pension schemes rather than defined benefit (DB). This rise in the number of pension savers is a step in the right direction, but DC plans must continue to evolve in order for them to provide savers with an adequate pension.”

The report goes on to find that the median saving of DC scheme members could yield £3,000 a year as an annuity, which is not a lot of money.

More work needs to be done to improve the adequacy of returns on DC savings, including by looking in more depth at costs and charges, as we have tried to do throughout our consideration of the Bill. Nevertheless, the top-up provided from access to master trust saving through the auto-enrolment scheme is a valuable addition to state pension provision, so it is worth while to ensure that as many low-income groups as possible have access to master trust saving.

I will start with how master trust saving for low-income groups could be improved through the Bill. Taking carers first, while those who leave or reduce their hours of employment to care for loved ones are rightly supported through the social security system, it seems unjust that they will probably miss out on the fuller benefits enjoyed by those who are able to save more into occupational pensions as a result of being able to remain in employment, in spite of the fact that carers engage in valuable labour—work that would otherwise have to be picked up by the state. It is my strong belief that the Government should try to improve the retirement prospects of carers, and master trusts, which have been set up to service large numbers of low-income savers, may be an avenue worth exploring. We would include carers as part of a wider review of groups that are excluded from pension saving.

The same is true of the self-employed. I was personally heartened by the amendment tabled by the hon. Member for Amber Valley. After more than a decade of expansion in that part of the labour market, self-employed people now make up 15% of the workforce. Vast numbers of them are at the very bottom end of the income scale, and there is much evidence to suggest that they are not saving as much as those in other sections of the workforce. Research by the Association of Independent Professionals and the Self-Employed found that four in 10 self-employed people do not have a pension. The New Policy Institute found that the self-employed are not only less likely to participate in pension saving but tend to save less as a whole when they do.

Despite that worrying evidence, there are few obvious means by which the self-employed can begin to build up a savings pot in a master trust. That is just one way in which Britain’s entrepreneurs have been let down and ignored. There is no mechanism to manage the enrolment of self-employed people in master trust schemes. Of course, the fact that there is no employer means that, like informal carers, self-employed people’s contributions cannot currently be topped up. I do not believe that it is beyond the bounds of possibility for an expert review to look into that conundrum. The Labour party remains the party of working people, including the self-employed, and we are keen to explore how they might be encouraged to save into defined-contribution master trust schemes to ensure that they have the dignified and secure retirement that we believe everyone has the right to.

Perhaps moving closer to the existing system of saving into master trust schemes, there is also the urgent question of people with multiple jobs. Under the current system, those whose earnings exceed the earnings threshold but result from multiple jobs are unable to access auto-enrolment into a master trust scheme. It seems that the only logic preventing that group from accessing savings is the administrative barrier posed by their having more than one employer. In other words, there is no mechanism either to establish total earnings to trigger access to auto-enrolment, or to determine the sponsoring employer of a person working multiple jobs. Although that issue may seem overwhelming to the Government, we believe that it warrants further attention—especially given the way the labour market is changing, with as many as 3 million people estimated to be working multiple jobs just to make ends meet.

I turn finally to access to master trust savings for low-income savers. Under the auto-enrolment policy developed by the Labour party, working people would have been automatically enrolled into a master trust scheme once their earnings had crossed the trigger level of just over £5,000, the logic being that people would begin to save towards an occupational pension at the same earnings level at which they began to pay national insurance contributions. However, the coalition Government increased the earnings threshold to £10,000, denying millions of low earners the automatic right to save towards a relatively low-cost occupational pension through a master trust.

The last annual review of auto-enrolment into master trust savings concluded that the lower earnings threshold will be £5,876 and the trigger threshold will be frozen at £10,000. Although that freeze will bring a few more workers into the scheme through inflation, we do not believe that that is happening quickly enough. Given the generational crisis that is developing in our pensions system, more needs to be done to include low earners in savings provision and encourage retirement planning.

In conclusion, we recognise that the upcoming 2017 review of auto-enrolment presents the Government with an opportunity to take seriously the problem that certain groups are excluded from master trust savings. The new clause would guarantee that the Government engaged with these vital issues and those groups in the full and proper way. To be clear, we are not trying to force the Government to implement specific policy proposals after the Bill’s passage, although in the view of our colleagues on the Constitution Committee, that would not be out of step with much of the rest of the Bill. We merely wish to place a statutory requirement on the Government fully and properly to consider as part of their planned review what steps could be taken to widen participation for some of the most vulnerable groups.

I have one very specific question about the implementation of the review’s recommendations once it is completed. We talked about this earlier in relation to another matter. Will the Minister have powers under regulations to implement those recommendations, or will we have to wait for another pensions Bill, which is unlikely during this Parliament? The new clause would help to increase the security and dignity of retirement for groups on the lowest incomes. How can the Minister possibly refuse to guarantee that the review will address these important issues and groups?

Richard Harrington (Conservative, Watford)

I compliment the hon. Member for Stockton North on his speech. He has quite clearly listened to all the speeches I have made since being appointed to this job. I will point out one or two facts to respectfully disagree with him—and, for once, his style, which I have not done up to now. To make this into a political matter by saying that auto-enrolment was Labour’s idea is not really fair. I may be correct in saying that Lord Turner, who chaired the Pensions Commission, was offered a peerage by three political parties and took one from the Liberal Democrats. The other commissioners were Labour and Conservative. I am not being flippant, but the spirit of our debate has generally not been party political at all.

Alex Cunningham (Labour, Stockton North)

I accept that—okay, we are making a few political points. It was a Labour Government who brought in auto-enrolment, but this Government have successfully encouraged more and more people to invest more and more, which is a very positive thing. I place that on the record.

Richard Harrington (Conservative, Watford)

That is very reasonable. The hon. Gentleman’s general approach—and mine, I hope—has been not to bring party politics into the debate, because we all have exactly the same objectives.

I have one or two further points to make. The hon. Gentleman mentioned women being excluded from auto-enrolment—not by law but in practice—for different reasons. Actually, the number of women being enrolled is very impressive, although I do not have it to hand. I am pleased to say that I do not think that this is a gender equality issue.

The fundamental point is that the issues that the hon. Gentleman mentioned and that his new clause would address were mostly covered by the Secretary of State in yesterday’s announcement about the extent of the auto-enrolment review. That was not timed to happen just before this Committee sitting; it is just how things worked out. The review will look at the self-employed, who are excluded from the current system, which has gone from nought to a lot very quickly, after all. It will also look at people with multiple earnings under the £10,000 mark from different sources. Incidentally, people paid less than that—I cannot remember the exact figure, but it is just under £6,000—are allowed to enrol, and they get help from their employer and the tax system, although at that level they would not necessarily pay tax. All these things are being looked at. The review will be very comprehensive and will go far beyond what the statute calls for. I will be very pleased to look at its results.

The hon. Gentleman asked whether implementing the review’s recommendations would involve another pensions Bill, which he and Her Majesty have decided we will not be having in this Session. I cannot say, because I do not know what the recommendations are, but some things will need primary legislation and others will not.

Unless the hon. Gentleman has an urgent intervention to make, I will conclude. I have listened carefully to what he said and am glad to have included it all in my speeches, and I am glad that it will all be included in the review.

Alex Cunningham (Labour, Stockton North)

My final intervention is to raise the very specific issue of carers. Will carers be included in the review?

Richard Harrington (Conservative, Watford)

The review is generally worded. It could include carers—they are not specifically mentioned, but I believe that it will include them, and I would encourage it to include them. However, to include them as a category would be a little unfair on others who may be in a similar financial position.

The hon. Gentleman’s sentiments are absolutely right, as were most things he said in his speech, but I do not think it is appropriate for the new clause to go into the Bill. It is far too early; we have been doing auto-enrolment for only a short time, and we are doing a comprehensive review. Despite his sentiments, I ask him to withdraw the motion.

Alex Cunningham (Labour, Stockton North)

I am pleased to have those commitments on the record, particularly those relating to some of the more vulnerable groups. I appreciate that there are other groups apart from carers, as the Minister said, but carers provide a tremendous service that is probably worth billions of pounds to our country every year, so it is important that we have some form of provision for them. The new clause was always going to be a probing clause. I beg to ask leave to withdraw the motion.

Enrolment in Master Trust scheme: duty on employers

Alex Cunningham (Labour, Stockton North)

I beg to move, That the clause be read a Second time.

It is almost as if I am doing an aerobics class; I have already warmed up, even in this cold Committee Room.

New clause 7 would provide employers with a fiduciary duty and a duty of care to members to ensure that the master trust of their choice meets the needs of their staff. The auto-enrolment process in the UK rests on the employer making the choice of scheme for those purposes. The new clause would ensure that, before authorisation, the employer is duty-bound to ensure that the master trust is fit for purpose and has all the necessary information for that choice to have a sound footing.

We need to ensure that the employer has a defined duty to carry out due diligence when choosing a workplace pension. Otherwise, many employers—through expediency or otherwise—will continue to make choices that may not be in the best interests of the scheme’s beneficiaries.

The past 20 years has seen us lurch from one mis-selling scandal to another. Pension transfers, endowments, payment protection insurance and interest rate swaps have all been subject to class actions, and to massive retrospective penalties being imposed on those found wanting in due diligence.

In the US, the employer has a fiduciary responsibility to their staff and chooses their scheme in their best interests. That means that if employers do not take due care in the choice and governance of the plan that they set up for their staff, they are liable to civil prosecution. Employers in the US take fiduciary obligations seriously, not least because scheme members are now taking and winning class actions if they do not.

A class action can focus on the choice of scheme provider, failure to establish suitable investment options and failure to monitor how funds perform as the scheme progresses. Some advisers in the UK, such as Pension PlayPen, think that the information given to employers to choose a workplace pension is insufficient, and that there is little supervision of the due diligence process by regulators, which is in sharp contrast to what happens in America.

The other day, Pension PlayPen stated on its blog:

“The common law includes the concept of an employer’s duty of care to staff, not just for their health and safety but for their financial welfare. This duty of care forms part of a social contract, the implicit responsibilities held by individuals towards others within society. It is not a requirement that a duty of care be defined by law.

An additional worry is that employers do not see this as their choice. Too often we get answers from employers ‘we did what our accountants told us to’. It is as much in the interests of accountants to ensure the employer states why they have chosen their pension as it is the employer’s.”

Craig Mackinlay (Conservative, South Thanet)

The hon. Gentleman has mentioned many times the potential for class action, particularly in the US, on various issues. Does he not believe that having the word “reasonable” twice in the new clause that he has tabled actually becomes a licence for class action, rather than closing it down?

Alex Cunningham (Labour, Stockton North)

I certainly do not. I am not a lawyer, but I believe that the new clause is sufficient and does not open the way for such action. What I am trying to do is provide a protection for employers within the scheme, and therefore also for members.

The latest complaint was filed in January against Aon Hewitt Financial Advisors, accusing the company of breaching the Employee Retirement Income Security Act 1974, or ERISA. That is the fourth lawsuit to target the fee arrangement for services provided by a computer-based investment advice programme.

Alex Cunningham (Labour, Stockton North)

I am doing that now. We have a clear warning that if a company fails in its fiduciary obligation, litigation may be an option. We know from the FCA report that implicit costs are opaque and likely to be much higher than those that have been explicitly presented. We believe that it will not be long before legal teams from the US alert their operations in the UK of potential opportunities for litigation. I can see the adverts on TV now: “Problems with your pension fund? Have you been subject to high fees and transaction costs that you never knew were there?”

The most important “don’t” must be, “don’t assign a low priority to your employees’ auto-enrolment choices.” The big lesson of the litigation—albeit US litigation—is that employers must assume that they have that fiduciary duty, as do trustees, and that they always need to have auto-enrolment choices on their radar screens. It is a lesson once again that the lack of transparency in the governance process, the administration process, the investment process and the advice process will lead to the detriment of the member.

To ensure that we can help build citizens’ trust in the system, we must have transparency for employers and members. We must have the information in front of the employer choosing the scheme to protect them and their employees. I commend new clause 7 to the Committee.

Richard Harrington (Conservative, Watford)

I thank the hon. Gentleman for his contribution with the new clause, but I respectfully give him my opinion that he seems to be fundamentally misunderstanding the whole regulatory system of automatic enrolment. So long as an employer chooses a scheme that meets the criteria—we have been through all the criteria and the whole regulatory and legislative system is behind that—the scheme qualifies for AE. The employer —which may be a he, she or it, if it is incorporated—cannot just decide on any old scheme. There is a significant regulatory hurdle in the Bill.

The employers’ duty is met by scheme choice, because that is what auto-enrolment is. It is not like a defined-benefit type of scheme, where the employer has to ensure that the contributions are enough to be able to pay out what they are contracted to pay out in the scheme documentation. They have to make a reasonable decision based on the whole authorisation regime. I argue that asking for more would be inappropriate and burdensome for employers.

It may help the hon. Gentleman to see my point if he looked at the regulator’s website—he might have done so already—which has comprehensive guidance for employers. Under the new clause, a typical employer would be doing exactly what the hon. Gentleman says is inappropriate: they would basically be doing what their accountant or adviser tells them, because most employers, particularly the small ones, by definition do not have this kind of knowledge. They are not professionals in this area; there are there to run their own business.

I do not understand, whether from a personal or a Government perspective, how asking them to do meaningful checks after they have gone with an approved and regulated scheme would add anything to the process. It is well-meaning, but it is unnecessary and should not be part of the Bill. I sympathise with the intent. The hon. Gentleman is trying to protect members from people acting in a fraudulent way.

Alex Cunningham (Labour, Stockton North)

Perhaps the Minister can address this very simple question: is he satisfied that employers could not be subject to legal action against them if they end up making a bad choice on behalf of their employees?

Richard Harrington (Conservative, Watford)

As I have explained, their choice on auto-enrolment is restricted to choosing a regulated, authorised scheme. I am not a Government lawyer, or any other type of lawyer, although perhaps I should disclose to my chagrin that I did a law degree 40 years ago.

Julian Knight (Conservative, Solihull)

Is it not true that many of the auto-enrolment schemes are vanilla in their investment outlook? Many of them—or a high proportion—are based around direct savings accounts and passive investment funds. They are not the high-risk, high-octane investments that would perhaps need the approach in the new clause.

Richard Harrington (Conservative, Watford)

I absolutely agree. In fact, such schemes are often criticised for precisely that reason. They are criticised for being too conservative—in the investment sense, not the political sense—and for missing out a lot of good possible investment decisions, and the thought of that being reviewed by every single employer. I mentioned NEST and its 230,000 employers. I cannot believe that it would be fair to place such a regulatory burden on them when they are choosing from an approved list. The whole purpose of the regulation is that the schemes are approved, proper and regulated.

I am trying to see where the hon. Gentleman is coming from. I hope that he can see where the Government and I are coming from, and why I am not of the view that the new clause would be appropriate. I respectfully invite him to withdraw it.

Alex Cunningham (Labour, Stockton North)

I accept the explanation that the Minister has provided about the employer making a choice from a regulated scheme and the protections included within that. If he is satisfied that employers will not face legal challenge as a result of the choices that they make within a regime where they must choose a scheme on behalf of their employees, and has placed that on record, I am content. I beg to ask leave to withdraw the new clause.

Written evidence reported to the House