Clause 123 - Funding of defined benefit schemes

Pension Schemes Bill [Lords] – in a Public Bill Committee am 11:30 am ar 5 Tachwedd 2020.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions 11:30, 5 Tachwedd 2020

I beg to move amendment 9, in clause 123, page 118, line 1, leave out subsection (2).

This amendment would remove a subsection which requires the Secretary of State, when making regulations or prescribing principles or matters under Part 3 of the Pensions Act 2004, to ensure that certain purposes are achieved as regards pension schemes.

Photo of Graham Stringer Graham Stringer Llafur, Blackley and Broughton

With this it will be convenient to discuss amendment 18, in schedule 10, page 185, line 29, at end insert—

“221C  Guiding Objectives

(1) In exercising any powers to make regulations or otherwise to prescribe any matter of principle under this Part, the objectives of the Secretary of State must include—

(a) supporting the ability of the trustees of a relevant scheme to decide the funding and investment strategy for the scheme taking into account the current and future maturity and liquidity of the relevant scheme consistent with the trustees’ duty to invest assets in the best interests of members and beneficiaries; and

(b) avoiding the specification of requirements in relation to funding and investment strategies that are likely to accelerate the closure of relevant schemes.

(2) In subsection (1), “relevant scheme” means an occupational pension scheme that is not near significant maturity and is open to new members and is reasonably expected to remain so, either indefinitely or for a significant period of time.”

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

It is a pleasure to serve under your chairmanship, Mr Stringer. I thank colleagues for their attendance and all the parliamentary staff as we try to progress parliamentary business in difficult times.

Clause 123 introduces schedule 10, which amends part 3 of the Pensions Act 2004. The clause is necessary, because it introduces amendments that improve the existing statutory framework for defined-benefit pension scheme funding and strengthen the enforcement powers of the Pensions Regulator to protect members’ pensions better. It follows from the DB White Paper and various consultations that have taken place for a considerable time.

The Government are seeking to overturn the amendment made in the House of Lords. This is with no disrespect to the other place. I respectfully suggest that no Government can commit to ensuring that contributions remain affordable or that scheme closures are not accelerated. We cannot be bound to ensuring that all schemes that are expected to remain open are treated differently from other schemes, as open schemes in this category do not all share the same characteristics. Some will be maturing, just like closed schemes, and it opens up the potential for abuse. A closed scheme could reopen to very small numbers of new members, circumvent safeguards and pursue a riskier investment strategy that would otherwise be inappropriate.

We do not want good schemes to close unnecessarily, or to introduce a one-size-fits-all regime that forces immature schemes with strong sponsors into an inappropriate de-risking journey. What we do want is to build on a well established scheme-specific funding regime that takes account of the key metrics of individual schemes in enabling trustees to assess what can reasonably be supported in terms of investment risk. To ensure that members’ benefits are protected and schemes do not take inappropriate risk, it is vital that trustees look at the characteristics of each scheme and balance scheme liquidity and investment risk with maturity. Open schemes with a strong sponsoring employer that are immature and have managed their risk appropriately should not be forced into an inappropriate de-risking journey.

I make it clear that the Government can commit to using the regulation-making powers available to ensure that the secondary legislation works in a way that does not prevent appropriate open schemes from investing in riskier investments where there are potentially higher returns as long as the risks being taken can be supported and members’ benefits and the Pension Protection Fund are effectively protected.

Photo of Neil Gray Neil Gray Shadow SNP Spokesperson (Work and Pensions)

There is a problem with encouraging good open schemes to de-risk. We know where the bond market and gilts market is right now; we know that that puts them at risk. Baroness Altmann has intervened this week to say:

“If you decide to ‘de-risk’, then you are also deciding to ‘de-return’, taking away the upside potential that is so vital for making DB affordable. Deficit schemes just keep getting worse and contributions keep on rising. QE”— quantitative easing—

“has undermined funding of all DB schemes”.

Is it not crucial, then, that amendment 18, which is the compromise, be allowed to go through, to ensure that good DB schemes are allowed to stay open and continue? Otherwise, as is the position at the moment, the Government are putting those at risk.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

With no disrespect to the hon. Gentleman, I disagree with the premise of what he said, and I disagree with Baroness Altmann, whom I spoke to only two days ago as part of ongoing consultation with their lordships and other peers as to the nature of this type of scheme. I can only reiterate—

Photo of Neil Gray Neil Gray Shadow SNP Spokesperson (Work and Pensions)

It is not just me or Baroness Altmann saying this. The schemes are saying that following this path puts their own good and open schemes at risk for members to continue to enjoy.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

The context is that the regulator has a consultation on this issue. The schemes wish to have a different situation to what is proposed by the regulator. It is worth making clear what the consolation is saying because it supports the argument that the Government are making, and not that of the schemes. Does the regulator’s consultation make it clear that all open schemes will not be treated like closed schemes and forced into an inappropriate and expensive de-risking? To answer the question, I refer to paragraph 475 of the consultation, on page 109:

“We acknowledge that if such schemes do continue to admit new entrants and do not mature then the scheme will not actually reach significant maturity. We are content that such a scheme retains the same flexibility in its funding and investment strategies that all immature schemes have.”

The regulator adds later in paragraph 481, on page 111:

“This is on the basis that open schemes have a longer time until they become significantly mature than closed schemes (some are not expected to mature at all) and longer investment horizons. Because of this extra flexibility, they can expect higher investment returns over the long-term which can be reflected in their discount rate assumptions.”

I want to make it clear again—I have said it once, but I will say it again—that the Government are not proposing to introduce a one-size-fits-all funding standard and neither is the regulator. Its proposals seek to secure a reasonable balance between the protection of member benefits, fairness between schemes, and the ability of schemes to take more investment risk, especially where an immature scheme has a strong employer and expects to remain open and in a steady status for a long time. There is an ongoing consultation. On 2 October, I met with individual schemes making this case and discussed it for over an hour. I have also engaged with the peers who are the proponents of this amendment.

I regret to say that the Government do not agree that amendment 18 is an appropriate compromise. The amendment is unnecessary and unhelpful. We state that trustees are required to act and exercise their powers, including their investment decisions, in the best interests of their members and we are not seeking to change that. Trustees must first and foremost carry out the terms of the trust in accordance with the trustee, the rules of the scheme and the applicable law. Legislation must set the boundaries within which the trustees can exercise their discretions and ensure that their legislative duties operate in such a way as to protect all members by also protecting the PPF and its levy payers.

There is no mention in amendment 18 of the ability of the sponsor to pay more in the future if investments do not perform as expected, and that must be part of a scheme-specific regime that assesses whether risk is supportable in a transparent and rational way. It is reasonable for schemes to invest in return-seeking assets to try to keep costs down, if that risk is supportable. Indeed, the Government have made that clear—I am the Minister who brought forward the illiquid proposals, which permit investment in venture capital, renewables, social housing and the like. The Government are not against such investment as part of a balanced portfolio. We are not in support of amendment 18.

Photo of Neil Gray Neil Gray Shadow SNP Spokesperson (Work and Pensions)

The Minister protests strongly the Government and TPR’s intentions. Why then not allow those protections and the intentions of the Government to be on the face of the Bill? The Opposition’s amendment 18 would satisfy those concerns and ensure those protections and also what those open schemes are calling for.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

With respect, I do not agree. The proposals in amendment 18 are not in accord with the proposals in the consultation by the regulator. As I have outlined, there are significant problems with such an amendment, and it is not something that this Government, or any Minister in my position, could support.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Work and Pensions) (Employment)

It is a pleasure to serve under your chairmanship, Mr Stringer. I thank the Minister for his opening remarks. He has had considerable dialogue with Jack Dromey, who I know is sorry that he cannot be here today. I will speak to Government amendment 9 and also Labour’s amendment 18 on his behalf. I also thank the hon. Member for Airdrie and Shotts for his interventions.

We regret that the Government seek to remove the amendment made to clause 123 in the Lords. As the Minister is aware, there are grave concerns about the impact of the provisions in the Bill on open DB schemes, which includes many public sector schemes. Labour has been clear all along that we do not accept the premise that good DB schemes are not worth protecting.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Work and Pensions) (Employment)

I thank the Minister for his intervention, and I am happy to see that that commitment continues to be made. Nevertheless, it is not least because DB schemes currently have 10.5 million members, with £1.5 trillion under management. The Minister will have noted that the Pensions Regulator recently made clear its desire to

“develop an approach that works well for open schemes”,

stating that it wishes to

“secure a reasonable balance between protection of member benefits, fairness between schemes, and flexibility for schemes to fund and invest as they wish—especially where they have a strong covenant and a long-time horizon.”

The new subsection (2)—as amended with this objective in mind—requires the Pensions Regulator to take a different approach to regulating the funding of open DB schemes, compared with those that are closed. It sets out several factors for the Secretary of State to take into account in regulations regarding scheme funding, which include distinguishing between open and closed schemes, balancing scheme liquidity and scheme maturity, and ensuring that affordability of contributions for employers and members is maintained.

Notwithstanding the Minister’s comments, I want to continue with our argument. A number of peers with considerable authority in the pensions world spoke in favour of the amendment. The Minister said he had spoken with some of them in recent days, including Baroness Altmann, who supported the amendment in the Lords. Baroness Altmann noted that the Pensions Regulator’s funding code seems

“to want to drive DB schemes on a path to so-called de-risking, aiming for a particular date of maturity. This concept is simply inappropriate for an open scheme.”—[Official Report, House of Lords, 30 June 2020; Vol. 804, c. 681.]

However, given that the Government do not wish to retain these provisions, Labour’s amendment 18, in the spirit of constructive engagement that we have maintained throughout this Bill, offers a compromise—as was noted by the hon. Member for Airdrie and Shotts—which aims to address the need for flexibility in the treatment of open schemes with the Government’s aim, which we share, to ensure that schemes plan appropriately for the long-term.

The Minister said that this was not an appropriate compromise, but allow me to lay out our arguments for proposing it. In drafting amendment 18, we sought to address some of the concerns that were raised about clause 123, as amended in the Lords. The present amendment has two core objectives. The first is to support the ability of trustees to decide the funding and investment strategy for schemes, taking into account current and future maturity and liquidity, consistent with the trustees’ duty to invest assets in the best interests of members and beneficiaries. That is intended to protect schemes from any inappropriately risky or risk-averse requirements that would significantly adversely affect the affordability of schemes for employers and members. The second is to recognise that schemes are usefully and beneficially open to new entrants and should be allowed to remain so. The amendment is aimed at avoiding requirements in funding investment strategies that are likely to accelerate the closure of relevant schemes.

I am aware that the Minister has had representations about our amendment from multiple trade unions, including representatives of the railways pension scheme, which has 350,000 members, 100,000 of whom are still active. That number will probably continue. The Minister may also have noted that others in the pensions world have expressed concern about the treatment of open DB schemes.

In response to the Pensions Regulator’s recent consultation on the DB funding code in September, the Pensions and Lifetime Savings Association expressed concern that the proposed code was too prescriptive and risked undermining many of the potential benefits of the new approach. It was also concerned that the proposals might unintentionally hasten the closure of open DB schemes. The requirement to fund accrued benefits in the same way as benefits for retirees would place a significant burden on funding requirements and did not reflect the differing dynamics and time horizons of many such schemes. The association said that the proposals could mean new accruals becoming prohibitively expensive when in practice benefits would not come into payment for many decades.

Lane Clark and Peacock also called for the treatment of open schemes to be given more thought, saying that it would lead in some cases to unnecessary de-risking and premature closure of otherwise viable schemes. The head of DB consultancy at Hymans Robertson said that the effect could be to force further DB closures by pushing up contribution rates, because of lower expected returns on investments, and that it could push stressed employers into insolvency at the expense of securing DB benefits:

“Put simply, it could push up costs so high that DB pensions become a thing of the past.”

Regrettably, as far as I am aware, no official economic assessment has been produced in advance of the legislation passing to understand the impact of the code of practice. However, research by RPMI with a cohort of open schemes estimated that the Pensions Regulator’s proposals could increase liabilities by between £120 billion and £160 billion.

Those are stark warnings. In that context, I welcome the Minister’s comments on the issue that it is critical to the 1.1 million ordinary members of the schemes that are currently open to new members and to the 7.6 million who are members of schemes still open to future accrual. In fact, we do not believe that our positions are so divided on this issue. Baroness Drake summarised it well in the Lords:

“The amendment seeks to address two issues: first, that it should not be government policy to require trustees of pension schemes materially open to new entrants with strong employer covenants to adopt a strategy that will result in them de-risking their investments unnecessarily and prematurely…and, secondly, that the Secretary of State, in exercising powers under Schedule 10 to make provisions through regulation on the funding of defined benefit schemes, should make provisions that are consistent with the policy in the White Paper statement that running on with employer support could be an acceptable long-term strategy for a materially open scheme. The amendment is consistent with any reading of the government policy in the White Paper, but it seeks to ensure that it happens.”—[Official Report, House of Lords, 30 June 2020; Vol. 804, c. 682.]

The Minister has said that he does not consider our amendment to be an appropriate compromise, but does he agree that the spirit of our amendment is consistent with Government policy? If so, will he continue to work with us to progress this issue in the light of the legitimate concerns raised about open defined-benefit schemes?

The Minister has referenced the regulator’s consultation. Does he agree that it is entirely appropriate for elected politicians to provide a policy direction of travel to the regulator, without dictating points of detail that remain rightly the realm of regulations? Will the Minister also give assurances that the Bill, as amended by the Government in Committee, will not accelerate the closure of open schemes and that they will be treated differently?

Photo of Richard Thomson Richard Thomson Shadow SNP Spokesperson (Business and Industry) 11:45, 5 Tachwedd 2020

It is a pleasure to serve under your chairmanship once again, Mr Stringer. I am pleased to get the chance to delve further into some of the issues that were raised on Second Reading, of which this was one. I am happy to add my support, along with that of my hon. Friend the Member for Airdrie and Shotts, to amendment 18.

When I spoke on Second Reading I warned of the need to be aware of unintended consequences, one of which originated outside the Bill. One that merited clear guidance in the Bill to prevent it from ever coming to pass was the issue around defined-benefit schemes.

The Minister says he does not want good schemes to close and schemes to be forced into the de-risking process. That is fine and good as far as it goes, but Ministers come, Ministers go, Ministers change their mind, yet legislation endures. I have been very impressed with the Minister’s handling of the Bill today and I do not want to see him go anywhere—

Photo of Richard Thomson Richard Thomson Shadow SNP Spokesperson (Business and Industry)

I have got a bit to go. The Minister highlighted paragraphs in the Pensions Regulator’s recent consultation, but I draw his attention to paragraph 210, which states:

“We consider that trustees’ focus should be to ensure the security of members’ accrued benefits rather than to ensure the provision of future benefits.”

Taking all that together, it is at best inconsistent. It should be obvious why we all want to be assured that schemes are funded to meet their liabilities. Nevertheless, that is a deeply worrying statement for many people, including the scheme managers and trustees. There needs to be a difference in the investment strategy between DB schemes, which are open to new members, and those that are not.

As the Minister said, there are clear differences between open and closed schemes. A scheme that is closed to new members, for example, has to have a fixed end point, and their assets need to be readily available to pay pensions. That means investing in assets where the value is predictable, which inevitably leads to investing in asset classes that have lower returns.

In stark contrast, a scheme that is open to new members sees scheme leavers replaced with new members. It does not have to sell assets to pay pensions and can continue indefinitely. To deliver the required investment returns, it needs to be free to invest in a range of asset classes, which may be more speculative and less predictable, but which, nevertheless, over the longer term, might be expected to deliver better financial results and outcomes for the members.

Again, I hear what the Minister says about the actions he has personally taken to increase the range of asset classes in which pension schemes can invest. That is all well and good, which makes it seem all the stranger that we might end up inadvertently with the unintended consequence of choking that freedom off for DB schemes, for want of a lack of clear guidance in the Bill. That is assuredly what will happen.

If we insist on ensuring the security of accrued benefits, which are not at any serious risk, we effectively begin to mandate an investment policy suitable only for closed schemes. As soon as that happens, the potential returns are restricted. The liabilities of the schemes increase overnight, potentially anywhere between £120 billion and £160 billion. The cost of contributions to the employer, potentially the employee, or both is therefore increased. Inevitably, over time—potentially a very short time—the schemes are rendered unaffordable, and we see the closure to new members of what were otherwise perfectly good DB schemes.

Clause 123 provides for open schemes to be treated differently, given their unique characteristics. Retaining the amendment made to the clause would certainly be a stronger safeguard than amendment 18. However, amendment 18 is a genuine attempt to try to find a compromise position that captures the essence of clause 123, while at the same time managing to be far less prescriptive in what the Secretary of State is obliged to do.

Some 21% of DB scheme members belong to schemes that are still open to new members. They still perform a vital role in people’s pension retirement provision, often for lower and middle-income families who have few other savings, and the matter therefore warrants the most careful attention. Amendment 18 would provide the means by which we can ensure that those DB schemes can continue to thrive and deliver for all their members, present, past and future.

I agree with the Minister when he says that there needs to be a reasonable balance between those classes of member, but legislation can be used to usefully set the parameters to guide trustees, which is exactly what amendment 18 would do, given the mixed messages from the regulator. If it is not deemed to be an appropriate compromise, I invite the Minister to work cross-party to try to find a compromise that would offer reassurance to scheme members and managers and that can definitely guarantee the future of DB schemes. Leaving it out of the Bill will not offer reassurance and, given the current mixed messages coming out of the regulator, will lead us down the path of unintended consequences with adverse outcomes for many of those who can least bear the cost.

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

I loved the first part of the hon. Gentleman’s speech, and I am grateful for his tacit endorsement of our approach. I also loved the latter part, because I do want to work on a cross-party basis. If mixed messages have in any way been interpreted—I am not sure it is an intention in any way by the regulator; I assure him of that and I have spoken to the regulator—and if any clarification needs to be made, I cannot repeat any more that we are here to support DB in whatever shape or form. We have had a DB White Paper, and that consideration and the consultation has brought forward various things. The ongoing consultation by the regulator is exactly that—a consultation.

The request was made for more thought. There is a legitimate and relevant point, although I will resist the amendment, that this is a perfectly valid debate to have in this place. It will definitely influence the regulator’s approach and ensure that, if there is any doubt whatsoever, not all schemes will be treated the same. There is not a one-size-fits-all approach. If anyone is proposing that that is the case, it simply is not. Every scheme should be looked at on its own merits and in its own particular way, because, as all colleagues have rightly identified, schemes have different profiles, different amounts and different objectives. That is what the regulator is trying to do—to build on the current approach.

I make a couple of quick points. Most schemes will not need to change their approach, as they are already doing the right thing. The investment risk that is supportable for each scheme will continue to depend on scheme- specific factors, including scheme maturity and the strength of the employer covenant, as is currently the case. Maturing schemes, whether open or not, will be expected gradually to de-risk their investments as they move towards lower dependence on the employer. There will be no such requirement for schemes that remain significantly immature, with strong employer covenants, who have been pursing appropriate funding and investment strategies. Taking investment risks—however one wants to describe that—is utterly acceptable as long as it is supportable.

I repeat that I am the Minister who, at the same stage as I am trying to improve and support DB, has given the schemes the power under the illiquids consultation to invest in alternatives, whether that is in green infrastructure, social housing or venture capital, building on the Treasury’s work with the patient capital review and building on the work that the Department for Work and Pensions has done for some considerable time, to make it crystal clear that such investments can be pursued and that they can also produce a higher return.

Photo of Richard Thomson Richard Thomson Shadow SNP Spokesperson (Business and Industry)

Does the Minister accept that there is a difference between being given the opportunity to invest in those asset classes and having the freedom to invest in them, if there is a perception that people are being guided down a route of de-risking, and would not that be the benefit of setting it out loosely or flexibly in legislation, in terms of the guidance that could then be given to trustees on how those schemes ought to be managed?

Photo of Guy Opperman Guy Opperman The Parliamentary Under-Secretary of State for Work and Pensions

The appropriate way forward, with respect, is a three-pronged approach, which would be a combination of primary legislation, regulation and the DB funding code to balance effectively employer affordability and member security. I think we all start with the fundamental principle—certainly as Minister I have to have it as the guiding principle—that the member is the most important person to be safeguarded, and I believe that the three-pronged approach is the appropriate way. There is an ongoing consultation and I genuinely believe that it should be allowed to run its course, with us all having the opportunity to make points to it.

I will just finish the point I was making: the scheme funding measures in the Bill, together with secondary legislation and the revised scheme funding code, seek to support trustees and employers to manage their scheme funding with a focus on longer-term planning. As is now the case, the scheme’s liquidity requirements and investment timelines and the amount of risk each scheme can support will depend on factors including its maturity and the strength of the employer covenant. Trustees can and do already invest in illiquid assets such as infra- structure, and our measures do not seek to discourage such investments where they are appropriate.

I finish on that point, although of course I am happy to maintain dialogue. I have met the various proponents of the scheme, I have explained to various peers why the Government cannot support these proposals, and I have exchanged correspondence with the various unions that have made representations to me. That dialogue will unquestionably continue, but, without any shadow of doubt, the Government will resist the Opposition amendment.

Question put, That the amendment be made.

Rhif adran 9 Pension Schemes Bill [Lords] — Clause 123 - Funding of defined benefit schemes

Ie: 9 MPs

Na: 6 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

The Committee divided: Ayes 9, Noes 6.

Question accordingly agreed to.

Amendment 9 agreed to.

Clause 123, as amended, ordered to stand part of the Bill.