APPENDIX 5: PENSIONS BILL — GOVERNMENT
AMENDMENTS
Supplementary memorandum by the Department for
Work and Pensions
1. Further to my letter of 23 June, I am writing
to you again about further Government amendments I intend to table
which contain regulation making powers which may be of interest
to the Committee. A supplementary delegated powers memorandum
is attached.
2. The supplementary memorandum identifies the
delegated powers conferred in the new Government amendments I
am tabling. It explains the purpose of the powers; the reasons
for using delegated legislation; whether the powers are subject
to Parliamentary scrutiny; which procedures apply; and the justification
of these procedures.
3. The Department has followed the precedent
in pensions legislation by setting out the overall legislative
framework on the face of the Bill but giving the Secretary of
State, in certain circumstances, the power to provide detailed
provisions in secondary legislation. This is due partly to the
fact that it is considered inappropriate for Parliamentary time
to be spent on every detailed provision during the passage of
the Bill; but is also a reflection of the fact that the content
of such provisions may change from time to time. It is desired
to avoid amending the primary legislation on each such occasion.
4. I thought it might be helpful if I briefly
summarised here the Government amendments contained with the attached
memorandum.
Extension to powers in clause 117
5. The Committee may remember that during the
passage of the Pensions Act 2007 I wrote to them on the abolition
of past protected rights to draw their attention to a Henry VIII
power contained within an amendment. (Protected rights are rights
accrued in schemes which contracted out of the State additional
pension on a defined contribution basis.) At the time the Committee
were concerned that the reason for the delegated power was that
a policy decision had not yet been made on the removal of one
of the protected right rules, which concerns survivors' benefits.
The Government responded to these concerns by removing the Henry
VIII power and placing most of the protected rights changes on
the face of the Bill. The Government also gave a commitment, following
further work, to return to this issue.
6. In the light of that further work, we have
now made a decision about the protected right rules concerning
survivors' benefits. I am tabling an amendment to remove, on the
face of the Bill, the rules that require the provision of survivor
benefits under protected rights. This will simplify scheme administration
for schemes and provide greater clarity and flexibility for scheme
members. Stemming from this, however it will be necessary to make
minor consequential changes to the legislation to address, for
example, any transitional issues which may arise around the point
at which the protected rights rules are removed. Therefore, the
amendment seeks to extend the existing power in clause 117, to
make in an Order any necessary consequential, incidental or supplemental
amendments, including consequential amendments to other Acts.
Other amendments
7. I believe the Committee will also have an
interest in:
- Regulation making powers within
a new clause before clause 105 that will allow the PPF to recover
the reasonable costs of implementing a Pension Sharing order (made
on divorce or dissolution of a civil partnership) which is made
before the PPF assume responsibility for a scheme.
- Regulation making powers in an amendment to clause
106 in relation to the Financial Assistance Scheme (FAS), to enable
pension schemes which currently fall between FAS and PPF to be
made eligible for FAS. The amendment also contains measures to
allow some flexibility to bring any further schemes with solvent
employers into FAS (in addition to those brought in by the current
regulations in front of Parliament).
- A regulation making power within a new clause
after clause 106 to enable functions relating to the restriction
on the purchase of annuities for members of FAS qualifying schemes
to be carried out by someone other than the FAS scheme manager.
- Regulation making powers in a new clause before
clause 107 to enable the extension of the Pensions Regulator's
anti-avoidance powers. New business models have emerged, operating
under the occupational pensions regulatory regime, that could
pose significant risks to the security of scheme members' benefits
and the Pension Protection Fund. The proposed regulation-making
powers are needed to ensure that pension schemes are supported
properly. Using secondary legislation will allow the Government
the flexibility to react quickly to emerging changes in the market,
and to consult with stakeholders on the fine detail of the changes.
- Regulation making powers in a new clause after
clause 110 that amends provisions in the Pensions Act 2004, extending
the circumstances in which the Pensions Regulator can contract
out its functions if it so chooses.
- Regulation making powers to allow the Department
to set out a clear framework to share specific customer data with
energy suppliers in order to target low-income pensioners who
may be eligible for savings on their fuel Bill.
- Regulation making powers in a new clause after
clause 117 to consolidate private pensions primary legislation,
which is currently contained within a number of different Acts.
8. Finally, I am attaching further amendments
which will enable the Bill to comply with the recommendations
the Committee made in their Ninth and Eleventh Reports of the
2007 - 2008 session, these are at annex C.
9. I have provided copies of this letter to L
Secretariat and the Lords Whips Office.
Supplementary memorandum
New clause before 105 - Charges in respect of
pension sharing etc.
Powers conferred on: Secretary of State
Powers exercised by: Regulations (statutory
instrument)
Parliamentary procedure: Negative resolution
10. A principle of divorce etc. is that the parties
undertaking the divorce or dissolution are responsible for bearing
the costs of the undertaking. This clause provides for regulations
which would enable the Board of the PPF to recover its costs from
the parties where the Board, following regulations[5]
made under s220 of the Pensions Act 2004, become responsible for
implementing certain orders on divorce or dissolution.
Purpose of power
11. The regulation-making powers in this clause
enable the Secretary of State to allow provision to be made allowing
the Board of the Pension Protection Fund to recover any reasonable
administrative costs incurred as a result of implementing the
pension share (for example, final valuation, costs of discharging
the liability for the pension credit, reduction of the member's
benefit etc). This will broadly follow the similar provisions
in relation to pension sharing set out in the Pensions on Divorce
etc (Charging) Regulations 2000 (SI 2000/1049) and regulations
which would be made under s100 of this Bill, which is the corresponding
provision relating to implementing orders sharing pension compensation.
Reason for delegation
12. It is appropriate to place these provisions
in regulations as they are technical in nature and will have to
cater for occasional less straightforward scenarios where, for
example, the charges the PPF can recover may need to offset charges
already paid to the trustees or managers of a pension scheme.
13. These powers mirror those already contained
in clause 100 which are subject to negative Parliamentary procedure
which we believe is also appropriate here.
Clause 106 - The Financial Assistance Scheme
Powers conferred on: Secretary of State
Powers exercised by: Regulations (statutory
instrument)
Parliamentary procedure: Negative resolution
14. Clause 106 amends section 286(2) of the Pensions
Act 2004 in order to extend the Financial Assistance Scheme.
Purpose of power:
15. This clause amends paragraph (b) of the definition
of "qualifying pension scheme" in section 286(2) of
the Pensions Act 2004 (financial assistance scheme for members
of certain pension schemes). Paragraph (b) provides that the winding-up
of a scheme must have begun in the prescribed period ending immediately
before the day appointed under section 126(2) of that Act (PPF
eligible schemes). The date appointed under section 126(2) is
6 April 2005, the intention being that if an underfunded scheme
was winding up before that date, the scheme members would get
assistance from the FAS, but if that scheme began winding-up after
that date, the scheme members would have the protection of the
PPF.
16. However, we have found that there are a small
number of pension schemes (for example the Desmonds and Son scheme)
where the employer went insolvent before 6th April 2005 (and so
the scheme does not qualify for the PPF), but the winding-up was
delayed until after 5th April 2005 and so the scheme is not a
qualifying pension scheme for the FAS either. This amendment will
allow us to make exceptions to the general provision, to enable
us to bring schemes such as these into FAS so that qualifying
scheme members can receive assistance from the FAS.
Reason for delegation:
17. The FAS is provided for by section 286(1)
of the 2004 Act, under which the Secretary of State must make
provision, by regulations, for a scheme for making payments to
qualifying members of qualifying pension schemes. It remains appropriate
for the provisions which determine the detail of which schemes
are qualifying pension schemes to be set out in delegated legislation,
to ensure that the requirements including exceptions and conditions
can be readily adapted in the light of ongoing experience.
18. Currently section 316(2)(n) of the Act requires
any regulations made under section 286 relating to the FAS to
be subject to the affirmative resolution procedure. The clause
amends section 316(2)(n) to allow regulations made under this
power to make exceptions to the prescribed period during which
a FAS qualifying scheme must have commenced winding up to be made
under the negative resolution procedure. We have considered carefully
whether regulations using this power alone should go through the
additional scrutiny of the affirmative resolution procedure or
whether the nature of these provisions are more suitable for the
negative resolution procedure. We have concluded that regulations
of this type which make exceptions to the standard provisions
are suitable for the negative resolution procedure. This may enable
us to bring forward regulations and help members of these pension
schemes more quickly, particularly if circumstances arise where
we need to deal with the issue in isolation. Regulations which
use other powers within section 286 will remain subject to affirmative
resolution procedures.
Qualifying pension schemes - conditions on the
employer
Powers conferred on: Secretary of State
Powers exercised by: Regulations (statutory
instrument)
Parliamentary procedure: Affirmative resolution
Purpose of powers:
19. This amendment modifies the current delegated
power in paragraph (c) of the definition of a FAS "qualifying
pension scheme" in section 286(2) of the Pensions Act 2004.
That paragraph (c) requires that to be a qualifying pension scheme,
the employer in relation to that scheme must satisfy prescribed
conditions at prescribed times. The FAS is to be extended to cover
a range of pension schemes which wound up or are winding up underfunded
where the employer remained solvent. It is possible that this
may negate the need for any employer-related conditions and so
the amendment insets the words "(if any)" into paragraph
(b) to provide for this scenario.
20. The delegated powers are already part of
the existing provisions in section 286(2) of the 2004 Act. The
provisions to be made using that power are subject to the affirmative
resolution procedure. That procedure remains appropriate following
this small modification, which simply changes whether or not employer-related
conditions are required in the delegated legislation.
New clause after clause 106 - Restrictions on
purchase of annuities
Powers conferred on: Secretary of State
Powers exercised by: Regulations (statutory
instrument)
Parliamentary procedure: Affirmative resolution
21. This amendment inserts a new section (section
286A) into the 2004 Pensions Act. The new clause prohibits the
purchase of annuities by relevant schemes unless they have already
made a binding commitment to purchase annuities, or have the approval
of the scheme manager.
Purpose of powers
22. The new clause includes a regulation-making
power so that the functions in the new section of the 2004 Act
could be carried out by someone other than the FAS scheme manager.
Reason for delegation:
23. Section 286 in the 2004 Pensions Act sets
out that regulations may make provision for the FAS to be managed
by the Secretary of State, who is currently the scheme manager,
or "such other person as may be prescribed" and that
regulations may also confer "functions in relation to FAS
on the Pensions Regulator of the Board of the PPF". A recent
package of regulations has conferred functions on the Board of
the PPF, and the Government is looking at the role the Board of
the PPF may play in the final delivery model for FAS.
24. Given the flexibility in current regulations
for different persons to be scheme manager, and that functions
may be conferred on the Board of the PPF and the Pensions Regulator,
the Government thinks it is appropriate in this legislation to
keep open the option of changing who will approve annuitisation
requests in future regulations.
25. Current powers to specify who will be the
scheme manager, and for conferring functions in relation to FAS
on the Pensions Regulator, or the Board of the Pensions Protection
Fund are subject to affirmative resolution. It is therefore appropriate
for regulations under this new power to be subject to the same
procedure.
New clause before clause 107 - Powers to amend
provisions of the Pensions Act 2004 relating to contribution notices
etc.
Powers conferred on: Secretary of State
Powers exercised by: Regulations
Parliamentary procedure: Affirmative resolution
26. This new clause confers powers on the Secretary
of State to make regulations to amend Part 1 of the Pensions Act
2004.
27. The proposed power would only be exercisable
by the Secretary of State if, without the regulations, there would
be a material risk of adverse effects on the benefits of, or in
respect of, members of a pension scheme; or a material risk of
compensation from the Pension Protection Fund (PPF) becoming payable.
28. The clause also provides that changes to
the Pension Regulator's powers should have retrospective effect
from 14 April 2008, the date on which Mike O'Brien, Minister of
State for Pensions Reform, with the Law Officers' agreement, announced
the Government's intention to consult on the proposals.
Purpose of power
29. The Pensions Regulator was set up under the
Pensions Act 2004 and was given a set of specific statutory objectives
which are:
- to protect the benefits of, or
in respect of, members of occupational and work-based personal
pension schemes;
- to reduce the risk of situations arising that
may lead to claims for compensation from the PPF; and
- to promote, and to improve understanding of,
the good administration of work-based pension schemes.
30. The 2004 Act also created the PPF, which
provides compensation for pension scheme members if the employer
has become insolvent and the scheme is under-funded on the PPF
basis. Support for pension schemes is largely based on the Scheme
Funding requirements in Part 3 of the 2004 Act and the employer
debt legislation in section 75 of the Pensions Act 1995. The Regulator's
anti-avoidance powers relate to the debt which is or may be due
under section 75 of the Pensions Act 1995. It has always been
the Government's intention that:
- there should be protection for
members of schemes with insolvent employers, namely the PPF; and
- employers should be required to support their
pension liabilities calculated on the buy-out basis under section
75 of the Pensions Act 1995 in full when a scheme winds up.
31. There has recently been a growth in new ways
of employers limiting their exposure to the risk associated with
their 'pensions promise' (that is, its liabilities in relation
to pension scheme members) with the advent of new market solutions
which have exposed weaknesses in the legislation.
32. The Government welcomes innovation in the
management of pensions risks and other ways for employers to try
to address pension scheme liabilities but is concerned about the
particular risks that some emerging business models have highlighted.
Some of the emerging models remove or reduce the security of an
employer without putting adequate capital in place to replace
that security.
33. Those providing or involved with these models
may also seek to profit from the scheme's assets: for example,
a special purpose vehicle (SPV) is set up to purchase companies
with well funded pension schemes, sell off the company and keep
the pension scheme, extracting profits through fees and surplus.
In this circumstance the pension scheme can be left with a weakened
covenant under some models; members bear all of the risks of a
downturn in investments, the SPV shareholders benefit from the
fees and surplus in an upturn. This could create an asymmetry
of risk: a business model where the employer benefits from the
removal of scheme liabilities, and the model provider benefits
if all goes well - but where scheme members' benefits could be
threatened or the PPF could pick up the bill if things go badly.
There is no backstop to ensure that all benefits will be paid
as promised and if the provider became insolvent the scheme could
enter the PPF with a funding deficit. This model is unfair to
members and to those responsible schemes which pay the PPF levy.
In some extreme cases, the members could be left completely exposed
without even the cover and protection of the PPF. Any new approaches
to pension scheme risk management should therefore be underpinned
by sufficient capital, or other supporting structures.
34. The purpose of the power is therefore to
give the Secretary of State the power to make regulations to amend
sections 38 to 56 of the 2004 Act where he considers that there
is a material risk to protect scheme members' benefits or the
Pension Protection Fund.
Reason for delegation
35. The Government believes that the most appropriate
way of delivering its policy intentions is to take a regulation-making
power to sections 38 to 56 that is sufficiently broad-based to
enable amendments to be made to ensure that the Regulator's powers
are effective and remain so in the face of market innovation.
36. The commercial market is endlessly innovative
in its quest to create new structures to avoid unwelcome liabilities;
it is often successful in that quest and (when it is successful)
there is a transfer of risk to other (innocent) parties - in this
case, members of pension schemes, the Pension Protection Fund
and responsible pension schemes.
37. Unlike tax avoidance, where there is a guaranteed
annual Finance Bill, there may be no appropriate legislative vehicle
to make the necessary changes. The Government therefore needs
to ensure it has the means to react to new innovations to ensure
that undue risks in relation to pension benefits do not arise.
The Government wants to ensure that the regulatory framework provides
adequate security without imposing undue costs on business, and
that it is important to get this balance right. Using secondary
legislation to set out the detail of the changes rather than the
primary would provide the Government with the flexibility to amend
the fine detail in future should that be necessary in light of
how the provisions work in practice. However, we are already aware
of some of some of the changes we wish to make under the power:
- a new alternative test for Contribution
Notices that would permit the Regulator to issue a Contribution
Notice if an action was materially detrimental to the security
of member benefits, with appropriate mitigations to ensure that
the existence of the power does not hamper the normal conduct
of business.
- removing the words "otherwise than in good
faith" from the second limb of the existing Contribution
Notice power. (These words do not appear in the first limb).
- a new alternative test for Financial Support
Directions on group resources
38. At the same time we propose to enable intervention
where appropriate by:
- enabling Contribution Notices
to be issued following a bulk transfer, to direct support to the
appropriate scheme
39. This power would be subject to the affirmative
resolution procedure as it is important that Parliament should
have the opportunity to debate any changes to primary legislation.
And there would be a requirement to consult the Pensions Regulator
and other stakeholders on the detail of any proposed changes.
This consultation on the regulations will provide stakeholders
with an opportunity to have further input into the detailed design
of the changes.
New clause after clause 110 - Delegation of powers
by the Regulator
Powers conferred on: Secretary of State
Powers exercised by: Regulations (statutory
instrument)
Parliamentary procedure: Negative resolution
40. The new clause after 110 allows the Secretary
of State to make regulations permitting the Pensions Regulator
to authorise prescribed functions to be exercised on its behalf.
Purpose of power
41. This power will enable the Secretary of State
to make regulations prescribing functions which may be contracted
out by the Regulator. This is an extension of the Regulator's
existing contracting out power in the 2004 Pensions Act, under
which the Secretary of State may make regulations for the Regulator
to delegate prescribed functions to prescribed persons.
42. It removes the need to identify in advance
of making regulations which persons will act on behalf of the
Regulator. Identifying which suppliers the Regulator will use
and laying this down in legislation will unduly constrain the
Regulator's ability to secure the best value for money. For example,
it may constrain the ability to switch suppliers and may also
delay the contracting out process. For this reason, the requirement
to prescribe suppliers is undesirable.
Reason for delegation
43. It is more appropriate to amend the existing
contracting out power than create a new wide primary power on
the face of the Bill (as was the case in the Child Maintenance
and Other Payments Act 2008). The Regulator has only just begun
to consider what functions it might contract out and is beginning
its sourcing work. There has not yet been opportunity for discussion
with stakeholders.
44. Given the Regulator is at the start of its
contracting out discussions, authorising it to do so by way of
later regulations allows scrutiny of the conclusions of those
discussions. Thus delegation of the power will present increased
opportunity to scrutinise the contracting out process, as it will
be more developed when regulations are made than now.
45. As this amendment simply extends the Regulator's
existing power to contract out functions rather than creating
a significant new power, it is considered appropriate for this
order-making power to be subject to negative resolution.
New clause after clause 114 - Disclosure of information
relating to state pension credit recipients
Powers conferred on: Secretary of State
Powers exercised by: Regulations (statutory
instrument)
Parliamentary procedure: Affirmative resolution
46. This new clause will provide the Secretary
of State with regulation making powers in order to supply energy
companies with social security information about individuals in
receipt of state pension credit. This is to enable energy suppliers
to provide assistance to the poorest pensioners with their fuel
bills.
47. The Government will ensure that sharing large
scale Government data will be in compliance with appropriate safeguards
and will follow statutory and best practice guidance on that.
The clause also allows regulation making powers to strengthen
the legal safeguards of data shared by the Government and energy
suppliers by creating a new offence for anyone who unlawfully
discloses restricted data.
Purpose of power
48. The purpose of the power is to allow the
Secretary of State to supply social security information to enable
energy companies to provide assistance with fuel bills to the
poorest pensioners. We envisage that the regulation making powers
will enable the Secretary of State to set out the purposes in
which the social security information may be supplied and used
and the type of social security information that may be supplied.
The regulation making power also creates an offence for the unauthorised
disclosure of this information.
Reason for delegation
49. We want the details of the information sharing
scheme to be prescribed in regulations so it remains flexible.
This is because we need to allow for the possibility that benefits
will change in name or substance in the future, or that the assistance
schemes will change and require different information.
50. We need to consider the details of the information
sharing scheme in more detail and take the opportunity to seek
views of the relevant stakeholders (particularly the energy companies
and the Information Commissioner).
51. Parliament will have an opportunity to debate
the draft Regulations as the affirmative Parliamentary procedure
will apply.
Clause 117 - Power to make further provision (Amendment
to clause 117 in connection with the new clause after clause 90
- Contracting out: abolition of all protected rights)
Powers conferred on: Secretary of State
Powers exercised by: Order
Parliamentary procedure: Affirmative resolution
52. The new clause after clause 90 - Contracting
out: abolition of all protected rights provides for the removal
of all the rules on protected rights (rights accrued by contracting
out of State Second Pension on a defined contribution basis before
that form of contracting out is abolished under section 15 of
the Pensions Act 2007). This will provide a major simplification
for both schemes and individuals.
Purpose of power
53. The key policy intention will be fulfilled
by the new clause; however the Government is aware there will
be some consequential amendments to other legislation required
as a result. For simplicity, therefore, our intention is to use
the powers already in clause 117 to make in an Order any necessary
consequential, incidental or supplemental amendments, including
consequential amendments to other Acts. To achieve this, we propose
to amend clause 117 so that the existing Order making power in
clause 117(2) extends to new clause after clause 90 Contracting
out: abolition of all protected rights.
54. The purpose of the power is to enable the
Secretary of State to amend, for example, the more minor cross
references to the provisions of the Pension Schemes Act 1993 that
are repealed by the new clause after clause 90. It will also allow
minor consequential repeals to that Act and other Acts so that
all provisions which mention protected rights can be removed.
55. In addition, it would allow the Secretary
of State to make any further amendments necessary to ensure a
smooth transition to the new arrangements for pension schemes
and members. The current intention is to introduce these changes
in 2012 and this power will also enable us to make further minor
amendments to take account of any changes in the law that might
occur before then.
Reason for delegation
56. The removal of the main requirement on pension
schemes for protected rights (other than those already catered
for under section 15 of, and Schedule 4 to, the Pensions Act 2007)
is achieved by the new clause. That requirement concerns survivors
benefits. The new clause includes an extension to the power in
clause 117(2) to ensure that any necessary minor consequential
amendments can be made as efficiently as possible. The delegated
power will also provide the flexibility necessary to address any
transitional issues which may arise around the point at which
the protected rights rules are removed.
57. In summary, the new clause after clause 90
- "Contracting out: abolition of all protected rights",
deals with the main repeals for the abolition of protected rights,
which would leave an Order under clause 117 to do the comparatively
minor tidying-up of the statute book. The minor consequential
amendments are likely to be numerous and technical. If these were
to be made via primary legislation they would take up considerable
Parliamentary time. We therefore believe they are more appropriate
to secondary legislation, using affirmative resolution to ensure
Parliament has the appropriate opportunity for debate.
New clause after clause 117 - Pre-Consolidation
amendments
Powers conferred on: Secretary of State
Powers exercised by: Order
Parliamentary procedure: Negative resolution
58. The Government intends to consolidate private
pensions primary legislation, which is currently contained within
a number of different Acts. Strict rules on consolidation mean
that changes cannot be made to the effect of the legislation being
consolidated - even to correct clear errors. A "pre-consolidation
order" made under the power conferred by this new clause
would enable errors to be corrected, spent provisions to be removed,
and ambiguities to be clarified. The order could not, however,
change the policy enacted by the legislation in any way.
59. This clause replaces section 321 of the Pensions
Act 2004, which is drafted in similar terms, and is intended to
update that section to enable pre-consolidation amendments to
be made to private pensions legislation, regardless of the date
on which that legislation is passed. This will allow the order
to extend to legislation made after the 2004 Act.
Purpose of power
60. The power will enable the Secretary of State,
by order, to make such modifications of the pensions legislation
referred to as in his opinion facilitate or are desirable in connection
with that legislation's consolidation. Such an order may not be
made unless a consolidation Bill has been introduced to Parliament
and may not come into force except in accordance with the terms
prescribed by the consolidating Act, should it be passed. Furthermore,
an order under this power must not make any provision which would,
if it were included in an Act of the Scottish Parliament, be within
that Parliament's legislative competence.
Reason for delegation
61. It is considered appropriate that amendments
made to facilitate the consolidation of private pensions legislation
should be made in secondary legislation. First, there may not
be an appropriate primary legislative vehicle available when these
amendments are ready to be made just prior to a consolidation;
secondly, we envisage that most of the amendments would be of
a minor and technical nature more appropriate to secondary legislation.
It is important to note that, as mentioned above, the Order cannot
be used as a means of changing policy.
62. We further consider that the negative procedure
is appropriate for this order-making power, as it is an updating
of a similar power in the Pensions Act 2004 which is exercisable
under the negative procedure.
Department for Work and Pensions
June 2008
5 Pension Protection Fund (Pension Sharing) Regulations
SI 2006/1690
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