Pension Schemes Bill [HL]
2.This Bill, which had its Second Reading on 1 November, is primarily concerned with the regulation of Master Trust schemes. These are occupational pensions schemes which provide money purchase benefits and which are used by two or more employers. The Bill also contains a provision concerned with early exit charges for members of occupational pension schemes.
3.The Bill contains a substantial number of delegated powers and the Department for Work and Pensions has provided the Committee with a delegated powers memorandum.1 Whilst we are grateful for the memorandum, the conclusions we have drawn below reflect our view that for some of the delegations—whether with regard to their scope or to the level of parliamentary scrutiny applied to them—a more complete and more informative justification would have been desirable.
Clauses 7, 8 and 11—Authorisation criteria
4.The Bill makes it unlawful to operate a Master Trust scheme unless the scheme is authorised by the Pensions Regulator. Clause 5(2) sets out the authorisation criteria to be applied by the Regulator. If the scheme meets the criteria, the Pensions Regulator is required to approve the scheme.
5.Clauses 7 to 12 contain supplementary provision about the authorisation criteria. In the case of some of the criteria, a power is conferred on the Secretary of State to make regulations setting out the matters which the Pensions Regulator must take into account in deciding whether a criterion is met. The relevant provisions are:
(a)clause 7 which is concerned with the requirement that persons involved in the scheme must be fit and proper persons;
(b)clause 8 which deals with the requirement that a Master Trust scheme must be financially sustainable;
(c)clause 11 which is concerned with the requirement that the systems and processes used in the running of the scheme are sufficient to ensure that it is run effectively.
6.The regulations, which are subject to the negative resolution procedure, are liable to have a significant impact on the decisions the Regulator takes when evaluating the relevant authorisation criteria. There is only a very limited explanation in the memorandum as to why the negative resolution procedure is considered to offer an appropriate level of Parliamentary scrutiny; instead, the memorandum focuses primarily on why the relevant powers are needed. According to the memorandum, the negative procedure is required to enable Government “to react in a timely fashion” to changes in circumstances and to changes in the market in particular. However, the memorandum does not give any concrete examples of the kinds of cases in which urgent action might be required.
7.We are also surprised that the memorandum does not acknowledge the existence of the made affirmative procedure, as a possible alternative to the negative procedure. Like the negative procedure, the made affirmative procedure allows for speed in that it can involve an instrument being made by the Minister, and brought into force, before it is approved by Parliament, such approval being necessary, within a specified period of time, if the instrument is to remain in force.
8.In a supplementary memorandum requested by the Committee,2 the Department has provided further information about the circumstances in which it might be necessary for changes to the regulations to be made urgently. The Department also concedes, in paragraph 4 of the supplementary memorandum, that the made affirmative procedure “would enable regulations to be brought into force as quickly as under the negative procedure” but nonetheless maintains its position that the negative procedure is preferable for dealing with these cases. It argues that the requirement for Parliamentary approval under the made affirmative procedure may give rise to concerns and uncertainty in a very risk averse market, and that the negative procedure is a commonly recognised and understood procedure and so is less likely to be perceived as giving rise to a lack of certainty and stability.
9.We believe that the negative procedure may offer an appropriate level of Parliamentary scrutiny for the delegated powers conferred by clauses 7, 8 and 11. However, the House will want to satisfy itself that the additional information provided in the supplementary memorandum, particularly the Department’s reasons for preferring the negative to the made affirmative procedure, are sufficient to justify the use of the negative procedure.
Clause 16—Duty to notify the Regulator of significant events
10.Clause 16 imposes a duty on persons who are involved in the running of a Master Trust scheme to notify the Pensions Regulator if they become aware that a “significant event” has occurred in relation to the scheme. Those to whom the duty applies are listed in subsection (2) and include the trustees of the scheme, a funder of the scheme, and persons providing legal, financial or actuarial services or managing the scheme administrative services. A person who fails to comply with the duty is liable to pay a civil penalty.
11.Clause 16 does not include any definition of what constitutes a “significant event” but, instead, the Secretary of State is required, under subsection (3), to make regulations setting out the events which are to constitute significant events for the purposes of the clause. The regulations are subject to the negative resolution procedure.
12.The delegated power conferred by clause 16(3) is a very wide one. No indication is given as to the matters by reference to which significance is to be judged. Paragraph 66 of the memorandum states:
“For the purposes of this memorandum, it is envisaged that a significant event will be an event of the type that may affect the ability of the scheme to meet the authorisation criteria.”
We are puzzled by the expression “for the purposes of the memorandum”. It suggests something short term and also that the Government do not have any clear idea yet as to how the power is going to be exercised. This absence of any policy is also reflected in the statement in the memorandum that the Department wishes to consult the pensions industry and others before creating the list of significant events.3
13.Clause 16 is an important provision in that it requires those involved in the running of Master Trust schemes to keep the Pensions Regulator informed of events which occur in relation to the scheme, backed by a civil penalty for failure to comply. The definition of what constitutes a significant event is fundamental to determining the scope of the duty imposed by clause 16. The power is expressed in very wide terms: there is nothing on the face of the primary legislation to limit or condition the kinds of events which might constitute significant events.
14.The Department has not explained the width of the power in clause 16(3) in its memorandum. It appears to be needed because the Government have not yet decided on the policy or the purposes for which the power is to be used. In our view this does not provide a satisfactory basis for drafting such a wide power, particularly as deciding what constitutes a significant event is fundamental to determining the scope of the duty imposed by clause 16. Accordingly, we consider the power to be inappropriate in the absence of any convincing reasons to justify its scope.
Clause 39(1)—Power to modify the scope of application of Part 1 of the Bill
15.Part 1 of the Bill sets out the new authorisation and supervision regime for Master Trust schemes. Clause 39(1) confers a power on the Secretary of State by regulations:
- to apply some or all of the provisions of Part 1 to pension schemes that do not fall within the definition of Master Trust schemes in clause 1 (subsection (1)(a)), and
- to disapply some or all of those provisions from schemes which do fall within the definition (subsection (1)(b)).
Regulations under clause 39 are subject to the affirmative resolution procedure.
16.The Department explains in its memorandum that that the power to extend the application of Part 1 is intended to allow the Secretary of State to respond to changes and undesirable innovation in the pensions market which have the effect of producing schemes which, although they do not fall within the definition of Master Trust scheme, should nevertheless be regulated as such. The power to disapply Part 1 is intended to address the opposite situation where a scheme falls within the strict definition of Master Trust scheme but is of a kind that was never intended to be subject to regulation under that Part.
17.We accept that, because of the complexity and evolving nature of pension schemes, it may be necessary to have a power which allows schemes which are in substance Master Trust schemes to be regulated as such, even if they do not fall within the definition in the Bill. We note, however, that there are no limits on the types of pension scheme which may be brought within the scope of Part 1, and that there is nothing to limit the circumstances in which the powers conferred by subsection (1)(a) may be exercised. In particular, there is nothing to ensure the powers can only be exercised where the Secretary of State considers that doing so is necessary to ensure that schemes which are in substance Master Trust schemes are brought within the regulatory framework under Part 1. No reasons are given in the memorandum to explain why such wide powers are needed.
18.The scope of the powers conferred by subsection (1)(b) are similarly unconstrained, and are capable of being applied to any kind of pension scheme and without any limits on the circumstances in which they can be exercised. Since the effect of exercising the powers will be to take schemes out of the regulatory system established by Part 1, we consider it important that the scope of the powers does not go beyond what is strictly necessary to achieve the policy aim.
19.Another aspect of the powers is that they allow the regulations to apply or (as the case may be) disapply “some or all of the provisions” of Part 1. It is by no means self-evident why it might be appropriate for only some of the provisions of Part I to be applied or disapplied in order to achieve the Government’s stated aim of ensuring that all intended pension schemes, and only the intended schemes, are covered by the regulatory regime in Part 1. However, nothing is said in the memorandum about this aspect of the powers.
20.The Department acknowledges in its memorandum that the powers conferred by clause 39 will have significant implications for members, trustees and founders of pension schemes to which some or all of the Master Trust scheme provisions are applied or disapplied. We agree with this assessment.
21.We consider that the Department has failed adequately to explain the breadth of the powers conferred and, in the absence of a convincing explanation for such wide powers, we consider clause 39(1) to be inappropriate.
1 Department for Work and Pensions, Pension Schemes Bill [HL]: Delegated Powers Memorandum: http://www.parliament.uk/documents/lords-committees/delegated-powers/Pension-Schemes-Bill-%5bHL%5d-DPM.pdf [accessed 8 November 2016]
2 Department for Work and Pensions, Pension Schemes Bill [HL]: Supplementary Delegated Powers Memorandum: http://www.parliament.uk/documents/lords-committees/delegated-powers/Pension-Schemes-Bill-%5bHL%5d-Supplementary-DPM.pdf [accessed 8 November 2016]
3 See para 66 of the memorandum.