Fourth Report Contents

Pension Schemes Bill [HL]

1.The Bill which had its Second Reading on 28 January makes provision in four areas:

2.The Department for Work and Pensions has provided a delegated powers memorandum. The Bill, which is substantial, contains a large number of delegated powers. The matters we wish to draw to the attention of the House are set out below. Of those, two appear to us to be cases where the scope of the power is wider than the policy it is intended to implement.1 We have made it clear in past reports that we will always judge a power on its actual scope and not how it is said it will be exercised. Government policy can change and therefore in our view it is important that the House considers powers on the basis of what they will in fact allow, rather than on the basis of what it is said they will be used for.

Clause 6(2)–Power to change the definition of qualifying benefits in respect of a collective money purchase scheme

3.Clause 6(2) amends section 32 of the Pensions Act 2011 (“the 2011 Act”). Section 32 is contained in Part 4 of the 2011 Act which introduced a change to the definition of “money purchase benefits” for the purposes of pensions law. The regulatory framework to protect members of occupational pension schemes is built on the understanding that money purchase benefits cannot develop a funding deficit. The reason for the change made by the 2011 Act was a Supreme Court judgment which decided that certain benefits could be considered money purchase benefits even though it was possible for them to develop funding deficits.

4.Section 29 of the 2011 Act was enacted to change the definition of “money purchase benefits” to remove the uncertainty caused by the Supreme Court judgment. The purpose of section 32 was to allow further amendments to be made to the definition; it confers a regulation-making power which enables the Secretary of State to:

“amend for any purpose the definition of “money purchase benefit” in the Pension Schemes Act 1993, the Pensions Act 2008 or Schedule 10A to the Building Societies Act 1986”.

By virtue of section 33, regulations under section 32 can be used to amend other primary legislation and also to make retrospective provision.

5.Clause 6(2) of the Bill amends section 32 of the 2011 Act to extend the powers conferred by that section so that they include a power to amend the definition of the benefits allowed under a collective money purchase scheme.

6.In its memorandum the Department explains that, since collective money purchase benefits are a subset of money purchase benefits, it is reasonable to ensure there is a similar power to amend the definition of such benefits in clause 2, in the event that it becomes necessary in the future to make further amendments to the definition of “money purchase benefits” relying on section 32. It is also suggested that the scenario in which the power will be used is likely to be where there is an unexpected court judgment, and therefore having the power will enable the Government to react in a timely manner to protect pension scheme members.2

7.It seems to us that the power is framed much more broadly than the assumptions on which it is based. There is nothing to link the exercise of the power so that it can only be exercised where amendments are made to the definition of “money purchase benefits”. Nor is there anything to prevent the power being exercised for wider policy reasons, and not simply as a means of responding to court judgments.

8.The power is a significant one. The definition of benefits in clause 2 is fundamental to the nature of collective money purchase benefits and schemes; and therefore any change to the clause is capable of having a significant effect on what those benefits and schemes are. There are no limits on the circumstances in which, or the purposes for which, the power may be exercised. Nor are there any limits on the nature of the amendments which may be made.

9.Also, there are two facts which in our view argue against there being a need for such a wide power:

10.In the light of these matters, we consider that the Government have not provided a sufficient justification for such a wide and significant power, and that the power as it stands is inappropriate. We consider it should be restricted so that it can only be exercised in the circumstances identified in the memorandum, namely where doing so is considered necessary as a consequence of a change which is being made generally to the definition of money purchase benefits.

Part 1–Use of the first-time affirmative procedure

11.Part 1 of the Bill, which makes provision about collective money purchase schemes, includes a large number of delegated powers which are subject to the first-time affirmative procedure. This means that the first exercise of the regulation-making powers is subject to the affirmative resolution procedure, with all subsequent exercises of the power being subject to the negative resolution procedure.

12.The first-time affirmative procedure applies in particular to clauses 11 to 17 which deal the authorisation of collective money purchase schemes by the Pensions Regulator. Clauses 11 to 17 set out the criteria that are to be applied by the Pensions Regulator in deciding whether to authorise a scheme: for example, that the persons involved in the scheme are fit and proper persons; that the design of the scheme is sound; and that the scheme is financially sustainable. In the case of each of the authorisation criteria, powers are conferred which affect how those criteria are to be applied, and the Bill provides for the first-time affirmative procedure to apply to the exercise of those powers.

13.The Department’s reasons for requiring the first-time affirmative procedure are substantially the same in each case:

14.The scope of the powers remains the same on the first and subsequent exercises, and therefore there is nothing in principle to prevent the changes made by subsequent exercises of a power from being as significant as the provision made on the first exercise. In the light of this, the House will wish to look carefully at the Government’s arguments in each case as to why they consider it likely that changes made on subsequent exercises of a power will not be of such a nature as to require the affirmative resolution procedure to apply.

Clause 25–Transfer rights

15.Clause 25 amends Chapter 1 of Part 4ZA of the Pension Schemes Act 1993 (“the 1993 Act”) which allows a member of an occupational scheme to transfer their accrued rights. The amendments deal with how Part 4ZA is to apply to the transfer of accrued pension rights from collective money purchase schemes.

16.Under the existing legislation, trustees are required to facilitate the transfer of benefits within six months of the date of the transfer application from the member. The same period also applies to the transfer of benefits from a collective money purchase scheme. However, clause 25(4) inserts a new provision which will allow the six-month period to be extended in the case of collective money purchase schemes by regulations made by the Secretary of State.

17.Clause 25(5) inserts new section 99A into Chapter 1 of Part 4ZA of the 1993 Act. The new section will ensure that, where a member of a collective money purchase scheme applies for a transfer of benefits, the trustees cannot enter into agreement for the transfer of benefits earlier than three weeks after the date on which they notify the member of the value of the benefits, unless the member consents in writing. The purpose of this provision is to give the member a “cooling-off” period before the trustees take action to facilitate the transfer. Section 99A also includes a regulation-making power under which the Secretary of State can change the length of the cooling-off period.

18.Both sets of regulation-making powers are subject to the negative resolution procedure. This is despite the fact that they are in substance powers to amend primary legislation (because their effect is to amend periods which are otherwise specified on the face of the 1993 Act). The reasons for providing for the negative resolution procedure to apply are set out in paragraph 1.108 of the Department’s memorandum:

19.We take the view that these are not sufficient reasons for applying the negative resolution procedure to the scrutiny of what are in essence Henry VIII powers, and accordingly we recommend that, in the absence of a more convincing justification, the affirmative resolution procedure should apply instead.

Clause 28–Power to designate significant events

20.Clause 28 imposes a duty on certain persons (for example, a trustee or employer) to notify the Pensions Regulator where a “significant event” has occurred in relation to a collective money purchase scheme. In its memorandum,3 the Department explains that certain events may impact on a scheme’s authorised status, and the purpose of this clause is to ensure that these events are reported to the Pensions Regulator as soon as reasonably practicable.

21.Nothing is said in clause 28 about what might or might not constitute a significant event for the purposes of the clause. Instead, the power is given to the Secretary of State to specify in regulations the events that constitute significant events for the purposes of the clause. No limits are placed on the kinds of event which might be specified in the regulations.

22.It seems to us that what constitutes a significant event for the purposes of clause 28 is fundamental to the nature and scope of the duty imposed by that clause on trustees and employers etc. The memorandum4 explains that the list of significant events will be developed in consultation with the Regulator and industry stakeholders. But nothing is said to explain why it is necessary or appropriate to wait until the legislation has been enacted before carrying out the consultation. The point is made that changes may need to be made to the list of significant events to respond to changes in the pensions market as collective money purchase schemes develop. But the fact that there may need to be a power to make changes, does not explain why it is not possible to specify on the face of the legislation the significant events which are to be the subject of the notification duty when the legislation first comes into force.

23.We accept the point made by the Department that the approach adopted here is consistent with the approach which has been adopted in previous Pensions Acts, such as the Pension Schemes Act 2017 and the Pensions Act 2004. However, we recommend that the House seeks further explanation from the Minister as to why it is not feasible to set out on the face of the Bill the events that are to constitute significant events for the purposes of clause 28, even if this were to be coupled with a power to make changes in the future to the list of events.

Clause 47–Power to extend the definition of qualifying schemes

24.The Bill requires all collective money purchase schemes to be set up under a trust by a single employer or a group of connected employers. Similarly, the Bill also requires a scheme to be used only by a single employer or by two or more connected employers. These limitations are set out in clause 3(2) and (3).

25.Clause 47(1) confers a power on the Secretary of State to remove these restrictions by regulations. This would then allow collective money purchase schemes to be established by a body which was not the employer of members of the scheme; and for the scheme to apply to more than one employer, without there being any connection between the employers.

26.The Department states5 that the single employer limitation imposed by clause 3:

“… is necessary as a safeguard until the legal requirements for other kinds of collective money purchase scheme structures are better understood. For example, commercial Master Trust providers are interested in operating collective money purchase schemes, but this work is at a very early stage of development.”

This suggests that the Government are minded to allow multiple-employer collective money purchase schemes to be offered, but that they have not yet worked out how such schemes should be regulated. The proposal therefore is to extend collective money purchase schemes to multiple employers only once the Government have been able to decide on the appropriate regulatory structure.

27.The fact that the Government have not yet worked out how multiple-employer collective money purchase schemes should be regulated has led to very wide powers being conferred by clause 47(3) to (5). Subsection (3) confers a power on the Secretary of State to make further provision in regulations about multiple-employer collective money purchase schemes. Although specific things are mentioned in subsection (3) as to what the powers may be used for. These are not exhaustive of the things which may be dealt in the regulations. The power is in effect a power to change, and add to, the provisions of Part 1 in any way that the Secretary of State sees fit in making provision about multiple-employer collective money purchase schemes. By virtue of subsection (5), it includes a power to modify, amend or repeal any provision of Part 1 itself, as well as a power to modify, amend or repeal any provision of any other enactment (primary or secondary).

28.The fact that the Bill currently prohibits multiple-employer collective money purchase schemes suggests that such schemes may give rise to significantly different regulatory issues from those presented by single employer collective money purchase schemes which are currently allowed under the Bill. This is also supported by the fact that clause 47(3) to (5) gives the Secretary of State such wide powers to make changes to the provisions that govern single employer schemes.

29.Given this background, we consider it is inappropriate to leave the provisions for regulating multiple-employer collective money purchase scheme to subordinate legislation; and, therefore, that the delegation of powers by clause 47 is inappropriate.

Paragraph 2 of Schedule 10

30.Schedule 10 to the Bill amends Part 3 of the Pensions Act 2004 (“the 2004 Act”). That Part requires certain kinds of occupational pension schemes (primarily defined benefit schemes) to have sufficient and appropriate assets to cover their liabilities. Schedule 10 introduces new requirements on trustees and managers of such schemes: a requirement to determine a strategy for ensuring that pensions and other benefits under the scheme can be provided over the long term, and a requirement to prepare a statement of that strategy.

31.The provisions relating to the statement of strategy are contained in a new section 221B of the 2004 Act which is inserted by paragraph 2 of Schedule 10. Section 221B(6) requires the statement of strategy which is prepared for a trust scheme to be signed on behalf of the trustees by a person who is the chair of the trustees, and who meets such other conditions as may be prescribed in regulations made by the Secretary of State. Subsection (7) goes on to provide that, where subsection (6) cannot be complied with because the trustees of a trust scheme do not have a chair, they must appoint one.

32.Therefore, the effect of this provision, as well as requiring the statement of strategy to be signed on behalf of the trustees by the chair of trustees, is to impose a new requirement on trust schemes to have a chair of trustees and for that person to meet certain conditions which are to be set out in regulations made by the Secretary of State.

33.In its memorandum the Department does not explain the reasons for including what appears on the face of it to be a significant new provision affecting defined benefit schemes which are subject to a trust. Paragraph 1.441 simply states that subsection (6)(b) provides a power for the Secretary of State to prescribe requirements regarding who is able to hold the role of chair of the trustees of a defined benefit pension scheme. Nothing is said in the memorandum to explain why it is not possible to specify the conditions on the face of the legislation, or why it is not possible or appropriate to limit the kinds of conditions which might be imposed using this power.

34.The Government have failed to explain why there is a need for a power to impose conditions on who may be the chair of trustees of a defined benefit scheme. In the absence of any explanation, we consider the delegation of power to be inappropriate particularly given the apparent significance of the power being conferred.

35.Regulations under section 221B(6)(b) are subject to the negative resolution procedure. The memorandum states:

“It is considered that the negative resolution procedure is appropriate because these will be technical requirements which are not expected to be controversial.”

There is nothing in the nature of the provision itself to suggest that the conditions will be “technical requirements”. The scope of the power is such that on the face of it anything could be specified as a condition which has to be met by the chair (for example, having specified professional experience as an accountant or a lawyer or being independent from any of the employers who are connected to the scheme). The conditions which are imposed may have a significant impact on who is allowed to be the chair of a defined benefits scheme, and presumably could have significant implications for particular schemes in finding an appropriate person to carry out the role, particularly if none of the existing trustees qualify.

36.We take the view that, if the power is retained, it should be subject to the affirmative resolution procedure.

Clause 124–Powers to specify conditions which have to be met before pension rights can be transferred

37.Clause 124 amends Parts 4ZA and 4A of the 1993 Act which confer a right on members of pension schemes to transfer their accrued rights. In particular, it amends sections 95 and 101F by inserting provisions which will prevent trustees or managers of a relevant pension scheme from transferring a member’s accrued rights unless conditions prescribed in regulations are met.

38.The amending legislation mentions specific things in respect of which conditions may be imposed: conditions about a member’s employment or place of residence and providing evidence about those things. But it is made explicit that these are not exhaustive, and the conditions may relate to other things with no limit on what those other things might be.

39.In justifying the need to specify the conditions in regulations rather than on the face of the primary legislation, the Department in its memorandum states.6

“Fraudsters will continually seek out new opportunities to take advantage of their victims. The models and mechanisms used will likely be adapted to circumvent the protections that are put in place to better protect members from pension scams, which can put their life savings at risk. Government believes it is necessary that requirements remain flexible to counter this evolving threat to pension savers.”

40.It is notable however that there is nothing on the face of the primary legislation to limit the power to impose conditions so that their purpose is limited to protecting members from scams. This is therefore a case where the scope of the power goes wider than the stated purpose for which it is being taken.

41.Having regard to the significance of the power which allows the Government to limit the circumstances in which a member of a pension scheme would be able to transfer accrued rights, we consider it is inappropriate for the power to be capable of being exercised for purposes other than those for which it is said to be intended. We recommend the power should be limited so that it can only be exercised where the Minister considers doing so is necessary to protect the interests of pension scheme members.

42.Regulations under the provisions to be inserted into sections 95 and 101F of the 1993 Act will be subject to the negative resolution procedure. The justification given in the memorandum is that “this aligns with the transfer procedural powers in existing legislation”. We do not consider that the negative resolution procedure offers an appropriate level of Parliamentary scrutiny, given the importance and width of the power. Accordingly, we recommend that the power is made subject to the affirmative resolution procedure, particularly if it is retained in its current form with nothing to limit the purposes for which conditions may be imposed in exercise of the powers.

Northern Ireland provisions

43.The extent of each of the provisions referred to above is limited to England and Wales and Scotland. In each case the Bill includes separate but identical provision for Northern Ireland:

Provision

Northern Ireland equivalent

Clause 6(2)

Clause 57(2)

First-time affirmative: clauses 11 to 17, 19, 20 and 28

Clauses 62 to 68, 70, 71 and 79

Clause 25

Clause 76

Clause 28

Clause 79

Clause 47

Clause 98

Paragraph 2 of Schedule 10

Paragraph 2 of Schedule 11

Clause 124

Paragraph 12 of Schedule 11

Clause 6(2)

Clause 57(2)

In our view, the same issues arise with the Northern Ireland provisions as arise with the England and Wales and Scotland provisions, and accordingly our recommendations should be read as applying to the Northern Ireland provisions as well.


1 See paragraphs 3 to 10 dealing with clause 6(2), and paragraphs 37 to 41 dealing with clause 124.

2 See paragraphs 1.16 and 1.17 of the memorandum.

3 See paragraph 1.115.

4 See paragraph 1.121.

5 See paragraph 1.194 of the memorandum.

6 See paragraph 1.466.




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