Pension Schemes Bill 2016-17

The Pension Schemes Bill 2016/17 was introduced in the House of Lords on 19 October 2016, went through its Lords’ stages before being introduced into the Commons on 17 January 2017. It received Royal Assent on 27 April.

The main focus of the debates was Part 1 – which established an authorisation and supervision regime for Master Trusts. There was limited discussion of Part 2 – which enabled restrictions to be applied to certain charges in occupational pension schemes.

Master Trusts – background

Master Trusts are pension schemes, set up by a provider such as an insurance company, for multiple employers which are unrelated.

The use of Master Trusts has grown in recent years – to 4 million members in September 2016, from 0.2 million members in 2010 – and is expected to grow further. The reason is that many employers have used them for auto-enrolment (new duties being phased-in between 2012 and 2018, requiring employers to auto-enrol their workers into a workplace pension scheme and made minimum contributions) (DWP Impact Assessment, para 11). Master Trusts are considered a “good fit” for auto-enrolment –  removing the need for an employer to set up their own scheme, while at the same time providing ongoing oversight of investments at lower operating costs than single employer schemes (HC 579, March 2016). However, a consensus developed that existing regulation was inadequate because:

• It had developed with single-employer schemes in mind and assumed ongoing employer interest in the running of the scheme.
• Many Master Trusts were set up to make a profit, giving rise to the need for a different type of regulation to ensure member benefits were protected.
• Master Trusts operated on a scale unprecedented in occupational pensions and the collapse of a large scheme had potential to create a significant shock (Impact Assessment, para 15-19).

To improve member protection, Pension Schemes Act 2017 provided for:

• An authorisation and supervision regime, requiring Master Trusts to demonstrate to the Pensions Regulator that they met certain key criteria;
• Trustees to be required to take certain actions to protect scheme members in the event of wind-up;
• The Pensions Regulator (TPR) to have greater powers to take action where key criteria were not met.

The Government planned to implement the new regime from October 2018 (HL Deb 19 December 2016, c1489). However, to protect members of existing schemes, some provisions took effect from October 2016 (when the Bill was introduced). These include requiring scheme trustees to notify TPR of certain events and restrictions on the charges member charges that can be imposed on members in the event of scheme failure (HC Deb 30 January 2017 c756).

Debate in Parliament

The main area of controversy – where an Opposition amendment was made to the Bill in the Lords but overturned in the Commons – related to the proposal that the Secretary of State should be required to establish a “scheme funder of last resort.” The Government opposed the amendment, arguing that: the risk of catastrophic failure was low; there were provisions in the legislation to protect member benefits; and that it did not want to deter other Master Trusts from rescuing a failing scheme (HL Deb 19 December 2016 c1507). However, Labour Peer Baroness Drake – who had proposed the amendment – said that there was nothing in the Bill to show how members’ benefits would be protected in the event of a Master Trust failing and not having the means to finance wind-up. (HL Deb 19 December 2016 c1504-9). The Lords’ amendment was removed from the Bill at Commons Committee stage and an Opposition attempt to reinstate it at Report Stage was defeated on division (PBC Deb 7 February 2017 c42; HC Deb 29 March 2017 c337).

A change compared to the Bill as originally presented to Parliament is that changes were made to the existing Fraud Compensation Scheme to ensure that Master Trusts were protected by it (DEP 2016-0916; Pension Schemes Act 2017, s 36).

Other issues of debate included:

• How to ensure member engagement – given that there is an acknowledged ‘principal-agent problem’ with Master Trusts (in that the employer who chooses the pension scheme has less of an incentive than the member to pick one that will deliver good outcomes and value for money). The Government said regulations would be used to ensure the regulator took account of a scheme’s systems and processes for member communications and engagement in making decisions on applications for authorisation. In the Commons, Shadow Pensions Minister Alex Cunningham proposed a number of amendments aimed at improving member engagement – including requiring Master Trusts to have member-nominated directors and to hold Annual Member Meetings.
• The requirement for the scheme funder of a Master Trusts only to carry out activities relating directly to it. The insurance industry was concerned that it would result in unnecessary cost and duplication because those schemes funded by an FCA-regulated entity already had to meet robust capital requirements and were able to benefit from economies of scale. However, the Government argued that the separation was necessary to enable the regulator to assess the financial position of the scheme with certainty. However, the Government made amendments in the Commons with the aim of minimising disruption to existing corporate structures and shared service arrangements. FCA-regulated companies would be exempt if they met requirements in regulations, which would be subject to consultation (PBC Deb 7 February 2017 c44-7).
• The impact of a ‘pause order’ – under which TPR can require schemes to pause certain activities – including receipt of contributions or payment of a pension – in certain circumstances. Members of both Houses were concerned about the potential impact on savers and pensioners. In response, Ministers responded that the purpose of the order was to allow the regulator to go in and make sure the problem was resolved. Opposition amendments aimed at providing for contributions and payments to continue during a pause order were defeated on division at Commons Committee stage (PBC Deb 9 February 2017 c85).

Part 2 – restrictions on charges

Part 2 of the Act provided for regulations to over-ride contractual terms in occupational pension schemes where these conflict with the regulations. The intention is enable the implementation of policies to restrict certain pension scheme charges in occupational pension schemes, i.e:

• A ban on member-borne commission charges (where a charge is passed on to members who are required to pay for advice and services they may not use or benefit from). The Government had already made regulations that from April 2016 prevent providers from imposing commission charges on members under new arrangements. Subject to Parliamentary approval, it intends to make regulations that introduce a ban on member-borne commission payments under existing contracts (DWP, Impact assessment, January 2017).
• A cap on early exit charges (i.e. charges incurred when an individual transfers funds out of their pension or accesses them before a date specified in the scheme rules). In November 2016, the Government announced that it intended to implement legislation to introduce a cap on early exit charges of 1% for existing members of occupational pension schemes and 0% for new members (Ibid).

The Pension Schemes Act 2017

The Pension Schemes Act 2017 received Royal Assent on 27 April 2017.

Much of the detail was left to regulations, on which consultation is planned from autumn 2017 (HL Deb 19 December 2016 c1489; HL Deb 1 November 2016 c561). The Government expects to implement the new regime from October 2018. (HL Deb 19 December 2016, c1489). However, to protect members of existing schemes, some provisions (relating to requirements to notify TPR of key events and restrictions on increasing member charges in the event of scheme failure) took effect from October 2016, when the Bill was introduced to Parliament. (HC Deb 30 Jan 2017 c756).