An examination of the triple lock mechanism used to uprate the State Pension - its effect so far and the arguments for and against
Documents to download
Pension Schemes Bill 2019-21 (720 KB, PDF)
The Pension Schemes Bill 2019-21 was published in the House of Lords on 7 January 2020, where it went through all stages ending with Third Reading on 15 July. Its aims include establishing a new form of pension scheme, improving protections for pension savings and helping people plan for their retirement.
It was introduced into the House of Commons on 16 July 2020 and had its Second Reading on 7 October 2020 and four sessions in Public Bill Committee on 3 and 5 November. Report Stage and Third Reading were on 16 November. The Bill was then sent back to the Lords for it to consider Commons amendments (which removed the four opposition amendments made in the Lords). The Government gave assurances regarding the approach to the funding of defined benefit schemes, saying it agreed “open schemes that are not maturing and have a strong employer covenant should not be forced inot an inappropriate de-risking journey” (HL Deb 19 January 2021, c1110).
Parts 1 and 2 – Collective Money Purchase Schemes
Parts 1 and 2 of the Bill would provide for a framework for the operation and regulation of Collective Money Purchase Schemes in the UK. These are also commonly referred to as Collective Defined Contribution (CDC) Schemes.
The existing UK workplace pensions framework enables employers to offer only either:
- Defined Benefit (DB) pension schemes, which provide pension benefits based on salary and length of service; or
- Defined Contribution (DC) schemes, where individuals build up a pot of money to provide an income at retirement. Unlike DB schemes, which promise a specific income, DC incomes depend on factors such as the amount paid in, investment returns and decisions made at retirement.
These two models place all the risks and associated costs – economic, financial, and longevity – with either the sponsoring employer (DB) or the individual member (DC). The Government believes creating a third option called Collective Money Purchase Schemes (CMPS) – where risks would be entirely with the members but shared between them collectively – could be beneficial to sponsoring businesses and individuals in certain cases.
Under a CMPS both the employer and employee would contribute to a collective fund from which the employee would then draw an income at retirement. The funding risk would be borne collectively by the individuals in the scheme, whose investments make up the fund. A CMPS would offer members a target pensions level that it would be aiming to pay based, on their contributions. The scheme must have rules under which the rate or amount of the benefit is subject to periodic adjustments designed to achieve a balance between the available assets of the scheme and the amount expected to be required to provide benefits under the scheme to members collectively.
Critics of CMPS often claim that they are inherently unfair towards younger generations as older people may have first call on the pooled fund to pay their pensions and workers may have to make up any shortfall with increased contributions. The Government believes it is possible to design a model to mitigate these risks, like that proposed by Royal Mail.
At Report stage in the Lords, Peers agreed to an amendment in the name of Liberal Democrat Peer, Lord Sharkey, that would require trustees to assess whether their scheme operated fairly between different groups of members. The amendment was removed from the Bill at Commons Committee stage. The Government said it would use regulations – following consultation – to set out clear principles and processes that schemes must follow to ensure that different types of members are treated the same, where justified (PBC Deb 3 November 2020 c12 and 22).
Part 3 – The Pensions Regulator (TPR)
Part 3 would introduce measures intended to strengthen TPR’s powers and improve the information available to it, to better enable it to protect DB scheme members’ savings. They would do this by:
- Strengthening the existing criminal and civil sanctions regime by introducing three new criminal offences and a new power to issue civil penalties of up to £1 million;
- Strengthening the regime for Contribution Notices (one of the powers available to TPR to ‘recover any losses caused to a DB pension scheme as a result of avoidance behaviours’);
- Enhancing corporate transaction oversight by requiring ‘persons involved in a corporate transaction to make a statement setting out information about the event and how any detriment to a DB pension scheme, as a result of this event, is to be mitigated;’ and
- Extending information gathering powers to enable the Regulator to enter a wider range of premises and require individuals to attend an interview.
When the Bill was in the Lords, Peers expressed concern that the scope of clause 107 (sanctions for avoidance of employer debt) was too wide in terms of the people potentially caught by it. The Government responded that it was concerned not to create loopholes. The issue was debated again at Commons Committee stage (PBC Deb 3 November 2020 c27-31).
Part 4 – Pensions dashboards
The Bill would create a legislative framework for pensions dashboards – digital interfaces that enable people to see all their pension savings in one place so that individuals can make better decisions about their retirement plans.
One area of debate has been whether there should be a single dashboard provided by the Money and Pensions Service (MaPS) – a statutory arms-length body – or multiple dashboards provided by industry. The Work and Pensions Committee recommended the former, on the basis that consumers wanted “simple, impartial, and trustworthy information” and that multiple dashboards, hosted by “self-interested providers” would add complexity. However, the Government said that multiple dashboards would improve consumer choice and decided that they should exist alongside a non-commercial dashboard, which would offer an “impartial service to those who prefer it, or who may not be targeted by the market.”
At Report stage, Peers agreed to amendments in the name of Labour Peer, Baroness Drake, that she argued would protect consumers from detriment. These were to i) require the MaPS dashboard to be up and running for a year, and the Secretary of State have reported to Parliament on its operation, before other commercial dashboards could be launched; and ii) exclude facilities for engaging in financial transactions, such as transfers, from pensions dashboards (a decision to allow which should require further primary legislation). The Government opposed both amendments, arguing that having commercial dashboards from the start would maximise the possible reach of the policy and help meet the differing needs consumers; enabling financial transactions via dashboards was part of a possible solution to the proliferation of small pension pots. Both amendments were removed from the Bill on division at Commons Committee stage, with Government members voting for this and the opposition against (PBC Deb 3 November 2020 c56 and 73-4).
Part 5 – Further provisions relating to pension schemes
The Bill contains a number of other provisions:
- Clause 123 introduces Schedule 10, which would provide for amendments to the scheme funding provisions of Part 3 of the Pensions Act 2004. It introduces a new requirement for schemes to have a ‘funding and investment strategy’ for providing pension benefits over the longer term and to report on its implementation to the Pensions Regulator in a new ‘statement of strategy’. A Lords amendment to require a different approach to the regulation of funding for open defined benefit schemes (i.e. those with actively contributing members) was removed at Commons Committee stage, with Government Members voting for this and the opposition against (HL Deb 30 June 2020 c689; PBC Deb 5 November 2020 c87) When the Bill returned to the Lords on 19 January 2021, the Government gave reasurances regarding the intended approach to regulating the funding of open schemes (HL Deb 19 January 2021, c1110).
- Clause 124 would require occupational pension schemes to manage the effects of climate change as a financial risk and to report on how they have done so.
- Clause 125 would allow regulations to be made to stipulate the conditions which persons, including a pension scheme member, will need to meet to have a statutory right to transfer their pension savings to another scheme. The aim is to protect members from scams by helping trustees of occupational pension schemes ensure transfers are made to safe, not fraudulent, schemes.
- Clause 126 would ensure that the Pension Protection Fund (PPF) can continue to administer the compensation regime as intended following court rulings.
The aim of this briefing paper is to provide background on the provisions in the Bill and debates in Parliament.
Documents to download
Pension Schemes Bill 2019-21 (720 KB, PDF)
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