§ 4.37 p.m.
§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish) rose to move, That the draft regulations laid before the House on 18th June be approved [24th Report from the Joint Committee].
§ The noble Lord said: My Lords, on behalf of my noble friend Lord Lindsay I beg to move this order. I am sure that it is for the convenience of the House that we also deal with the draft Occupational Pension Schemes (Pensions Compensation Board Limit On Borrowing) Regulations 1996 laid before the House on 18th June and the draft Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, which were laid before the House on 26th June. These regulations are an integral part of the package of measures set out in the Pensions Act 1995.
§ Pensions are one of the most important ways in which people hold a stake in this country. Almost £600 billion is invested in private pension funds—more than the rest of the European Union put together. We are committed to building on that success.
§ It is essential that we continue to provide an environment in which private pension provision can flourish. The Pensions Act will play a major part in this. It will give people the security they need to invest for their retirement. It will also introduce greater flexibility for contracted-out schemes so that they can provide benefits in the way that best suits them and their members.
§ Perhaps I can explain each of the orders in turn. I begin with the Pensions Compensation Board limit on borrowing regulations. Next April the measures in the Pensions Act will introduce a strengthened legal and 1408 regulatory framework for occupational pension schemes. As I have said, this will improve the security of members' pensions. However, no regulatory system can provide an absolute guarantee against a determined criminal. The new pensions compensation scheme will act as a longstop. Where, as a result of dishonesty, the value of a scheme's assets is reduced and there is no employer to stand behind the scheme compensation can be paid. The compensation scheme will be operated by the Pensions Compensation Board. The board will have responsibility for determining whether compensation is payable, and how much can be paid. The board will come into being on 1st August 1996. It will be chaired by Dr. Julian Farrand, who is also the Pensions Ombudsman.
§ The board will need to be able to meet urgent calls for assistance and act quickly to limit any financial hardships to scheme members. But it would be undesirable for the board to build up large reserves as a contingency against valid claims. Therefore it needs to be able to borrow from recognised financial institutions. Its borrowing powers will be activated from 1st August, and this will enable the board to raise funds to meet its start-up costs.
§ The regulations before the House today propose setting the statutory maximum amount that the board may have outstanding in respect of any money borrowed at £15 million. It is not expected that the board will generally need to borrow large amounts. It has levy-raising powers. However, we recognise that the limit needs to be sufficiently high to ensure that urgent and significant calls for help can be met should they arise. The borrowing limit is one control to ensure that the compensation scheme remains affordable. We can also set the maximum amount of the annual levy. As the board is a public body its finances will be subject to government accounting rules and there will be a financial memorandum with the board. In addition, the Comptroller and Auditor-General will audit the board's accounts. The proposed statutory borrowing limit is set at a realistic and affordable level and effective controls will be in place to ensure that the board maintains the highest standards of propriety, regularity and value for money.
§ I now move to the regulations on contracted-out mixed benefit schemes known as "COMBS". These regulations will enable a single occupational pension scheme to contract out of SERPS on both a salary-related and money purchase basis. Present legislation requires employers who run contracted-out schemes to provide either salary-related benefits or money purchase benefits. They cannot have both types of contracted-out rights in one scheme. A scheme can change the basis on which it contracts out only if the scheme trustees first discharge their liability to pay accrued contracted-out benefits. These new regulations will enable schemes to hold two kinds of contracting-out rights in one scheme. From 6th April 1997 new schemes can elect to contract out as COMBS from the outset. Existing schemes already contracted out on a purely salary-related basis will be able to elect to become 1409 COMBS from the same date. The option will be extended to cover existing contracted-out money purchase schemes one year later, from April 1998.
§ Our aim is to maintain the attractiveness of contracting out for employers by allowing them greater flexibility to respond to changes in the financial environment, the labour market and the pattern of pension provisions. Scheme members will also benefit. This will be particularly true where they are free to choose which part of the scheme to join, and whether to move from one part to the other. These new flexibilities will also broaden the options which employers have when designing and setting up a contracted-out scheme.
§ We have tried to keep the provisions as simple and as easy to understand as we can by sticking, where possible, to the existing rules for contracted-out schemes. Therefore, broadly speaking, members of the salary-related side of the scheme will be subject to the salary-related provisions of the main contracting-out regulations, and members of the money purchase side will be subject to the relevant contracted-out money purchase provisions. The employer will also be spared the need to get to grips with a completely different set of procedures when deciding to go down the COMBS route.
§ Where an internal transfer takes place, the regulations set out the basic requirements with which schemes must comply. We have specified the minimum necessary in order fully to safeguard the rights of members. These contracted-out mixed benefit schemes are a new concept. We shall monitor them closely to see that they are working as intended. But the industry has asked us for them and we expect them to be welcomed as a more flexible contracting-out option.
§ I turn to the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations. They deal with requirements on trustees to obtain audited accounts and a statement from the auditor as to whether contributions have been paid correctly and on time. For ease, perhaps I may simply call them "audited accounts".
§ Auditing provides an independent view on whether accounts show a true and fair picture. Audited accounts are, therefore, one of the most important controls to ensure pension scheme security. The requirement on pension schemes to have audited accounts was first introduced in 1986. The 1996 regulations update this existing requirement. We have made two significant changes to reflect the importance that we attach to audited accounts. First, trustees will have to obtain them within seven months of the end of the scheme year. This compares with 12 months allowed under existing regulations. It means that they will be available to scheme members much sooner. Secondly, they introduce a criminal sanction on trustees who fail to obtain audited accounts. This brings the requirements on pension scheme accounts more into line with those on company accounts. On summary conviction, trustees will be subject to a fine not exceeding £5,000.1410
§ These regulations strengthen the financial control of pension schemes. They will increase the security of occupational pension funds without imposing unreasonable burdens on employers.
§ In conclusion, we need to ensure that funded pension provision can continue to flourish into the next century and beyond. As part of a wider package of pension reforms, the regulations which I bring before your Lordships today will make an important contribution to this process. I commend them to your Lordships.
§ Moved, That the draft Regulations laid before the House on 18th June be approved [24th Report from the Joint Committee.]—(Lord Mackay of Ardbrecknish.)
§ 4.47 p.m.
§ Baroness Turner of Camden
My Lords, I thank the Minister for his detailed explanation of these regulations. All of them have been accepted in the other place. It is not our custom to oppose regulations in such circumstances; nor do we want to do so in respect of these regulations. There are, however, some points relating to the regulations laid under the Pensions Act which I believe should be made.
First, the Minister will not be surprised to hear from me that some noble Lords are concerned about the general weight of regulations under the new Act. Comments to this effect have already been made by organisations which are active in the pensions industry. I am glad that I am not a professional engaged in the administration of an occupational pension scheme.
At the outset, I accept that this issue is not an easy one. It is desirable that scheme members should have as much protection as possible because their investment in a pension scheme is probably the most important one that they will make and is second only to their investment in house purchase. It is in the interests of everyone that that investment should be properly protected. It is a question of getting the balance right and having sufficient regulation to protect scheme members and their expectations while at the same time not having a regime which is so complex that employers deem it not worth their while to have an occupational scheme at all, thus driving more and more people into personal pensions where their future may not be as assured as it might be under a good occupational scheme—or perhaps they may have no provision at all.
I know that it is the policy of the Government to persuade people to take out private personal pensions, but many have little notion of how much they need to contribute to produce a pension of reasonable size when they reach pension age. Good occupational provision is still the best way to provide for large numbers of people. Very complex legislative requirements may have the effect of inhibiting the growth of such provision. The number of new final salary schemes has already fallen dramatically. It is my understanding that virtually all of the new occupational schemes are money purchase schemes. I am sure that the Government have been advised by the National Association of Pension Funds of its concerns about the complexities inherent in the procedures relating to mixed benefit schemes.
1411 The Minister has been good enough to explain in detail what on the surface appears to be a somewhat complex situation. I am grateful to him for his explanation this afternoon. I understand that the provisions will require members who want to transfer from money purchase to final salary or whatever to give their consent in such circumstances. Of course there is no objection to that, but the regulations are complex. I am glad that the Minister has said that it is the intention of the Government to make them as simple as possible in the circumstances.
With regard to audited accounts, of course there can be no objection whatever to that requirement. It is perfectly right and proper. However, I raise one point about lay trustees. It is right that there should be member-nominated trustees. We had a good deal of discussion about that matter when we debated the Pensions Bill in this House.
The responsibilities of trustees under the new Pensions Act are considerable. The regulations contain references to such responsibilities, including a provision for fines if they are not complied with. The Minister has referred to that this afternoon. That is all right, I suppose, and I am not complaining about it, but it seems to me that trustees should have some training for the tasks that they will need to perform. I believe that such training should be mandatory in the interests not just of the trustees but of scheme members so that their interests can be protected adequately.
I know that the regulations are not about trustees or their training, but they present another opportunity to put this point to the Minister yet again. I shall be grateful for any response he feels he can make. However, having said that, we offer no opposition to the regulations. They are, in the main, to the benefit of scheme members, and to the whole matter of the safety of members' investments in occupational schemes. We wish them well.
§ Earl Russell
My Lords, the Minister may be glad to hear that on this occasion I believe that he has succeeded in doing something which is not controversial, which may save us a little time. However, I hope he will forgive me for mentioning, extremely briefly, one business matter about which he may wish to talk further in the future. I have given him notice of this point.
I have today just put down a Motion in "no day named" to move to resolve that the proposed sale of DSS benefit offices shall not proceed until the House is satisfied that adequate arrangements are in place to preserve ministerial accountability for the delivery of benefits.
I hate introducing business late in July, but if the Secretary of State bowls at my middle stump I have to play a stroke, even if it is the last ball of the day. So I hope that the Minister can assure me that no decision on this matter will be taken until the usual channels have had a chance to consider it. I know that he cannot anticipate the decision of the usual channels, but if he can tell me that no decision will be taken until the autumn when the usual channels are flowing again, that would be all I could legitimately ask him.
1412 On these regulations, I agree entirely with what the noble Baroness, Lady Turner of Camden, said about their complexity. I believe that there is unanimity in the House about the need for and propriety of insisting upon proper audited accounts. But if noble Lords look at the schedule of the regulations, they will see that they are pretty complicated. There are specific headings according to which the accounts must be divided. If I know anything about accounting material, which is not much, it is that it never divides quite according to the headings under which it is meant to divide.
I agree with what the noble Baroness said about training. I hope that the Minister can also assure us that this method of dividing the material has been a matter of the fullest consultation with the industry, and will continue to be so.
I accept entirely the Minister's explanation of the borrowing limit of the Pensions Compensation Board. I should be glad to know if he can tell me how the figure of £15 million was arrived at. Why not £12 million? Why not £18 million? No doubt there was a reason, but I should like to hear it.
On the contracted-out regulation, I must declare an interest, since, if I do not encounter the proverbial bus, I hope to benefit from them in due course. Having said that, I have nothing further to say about them.
§ Lord Mackay of Ardbrecknish
My Lords, I am grateful to the noble Baroness, Lady Turner of Camden and the noble Earl, Lord Russell, for the welcome that they have given to the regulations. They are as familiar as I am with the debate we had on the Pensions Bill. We have all been over these matters on a number of occasions.
I say, first, to the noble Earl, that there has been considerable consultation with the industry not just on these three regulations but on all the other regulations that we are bringing forward. Indeed, there are usually two sets of consultations. There is an initial one, and then we pretty well always put out another consultation when we have come to a decision in the light of the previous one, just to ensure that we have the position right, because these are important issues. This is an important industry, and we want to take it along with us.
I know, as the noble Baroness pointed out, that there are a number of suggestions going around that we are over-regulating in this field. Although she did not use the figure, I have been accused of producing 1,000 pages of regulations. I sent my officials off to have a count, and I am told that we have managed to achieve 400, which is an increase on roughly 300. However, in my defence let me say that many of those pages will not be in the least relevant for many schemes because it will depend upon which kind of scheme is being operated. Many pages in the regulations deal with matters such as the winding up of schemes, which fortunately does not happen often, and therefore the great majority of schemes will not have to get to grips with them. It is not quite as bad as has been suggested.
Having said that, I am well aware of the desire in the industry to keep the burden of regulation as low as we can. That is what I have attempted to achieve with my 1413 officials throughout the work since the Pensions Bill completed its stages. We have attempted to balance the need for security for members of the scheme with the need to ensure that we do nothing to inhibit employers from running the schemes.
I am as keen as the noble Baroness to see employers continue to run schemes, and to start new schemes. It is not an either/or situation. Both employer led schemes and personal pensions have important parts to play because not everyone can get into an employer's pension scheme, because not all employers run them. I want to underline the point that we are keen to see employers' pension schemes continue. The last thing we want to do is to give employers the feeling that they are being so over-regulated that they would rather not bother to continue to run their schemes. We are at one on that.
The noble Baroness—not to my surprise, I may say—brought up the subject of training for trustees. We had a considerable debate on that subject. We differed on whether there should be mandatory training. As I recall it, my view on the matter prevailed, and we do not have mandatory training. However, we have provision for people to have adequate time off their work for training. There are a number of training schemes available. We have gone a long way towards ensuring that people can have training by having paid time off their work in order to do their training. We believe that that is important.
Just a fortnight ago I addressed a northern pensions conference at Newcastle. The bulk of the audience was drawn from the trades unions and people who are involved in being trustees. So a great deal of work is being done on the subject, and I am sure we all welcome that.
I was asked whether £15 million for compensation was the right level. I suppose my answer is, how long is a piece of string? It was the illustrative estimate made for the Pensions Act compliance cost assessment. We arrived at it by looking at the number and size of the compensatable events that might occur on average in each year over a 20-year period. We made adjustments for any recovery of assets that we might hope to achieve.
We hope that the actual cost will be much lower, particularly in the first year or two of the scheme, as the reduction in assets must have taken place after April 1997. Of course we cannot rule out that the board might at some stage have to meet a significant claim, and to do so quickly, if pensions in payment are to continue. So that is how we arrived at the figure.
As to the other point the noble Earl made, I have to say that as it is well outside the context of these regulations, I have noted what he said.
§ Earl Russell
My Lords, before the Minister sits down, it would be for the convenience of the House, since it is due to rise so soon, if he could give me a rather more precise answer than merely noting what 1414 I said. I do not want to take up the time of the House unnecessarily just before it rises, but if he could save us all that trouble I should be very grateful.
§ Lord Mackay of Ardbrecknish
My Lords, I always like to be helpful but I am in some difficulty because I shall be straying not only a mile or two but many miles from the regulations. Perhaps I may recommend that the noble Earl discovers what I said today on "The World at One" about the timetable of the project. He will then understand that not a great deal will have happened by the time the House returns.
On Question, Motion agreed to.