Pension Schemes Bill [HL] — House of Lords, 2016-12-19
Topic: Labor
Jean Lesley Patricia Drake (Labour, Centre-left): My Lords, a key purpose of the Bill is to protect the pension pots of ordinary people from being raided in the event of a master trust pension scheme failing. At the moment, the considerable costs, including administrative costs incurred when a failing scheme is wound up and the members transfer to another scheme, are borne by the members themselves through the charges imposed. The intention of the Bill is to prevent that happening in future. It places a capital adequacy requirement on authorised master trusts to have available sufficient resources to meet such costs in the event of failure and provides for members’ pots to be transferred to another master trust. The Government argue that, in the event of a scheme failure, the capital adequacy and transfer regime will always work. There is no provision if it does not The provisions in this Bill, while welcome, cannot guarantee that there will always be sufficient resources available to a failing scheme to finance the costs of wind-up or that another master trust will always willingly pick up all the pieces and costs. No regulator is infallible. The amendment introduces a requirement on the Secretary of State to make provision for funds of last resort to manage those instances of failure. It does not prescribe what that provision should be—for example, a pension scheme with a last-resort public service obligation, or an obligation on master trusts for tail-risk insurance. But without such a provision, the Government cannot claim as they have that from the day it becomes law the Bill will protect scheme members and their pots from the costs of managing failure The reasons for this amendment are several: the Pensions Regulator will need to rely significantly on the judgment of its supervisors to assess whether a master trust meets the requirements for ongoing authorisation, to assess not only against current risks but also future risks and make judgments on when it is necessary to intervene. It will not be regulating a legacy system but the future evolving and expanding system, covering millions of members for a very long time. The Bill places a prohibition on using members’ pots to fund a wind-up, but that does not mean that it will all sort itself out. If providers go insolvent, who ultimately will ensure that the wind-up and transfer actually happens? Pots could be left in limbo for many months. Even if the trustees have a legal duty to make such a transfer, they will not be able to pay for advice and administrative services to enable it to happen The year 2008 taught us that even the grandest institutions with strong reputations can fail. No regulator can guarantee to remove all risk, and the Pensions Regulator is no exception. However exceptional, a situation could arise whereby a failing master trust will not have sufficient resources on wind-up. Regulator assessment of capital adequacy requirements may simply have been wrong. I hope that that never occurs, but the Government cannot guarantee that it will not. Administrative disarray, failure of controls in the outsourcing to third-party administrators, major computer failure or other failures can hike up costs and cause costly delay in wind-up I recently read The Prudential Regulation Authority’s Approach to Banking Supervision of March 2016, and paragraph 44 says: "The PRA’s supervisory judgements are based on evidence and analysis. It is, however, inherent in a forward-looking system that … there will be occasions when events will show that the supervisor’s judgement, in hindsight, was wrong". The resolution regime when a trust fails provides for transferring members’ pots to another master trust. The Government are relying on the industry to always step up to the plate, but they cannot be certain that it always will. I am sure that there are master trusts now that are already concerned about what that means and will not want to commit to being part of a panel or carousel of providers which will always guarantee to accept the transfer of members. They may consider the unknown future exposure to costs or the liability for the administrative errors or failures of a failed scheme too unpalatable. They may want to cherry pick, leaving a less-profitable section of the members stranded. It is not difficult to imagine the sorts of problems that could occur. The Government cannot assume that the increase in scale achieved from accepting a transfer of members from a failed trust is a sufficient incentive for another provider to always volunteer to rescue.