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Pensions Bill

My Lords, on 27 July 2011, the Supreme Court handed down judgment in Bridge Trustees v Houldsworth and another. This was the first occupational pension scheme case considered at the Supreme Court and dealt with the meaning of ““money purchase benefit”” in pensions law. This definition is a fundamental concept underpinning the design of the regulatory framework for pensions, and it is vital that trustees, employers and members are all clear about the meaning of the term. Despite accepting that Parliament and Ministers had legislated over a number of years on the assumption that a money purchase benefit could not develop a funding deficit or surplus, the Supreme Court decided that certain benefits that could develop funding deficits or surpluses could still fall within the definition of money purchase benefit. This means that the judgment will result in some schemes being regarded as money purchase benefits under the current legislation, even if it is possible for funding deficits to arise in respect of those benefits. For example, under the judgment, even when benefits are subject to a guarantee in the build-up phase, they should be considered to be money purchase benefits, or where schemes use money purchase rights to provide a pension from the scheme itself, rather than to purchase annuities from an insurer, the pensions should be considered to be money purchase. The judgment will place some benefits outside the scope of a wide range of legislation that was put in place to safeguard members’ benefits. Money purchase benefits are not covered by scheme funding or employer debt requirements; nor do they have access to the Pension Protection Fund or the financial assistance scheme. If the judgment stands, the members will not be protected for certain sorts of benefits in the event of the scheme not being able to pay out; yet these workers thought that their rights were protected. For example, if you get a pension from the scheme rather than from an annuity provider, you expect to continue to get that pension, irrespective of what happens to your former employer. This position has been put in doubt by the judgment and it is important to act quickly to provide clarity and certainty for those workers. Following the judgment, the Government announced the intention to legislate as soon as possible to provide clarity for trustees, employers and members. I appreciate that noble Lords may consider it unusual for the Government to bring forward such amendments at this stage in the Bill, but we consider it necessary that we legislate to protect members immediately. The pensions industry expected this amendment, and it wants certainty so as to be able to operate and advise schemes. Indeed, the Society of Pension Consultants urged us to make an amendment to this Bill. It said: "““We can understand the government's decision to legislate in the way it intends. However, we would ask that the government passes the necessary legislation as soon as practicable, perhaps as an addition to the Pensions Bill””." These amendments clarify the definition of ““money purchase benefit””. They also take associated regulation-making powers. I take this opportunity to assure noble Lords that these powers will be subject to public consultation and the affirmative procedure—both stakeholders and Parliament will have the opportunity to scrutinise the regulations. Law is based on words, and having a common understanding of what the law means is essential not just for law-makers but for society as a whole. If trustees, employers and members are unclear about what sort of benefits their scheme is providing, that simply produces uncertainty and confusion. Section 181 of the Pension Schemes Act 1993 defines money purchase for the purpose of that Act. This is the core definition of money purchase benefit on which subsequent law builds. Amendment 29 amends Section 181 to restore the definition of money purchase benefit to the meaning that it was widely believed to bear before the Bridge litigation. The revised definition makes it clear that only a benefit that is calculated solely by reference to the relevant assets—or, where the benefit is a pension in payment, that is backed by a matching annuity contract or insurance policy—is a money purchase benefit. If there is any additional form of ““promise”” in relation to a benefit, it cannot be a money purchase benefit. For example, if there is a guaranteed investment return in the build-up phase, that is not a money purchase benefit; or if a scheme has promised to pay a set rate of annuity that is not backed by a matching asset such as an insurance policy, that is not a money purchase benefit. It is simple; if there is a promise, there needs to be something to back it up. A money purchase benefit is one derived solely from the relevant assets. In other words, the member gets the value of the contributions, plus the real investment return, less any administrative expenses. The previous definition stated that average salary benefits were not a money purchase benefit. This reference has been removed because, following these amendments, it is not necessary explicitly to exclude one type of non-money purchase benefit from the definition. The proposed new clause also amends similar definitions of money purchase benefit at Section 99 of the Pensions Act 2008 and in Schedule 10A to the Building Societies Act 1986. Amendment 30 enables the Secretary of State to make transitional arrangements for specified types of schemes. It is an established principle that people who go to court and win should see the benefit of that judgment. Therefore, we need to consider how members of the pension scheme in the judgment see the benefit of that judgment. This is a complex exercise. We will need to work through the various classes of member of the pension scheme and consider whether and how to modify the definition of money purchase benefit in respect of each class. Transitional protection may also be needed where trustees have taken decisions in the past that are inconsistent with the clarified definition and those decisions cannot practically be reopened. Our starting point is that trustees should not have to unpick decisions that have already been made in good faith. It would not be practical for trustees to have to unpick decisions that could have been made up to 14 years ago and which could have involved purchasing annuity contracts. Furthermore, some schemes might have been wound up on the understanding of the wider definition of money purchase. It would be impractical to unpick those decisions and we propose to take powers to make transitional provisions for that group. However, we do not want to leave an opportunity for an employer to wind up a scheme today that would fall within the wider definition of money purchase benefit reached by the Supreme Court and avoid paying an employer debt in respect of that scheme. That would mean that members of the scheme would lose out. So it is important that we carefully consider the need to have transitional protection and do not have a blanket approval. The Government will consult before exercising these powers, and any instrument made using the powers would be subject to affirmative resolution. Amendment 31 allows consequential amendments to other legislation to be made by regulations. There are numerous references to money purchase benefit within existing pensions legislation and it important that the new definition accurately flows through to all of them. We do not think that substantial changes will be needed to other legislation but want to ensure that there are not any unintended consequences as a result of the clarified definition of money purchase benefit. I can assure noble Lords that the Government will consult on any regulations under this power and that they will be subject to the affirmative procedure. Amendment 32 allows the Secretary of State to exclude other benefits from the definition of money purchase benefits. This is an enabling power to ensure that if new benefit structures are designed that could result in there being a deficit they can be excluded from the definition of money purchase benefit. This provides future flexibility to respond to the ever-evolving pensions market. However, to be clear, the core principle remains. If a benefit can develop a deficit, it is not a money purchase benefit. Amendment 33 is a procedural provision which sets out that regulations under Amendments 30, 31 and 32 will be subject to affirmative procedure. The regulations may apply to specific groups or may amend primary legislation. Therefore, it is appropriate that Parliament consider these regulations. Amendment 34 allows for Amendments 30 to 33—for the purpose of making regulations—to come into effect on Royal Assent of the Bill. Amendment 29 will be brought into force by order and we intend to bring regulations made under Amendments 30 to 33 into force at the same time. These amendments are all retrospective to 1 January 1997. However, the amendment to the definition in Section 99 of the Pensions Act 2008 will come into force at the same time as that section. Otherwise, in this particular case the amendment would be in force before the original provision. The department announced the intention to legislate to correct the effects of the judgment with retrospective effect on the day of the Supreme Court’s judgment. This was done to prevent some trustees or employers triggering a winding-up of schemes in the window of opportunity between the date of the judgment and legislation being brought into force, thereby avoiding scheme funding and employer debt obligations at the expense of members and the PPF or the financial assistance scheme. The clarified definition of money purchase benefit restores the law to the long-standing Government understanding of the term. If the amendment were not retrospective, employers and trustees who had made sensible decisions based on an understanding that a money purchase scheme could not develop a deficit would potentially be in breach of the law as it stands now as a result of the judgment. The definition of money purchase benefit is a fundamental building block of pensions law. It is important that members, employers and trustees understand what the definitions mean and have clarity about how their schemes should operate. This clarified definition and the power to allow transitional protection aim to provide that clarity. I beg to move. Amendment 29A, as an amendment to Commons Amendment 29 Moved by Moved by Baroness Drake "29A: Line 17, after ““insurer”” insert ““in the name of the member””"