As my hon. Friend the Member for Airdrie and Shotts (Neil Gray) set out earlier, there is a great deal in the Bill that the SNP can welcome, including pension dashboards, allowing trustees to take cognisance of the environmental impacts of the investments under their control, legislation to help avoid the unsuitable transfer of funds and allowing the Pension Protection Fund to continue. Those are all good and welcome improvements to the regulatory and administrative landscape in which pensions operate.
When it comes to dealing with pensions—as Members have said, in many cases, that is the most significant investment that many of us make—it is crucial that we are aware of unintended consequences. As a cautionary tale, I remind Members of what happened when the ability of funds to benefit from advance corporation tax was removed. While Treasury coffers have swelled as a consequence, that sounded the death knell for many excellent final salary pension schemes. Those on the Treasury Bench may not care terribly much for that comparison, but it is the sort of cautionary tale with which we would wish to approach this to make sure we are doing our level best to avoid similar
mistakes arising from past legislation and the present legislation, and it is on that note that I wish to focus my remarks.
The first issue I wish to concentrate on is one addressed by the hon. Member for Birmingham, Selly Oak (Steve McCabe) in relation to clause 123 and funding requirements for defined benefit schemes. It is obvious why we would all wish to be assured that schemes are funded to meet the liabilities they have, but if we are to insist on being able to demonstrate that too rigidly, there is a very grave risk that the resulting investment policy that needs to be enacted will become so conservative that it focuses on meeting current liabilities at the expense of delivering future benefits for members within the scheme.
Obviously, that could mean a change in investment strategy away from equities to secure but potentially lower yielding investments, such as bonds, fixed interest investments, property infrastructure and similar, rather than balancing that mix with other types of investment, which might be expected to deliver higher returns over the longer term, and that danger is very real. Paragraph 210 of the consultation the Pensions Regulator is undertaking says:
“We consider that trustees’ focus should be to ensure the security of members’ accrued benefits rather than to ensure the provision of future benefits.”
An estimated 21% of defined benefit scheme members in the UK belong to schemes that are still open to new members, and if the approach that seems to be favoured by the Pensions Regulator is followed for schemes that are open to new members, then as surely as night follows day, scheme investments will begin to ossify in favour of those preserved benefits, at the expense of the ability of these schemes to absorb new members, and that is something that will slowly be closed off to the detriment of those potential new members.
Clause 123 recognises the difference there needs to be in an investment strategy between schemes that are closed to new members and those that remain open. I do not believe that it is or should be the intention of guidance to close down such schemes to new members, but I think that is a danger this will have. Enshrining in legislation the ability of trustees to reflect the characteristics of the schemes that they manage in their investment strategies would help to avoid such an adverse and presumably unintended consequence. I encourage the Minister to ensure that such a clause or something that has similar effect is included in the final legislation.
The second point on which I wish to focus relates to something that is not addressed in the Bill at present. It relates to the treatment of multi-employer industry pension schemes, and I would like to cite the example of the Plumbing & Mechanical Services (UK) Industry Pension Scheme. I state for the record my interest as a member of the all-party group on plumbers’ pensions. For Members who are not familiar with it, this scheme is an industry-wide occupational scheme that provides defined benefits. It has over 35,000 members and has, over its life to date, had about 3,500 employers involved in the scheme. The scheme opened in 1975, and it closed to future accrual of benefits from the end of June 2019, with about 350 employers participating in it at that
point in time. One of the issues here is the size of the scheme relative to the remaining employers, many of which are small businesses.
Employer debt legislation contains a number of statutory easements, which are available to many employers facing a section 75 debt under pension legislation—the Pensions Act 1995—when they close their businesses. However, those statutory easements do not cover all situations, such as where an employer has retired or has ceased trading, where the overall amount of the liability in relation to the scheme is small in comparison with the scheme’s size or where an employer has triggered a section 75 debt prior to the closure of a pension scheme to future accrual. In this particular instance, the trustee has been able to apply some existing easements allowed for in legislation, but there are a number of particularly sensitive cases where easements cannot be applied. As a result, individuals face personal bankruptcy, and companies that would otherwise be financially viable face being forced into insolvency.
I want to go into further detail about this case. The trustee currently has 72 employers to consider pursuing for payment where existing easements may not apply. Of those, 43 are incorporated and 29 are unincorporated. Of the 29 unincorporated employers, 20 have retired, and the existing statutory easements cannot apply where the employer has ceased trading. In these cases, there is no ongoing business, but because those employers were unincorporated, they have personal liability to the scheme, which means that their personal assets can be seized by the trustees and used to settle the employer’s debt to the scheme. The trustees advise that, under section 75, these 20 employers collectively have a liability to the scheme of £7 million. Even if each of those employers was made personally bankrupt, only a fraction of that £7 million is likely to be recovered.
I spoke this morning over the telephone to a member of a small local plumbing business in my constituency. He had written to me at the start of the year, and I will give the House a flavour of what he said, because his experience is sadly not untypical. He said:
“I am approaching retirement age, but retiral will trigger my section 75 debt as the law stands at the moment. My father started our employees on the… pension scheme almost forty years ago, long before it was mandatory to have a pension scheme. When I told him about this section 75 issue, my dad burst into tears and said ‘What have I done to you’. I said it was not his fault as he was only doing what he thought was a good thing for our employees by entering them into a pension scheme. Surely after almost 40 years paying into the scheme, all the payments that were due, it can’t result in me losing my house, my office building and my own personal money, which is by no means substantial, and being declared bankrupt.”
There are two methods that could be used to address that, and my party will table amendments on this in Committee. One is the introduction of a trustee discretion to allow trustees not to pursue a section 75 debt when it is below a de minimis threshold. The other is the alteration of deferred debt arrangements to permit employers in a scheme closed to future accrual to apply for a deferred debt arrangement, providing they meet other statutory tests.
That is exactly the sort of thing that I mean by unintended consequences, because I cannot believe for one moment that anyone would have deliberately set up a scheme or put in place a law of that nature with these
sorts of outcome in mind. I hope that my party’s amendments in Committee will be accepted and incorporated, because the Bill provides the best opportunity that many will have to get these issues resolved and ease that burden on their minds.
On the whole, this is a good Bill, and we find much in it to support. It gives opportunities to improve the pensions and retirement savings landscape, and I hope that the Government will remain open to further suggestions on how the Bill might be improved as it progresses and heed the warnings, so that we can avoid these unintended consequences.
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