My Lords, I too generally welcome the Bill, which makes a number of improvements to the pensions landscape. However, there are a few areas that I would like to raise.
I welcome the introduction of the new class of pensions: collective money purchase schemes, or CDCs. The ability to pool risks across members should bring real benefits, including potentially higher pensions than current defined contribution schemes can produce. However, I would strike a note of caution. I fear that these schemes are being seen as a replacement for defined benefit schemes, which they most emphatically are not.
First, as the noble Lord, Lord McKenzie, said, we must clearly understand that CDC schemes do not guarantee any particular level of pension but merely provide a target. More importantly, even once you start to receive your pension, the amounts paid each year are still not guaranteed and may go down as well as up. That is a fundamental difference compared with defined benefit schemes and annuities purchased under defined contribution schemes. Retirees will expect their pension to at least grow in line with inflation, but the experience in the Netherlands shows that that is not always the case. Indeed, none of the five largest Dutch schemes has managed to keep up with inflation over the last decade, and three of them have made cuts in nominal terms to the level of benefits. If we are to avoid scandal, this risk must be clearly communicated, with very clear health warnings when people sign up to a CDC, in any communication that includes a forecast, and when people are nearing retirement, so that they understand the risk that their pension is not a fixed and growing amount.
Secondly, the principal benefits from CDC schemes arise, as we have heard, from the pooling of risk. However, when risk is shared, there are inevitably winners and losers. As the noble Lord, Lord Sharkey, mentioned, it is important to ensure that we do not create further intergenerational unfairness. Because employers have no obligation to increase funding, a CDC scheme has only two ways of reacting to lower returns: cutting benefits for existing pensioners or
raising contribution levels for employees, or a combination of both. It is always easier to push the problem into the future. This creates the risk that one group is favoured over another. Trustees and the regulator will need to ensure that risks and returns are not skewed against the younger generation to the benefit of pensioners, or indeed the other way around. It would be good if the Minister could comment on these issues.
The next part of the Bill strengthens the powers of the Pensions Regulator, especially in relation to corporate transactions, which is greatly to be welcomed. However, I cannot help feeling that there is a missed opportunity to do more here. Recent high-profile failures, such as Carillion and BHS, went under with significant pension fund deficits after shareholders had taken substantial sums out of the companies; for example, Carillion consistently paid out dividends in the range of £50 million to £75 million a year, while at the same time the pension deficit grew from less than £100 million to over £600 million. In the year to March 2018, FTSE 100 companies with DB schemes paid £84 billion in dividends, compared with £8.2 billion repairing their deficits—a ratio of over 10 times. For FTSE 350 companies with DB schemes, the median ratio of dividends to deficit reduction contributions is even higher, at 14.2 times, and is growing. The Pensions Regulator itself has said:
“We are concerned about the growing disparity between dividend growth and stable deficit reduction payments. Recent corporate failures have highlighted the risk of long recovery plans while payments to shareholders are excessive relative to deficit repair contributions.”
It would be tempting simply to prevent companies with pension fund deficits from paying dividends at all, but commercial reality is not that simple. Stopping a company paying dividends might actually make its financial position less stable as markets react badly and the cost of capital increases. Deficits can be short-term, and the payment of a dividend may have no material adverse impact on the position of the pension fund. We should also remember where dividends go; much goes into pension funds. There is a balance to find here. However, we could move that balance to strengthen the position of pension funds relative to shareholder returns. Clause 103 in Part 3 goes some way in this direction, but we could do more to safeguard scheme members.
The noble Lord, Lord Sharkey, mentioned the Bill that the noble Lord, Lord Balfe, introduced to make it a requirement for trustees and the regulator to approve the distribution of dividends, which I support. This important protection could easily be covered in this Bill, at least in part, simply by including the declaration of a dividend as a notifiable event under Clause 109, to be treated in the same way as any other relevant corporate transaction. I would welcome the thoughts of the Minister on this.
Related to this, we have heard about delegated powers in this Bill, but one that jumps out at me, where the Bill and the Explanatory Memorandum are somewhat less than clear, is what will actually constitute a notifiable event in Clause 109. The Explanatory Notes refer simply to,
“circumstances to be prescribed by regulations.”
It seems odd that such an important, even headline, element of the Bill is left completely to be dealt with by future regulation. It would clearly be better to put what is intended into the Bill. Perhaps the Minister could clarify what notifiable events will in fact include and why that cannot be included in the Bill. At least, could the regulations be published before Committee, as with those from Part 1, which she mentioned earlier?
My next point relates to pensions dashboards. I wholeheartedly welcome them. As someone who is rapidly approaching his crucial 55th birthday and trying to work out what to do about pension funds from various past employers, having all the information in one place will be of great benefit. In fact, I am probably one of the one in five to whom the noble Lord, Lord Sharkey, referred. My fear, however, is that those funds that are oldest and hardest to find will be the very ones that do not end up on the dashboard. How do the Government propose to ensure that all funds can be added to dashboards in a reasonable timescale? Also, importantly, will the state pension entitlements be included in the dashboard?
Finally, the Bill makes some welcome changes to transfer rights, but it does not address the important underlying issue of how transfer values themselves are calculated. I greatly recommend an article in the Sunday Times by Louise Cooper on 27 October, from the last time we were about to look at the Bill, which sets out the problem very clearly. She gives the example of a fund that will pay an inflation-linked pension of £4,000 a year. The transfer value that she was quoted from that fund for that £4,000 a year is £130,000. An annuity providing the same benefits would cost £240,000: nearly double the transfer value.
This chimes with my experience of looking into consolidating a small pension from an old DB scheme. The differences between transfer values and annuity prices are so large that, intuitively, someone must be profiteering here. While the law requires advice to be taken before the transfer of funds over £30,000, there seems to be no legal way to ensure fairness in respect of the transfer valuation itself—how it is calculated. I imagine that consumers may be losing out substantially. It would be good to hear the Minister’s thoughts on that as well.
4.42 pm