My Lords, we have come a long way since the probing discussions in Committee, when the noble Baroness, Lady Altmann, first raised concern about whether there were steps afoot to cause de-risking of open DB schemes and the effect that that might have of shifting investment to gilts. I was among several noble Lords who agreed with that concern, and I followed up on Report with an amendment, kindly signed by the noble Baroness, Lady Altmann, and the noble Lords, Lord Young of Cookham and Lord Vaux of Harrowden, which was passed.
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In the light of experience, it could perhaps have been better framed. The message is that there is a difference between open defined schemes that are not on the path to maturity—when investments have to be progressively used up to pay pensions—and closed schemes that are on that inexorable path to maturity. This difference opens wider investment possibilities in
relation to liquidity and risk. Absent such recognition—which is the status quo—schemes would become unnecessarily expensive for both employers and employees. They would become unaffordable. There would be knock-on effects for the wider economy because a great source of investment would be removed.
My amendment was followed up with cross-party vigour in the Commons. Although the Government have not accepted any amendments, there have been many helpful meetings and written exchanges with our Minister, the Pensions Minister, Guy Opperman, and the Pensions Regulator. Progress has been made and I think we have all learned something. I am particularly grateful to the Minister for enabling those meetings, for giving us the time to think about our response and for proposing statements that addressed our concerns.
Most open schemes will follow what is now called the bespoke approach; that is, one tailored to individual circumstances. Recently, I had a helpful email exchange with the regulator about fast track, which was described in the consultation and which can be used by open schemes, which acknowledged the more general recognition that open schemes do not have to progressively derisk: “If you are an open scheme with a strong flow of new entrants, then you might always be 20 years from maturity. You might, therefore, always be at the same point in the covenant to maturity table and you may never be constrained by a lowering of the discount rate consistent with that.” Trying to correct arguments that have gone backwards and forwards is always slightly distracting. Is the word “different” useful, or will it be played on by those wishing to avoid appropriate contributions? What is meant by maturity? These terms have been challenged, yet they are inevitably used by all sides.
The noble Baroness, Lady Altmann, and I put our heads together to suggest statements and the reserving Amendment 4B, which we shared with other noble Lords for their comments. The amendment states simply that regulations should support the ability of scheme trustees to decide
“the specific funding, investment risk management and diversification strategy that is appropriate for the long-term time horizon, liquidity and employer covenant of the scheme.”
The long-term time horizon is another way of saying maturity. Liquidity relates not only to investments but to the cash flow of schemes. The strength of the employer covenant is a further factor in how trustees assess risk to the scheme and how to manage deficits. It covers the assets that have been pledged to support the scheme and, more generally, what assets the employer has.
We submitted five points to the Minister. First, we proposed that the DB funding regime should remain scheme-specific; any bespoke approach should build on this foundation and be flexibly applied to take account of individual scheme circumstances.
Secondly, member benefits can sometimes be safeguarded, not by derisking investments, but by an appropriate risk management strategy determined after careful analysis by the trustees, taking account of time horizon, liquidity, employer covenant and appropriate diversification.
Thirdly, detailed provisions for ongoing DB funding, including any necessary assessment criteria and metrics, should be set out in regulations. These would acknowledge the position of open and less mature schemes and be encompassed within the Pensions Regulator’s defined benefit funding code of practice.
Fourthly, prior to publication of draft regulations, the Government should commit to an engagement programme with a range of schemes, particularly those remaining open and immature, and launch a consultation document informed by this engagement.
Fifthly, the Government should also publish a comprehensive regulatory impact assessment of the draft regulations, including an analysis of the impact of any suggested derisking approach on members and sponsors of schemes that are open, immature or have no intention of buyout. To clarify, I hope there would also be impact assessments for the regulator’s code of practice. Perhaps this is already a requirement. While I accept that it may not be possible to know whether buyout is intended, there should not be a general assumption that all employers want to get to buyout of their DB schemes, even if the insurance companies wish to funnel them in this direction.
I reserve my right to call a vote on my amendment, but I am optimistic that it will not come to that. I beg to move.