That this House do not insist on its Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88, and do agree with the Commons in their Amendments 88A, 88C and 88E to 88P to the words restored to the Bill by the Commons disagreement to Lords Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88.
88E: Clause 40, page 45, line 36, after “in” insert “main”
88F: Clause 40, page 45, line 40, after “in” insert “main”
88G: Clause 40, page 46, leave out lines 1 and 2
88H: Clause 40, page 46, line 22, at end insert—
“(6A) Regulations under this section may not have the effect of requiring, as a condition of a scheme's approval under subsection (1)—
(a) more than 10% (by value) of all of the assets of the scheme that are held in main default funds to be qualifying assets, or
(b) more than 5% (by value) of all of the assets so held to be of a UK-specific description.
(6B) In subsection (6A)(b) “UK-specific description” means a description framed by reference to whether an asset is located in the United Kingdom or meets any other condition linked to economic activity in the United Kingdom.”
88J: Clause 40, page 46, line 24, before “default” insert “main”
88K: Clause 40, page 48, line 8, at end insert—
“(12A) The power to make regulations under subsection (1) may only be exercised once.”
88L: Clause 40, page 54, line 27, at end insert—
“(16A) The following provisions are repealed at the end of 2035—
(a) in section 204A of the Financial Services and Markets Act 2000 (meaning of “relevant requirement” and “appropriate regulator”)—
(i) in subsection (2)(aza), the words “or the asset allocation requirement in section 28C”;
(ii) in subsection (6)(aza), the words “or the asset allocation requirement in section 28C”;
(b) in section 90(6)(ea) of the Pensions Act 2004, the words “or the asset allocation requirement in section 28C”;
(c) the relevant asset allocation provisions of the Pensions Act 2008.
(16B) For the purposes of subsection (16A), the “relevant asset allocation provisions” of the Pensions Act 2008 are the following—
(a) in section 20(1A) (asset allocation requirement: Master Trusts)—
(i) in the opening words, the words “and Condition 2”;
(ii) Condition 2;
(b) in section 20(1B) (exemptions), the words “or 2(b)”;
(c) in section 20(1C) (protected period)—
(i) in paragraph (a), the words “or Condition 2”;
(ii) in paragraph (c), the words “or the conditions for approval under section 28C”;
(d) in section 26 (quality requirement: UK personal pension schemes)—
(i) subsection (7B);
(ii) in subsection (7D), the words “or (7B)”;
(iii) in subsection (7E)(a), the words “or sixth”;
(iv) in subsection (7E)(c), the words “or the conditions for approval under section 28C”;
(e) in section 28 (certification that quality requirement or alternative requirement is satisfied)—
(i) in subsection (4)(a), the words “or 2”;
(ii) in subsection (4)(b), the words “and sixth”;
(iii) in subsection (4)(c), the words “or 2”;
(f) section 28C (approvals in respect of asset allocation);
(g) section 28G (suspension of asset allocation requirement: savers’ interest test);
(h) in section 28H (risk notices), in subsection (1)(b), the words “or 28C”;
(i) in section 28I (penalties)—
(i) in subsection (1)(a), the words “or 28C”;
(ii) in subsection (2)(a), the words “or (7B)”;
(j) section 30A (review of exercise of powers under section 28C);
(k) in section 143(5)(a) (orders and regulations)—
(i) the word “(7B)”;
(ii) the words “28C (other than subsection (10)(f))”;
(iii) the word “28G”.
(16C) In consequence of the repeals under subsection (16A), at the end of 2035—
(a) in section 73(2)(dza) of the Pensions Act 2004 (inspection of premises), for “28G of the Pensions Act 2008 (scale and asset allocation)” substitute “28F of the Pensions Act 2008 (scale)”;
(b) in section 28(4)(b) of the Pensions Act 2008 (certification that quality requirement or alternative requirement is satisfied), for “conditions” substitute “condition”.
(16D) The Secretary of State may by regulations make transitional or saving provision in connection with any repeal or amendment under subsection (16A) or (16C).”
88M: Clause 40, page 54, line 31, after “section” insert “, section 41 or the Schedule”
88N: Clause 40, page 54, line 32, after “subsection” insert “(16D) or”
88P: Clause 122, page 154, line 11, leave out “2035” and insert “2032”
My Lords, I do not get to say “forthwith” often enough. That is a great start to the day. I thank all noble Lords for their continued scrutiny of this important Bill. We are now looking today at the remaining areas of disagreement.
Let me start with the reserve power. Amendment 15 and those connected with it sought to remove the reserve power on asset allocation from the Bill. Noble Lords will be aware—indeed, we just heard—that the other place has considered this House’s amendments and has once again disagreed with the amendments that would remove the reserve power from the Bill. In doing so it has tabled further amendments in lieu, and I will come to those in a moment. However, I want first to acknowledge the level of interest in the House on this issue.
Noble Lords have engaged with these provisions with great care, and I am genuinely grateful for the quality of scrutiny that has been brought to bear at every stage from Committee through Report and to our exchanges between the two Houses. I know that many noble Lords remain concerned about the reserve power and I do not dismiss those concerns out of hand, but I must also be candid with the House about where we stand. The elected House has now considered the case for the reserve power on two occasions, and on both occasions it has concluded that the power should remain in the Bill. However, the Government have not simply dug in; they have responded to the concerns raised in this House with substantive changes to the legislation. In a moment, I will set out what those changes now amount to, because the cumulative picture is important.
I will briefly restate the case. There is a well-evidenced collective action problem in the defined contribution market. The industry itself has been clear that a key barrier to delivering on its commitments are market dynamics that continue to focus on minimising cost rather than maximising long-term value for savers. The industry wants to diversify in its savers’ interests but risks being undercut by competitors which see a commercial opportunity. The reserve power exists to address that problem, and that problem alone.
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Finally, I turn to Lords Amendment 77, which called for a review of public service pension schemes. I am grateful to the noble Baroness, Lady Neville-Rolfe, for making herself available yesterday to engage my colleague the Minister for Pensions. I agree with her that it is crucial for the Government to understand the intergenerational impact and long-term costs of public service pensions, and to ensure that these costs are taken into account when making staffing decisions in the public sector. The Government have listened closely to the arguments made during the Bill’s passage, both in this House and in the other place. In response, the Government brought forward a concession in the other place, and I can confirm that they have now agreed to that concession.
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In the first round of these exchanges, the Government tabled three amendments in lieu, delivering two concessions that responded directly to arguments made in this House. The first, which had been pressed by the noble Viscount, Lord Younger of Leckie, and the noble Baronesses, Lady Stedman-Scott and Lady McIntosh of Pickering, was the statutory cap. Regulations may not require more than 10% of default fund assets to be qualifying assets or more than 5% to be of a UK-specific description. That writes the Mansion House Accord targets into primary legislation so that no future Government can use the power to go further.
The second, responding to the type of concern raised by the noble Baroness, Lady Bowles, and other noble Lords about the breadth of the power, was the asset class neutrality requirement, which ensures that regulations must cover each of the named private market categories and cannot concentrate requirements in any one class. Those amendments represent meaningful constraints on the reserve power, of a kind for which this House has previously signalled strong support. I stand by them.
Today, the Government, with the support of the other place, propose to go further, in three ways. First, we have tabled an amendment to bring forward the existing sunset date for the reserve power from 2035 to 2032. The Mansion House Accord commits the industry to reaching its targets by 2030. Bringing the sunset forward aligns the power more closely with that timeline. If the power has not been exercised by the end of 2032, it falls away entirely, and if it has been exercised, the percentage requirements set under it may not be raised after that date.
The second amendment ensures that the power to set the headline percentage may be exercised only once. Combined with the statutory caps, this means that any future Government have at most a single opportunity to set the asset allocation requirement, and only up to the levels to which the industry itself has committed under the accord.
Thirdly—I ask the House to consider carefully the significance of this step—the other place has agreed an amendment providing for the full repeal of the asset allocation regime at the end of 2035. I want to be precise about what that means, because it goes beyond the sunset of the enabling power. Even if the power has been exercised and requirements are in force, the entire framework—the approval requirements under Section 28C, the savers’ interest test, the associated penalty and review provisions and any asset allocation requirements which have been brought into effect—is repealed from the statute book at the end of 2035. I therefore hope that noble Lords who have expressed objections to this power being a permanent feature of our pensions legislation will recognise that the Government have listened to them.
I will set out what the reserve power now looks like taken in the round. It is capped at the accord targets; it cannot be used to compel investment in a single hand-picked asset class; the headline percentage can be set only once; the power lapses in 2032 if not used; and, if it were ever used, the entire regime is repealed at the end of 2035—every element of it removed from the statute book.
On top of all that, it remains subject to the savers’ interest test, statutory reporting requirements both before and after any regulations are made, and the affirmative procedure. This power has been meaningfully altered and constrained by the scrutiny of this House, and I hope noble Lords will recognise the collective significance of those safeguards. Industry has welcomed our amendments to constrain the power. By way of one example, this morning, Aviva said:
“We welcome the government’s amendments to constrain the reserve mandation power so that it can only be used to support delivery of the Mansion House Accord … We hope this is enough to build the consensus needed for the Bill to be passed in this Parliamentary session”.
I understand the position of those who believe the power should not exist at all. The noble Baroness, Lady Bowles, has made that case with clarity and rigour, and I respect it. But the Government’s view is that the risk of inaction, of allowing the collective action problem to persist to the detriment of pension savers, is the greater risk. The power as it now stands is a carefully circumscribed instrument, designed for a single purpose and limited in every dimension.
This House has done its job as a revising Chamber. The Government have engaged in good faith with the concerns raised and responded with changes to primary legislation—not undertakings, not assurances, but amendments to the Bill. I hope this demonstrates the seriousness with which we have taken this House’s scrutiny and I ask noble Lords not to insist on their amendments and to agree the amendments proposed by the other place in lieu.
I turn now to Lords Amendment 35B, which would require the Secretary of State when making regulations across the scale measures and those for default arrangements to
“have regard to the benefits of competition among providers of pension schemes”.
The Government absolutely support a competitive market; that is evident through all the scale measures. However, we believe that in designing regulations, a range of factors must be taken into account. Our focus always has to be on delivering the best outcomes for members.
Noble Lords have stressed the importance of competition as the market moves towards scale. The Government agree: we have always considered it to have a central role in the policy. The new entrant pathway is designed to drive this, as is the freedom schemes will have to open new default arrangements which will support competition. However, we have listened carefully to the arguments that have been made during debates, especially by the noble Baroness, Lady Noakes, and we recognise the desire to see that commitment feature in the Bill. We have therefore tabled amendments in lieu to set out that regulations, both those in respect of the scale measures and those relating to default arrangements, must have regard to the importance of competition and innovation.
However, under the Government’s Amendments 35C and 35D, regulations will also need to have regard to additional factors: the importance of scale, improving member outcomes and effective governance. It is clearly right that we place members at the heart of this policy—I am sure there can be no disagreement that their needs are just as important as those of the market that serves them. Members’ interests come first and this amendment recognises that.
The noble Baroness, Lady Noakes, has asked me to confirm two matters in relation to this amendment: first, how the Government will meet the new duty in relation to the different factors set out. Under our amendments, when making regulations, the Government will need to have regard not just to the need to reach an appropriate scale but to the importance of competition and innovation in the design and operation of schemes, to effective governance and to the vital objective of improving outcomes for members. This amendment captures the basic but important principle that the Government’s approach to making regulations must be holistic, taking account of many relevant factors. The Explanatory Notes will also make this clear.
Secondly, the noble Baroness asked me to confirm why new Section 28J does not appear in the list of provisions in this amendment, and I am very happy to do so. This is because new Section 28J will allow the Treasury to make regulations that switch on the FCA’s enforcement powers in relation to Chapter 3. This is primarily a question of whether these powers should be available to the FCA, so the matters listed in the amendment are therefore not applicable to that question in the same way they are to the powers that allow the Government to construct key elements of the scale framework. I hope that explains things to her satisfaction.
Lords Amendments 37B and 37C set out the ability for a regulator to exempt a scheme on the basis of an innovative offering or where consolidation may not improve member outcomes. We debated this amendment this week and I will not restate the arguments in the interests of time. The Government have long been clear about our intention to adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale to deliver better returns for UK savers, and that is what we are doing in the Bill.
While I recognise that this policy may have an effect on some schemes in the market, we must prioritise the need to deliver on this commitment to members. Our priority is to serve those who have begun to save through auto-enrolment and who work hard to save for retirement: we want to ensure that they are saving into schemes that deliver better outcomes. However, we have heard concerns expressed, in this House and in the other place, that the benefits that innovation can bring should not be lost in the process of consolidation. We agree. We have therefore tabled Amendments 37D and 37E in lieu to require the Secretary of State, in conjunction with the regulators, to publish a report about the effects of pension scheme consolidation, and the extent to which innovative product designs are adopted or maintained following consolidation activity, as well as any barriers that may exist to preserving these features. This report will be published within 12 months of the Bill becoming an Act. The timing of the report will ensure that the Government are then able to take action, as needed, in advance of the scale measures being commenced in 2030.