Contribution
My Lords, Amendment 13 is in my name. I shall also speak to Amendment 15, which is very similar. I also support the aims of Amendments 14 and 16 to 19, which seek to make sure that members’ interests are taken into account when trustees distribute, or consider distributing, a surplus to employers.
Amendment 13 seeks to build on the important discussions we had in Committee. I thank the Minister for her thoughtful responses to those discussions. I appreciate the Government’s commitment to ensuring that defined benefit pension schemes can contribute to economic growth through the prudent and efficient use of their substantial surpluses. With around £1.2 trillion in private sector defined benefit assets—and that is on prudent measures—the potential for positive impact is huge, given the estimated £240 billion surplus from those 4,500 schemes.
Trustees who have stewardship over these assets on behalf of around 9 million scheme members are now being encouraged to make strategic decisions which could reshape some schemes for the future and deliver broader benefits, potentially both to members and to the economy. The Bill is correct in encouraging that to happen. Of course, trustees have significant responsibilities when they assess a scheme’s surplus and whether to it pay out or to preserve it. As the noble Lord, Lord Davies of Brixton, has so often reminded us, a surplus is merely a reserve—a buffer against future bad markets, perhaps. In some schemes, the extent of that surplus is so significant, with the employer having put in so much money during the past few years, because of the impact that quantitative easing had for so long on pension schemes’ liabilities, that it is perhaps appropriate for trustees to consider whether employers should be able to get some of that money back, especially if they could invest some of it into their business and help grow the strength of the employer behind the scheme.
As trustees have these greater responsibilities, my amendment seeks to ensure that the relevant comparisons are being made before any surplus is distributed, so that the trustees have considered the available options. The current Technical Actuarial Standard 300 would properly inform them. This would include not just paying out a surplus but running the scheme on for the benefit of the members. It could also include possibly finding a new employer sponsor who could manage the scheme with a greater strength behind it and take advantage of the surplus to some degree both to enhance member benefits and to return some money to the employer.
The noble Lord, Lord Davies, may well tell us that these technical actuarial standards and the reports, such as TAS 300, are already in place, so why do we need the amendment? I am informed by significant areas in the pension industry that advise many DB schemes that, although there is a requirement for these reports, trustees do not always take note of them. They are not even always presented to the trustees. This is under the aegis of the Financial Reporting Council, which does not have sufficient resource to enforce the standards that it would, perhaps, otherwise wish to do.
This amendment makes it clear to trustees that they must consider the broader actuarial advice—not just asking whether they should pay out the surplus and how much they should pay out but considering the other options that would be available. Many trustees will consider paying out a surplus alongside a scheme buyout, for example. This actuarial report would help to inform the trustees of the potential benefits and improvements to members that could be achieved by not buying out and by running the scheme on, for example.
At the moment, for each £1 billion of buyout funding that exists in a scheme, if they buy out, approximately £150 million to £250 million then goes to the insurance company in profit because it takes in the money but then rerisks it but invests in higher return assets—so it makes that profit. It is entirely feasible to imagine that a scheme that carries on could itself get that extra profit by running the investment policy in a kind of low-risk way, just as an insurance company would do, but that money could then go to the members or be shared between the members and the sponsor.