The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)

My Lords, I am grateful to the noble Baroness, Lady Altmann, my noble friend Lord Davies and the noble Viscount, Lord Thurso, for introducing their amendments. During our various deliberations, many noble Lords have highlighted the fact that the level to which a DB scheme is funded is subject to volatility and to changes in the underpinning assumptions used to ensure that schemes remain able to meet the promised pensions. This is something we take seriously as we all want to ensure that the policy aim here can be achieved: for surplus funds to be used to benefit members and employers, but with the right protections so that every member’s pension can be paid. As I have outlined previously, the DB funding code and the underpinning legislation require trustees to aim to maintain a strong funding position. Our changes preserve trustee discretion over surplus release. Crucially, trustees must receive actuarial certification that the scheme meets a prudent funding threshold, and members must be notified before surplus is released. Let us not forget that these changes are simply levelling the playing field, as some schemes can already release surplus. Amendments 16 and 19 would both require a consultation to take place before surplus is released. I understand the wish of noble Lords for the voice of members to be heard when decisions are being taken about releasing surplus. We agree with that observation; that is precisely why the decision to release surplus remains in the hands of trustees, who are there to represent their members. Trustees will consider a range of scheme-specific circumstances, including the employer covenant and wider endgame planning, when discharging their duty to members. It is, however, entirely for trustees to decide whether they may seek broader views before taking a decision to release surplus. It is their decision, not that of the employer. In our view, a legislative requirement to consult is not proportionate. The existing framework gives trustees scope to seek broader views as required, and the fact remains that, ultimately, trustees must act in the best interests of scheme beneficiaries when taking a decision to release surplus. Furthermore, under our changes, trustees will continue to be subject to a requirement to notify members in advance of any surplus release, maintaining this key protection for scheme members. I can assure my noble friend Lord Davies that we will be monitoring closely how schemes intend to use, and are using, these powers. Amendment 17 seeks to retain the statutory requirement that trustees be satisfied that it is in the interests of members before agreeing to surplus release. We discussed this in some detail in Committee. Trustees already have a clear overarching duty to act in the interests of scheme beneficiaries. We have had clear feedback from industry-wide stakeholders, including trustees, who have welcomed the repeal of this statutory requirement. Existing legislation is perceived by trustees as a barrier to considering the release of surplus because they are not sure how this additional test is reconciled with their existing overarching duties. This could clearly lead to indecision on whether to release surplus, which may ultimately lead to members losing out. We are making this change to put it beyond doubt for trustees that they are not subject to any additional tests beyond their existing, clear duties of acting in the interests of scheme beneficiaries. Amendments 14 and 18 cover the consideration of discretionary awards upon the release of surplus. I understand the concerns raised by scheme members whose pensions have not kept pace with inflation. But the Government do not think that these amendments would be helpful to trustees or members. These amendments address only a single element of the matters that trustees must consider when determining whether to release a surplus. In practice, trustees’ overarching duty to act in the interests of all beneficiaries requires them to weigh a broad range of criteria before deciding whether a surplus should be released and, if so, how members might appropriately benefit. This may include the award of discretionary increases but, by narrowing the scope of these considerations, the amendments would risk constraining trustees in the proper discharge of their responsibilities. The noble Viscount highlighted some matters that we may return to when we discuss his Amendment 22. I will touch on them now—what happens in circumstances where there appears to be a decent surplus and trustees may be minded but employers are reluctant—but, if it is okay with the noble Viscount, I will come back to that in the debate on his Amendment 22 as it is probably more closely focused on that. The Government therefore believe that it is important that trustees remain in the driving seat. They are best placed to understand the individual circumstance of their scheme, its characteristics and history, and to decide how members may benefit from the release of surplus. By extending the power to return surplus to more trustees, we are levelling that playing field, with strong safeguards in place to protect member benefits. Trustees will be in a better position to negotiate member improvements in return for agreeing to release surplus. There is clearly an appetite out there for trustees to enable members to benefit from this. Recent industry research shows that over 40% of employers intend to share DB surplus with members. We are confident that there is an appetite. We need to be careful not to create so many new restrictions that the policy aim of allowing more trustees to share surplus is not achieved, because that would prevent surplus delivering real value not just to employers but to members and the wider economy. I turn to Amendments 13 and 15 in the name of the noble Baroness, Lady Altmann. Amendment 15 would require regulations to include a condition that trustees receive and consider actuarial advice on scheme funding. Amendment 13 would create a legislative requirement for trustees to commission actuarial advice on future benefits and alternative approaches to surplus release before modifying a scheme to allow for payment of surplus to the employer. I am not going to revisit our discussion on TAS 300, which is a particularly delightful memory from Committee, but I understand the concerns raised by the noble Baroness about trustees having appropriate advice to be able to make an informed decision about their endgame choices and whether to release surplus. Trustees will be required to take into account the scheme’s long-term funding objective when making decisions on surplus. This will include the factors that are listed in these amendments. Under the funding code, trustees are already required to set out their funding and investment strategy, describing how they intend to meet members’ benefits over the long term—in other words, their long-term objective. They will already be seeking appropriate advice before determining the long-term objective for their scheme. That objective is reviewed in line with each triennial valuation at a minimum. Putting in place additional legislative steps that require trustees to commission and receive actuarial advice before releasing surplus could result in additional unnecessary bureaucracy. Hardwiring specific legislative considerations that trustees must take into account will remove their flexibility to gather the most appropriate advice for individual schemes. The Pensions Regulator—TPR—has set out guidance for schemes considering their long-term objective and options, including buyout, superfunds and run-on, which sets out clear expectations of trustees. In particular, the guidance says that trustees “should regularly review the best way to deliver members’ promised benefits”. It is not the responsibility of the FRC; it is for TPR to set out the requirements on trustees and monitor them.