Baroness Sherlock (Lab)

My Lords, I am grateful to all noble Lords who have spoken on these amendments to Clause 10. Having previously set out the Government’s policy intent and the context in which these reforms are being brought forward, I start with the clause stand part notice tabled by the noble Viscount, Lord Younger. As he has made clear, it seeks to remove Clause 10 from the Bill as a means of probing the rationale for setting out the conditions attached to surplus release in regulations rather than in the Bill. It is a helpful opportunity to explain the scope and conditions of the powers and why Clause 10 is structured as it is. The powers in the Bill provide a framework that we think strikes the right balance between scrutiny and practicality, enabling Parliament to oversee policy development while allowing essential regulations to be made in a timely and appropriate way. It clearly sets out the policy decisions and parameters within which the delegated powers must operate. As the noble Viscount has acknowledged, pensions legislation is inherently technical, and much of the practical delivery sits outside government, with schemes, trustees, providers and regulators applying the rules in the real-world conditions. In pensions legislation, it has long been regarded as good lawmaking practice to set clear policy directions and statutory boundaries in primary legislation, while leaving detailed operational rules to regulations, particularly those that can be updated as markets and economic conditions change and scheme structures evolve, so that the system continues to work effectively over time. In particular, Clause 10 broadly retains the approach taken by the Pensions Act 1995, which sets out overarching conditions for surplus payments in primary legislation while leaving detailed requirements to regulations. New subsection (2B) sets out the requirements that serve to protect members that must be set out in regulations before trustees can pay a surplus to the employer—namely, before a trustee can agree to release surplus, they will be required to receive actuarial certification that the scheme meets a prudent funding threshold, and members must be notified before surplus is released. The funding threshold will be set out in regulations, which we will consult on. We have set out our intention and we have said that we are minded that surplus release will be permitted only where a scheme is fully funded at low dependency. That is a robust and prudent threshold which aligns with the existing rules for scheme funding and aims to ensure that, by the time the scheme is in significant maturity, it is largely independent of the employer. New subsection (2C) then provides the ability to introduce additional regulations aimed at further enhancing member protection when considered appropriate. Specifically, new subsection (2C)(a) allows flexibility for regulations to be made to introduce further conditions that must be met before making surplus payments. That is intended, for example, if new circumstances arise from unforeseen market conditions. Crucially, as I have said, the Bill ensures that member protection is at the heart of our reforms. Decisions to release surplus remain subject to trustee discretion, taking into account the specific circumstances of the scheme and its employer. Superfunds will be subject to their own regime for profit extraction. Amendment 37, tabled by the noble Viscount, Lord Thurso, seeks to retain a statutory requirement that any surplus release be in the interests of members. I am glad to have the opportunity to explain our proposed change in this respect. We have heard from a cross-section of industry, including trustees and advisers, that the current legislation, at Section 37(3)(d) of the Pensions Act 1995, requiring that the release of surplus be in the interests of members, is perceived by trustees as a barrier because they are not certain how that test is reconciled with their existing fiduciary duties. We believe that retaining the status quo in the new environment could hamper trustee decision-making. By amending this section, we want 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. I turn to Amendments 31 and 43, which seek to clarify why the power to make regulations governing the release of surplus is affirmative only on first use. As the Committee may know, currently, only the negative procedure applies to the making of surplus regulations. However, in this Bill, the power to make the initial surplus release regulations is affirmative, giving Parliament the opportunity to review and scrutinise the draft regulations before they are made. We believe that this strikes the appropriate balance. The new regime set out in Clause 10 contains new provisions for the core safeguards of the existing statutory regime; these are aligned with the existing legislation while providing greater flexibility to amend the regime in response to changing market, and other, conditions. Amendments 35 and 36 seek both to prescribe the ways in which members are notified around surplus release and to require that trade unions representing members also be notified. I regret to say that I am about to disappoint my noble friend Lord Davies again, for which I apologise. The Government have been clear: we will maintain a requirement for trustees to notify members of surplus release as a condition of any payment to the employer. We are confident that the current requirement for three months’ notification to members of the intent to release surplus works well. However, there are different ways in which surplus will be released to employers and members. Stakeholder feedback indicates that some sponsoring employers would be interested in receiving scheme surplus as a one-off lump sum, but others might be interested in receiving surplus in instalments—once a year for 10 years, say. We want to make sure that the requirements in legislation around the notification of members before surplus release work for all types of surplus release. We would want to consider the relative merits of trustees notifying their members of each payment from the scheme, for example, versus trustees notifying their members of a planned schedule of payments from the scheme over several years. Placing the conditions around notification in regulations will provide an opportunity for the Government to consult and take industry feedback into account, to ensure the right balance between protection for members and flexibility for employers. I understand the reason behind my noble friend Lord Davies’s amendment, which would require representative trade unions to be notified. They can play an important role in helping members to understand pension changes. However, we are not persuaded of the benefit of an additional requirement on schemes. Members—and, indeed, employers—may well engage with trade unions in relation to surplus payments; we just do not feel that a legislative requirement to do so is warranted. The points about the role of trustees, in relation to acting in the interests of members in these decisions, were well made. Amendment 34 would require member consultation before surplus is released. I understand the desire of the noble Viscount, Lord Thurso, to ensure that members are protected. The Government’s view is that members absolutely need to be notified in advance, but the key to member protection lies in the duty on scheme trustees to act in their interests. Since trustees must take those interests into account when considering surplus release, we do not think that a legislative requirement to consult is proportionate.