Baroness Sherlock (Lab)

My Lords, I am grateful to the Committee for the handful of questions that has been offered up. I share with the noble Viscount, Lord Younger, disappointment that there are not hordes of colleagues here wanting to question these regulations. They are extremely important and utterly fascinating, but there is no accounting for taste—what can we say? I am very grateful to him and to my noble friend Lord Davies of Brixton for being here, asking such excellent questions and keeping me on my toes. I am going to try to work my way through them. It is worth saying at the outset that my noble friend Lord Davies had quite a nice analogy about moving into a house. I moved house a year ago, and he is absolutely right—I now realise there should be power points in the middle of my kitchen where I actually use my devices and none of them are there. However, the reality is that there have to be some power points; some decisions have to be taken. At some point down the line, I may decide on additional power points and just have them put in. There may be new lights in the house, but we have to start off with lights, and we may add more lights later. We have gone to considerable care to make sure that the system is set up as robustly as possible, but we will adapt and learn as we have experience from this. That is an important question, but it is one I am happy to offer reassurance on. We think that CDCs are a type of money purchase because there is a type of money purchase benefits in the legislation. They are covered by the legislation applying to money purchase benefits and not DB benefits. I can see him shaking his head; I have failed to persuade him, but I will keep trying on subsequent questions. My noble friend mentioned in passing that there are lots of different kinds of legislation and asked how they join up. I assure him they absolutely do join up. The Government have a vision for the pensions landscape. Most of these issues are coming in stages; for example, we have made our views known; we have had comments and clear steers from the Chancellor; we have had the pensions investment review, which set out the landscape, and as a result of that, we have the Pension Schemes Bill, which starts next week and which he and I are looking forward to so much. That will make the necessary adjustments to the landscape so that the Pensions Commission, which is doing its work on issues such as adequacy, can make sure that if savers, or indeed employers, are encouraged to invest more, or in different ways, the market is fit for it at that point. These things do connect; I accept that they are complicated. One of the challenges is that pensions are very complicated, and there is a lot of money at stake, and therefore it matters—he raised the point about regulation—that we get that absolutely right. My noble friend mentioned in passing the question about retirement CDCs. He will be aware the consultation has just closed and so more information on that will be coming out soon. He asked about whether CDC schemes will be captured by things such as the scale requirements in the Pension Schemes Bill. Because CDC schemes are a new and innovative development with the potential to offer improved outcomes, they will need to have a degree of scale and a long investment horizon to enable them to invest in a wider range of assets, including productive assets. It is right to give this new market the space to develop with confidence, but we are going to keep the requirements for these schemes under review as the market develops. He asked about how the legislation will ensure fairness between members of different employers. Regulation 40 specifies that any adjustment to benefits that may need to be made must be applied to all members “without variation”. Regulation 40 also requires that benefit rates must be determined on the principle of actuarial equivalence and that, as he will of course be only too aware, is achieved when the expected accrual and expected contribution levels are equal over a period of time. That prevents new entrants unfairly subsidising existing members and avoids cross-subsidies between employers, which could, for example, happen if one employer had a younger workforce than another. Both he and the noble Viscount, Lord Younger, asked about communication to members of CDC schemes. The regulations require schemes to inform members regularly and clearly that the rate or amount of benefits provided under the scheme is not guaranteed and can fluctuate. This includes providing this information at joining, annually and in retirement. CDC schemes are also required to have adequate systems and processes for communicating with members and must provide information in their authorisation application about monitoring them to help ensure the systems and processes remain effective. To ensure transparency, key scheme information must be made available on a publicly available website, including the scheme rules, a summary of the scheme design and information about the most recent actuarial evaluation of the scheme. My noble friend commented about whether the regulation is all too burdensome or too hard to join, but as in DC schemes, members will bear all the risks of the CDC scheme in accumulation and decumulation. So, we think it is only right that we make sure these schemes are well-designed, well-run and resourced properly so that employers, members and the Pensions Regulator can have confidence in the scheme at authorisation and on an ongoing basis. My noble friend raised the question of commercial interests. I know he was not necessarily challenging there being commercial providers; it was more about the language and how that is understood. We have worked quite hard to make sure that the authorisation criteria require a clear separation between the trustees and those funding the scheme, promoting the scheme and trying to make a profit out of it. The promotion and marketing authorisation criterion mitigates against the risk of overpromising to gain a competitive advantage, as I said in my opening speech. Although my noble friend does not like the term “proprietor”, the financial sustainability requirements are designed to prevent that person passing on to members the costs of setting up and operating the scheme.