The hon. Gentleman raises an important point. Our first strategy is to ensure that the guidance guarantee is accessed by as many as people as possible. We are placing a legal duty on schemes and providers to flag up the guidance guarantee to people, both in wake-up packs and when people approach schemes to access their money.
The hon. Gentleman raises the issue of people who do not access the guidance—and indeed those who do, come to think of it, although particularly those who do not. The FCA will have more to say on the requirements on schemes and providers when people approach them having not accessed the guidance. There is already a general duty on providers to “treat customers fairly”, but the FCA will have more to say on whether that safeguard goes far enough, or whether further safeguards are necessary. I am grateful to the hon. Gentleman for raising that point.
As well as the changes in relation to transfers from unfunded public sector schemes and transfers of defined benefit rights, which I will deal with in a moment, new clause 24 and its accompanying schedule amend the existing transfer rights in the Pensions Schemes Act 1993 to ensure that the new flexibilities operate as intended. We will do that by extending the current transfer rights
for those with “flexible benefits” up to and beyond their schemes’ normal retirement age, and applying statutory transfer rights at benefit categories, rather than at scheme level. Amending the transfer rules will ensure that individuals with uncrystallised flexible benefits will have the option to transfer their rights to another pension scheme.
Those amendments will also give individuals greater flexibility by giving members a statutory right to transfer at benefit category level, rather than at scheme level. Where an individual has more than one category of benefits under a scheme, they will now have an option to transfer out of a particular category of benefit, or their entire pot if they wish to, provided they have ceased to accrue rights in that particular category of benefit. Amendments 28, 49 and 50 make minor consequential change in respect of new clause 24 and new schedule 1.
New clauses 25 to 30 and Government amendment 29 address the implications of the new flexibilities for public service pension schemes. Regarding new clause 25 and, for Northern Ireland, new clause 28, following further policy development, that clarifies that the ban on transfers is limited to transfers from unfunded defined benefit public service pension schemes to schemes from which flexible benefits can be obtained. Further, the amendment ensures that the changes are delivered in the Pension Schemes Act 1993, rather than in regulations made by HM Treasury.
Additionally, new clause 26—new clause 29 for Northern Ireland—implements a safeguard for transfers out of funded public service pension schemes that is similar to that available in the private sector for reducing transfer values in specific circumstances.
New clause 25 restricts the right under the Pension Schemes Act 1993 to transfer from one pension scheme to another, so as to prevent a member of an unfunded public service defined benefit scheme from using that right to transfer to another pension scheme in which they can obtain flexible benefits. New clause 28 does the same for Northern Ireland. The new clauses also allow the Treasury—and in Northern Ireland, the Department of Finance and Personnel—to make regulations providing for exceptions to the transfer ban.
New clause 26 introduces a new safeguard that gives Ministers a power to designate a funded defined benefit public service pension scheme and in that way require the reduction of cash equivalent transfer values in respect of transfers from that scheme to pension schemes from which flexible benefits can be obtained. New clause 29 does the same for Northern Ireland. The use of the power will be restricted to cases in which the relevant Minister considers that transfers, either singly or in combination with other factors, increase the risk or amount of taxpayer intervention in the scheme.
The new clauses provide a power which, when used, will require the reduction of transfer values in respect of transfers requested after a scheme is designated, and completed before the scheme is no longer designated. The new clauses time-limit the use of the power and place an obligation on the scheme trustees or managers to alert the relevant Minister should they believe either that the power needs to be used or that, having been used, it is no longer needed.
We intend that the level of the reduction to be applied should be set out in regulations made by the Treasury, and new clause 26 also provides regulation-making
powers for the Treasury to determine the amount of the reduction that should be made when a pension scheme is designated. Additionally, in the case of certain Scottish schemes, the power to designate a scheme is to be conferred on Scottish Ministers. New clause 29 makes parallel provision for Northern Ireland. In respect of parliamentary and ministerial schemes in England, Scotland and Northern Ireland, the new clauses give that power to the relevant trustees or scheme managers. Finally—that is an interim “finally”, not a final “finally”, by the way—new clauses 27 and 30 make amendments to pensions legislation that are consequential to new clauses 25, 26, 28 and 29.
I should like to explain the thinking behind these measures, Currently, only a small number of transfers take place out of the public service pension schemes to defined contribution schemes, but the introduction of the flexibilities might make transfers out to defined contribution schemes more attractive for some. In unfunded public service pension schemes, there is no fund of assets with which to finance transfer payments. Instead, they are funded from contributions and through general Government expenditure. So for every extra pound paid out in transfers, the Government will have a pound less to spend that year on public services. We have estimated that if 1% of all public service workers reaching retirement took their benefits flexibly, it would cost the taxpayer £200 million a year, and we do not think it fair to ask the taxpayer to meet those up-front costs.
Unlike with unfunded schemes, there is a pool of assets to support the payment of pensions in funded public service pension schemes, which can be used to meet the immediate cost of transfers out. Our expectation therefore is that, in the vast majority of cases, allowing greater flexibility in the funded public service pension schemes will not impact on public finances. However, it would be inappropriate for the Government to provide these freedoms to members of public service pension schemes and provide no back-stop protection to taxpayers, should transfers—either singly or in combination with other factors—contribute to a scheme needing support from local or national taxpayers to meet the cost of its liabilities. This is aligned with the position the Government have taken on the unfunded pension schemes, in which we have taken the decision to ban such transfers in the light of the cost risk to the Exchequer, and ultimately the taxpayer. Should a situation arise in which there is a risk to the taxpayer, this new safeguard will give Ministers and scheme managers the appropriate tools to address it.
The Government intend to legislate for some limited exceptions to this ban, and these provisions give the Treasury powers to make regulations providing exceptions to the transfer ban. It is intended that the Treasury will prescribe certain limited circumstances in which a transfer will be permitted. We will announce further details in due course, but we are considering options such as some specific circumstances under Fair Deal. Amendment 29 removes clause 36 and, as discussed earlier, new clause 25 is the replacement provision.
Moving on to the treatment of draw-down and to the Pension Protection Fund assessment, which are covered by new clauses 14 to 23, we are introducing changes to allow occupational pension schemes to offer the new forms of access to pension saving being created by the Taxation of Pensions Bill. In future, schemes will be able to offer more options for decumulation, including
draw-down pensions and lump sums. Schemes will be able to offer options to allow all or part of money purchase funds, as defined under tax legislation, to be designated for draw-down after the minimum age—generally 55—is reached. They will also be able of offer members the option to take one or more lump sums from their money purchase funds after the minimum age has been reached.
We are making changes to pensions legislation to allow occupational pension schemes to offer flexibilities to members, and to ensure that the flexibilities operate as intended in relation to cash balance benefits when schemes wind up or enter the Pension Protection Fund assessment period. Cash balance benefits involve guarantees about the amount of a member’s accrued fund and cannot easily be designated for the payment of draw-down. For draw-down funds to operate as intended, cash balance benefits need to be turned into money purchase benefits before designated as “draw-down”. New clause 14 limits draw-down to money purchase benefits.
In addition, the Government will bring forward regulations to allow modification of scheme rules to convert cash balance benefits into money purchase benefits, where the member wants to exercise draw-down. Schemes will need to convert cash balance benefits into money purchase benefits, and new clauses 15 and 16 contain regulation- making powers for this conversion process. They are fall-back powers, as no scheme is currently offering the extended forms of access and we have no evidence of how such conversions might be undertaken. If there is evidence that schemes are not offering fair value for cash balance benefits in conversion or as a lump sum, we will bring forward regulations to impose requirements.
If an occupational pension scheme is underfunded at wind-up, assets relating to non-money purchase benefits shall be distributed according to a specified priority order. Members therefore see a reduction in their benefits in accordance with that priority order. New clause 17 contains provisions about the conversion of benefits during wind up. We want to prevent some members from avoiding any reduction to Pension Protection Fund levels of compensation. Therefore, we want to prevent members from converting non-money purchase benefits to money purchase after a scheme begins to wind up. If we did not do that, there would be a risk that benefits converted to money purchase would be discharged in full, to the potential detriment of other members.
If schemes offer the new decumulation options, we need set out how rights under the scheme are treated if the scheme enters the PPF. Our provisions restrict what can be done with non-money purchase benefits when a scheme is in a PPF assessment period. New clause 17 prevents the conversion or replacement of non-money purchase benefits with money purchase benefits. New clause 18 restricts the payment of lump sums to those that would be payable if the scheme transferred into the PPF. Crucially, a scheme needs to be in as steady a state as possible while it is assessed for transfer into the PPF, so that its overall financial position can be determined. In addition, if members were able to transfer or discharge their benefits, this would delay the process and deplete the assets available to be transferred with which to pay compensation to other members. There are no restrictions
on the payment, transfer or discharge of money purchase benefits. New clauses 19 and 23 replicate these provisions for Northern Ireland.
In new clauses 31 and 33, we introduce several definitional terms that will apply to a number of areas we are amending under part 4 of the Bill. New clause 31 introduces the definition of a “flexible benefit”, which will determine whether the requirements relating to independent advice, draw-down, treatment of lump sums and transfers will apply to that form of benefit or not. New clause 32 contains definitions of “cash balance benefits”. which are a form of benefit that will fall within the scope of flexible benefits. Those definitions seek to ensure that where a member’s pension saving results in a cash amount, as opposed to an income amount, they are able to access those benefits flexibly. The definition of “flexible benefit” is intended to include all those benefit categories that fall within the scope of the flexibilities introduced by the Taxation of Pensions Bill. The definition includes money purchase benefits, cash balance benefits and a residual category of benefits which are neither money purchase nor cash balance benefits for the purposes of pensions legislation, other than the provisions relating to pensions in the Finance Act 2004. This residual category may include a benefit structure which provides a sum of money at the member’s retirement date but is also subject to an additional guarantee, such as the option of a guaranteed annuity rate offered before the member becomes entitled to receive their pension. New clause 33 also defines a range of terms to ensure that the flexibilities apply to the right individuals, both members and those who may be entitled to survivor rights, as well as at the right points in time.
Government amendments 56 to 72 relate to the smooth running of the pensions guidance service and ensure that the legislative framework works as it should. They fall into three groups, the first of which comprises those aligning definitions with the ones used in the rest of the Bill. The second group comprises those ensuring that those delivering guidance work together effectively and share information. The third group comprises the consequential amendments. I outlined earlier the new definition of “flexible benefits”, which is used in this Bill to refer to money purchase or defined contribution schemes. Amendments 56 and 57 introduce the language of flexible benefits into the high-level definition of pensions guidance. Amendments 30, 58, 67, 68, 69 and 72 are necessary as a consequence of these definitional changes.
On information sharing, amendment 60 inserts new section 333EA in new part 20A of the Financial Services and Markets Act 2000. Subsection (1) provides for a duty on designated guidance providers and the Treasury to co-operate in the giving of pensions guidance. Subsection (2) provides for a gateway to share information. Ensuring that delivery partners and the Treasury are under an obligation to work together and, importantly, that they may share information with each other, subject to the usual data protection requirements, is important. It ensures a well-integrated and well-functioning guidance service; allows delivery partners to learn from each other and for evaluation of the overall service; and, finally and most importantly, facilitates a smooth journey for consumers through the service. The remaining provisions in this group make minor or consequential changes,
principally to ensure that the guidance framework slots into the Financial Services and Markets Act 2000. They include amendments 61 and 63.
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Finally, there are a series of “back of the Bill” amendments: on powers to make consequential amendments; on regulations; on crown application; on extent; on commencement and on the long title of the Bill. Just to be clear, I am referring to amendments 4, 24, 26, 27, 33 to 37, 39 to 42, 44 to 46, 48 and 1.