My Lords, I have enormous sympathy with the aims of the two amendments in this group. Amendment 8, in the names of the noble Baronesses, Lady Drake, Lady Sherlock and Lady Bowles, was expertly moved by the noble Baroness, Lady Drake, and deals with situations where a pension scheme may not have enough money to meet its obligations and there is a risk that it will need to draw on the funds in the members’ pension pot rather than have money coming in from outside.
As I mentioned in debate on earlier stages of the Bill, I am particularly concerned about the situation where a scheme has had a triggering event or is winding up and may not have sufficient administrative budget to cope with, for example, a significant IT failure in which member records are lost or transposed from one to another so that it is an enormous job to unscramble each member’s entitlement. The costs of that work can be significant; if no reserves are in place to meet those costs and the employer is in financial difficulties, what
will a CMP scheme be able to do to fund the costs of sorting out the records? It is true that the aims of the CMP scheme as set out in the Bill will be to have central estimated assumptions for guiding benefit adjustments to ensure that there is no difference of treatment between different members, but on the particular issue that I am referring to and that Amendment 8 refers to, the continuity strategy outlined in the Bill is supposed to have money to meet a triggering event, including its costs, but may not do so.
Therefore, as I understand it, the thrust of this amendment is to ensure that the Pensions Regulator requires a separate capital buffer, or that an insurance arrangement will cover the costs incurred in winding up, or that, in exceptional circumstances, the costs required to administer the scheme are met other than from members’ funds. When we set up this new regime, it is important that we make sure that we cater for eventualities that we do not expect to happen but which we know could in theory happen. Having seen with defined benefit schemes the devastating impact of scheme wind-up without sufficient resources and the amounts of money taken out of defined benefit schemes when an employer has failed or walked away from the scheme—those cases have reduced the amounts available for pensioners, in some cases to zero—there is a real need to look at some catastrophe insurance, disaster-type insurance or capital buffer of some kind to make sure that we have catered for that before it happens.
I think it would be wise for my noble friend to consider what else might be done over and above what is in the Bill. I also look forward to her answer to the specific question asked by noble Lords about what would happen in practice should a scheme require money that does not currently exist within the fund, other than in members’ entitlement pots, to cover the costs of wind-up. Of course CMP does not give each person an individual pot, but if the overall assets have to be raided to meet these costs, their pensions will be impacted.
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That brings me to Amendment 32 in the names of the noble Lords, Lord Sharkey and Lord Vaux, and the noble Baroness, Lady Bowles. Again, I think it is true that the aim of the CMP system is to make sure that the benefit adjustments are fair to different cohorts of members. That is the crucial term—“cohorts of members”. My concern revolves around the position, as explained by the noble Lords, Lord Sharkey and Lord Vaux, of those who decide to become non-members. There is a real issue that trustees are required to assess that the scheme operates fairly but they also need to reduce the risk of a certain class of current members—in particular, those who decide that they wish no longer to be members—to select against those who remain members of the scheme. This selection can be either deliberate or inadvertent.
As the Institute and Faculty of Actuaries points out in its briefing, there are different ways to define fairness, but if we set up a system where either those members who are unwell, as the noble Lord, Lord Vaux, outlined, or those who decide that the markets are at record highs so they would like to cash in their pot right
now and take the value as of today are able to select against the remaining members of the scheme, the principle of CMP is to some extent undermined. This type of scheme was originally proposed before the pension freedoms were introduced in the old environment, which it would have been much less likely for members to choose to transfer out of. In the current environment, many members may decide that they wish to transfer because of other benefits associated with pensions.
Therefore, whether or not the amendment is worded correctly—the concept of “fairness” is of course open to interpretation—we need to ensure that there is some kind of risk adjustment or long-term margin taken from those who wish to become non-members of a scheme, so that there is a buffer against future bad markets or unexpected changes in the parameters on which pension values are currently based for these schemes to become more sustainable in the long term. I look forward to my noble friend’s response and, possibly, reassurance.