My Lords, I had intended to add my name to this amendment, and I apologise that I failed to do so. The noble Baroness,
Lady Bowles, has raised an extremely important issue in the amendment and has eloquently set out the reasons.
We are often guilty of looking at defined benefit schemes as a concept that is on the way out—that we are only really talking about the run-out of closed schemes —but that ignores the fact that many DB schemes remain active and open to new joiners. I am very grateful to the Railways Pension Scheme for explaining the potential implications for such schemes of the regulator’s consultation on the defined benefit funding code of practice.
For schemes that are mature or closed and in the run-down phase, it makes complete sense to minimise the risk of the investment strategy so that there is a high degree of certainty that the fund will be able to meet its obligations. The flipside of that, of course, is that a low-risk investment strategy means a low return. That is fine for mature schemes, but schemes that are not mature and still live would suffer from being restricted to a low-risk, low-return investment strategy. As the noble Baroness, Lady Bowles, said, the largest part of benefits paid from a fund typically come from the investment returns earned over its life. If forced to take such a low-risk, low-return approach in order to meet a certain level of benefit, they would have to massively increase contributions from either the employer or the employee or a combination of both. Indeed, I confess that I had not understood that there are DB schemes that specifically share such risk between employers and employees.
A higher-risk investment strategy with the ability to earn better returns is entirely appropriate for schemes that are not mature. I think that it was the noble Lord, Lord McKenzie of Luton, who, in Committee, raised a concern about hastening the demise of defined benefit schemes. If the regulator, in taking an overly risk-averse approach, insists on too low a risk and a low-return approach for open or immature schemes, they will inevitably become less attractive to employers and possibly to employees. All we will achieve is the hastening of the end of defined benefit schemes, which are the gold standard for pension saving, especially for those on lower earnings.
The amendment is therefore critical to ensure that the regulator takes into account the state of maturity of a fund when looking at scheme funding and to ensure that trustees have sufficient discretion to be able to act in the best interests of their beneficiaries.