My Lords, I thank the Minister for his introduction to these regulations and all noble Lords who have spoken for their contributions. I should perhaps say that nothing in my speeches should ever be taken as actuarial advice or indeed advice of any kind, unless you have money to burn. As we have heard, these regulations implement significant changes to the DB scheme-specific funding requirements in association with the revised DB funding code. I will go through what I understand them to be doing—I invite the Minister to correct me if I have it wrong—and I have some questions.
The changes are driven by the recognition that most DB schemes are closed to future accruals and are maturing, which makes the longer-term strategic management of them important if members are to make sure they get their benefits in full when they fall due. The key principles underpinning the changes are a requirement for schemes to be in a state of low dependency on their sponsoring employer by the time they significantly mature, and better trustee engagement and better understanding and accountability between trustees and the regulator.
The regulations require trustees to agree a funding and investment strategy—an FIS—with the sponsoring employer, which will set out that longer-term funding objective and how it will be achieved over the lifespan of the scheme. Schedule 1 then sets out the matters and principles that trustees must have regard to in setting their FIS, and that they have to think about liquidity and unexpected requirements on the journey
and after significant maturity, including the strength of the employer covenant, which I will come back to in a moment.
The trustees have to consult the employer on a statement of strategy on progress in achieving their FIS. In the absence of a Keeling schedule—I confess I am slightly obsessed with them—I went back to the Pensions Act 2004. Section 221B states that
“trustees or managers must, as soon as reasonably practicable after determining or revising the scheme’s funding and investment strategy, prepare a written statement of … the scheme’s funding and investment strategy, and … the supplementary matters set out in subsection (2)”.
Paragraphs (a) to (c) of Section 221B(2) say that the supplementary matters are: the extent to which trustees or managers think the funding and investment strategy is being successfully implemented, and if not, what they will do about it; the main risks faced by the scheme in implementing the funding investment strategy and what they are doing about the risks; and their reflections on past decisions and lessons learned. Paragraph (d) adds:
“such other matters as may be prescribed”.
These matters are now prescribed because they are defined by Schedule 2 to these regulations, which specifies the information to be covered in the strategy statement.
I assume this means that TPR will now have discretion on the level of detail it can request from a scheme in relation to the supplementary matters. Otherwise, without that discretion, it would have to rely on its existing powers and the setting of the clearer funding standards in these regulations. Is that a correct assumption? How will the DWP monitor whether the regulator is delivering that higher level of probability for which it is shooting? Are the Government leaving the door open to the prospect of increasing the regulator’s powers? That is an interesting one.
To return to the covenant, Regulation 7 puts the employer covenant assessment on a formal legal footing for the first time. The covenant now appears to be central to the new regulatory framework, rather than being left for the regulator to cover in the code. I presume the intention is for this to be an area of increased focus for trustees. This is welcome, given the increasing importance of covenant strength to the decisions made by trustees, although I suspect the law is catching up with trustee thinking as much as driving it.
However, getting access to enough information to assess the employer covenant is not always easy, and trustees and employers may not always align in their view of the strength of the covenant. The Minister mentioned that change can come quickly. We live in a world where changing markets and the impact of technology, mergers and acquisitions, leveraging and new creditors can all make a material difference to the strength of the covenant in pretty short order. The same forces can also reduce trustee confidence in the strength of the covenant in the longer term.
Regulation 7 requires trustees to assess the strength of the employer covenant, looking at current and future developments and the resilience of the business when they are setting or revising the FIS. As the Minister mentioned, funding deficits must be addressed
“as soon as the employer can reasonably afford”.
But we are also told that the impact on the sustainable growth of the business must be taken into account. Does that not put the trustee in the position of being faced with a push-me pull-you set of regulatory requirements, where the two are pulling in different directions?
Trustees will be required to seek more detailed information from the employer regarding its business. The regulator will provide updated guidance on the covenant, which will set out its expectations of both employers and trustees, and the regulations will clearly require trustees and employers to work more collaboratively in future. I have two questions about this, following the issue flagged up by my noble friend Lady Drake. Because placing the assessment of an employer covenant on a legal basis is novel, we need the Minister to make it clear how the regulator will resolve disagreements between trustees and employers on the current and future strength of the covenant, where that is inhibiting agreement on the FIS. If they cannot agree on the FIS because of different views on the strength of that, what will the regulator do about it? Secondly, will the regulator be able to impose its own view of the covenant on trustees?
Regulation 16 strengthens the requirements on the chair in respect of the strategy statement. It seems that the code has been drafted in a manner which assumes that chairs of trustees are appointed by the trustee board. I believe that there are still occupational schemes where the appointment of the chair is wholly the decision of the employer. Does this carry any implications for the requirements placed on chairs appointed in that way?
The costs incurred by trustees, which are funded by employers, will inevitably increase as a result of this. I am quite sure that the Minister will have read the 13th report of the Secondary Legislation Scrutiny Committee. I will not read it out in detail, but it points out the DWP’s assessment that about 16% of DB schemes had deficits in March 2023. It says:
“The Impact Assessment … claims that, as a result of these Regulations, DB schemes’ aggregate ‘deficit reduction contributions’ could be around £0.26 billion lower over the 10-year period compared to the current situation”.
It goes on to point out a range of issues around this, but what interests me is this:
“We note … that the IA states that it is based on data from March 2021, ‘therefore more recent market developments (particularly the rise in interest rates and gilt yields which impacted the estimated liabilities) are not captured in the modelling.’ In the light of market volatility, the House may wish to explore how robust DWP’s assumptions are about the potential benefits of these Regulations”.
I do not have a dog in this fight, but could the Minister put a response to that on the record? What assurances can he give the Committee in response to the concerns of the Secondary Legislation Scrutiny Committee?
Another point was made by that committee in its 17th report. I think the Minister indicated—or maybe he did not; I cannot remember—that this is a revised version of an instrument originally laid on 29 January. The DWP had to amend the content to amend the commencement date of one of the provisions to ensure that it aligned with the policy intention. Yet again, for the record I note a disappointment that once again we are having another instrument laid because of errors
made in the original that needed to be corrected. It is becoming a bit of a pattern, I am afraid. But in this case, it provides us with an opportunity. In its 17th report, the SLSC said at paragraph 7:
“Our 13th Report of this session provided the House with extensive supplementary information on how the obligation is intended to work, and we are disappointed that DWP did not take this opportunity to improve its Explanatory Memorandum”.
Can the Minister explain to the Committee why the Government did not take that opportunity afforded to them by the need to reissue the instrument?
I have two quick points to make that were raised by other Members. First, on the Work and Pensions Select Committee report, the Minister said that the Government would respond to that in due course. I recognise that it has only just come out and they will not be able to. However, there is one point that would be helpful in particular—they will already have thought about this—which is that the committee raised the position of open schemes and relayed concerns that, despite some of the changes that had been made, some open schemes still thought that the new regime could require them to de-risk prematurely. Are the Government confident that they have landed in the right space on this?
Secondly, my noble friend Lady Drake asked a very important question about the regime governing investment by schemes that have reached significant maturity, essentially about whether they will no longer be required to balance cash from investments and liabilities going out. It would be very helpful if we could know about both of those.
I apologise to the Minister that I have, yet again, asked a number of questions, but I am grateful and look forward to his reply.