Pensions Regulator Defined Benefit Funding Code of Practice 2024

Motion to Take Note

15:45:00

Moved by

That the Grand Committee takes note of the draft Pensions Regulator’s Defined Benefit Funding Code of Practice 2024, laid before the House on 29 July. Relevant document: 2nd Report from the Secondary Legislation Scrutiny Committee

I always appreciate a challenge, and I was quite interested to note that our Whips have got the idea that this debate will last half an hour, but I will not take up the whole 30 minutes. First, I have to declare an interest: I am a fellow of the Institute and Faculty of Actuaries, or IFoA as it is now. Many members of the institute provide advice on funding of defined benefit or DB schemes, and they will be significantly affected by the code that is before us. However, I add with some emphasis that I no longer practise as an actuary, hence nothing of what I say must be regarded as constituting actuarial advice. It might sound like actuarial advice, but I assure those here that it is not; noble Lords have to get their own advice rather than take it from me. Nevertheless, I speak from experience as a scheme actuary who has undertaken scheme valuations including, in the past, under the Pensions Regulator or previous iterations. We are talking about the regulator’s defined benefit code of practice—the code—issued under Part 3 of the Pensions Act 2004. I very much welcome the opportunity to make a few remarks about the code and to ask my noble friend the Minister some questions. TPR has been producing codes of practice on funding going back to 2006, but it is worth pointing out that it first consulted on this iteration of the funding code more than four years ago, in March 2020, with a second attempt in December 2022. This version was published for consultation in March this year, so its final form comes after years of waiting and four Prime Ministers; the whole Covid epidemic; a significant shift in the financial position of many defined benefit schemes, with increased investment returns in particular; considerable discussion about how these funds should be invested in the light of the Mansion House reforms under the last Government; the pension review under this Government; and, not least, an increased appreciation of the risks to defined benefit schemes from climate change. So much has happened and the code has, in effect, had to hit a moving target. Unfortunately, I would argue that even this version has not really caught up with developments and events. The new code, together with the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024, which we discussed in this Room last March and which came into force in April, gives trustees and advisers most of the tools and processes to follow for DB funding valuations with a valuation date on or after 22 September 2024. There has been a bit of time-shifting going on here, but it is not a concern. It is clear that there will be specific areas of the code where further clarification is required, which will be found out only in practice. I will not repeat everything I said in March, but I want to emphasise my main point. I was talking about the regulations, but it applies to the code as well: “The regulations are patently too prescriptive. The details that they require are not directed at the objective of protecting members’ benefits but are about establishing a system where box-ticking will take priority over the longer term and broader interests of scheme members”.—[Official Report, 26/3/24; col. GC 165.] This version may well be better than earlier drafts but, given that the code is already in effect in practice, it should be understood that it is only one stage of the longer-term reassessment that is required, given the continued pace of developments in this sphere. We should not be under the delusion that this constitutes a job done. There are positives that I want to recognise. The DWP tells us that the draft code has been revised to strike a balance between setting clear funding standards and maintaining flexibility for scheme-specific approaches. The move to a more principle-based rather than prescriptive approach to areas such as the low dependency investment allocation and assessment of the covenant is helpful and gives the trustees some flexibility. Other commentators have welcomed the redefinition of what constitutes significant maturity; clarification of what happens when the valuation is based on notional investment rather than actual investment; greater clarity on how to assess the employer covenant; and—this is particularly important—what applies when there are surplus assets. It is to be welcomed that the final version includes a section for open schemes, collating the guidance that is relevant to them across the code. Nevertheless, the code remains a work in progress. The IFoA has said: “The totality of the changes being introduced by the new code remain complex”, and that there are still a few more steps on the journey to take. It says that it hopes “the regulator will adopt a pragmatic approach when considering the first valuations under the new regime, due to the short implementation period for the final rules”, emphasising the point that this is a work in progress. My major concern remains that here we have 100 pages of detailed instructions and rules, albeit with quite a lot of repetition, not just on how to undertake a valuation under the terms of the legislation for a defined benefit scheme but about how such a fund should operate, particularly in the field of investment. It passed through my mind to go through the document quoting the minutiae that is dealt with—for example, telling us that we have to use a Macaulay duration calculation. I have resisted that temptation—I do not wish to delay people too much—but I have no doubt that the requirements, while well intentioned, are excessive. Although there are references to proportionality, what will happen in practice is that the code will suffer from what is described as procedural drift, where individuals become overreliant on routine processes, potentially leading to reduced understanding of the overall decision: failure to see the wood for the trees. The underlying belief, as far as I can tell, is that detailed prescriptions and requirements are better than general principles. I do not know what evidence there is for such a belief. Is it true that detailed prescriptions and reporting requirements along the lines set out in the code make it any more likely that members will receive their benefits? I doubt it. As an overriding principle, given the inherent uncertainty about any attempt to forecast the future, there is no reason to believe that making an algorithm more complex improves the outcome. One problem that concerns me, which I raised in the debate in March, is how the code reacts with Technical Actuarial Standard 300: Pensions. TAS is set by the Financial Reporting Council and lays down how any actuary in the UK should undertake technical actuarial work required by legislation to support decisions on funding, contribution requirements and benefit levels. I have the latest version here; it came into effect in April. The point is that the actuary who undertakes the valuation at the request of the trustees must comply with the professional standard. However, we are in the peculiar position where the code makes no reference to TAS, and TAS refers only by implication to the requirements of the code in an appendix. It is a matter of concern that the 18 pages of TAS, only four of which refer to scheme funding, make more sense than the 100 pages in the code. What exactly in the code achieves anything that is not already achieved by those four pages in TAS 300? We are told that in its review of TAS 300, the Financial Reporting Council has deferred consideration of the provisions on funding and financing until the new legislation on funding and TPR’s revised code of practice are in place. I am not convinced that this will work. There must be a real question about who is responsible for setting technical standards on funding DB schemes—the Financial Reporting Council or the Pensions Regulator. Judging by the record, my vote goes to the Financial Reporting Council. Having made that general point, to which I will no doubt return in future, I have three specific questions about how the code will deal with continuing developments in DB pensions. First, there must be a question of whether the code deals with whatever comes out of the first stage of the pensions review. We have been told that the first stage is due to report in the next few months and will consider further measures to support the pensions Bill. It will take account of the need to prioritise gilt market stability, liquidity and diversity. The objective, we are told, is to boost investment, increase saver returns and tackle waste in the pensions system. The problem is that this objective is not reflected adequately in the code. How and when will these issues be reconciled? How will what comes out of the pensions review be reconciled with what has been established in the code? The second question arises from the improved state of DB funding, which has led to more schemes being run on—continuing rather than moving quickly to buyout. Because schemes will be running on and must, under the code, have the objective of being fully funded, this raises a question: when schemes move into surplus, what rules apply to that surplus? In discussions that people have initiated since we have seen the improvement in scheme funding, it has been suggested that schemes with a material surplus may invest in a greater allocation to growth assets. This aligns with the policies I have just referred to—of both the previous and the new Governments—which emphasise investing for UK growth. That objective is not adequately reflected in the code. In addition to the issue of investing surplus, there are other possible results of improved financial conditions for DB schemes. Not least of them is the possibility of improvements in members’ benefits, either through trustees exercising the discretionary powers that many of them have or through rule changes. In the same way, some people are talking about the possibility of powers being used to refund sponsoring employers or to use the surplus in the scheme to cover the cost of accruing benefits. Unfortunately, the Pensions Regulator appears to have given insufficient thinking to such developments and to how its powers will be exercised when confronted with such issues. The code does touch on the issue, talking about covenant leakage but in a way that is clearly inadequate when faced with the challenges that will arise from these moves. Will the Government press the Pensions Regulator to give the issues that arise from the potential existence of scheme surplus further thought and more adequate thinking? I have already complained that the code is too complex. I am not suggesting that this should be in the code, which is complex enough, but it is an area to which the Pensions Regulator has to give considerably more thought, so that we know where it is coming from when confronted with these issues. The third issue, which I will cover swiftly as we will debate it again on Thursday, is the impact of climate change. The code touches briefly on the issue, in paragraph 23 of the application module, but it is an issue on which the Pensions Regulator has to take much more of a lead. Will the Government encourage the regulator to pursue what needs to be done to enable schemes to confront the challenge of the greater risks that face the financial system, including defined benefits schemes, as a result of global warming?

16:00:00

My Lords, I declare my interest as a DB pension scheme trustee as recorded in the register. I thank my noble friend Lord Davies for securing this debate. This is an important code, and it should not pass without comment. As the Explanatory Memorandum and my noble friend observe, while aggregate DB funding levels have improved in recent years, financial markets and economic conditions are changeable and funding positions can quickly deteriorate. There is a dynamic in the pensions world related to economic circumstances, whether fiscal policies, investment returns, gilt yields or the impact of technologies on markets, to name but a few. An intended purpose of the code is to allow TPR to be more proactive in identifying and mitigating emerging risks in a targeted way. There have been significant instances over the past 30 years of regulatory failure to identify or respond quickly to emerging risks in DB pension provision, some with dreadful consequences. What do the Government believe are the most compelling levers in this code that will materially improve mitigating such emerging risks? The new code sets two key requirements: planning for the length of the scheme’s journey plan to get to full funding at an appropriate pace of de-risking and assessing current funding positions when carrying out valuations. As part of that planning, the code trustees must set a funding and investment strategy—that is, the journey to getting to the planned endgame for the scheme. The strategy must set out how the trustees will transition from the scheme’s current funding position to low employer dependency funding when the scheme is mature. In making that transition, how risk can be supported by the employer and the strength of the scheme has to be made clear. During the consultation a lot of concern was expressed that the new code could weaken an important fiduciary power of trustees to make the investment allocation decisions by requiring trustees to invest in line with the investments set out in the funding and investment strategy that must be agreed with the sponsoring employers. In response to those concerns, although changes have been made to the code to clarify that decisions in relation to the scheme’s investment allocation are not constrained by the notional investment allocations in the funding and investment strategy, an inference remains that, in most instances, TPR expects trustees to align their investment strategy with the funding and investment strategy. Will the Minister confirm unequivocally that the code will not remove the power of existing trustees to decide on the scheme’s investment allocation? It is an important power in addressing moral hazard. The code places a welcome greater emphasis on the strength of the sponsoring employer covenant, which is of fundamental importance but is often lost in debate, when considering funding and investment risk. The level of cash generated by a sponsoring employer and its future prospects will be key determinants of how much investment risk a scheme should take. The strength of an employer covenant can change very quickly following mergers, acquisitions, restructurings et cetera. Such changes may result in changes to the level of debt in a company, dividend policy, free cash flow, covenant and longevity. The code requires any funding deficits to be repaid as quickly as the sponsor can reasonably afford, but trustees will have to consider the impact on the employer’s sustainable growth. Trustees will need to assess such affordability annually; they will also have to provide evidence for their view of what is reasonably affordable and their opinion on the maximum supportable risk that a sponsor employer can bear. These are potentially significant areas for disagreement between sponsoring employers and trustees, with one seeking to discharge a fiduciary duty to protect its members and another wanting maximum freedom from the liability of funding a pension scheme, but TPR has still to provide its covenant guidance on the main areas that trustees must consider when assessing the employer covenant. In that sense, there is a significant area of this code where an important point of detail is missing. Can the Minister advise when such covenant guidance will be issued? The code emphasises a flexible and scheme-specific approach to regulation, taking into account the variety of DB schemes. It contains provisions for schemes that remain open to new members and may not be maturing, such as schemes that are now closed. Again, that is quite a controversial issue in the initial iteration and consultation on the development of this code. The considerations around investment strategy and the ability of trustees to choose how to invest now recognise the different characteristics of open schemes compared to closed schemes; the importance to open schemes of long-term planning; and a more flexible approach to assessing investment risk, which is supportable by the covenant and the scheme. Finally, the Explanatory Memorandum—I shall pick up with brevity a point that my noble friend elaborated on in more detail—states: “The approach to monitoring this legislation is that there is no requirement to carry out a statutory review of the draft Code”. However, as we all know, the previous Government were—and, more so, the current Government are—focused on the issue of wider funded pension scheme consolidation and scheme investment strategies. Although I recognise that the Minister cannot comment on the outcome of such considerations or what may flow from the first pension review, if those outcomes had an impact on the provisions of the DB code, what would be the mechanism and consultation for revising the code as a consequence?

My Lords, I congratulate the noble Lord, Lord Davies, on securing this important debate. I agree with the noble Baroness, Lady Drake: the code is an important document that certainly deserves the attention of this Committee. I apologise to the Minister because this debate may well end up lasting more than the half an hour that was apparently expected; I will try to be as succinct as I can. The overall aim of the defined benefit code is to protect member benefits. The whole point of the code was that, in the past, there had been a kind of free-for-all where employers and trustees could invest and take as much investment risk as they wished. Given other circumstances in the market, hundreds of thousands of members either lost their benefits or were at significant risk of doing so. I welcome the fact that there is now a stronger regulator, the Pension Protection Fund and this kind of code, which is constantly being revised and updated. However, I stress that I agree wholeheartedly with the comments of the noble Lord, Lord Davies, that this particular document, like previous documents, is rather too prescriptive, with excessive requirements placed on trustees, who may or may not need them. It seems to attribute spurious accuracy to an inherently uncertain outcome of events. The kind of box-ticking and groupthink approach that needs to be revised within 15 months of each new valuation will be costly to the schemes, and it is not clear what value will be added if the long-term strategy is unchanged or not likely to change. Some of the issues we are grappling with, in this code and in the defined benefit universe as a whole, are dependent on and the result of the exceptional period of quantitative easing introduced in 2009. It was deliberately designed to drive down government bond yields and, concomitantly, to clearly put a much greater inflation risk on liabilities. That is indeed what happened. Initially, assets did not keep up with liabilities, but the fears of ongoing falls in gilt yields over that subsequent period, as quantitative easing, gilt printing and the driving down of long-term bond yields continued, have made anyone involved in the defined benefit space rather nervous of what are called “non-matching assets”. We had a reversal of conventional thinking about defined benefit pension schemes. They were supposed to invest to take risk and welcome risk placed judiciously. This thinking became: do not take risk or try to beat the gilt market, because the gilt market may beat you and increase your deficit. So a whole groupthink built up around the idea that defined benefit pension schemes should have as much as possible in so-called matching assets, because you want to match your liabilities. The fact is that, if you want good funding, you need to outperform your liabilities—just matching them is not sufficient—but I am not sure that that is reflected very much in the code for schemes that are not in healthy surplus. I welcome the Minister’s comments on the fact that we are talking about estimated liabilities based on expected future values, relative to current mark-to-market actual values for the assets, and on whether the risks of attributing that spurious accuracy to the long-term liabilities have been sufficiently considered. In this regard I declare my interests: I work with some defined benefit pension schemes, and have done so in the past, to advise on investment strategy. It seems to me that part of the thinking going through this defined benefit code is that it is better for all schemes to fail conventionally than for too many schemes to try to do unconventional things that might succeed but incur greater risk. I feel we need more scheme-specific flexibility there, and we need to consider the impact of quantitative tightening and how that will be different for the pension liabilities associated with these schemes. I welcome the differentiation mentioned by the noble Baroness, Lady Drake, and the noble Lord, Lord Davies, between open and closed schemes. I urge the Government to consider going further in allowing and enabling open schemes to take advantage of investment opportunities from a diversified array of risk assets, even in circumstances where there is, perhaps, some nervousness about the sustainability of the employer. There is concern about the stability of the gilt market, but there is also an inherent conflict between that desire for stability and the need for outperformance of liabilities that these schemes could be delivering. If capitalism is not at an end—one might argue that it is—then investing in assets of higher risk than government bonds or the supposedly safer assets should, on aggregate and in the long run, deliver better returns. On top of that, we have a Government who rightly want to use more pension assets to boost the economy. There are assets such as infrastructure, small growth companies and equities as a whole, both domestically and internationally, that could deliver that objective, but they entail risk. That is where I hope the funding code may be further refined.

16:15:00

I finish with three questions. First, what consideration have the Government given to the costs and risks of so many of these schemes just targeting buyout? I stress the risks around the stability of offshore insurers for many of these annuity contracts. What risk margins—which are never declared—are being built into these contracts and how much resource might be being wasted by heading to buyout and not investing in higher-return or expected return assets along the way, in the hope of buying out one day even if one cannot at the moment?

Secondly, have the Government assessed the long-term impact of the ending of quantitative easing and the introduction of quantitative tightening on the risk in this funding code?

Finally, what desire do they and the regulator have for flexibility and diversity of investment strategy within open schemes? If they all invest similarly, surely there is a dangerous concentration of risk. We saw some of that in 2022 when low-volatility matching assets turned out to be more volatile than the highest-volatility asset type that one might have thought of. The schemes and, perhaps, the economy suffered huge losses. Do the Government think there is merit in encouraging the code to have a broader opportunity set of risk-taking among different schemes, especially for those that are open or cannot realistically head to buyout in the nearer term, so that there is a different approach to the long-term strategy?

My Lords, I was not intending to speak because this is way out of my comfort zone, but I congratulate the noble Lord, Lord Davies of Brixton, on securing this debate. I spent a year in opposition as a shadow Minister trying to encourage women in particular to enter into a pension scheme. This is a classic example of how fiendishly complicated UK pensions are. I have a number of questions for the Minister, who is quite an expert in this field having shadowed it for a number of years. I welcome her to her place in this Administration. The Secondary Legislation Scrutiny Committee says in its second report that it remains concerned about the cumulative burden of so much regulation on the schemes. While the Explanatory Memorandum states that there were two waves of consultation, it is still not entirely clear how much support for and understanding of the scheme there is. However, my main concerns relate to paragraphs 9.3 and 9.4 of the Explanatory Memorandum, which cover the impact assessment and the schemes’ mind-boggling costs. Paragraph 9.3 states: “Initial implementation costs, including familiarisation, could total around £36.8 million in the first year” alone; I am not surprised, given how complicated it is. It goes on to say: “Schemes may then face ongoing administration costs of £5.4 million per annum”. However, paragraph 9.4 states that there will be “an estimated increase of around £7.1 billion to around 1200 schemes over the 10-year period”. Will there be any sort of watch to see whether those figures are final—or, indeed, whether there may be some liquidity in them? They might not represent the final cost going forward but they are eye-watering. It is right to update the code but, in view of the figures, have the Government reached a verdict on what the cumulative burden on the schemes will actually be?

My Lords, I thank the noble Lord, Lord Davies. Indeed, I thank all the speakers for the expertise gathered in this Room on what is an unlikely subject for many people. On the DB funding code, first, with all the expertise that has been expressed—and for those reading Hansard who have no expertise—perhaps I ought to say something basic. For the record, what is a defined benefit pension? It is a type of workplace pension that guarantees you a specific income for life throughout retirement. The amount that it pays out depends on things such as your final salary, your average salary and how long you have been a member of your employer’s scheme. I know that everyone in the Room knows that, but people outside it may not. The DB code has been many years in the making, as the noble Lord, Lord Davies, said. It sets out in detail how defined benefit pension schemes will have to approach funding in future, including things such as how quickly they must deal with any deficit that may arise. The code was arguably written in an era of deficits, whereas the majority of DB schemes are now in surplus, but I agree that you still need a set of rules for those schemes that are short of funds. Despite all the worthy speeches, most of the code is uncontroversial, in my view, and has my general support. The response from the industry has been broadly positive; it appears to give trustees and scheme sponsors flexibility while ensuring that they carry out proper risk management as it relates to their pension products. Numerous articles have been written on it; given the length of this debate, I will not go into them in any great detail, but I highlight an article entitled “PwC Comments on The Pensions Regulator’s New Defined Benefit Funding Code of Practice” and an article in Pensions Age Magazine headed “Industry expresses ‘relief’ as TPR confirms final DB Funding Code”. So the industry and commentators have been complimentary in general terms. However, I wish to raise some issues on which I would appreciate the Minister’s views. First, how far does the code truly accommodate the needs of remaining open DB schemes? This was a big topic of debate in the Lords during the passage of the Pension Schemes Act 2021. Does it allow them to take an appropriate level of investment risk for the long term, rather than having to go for lower-risk assets prematurely? This simply means that they cost more to run, as the noble Baroness, Lady Altmann, said in another way. Secondly, how far does the code recognise the particular position of charities and other not-for-profit sponsors of pension schemes? Is there a risk of charities being forced to close deficits too quickly and, therefore, having to divert a loss of revenue income into the pension scheme? There would then be a risk of it appearing to donors to those charities that their money is not being used for front-line charitable purposes, thereby weakening the charities’ futures. I would appreciate the Minister’s comments on that. Finally, I am sure the Minister has read the blog by David Fairs, who worked at the Pensions Regulator. It was headed: “At long last, new regulations fire the starting gun for the new funding regime”. He stresses the challenges and opportunities missed. He queries—and he is an expert—whether the new funding code will make a significant difference. I ask the Minister the same question.

My Lords, I thank the noble Lord, Lord Davies, for giving us the opportunity to have the first pensions debate in this House since the general election. This Committee is my first experience of swapping sides with the Minister, and it gives me the opportunity to wish her well in her role with all its responsibilities, with which I am all too familiar. This debate on the defined benefit code of practice is interesting in that, as has been said, it is not an SI but arises out of one in the form of delegated powers from the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024. It seems that every decade or so there is a requirement for a code update: there was one in 2006, leading to the current version in 2014, and now in 2024 we are debating another code of practice—number four, I believe. Updates are based on the premise that the pensions landscape changes, and of course it does, as now with the need for scrutiny of liabilities in DB schemes, the plethora of closed and maturing schemes and the need to ensure risk management, greater robustness over the longer term and optimum management of open schemes, which have been alluded to in this debate. Ensuring that pension schemes are well managed is essential in safeguarding the incomes and welfare of pensioners. This is especially important at a time when the cost of living is high and the Government are restricting the financial support available to pensioners—more of which later. I welcome the publication of this code and its stated aim of helping trustees comply with their responsibilities under the defined benefit pension funding requirements. The focus is necessarily on supportable risk and ensuring that trustees and sponsoring employers are not caught unawares and plan well ahead, in particular where schemes are nearing maturity. The work on the code was undertaken by the regulator under the previous Government, and I am pleased that the consultation on the code—there have actually been several, as the noble Lord, Lord Davies, and others alluded to—has been widely accepted by a broad range of stakeholders. I note that where there were concerns, such as on the need for flexible risk-taking at low dependency and not a one-size-catch-all approach, they were largely addressed and accepted in discussions with the industry. I have listened with interest to the technical points raised by a number of noble Lords, in particular the noble Lord, Lord Davies, and I know that these points will be addressed—I say this with some relief—by the Minister. By his own admission, the noble Lord, Lord Davies, repeated some of the points made in the debate in March, such as about so-called box-ticking and the code being too prescriptive. In March he also mentioned his concern about the regulator misunderstanding its role, although I am not sure he alluded to that today. My first question to the Minister leads on from this. It is simply: is the job done? Is the code an iterative process because we do not want another 10-year wait, or do we just accept that this is bringing it up to date and that, in effect, we wait for eight or 10 years? It does not particularly matter, I suppose. I have some questions of my own on the code. The best-practice management of pension schemes is dependent on the effectiveness of trustees. How does the Minister regard the current landscape for recruiting trustees? There is a danger that too much guidance and steer towards adherence to codes, with the greater responsibilities attached, could act as a chilling factor. What is her assessment about the training of trustees? This question plays into other questions, not least those of the noble Lord, Lord Davies, and the noble Baroness, Lady Drake, who quite rightly alluded to the important relationship between employers and their covenants, as well as the trustees. Who undertakes this training? This is important in assisting the chairs of trustees and, of course, the supporting employers.

16:30:00

Can the noble Baroness set out how the regulator will monitor the code of practice’s effectiveness? There is no statutory duty to undertake a review, so what is the process for the regulator to act quickly and effectively where a scheme falls well below the standards? I argue that there is a vagueness, with the regulator stating that it will review codes and guidance “regularly”—what does that mean? Should the guidance not be more, rather than less, prescriptive, as the noble Lord, Lord Davies, has suggested today and in the past?

My question on cost mirrors the questions raised by my friend, the noble Baroness, Lady Altmann, and my noble friend Lady McIntosh. I will not repeat what my noble friend Lady McIntosh said because it covers the whole range of the concern about the costs. But I add that this may result in around 1,200 schemes facing additional costs amounting to approximately £7.1 billion over a 10-year period—she mentioned that latter point. To what extent will these costs be passed on to the individuals contributing to the pension schemes?

This code emphasises the benefits of low-dependence investment allocation. I understand that this is an investment strategy under which the value of the assets is very resistant to short-term adverse changes in the markets. However, the code states that there is no requirement to invest in line with the low-dependence investment allocations, so is this flexibility really in the best interests of those contributing—I underline that—to defined benefit pension schemes?

There is a repeated emphasis throughout this code on giving trustees the flexibility to take or assess investment risk. I have always been under the impression that pension funds took a long-term stance towards investing. Is this a fair assessment of investment attitudes and, if so, does this code comply with this spirit and the high-level guidance?

I hope the Minister will forgive me for asking a few wider questions on pensions. Can she update the Committee on the progress on developing the pensions dashboard, with the final deadline of 26 October 2026—in about two years—very much in mind? Can she give an overview of what actions the Government are taking in the pensions space? Perhaps a letter may be required.

Further to the points raised by the noble Lord, Lord Davies, the King’s Speech stated the intention to bring forward a pension schemes Bill, which, inter alia, would allow savers to consolidate multiple small pension pots, ensuring that they can make the most of their hard-earned savings. When do the Government anticipate bringing this Bill before Parliament? I presume it is linked to the dashboard, but I will let the Minister answer that.

On 8 October this year, the Government launched a consultation on extending the so-called collective defined contribution provisions—CDCs. What are the Government expecting and hoping will be the result of this consultation? Furthermore, what are the timings and when can we expect the Government’s response to it?

Any pensions debate, including on linking this to funding for retirement, would not be complete without mentioning pension credit and the winter fuel allowance. This subject continues to be a high-profile running story in the press, stretching back at least two months. Contrary to what the Government think, pensioners are not well off compared with those in other developed countries. According to the OECD in 2021, the typical disposable income for a UK pensioner was £17,656—that is below Italy, France, Germany and the US. The UK spends just 5.1% of its GDP on old-age pensions, which is below the US at 7.1%. What are the latest figures for the uptake of pension credit? By the way, we all want the 288,000 or so who are not claiming it to claim. What is the cost to the Treasury of the latest uptake? How is this therefore impacting the proposed saving of £1.4 billion, which the removal of the winter fuel allowance is meant to achieve? The Minister will not be able to say what is in the Budget—I will not push her on that—but she can give a view on what mitigations could be put in place regarding this ill-judged policy.

To conclude, I am aware that a code of practice is not a legal document but is designed to give clear guidance to those who have significant responsibility for managing our defined benefit schemes. To this extent it seems to have achieved its aims.

My Lords, I thank my noble friend Lord Davies for securing and opening this debate and all noble Lords for their thoughtful and constructive contributions. I say to my opposite number, the noble Viscount, that it is easier asking questions than answering them in this space, so I hope that noble Lords will bear with me. More questions were asked today than I can conceivably answer in the time I have, but I will do my best to get through them. I assure noble Lords that we will carefully scrutinise Hansard and write to them with the answers to any questions that I cannot pick up. First, by way of background, as my noble friend noted, earlier this year the House approved the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024. It is worth remembering that, alongside those regulations, the code of practice we are discussing is a key component of the new arrangements for the funding of DB occupational pension schemes. I am grateful to the noble Lord, Lord Palmer, for explaining what a DB scheme is to those watching at home. I hope that those watching at home who have never heard of a DB pension scheme are enjoying themselves, and I encourage them to read Hansard afterwards. The code is designed to provide practical guidance for trustees and employers to meet their legal obligations, and it includes key metrics needed to implement the requirements. We moved very quickly to lay the code in the new Parliament to give schemes and industry the certainty they have been calling for. It may not be noticed from reading the debate that in fact the code has been well received. A lot of consultation has gone on. The new scheme is designed to ensure the security and sustainability of DB pensions. Let us not forget the reason we needed to act at all: the damage done by schemes that were not appropriately run and the ensuing loss of benefits to members. Not taking action was not an option. These reforms strengthen the funding regime by providing clearer, more enforceable funding standards with a greater focus on long-term planning. My noble friend Lord Davies noted that we have published two consultations on the code. The first, in 2020, considered the key principles to underpin the new regime and the proposed regulatory approach. The second was a consultation on the first draft of the code that we are debating today. DWP and the regulator worked collaboratively with and listened to a wide range of stakeholders. As a result, changes have been made to the code to provide more flexibility. For example, the regulator developed a chapter specifically for open schemes. When the code was published in July, it was welcomed for providing clarity and achieving a flexible approach. There is broad consensus that the code strikes the right balance between member security and employer affordability. Crucially, it provides sufficient scheme-specific flexibility to take account of the very wide range of scheme circumstances. I thank the noble Lord, Lord Palmer, for his support and the noble Viscount, Lord Younger, for the acknowledgment. Broadly speaking, we are looking at detail, but we think we are doing the right thing in the right way. The new framework, including the code, has been revised following extensive engagement with industry to ensure that it provides flexibility for schemes to invest in a wide range of asset classes, including growth assets, both before and after significant maturity. Open schemes, like others, will have significant flexibility to invest in riskier investments with potentially higher returns, if the risk can be supported, so member benefits are protected. It also makes clear that the open schemes will not be made to derisk as long as they remain open to new members, are not maturing and the risk they are taking is supported by the employer covenant. I will try to go through as many of noble Lords’ questions as I can. First, the phrase box-ticking has been used once or twice. I reassure noble Lords that this regime is absolutely not a box-ticking exercise. The regulator is taking the opportunity provided by the introduction of the new regime to evolve the way it regulates DB funding. This includes proportionate measures with flexibility for different schemes. The regime will be based on clear metrics designed to protect members’ benefits as well as to take account of employer affordability. The Pensions Regulator operates on a risk-based and outcome-focused approach. We think that that proportionality is in the right space. The regulator is introducing a twin-track approach: fast-track and bespoke. This aims to help target its engagements with the sector effectively. Where a scheme meets a series of fast-track parameters, the regulator will ask for less information and is less likely to engage with trustees. On the other hand, the bespoke route allows schemes to take a different approach and to provide evidence of why this is appropriate. Many of them are unlikely to require further engagement between the regulator and trustees. My noble friend Lord Davies asked about the use of scheme surplus. I remind the Committee that, in February, the options for defined benefit schemes consultation sought views on the potential benefits of introducing additional flexibilities for the use of surplus funding on DB pensions schemes. The Government will continue to consider the potential of such flexibilities to benefit scheme members and sponsoring employers while supporting economic growth. The noble Viscount, Lord Younger, asked about low dependency investment allocation. The flexibility of the UK’s funding regime is one of its greatest assets and one that we have been careful not to undermine in the new arrangements. Pension schemes are many and varied and each has its own circumstances, so they are best managed through scheme-specific arrangements. That is why we try to balance clear metrics on how liabilities have to be calculated with scheme-specific flexibilities that allow trustees the discretion to react to changing circumstances and act in the best interests of their members while strengthening the ability of the regulator to intervene and act if things go wrong. Noble Lords may have other views. We believe that this balance is right and in the interests of members of schemes. There was a question about whether trustees have the flexibility to take decisions in the light of the circumstances of their individual schemes. Flexibility is a key strength of the regime, but it is balanced with those funding standards and the key metrics of the new arrangements. The bottom line is that it is fine to take supportable risk. Taking investment risk to benefit from potentially higher returns is fine if there is enough time for asset values to recover or a sponsor with enough resources to pay more in the future. That is why the new regime focuses on the key metrics of maturity and covenant strength. The noble Baronesses, Lady McIntosh and Lady Altmann, raised costs to scheme members. It is worth putting those absolute costs in the context of the scale of our pensions world. The impact assessment for the code indicates that costs will amount to around £7,000 per scheme on average, with ongoing administrative costs of approximately £1,100 on average per scheme. That excludes costs associated with changes in deficit repair contribution payments, of course. Those are small costs compared to the overall liabilities of a scheme. They are unlikely to have a significant impact, and certainly not on members. Most schemes are closed, and members of those schemes will not be paying contributions. Modestly increased costs are unlikely to have any impact on the probability of members’ benefits being paid in full. There are some members in schemes which share costs and are still open for accrual, but they are the minority. Only 4% of schemes are fully open; 20% are closed to new members. As the costs per scheme are estimated to be low, we do not anticipate any significant material impact on members overall. This must be seen in the context of the impact of clearer funding arrangements with more emphasis on long-term planning, which should make members more confident that their benefits will be paid in full. We were asked what will be done to monitor the costs. We will continue to monitor the costs. Although there is some uncertainty about trustee behaviour and response, as we cannot know that, the impact assessment used data from March 2022 and modelled, on average, an overall net saving of around £20 million per year. I can write with more detail if Members would like that. It is worth understanding that the regulations and code are principle-based. The code is practical guidance for implementing the regulations. The noble Lord, Lord Davies, asked about different valuation methods. I will not get into TAS but will write to him on how TAS interacts. However, I have a word for the broader audience watching from home about the different valuation methods. There are two main ones. The technical provisions are, rightly, used to assess contributions and deficit recovery contributions because they are calibrated to balance member security with employer affordability. On the other hand, the solvency measure is much more generic and less scheme-specific. It is used to assess funding against the cost of insurance buyout. That is a much stronger measure. Schemes are not required to be funded to that level because that would make DB much more expensive, if not unsustainable. The use of these technical measures does not push schemes into inappropriate de-risking or into a risk-adverse approach. Schemes can choose a variety of approaches to setting their liabilities, including by reference to the investments that they intend to hold. They will be affected by a whole range of considerations, not least the route to compliance with TPR that they choose to use. The new regime is extremely scheme-specific and flexible. Even at significant maturity, schemes can invest in a proportion of return-seeking assets provided that the risk can be supported. Most schemes are currently investing more prudently than the new regime requires. Indeed, the regime suggests that there is headroom for some schemes to take more investment risk than they are taking currently, of which I am sure the noble Baroness, Lady Altmann, will be very conscious. The requirement in this to derisk will, as intended, mostly impact outliers which have been pushing the scheme-specific flexibilities further than they were ever expected to stretch and, in doing so, putting members’ benefits at risk. It is right that those outliers should be required to derisk to protect members’ benefits through the clearer and more enforceable metrics of the revised regime.

16:45:00

The new arrangements as a whole introduce clearer funding standards, with an emphasis on long-term planning. There is a range of levers out there, but the underpinning principle of sustainable risk is crucial. My noble friend Lady Drake may be interested to reflect on this. The new arrangements ensure that investment risk is considered alongside an assessment of whether that risk is supportable by having sufficient time for asset values to recover and a sponsor able to pay more in future if necessary. Along with the journey plan to low dependency by the time a scheme reaches significant maturity, that will give us some really important levers to protect members’ benefits.

Various noble Lords asked how TPR will monitor the effectiveness of the code. Obviously, codes are meant to be longer term, but the regulator will absolutely monitor its effectiveness, primarily through engagement with pension schemes. The DWP, alongside the regulator, will monitor how the funding and investment approaches of the schemes develop in response to the new code and the legislative framework. At the very least, funding and investment regulations will be required every five years. The code will be reviewed and revised as appropriate and we will keep it under review. In the end, the code is practical guidance for the regulations.

Proportionality remains a key theme throughout the code. TPR has made clearer the level of detail and analysis that it expects from trustees, depending on the scheme’s circumstances, when setting the low dependency investment allocation and assessing the employer covenant and supportable risk. The regulator carefully considered the feedback to its consultation on the statement of strategy, particularly in relation to undue burden and cost and ensuring that its approach reflected the circumstances of all schemes. For most schemes, the cost of compliance is likely to be low. Many schemes will be asked for less information than was proposed in the consultation.

However, the new code gives TPR an opportunity to evolve how it regulates DB funding, from the information it collects from schemes to how they provide it to TPR and how TPR processes it and engages with schemes to understand their approach to valuation. TPR is also enhancing its digital service to make the process for submitting valuations more reflective of the way that users engage with the regulator while ensuring that it captures the information it needs to identify emerging risks more effectively and respond to them in a targeted way.

The noble Viscount, Lord Younger, asked about the training and recruitment of trustees, which is a very good point. He will know that all trustees have to meet minimum standards of knowledge and understanding. He will also be very aware, because of his recent job, that the DWP has put out Pension Trustee Skills, Capability and Culture: A Call for Evidence, which confirmed that most trustees are knowledgeable, well equipped and committed to their roles. However, some trustees require more support than others to meet their knowledge and understanding obligations. The DWP is working with TPR to implement a trustee register which will better enable data analysis and target support to trustees who need it most. Professional trustees are also encouraged to seek accreditation. We are considering whether legislation should be taken forward to mandate that in future. DWP officials are considering the appropriate steps to ensure that most schemes are equipped with at least one trustee who has additional qualifications or experience.

The question of recruitment is important. I recognise that in some circumstances excessive regulation or guidance could be unhelpful, but I do not believe that that is the case here. The DWP and TPR worked closely with a wide range of stakeholders, including scheme trustees, in developing the detail of the new regime. We hope that the clearer funding standards, supported by practical guidance, will support trustees to make decisions in the best interests of their members.

My noble friend Lady Drake asked about employer covenant strength and when we will provide more details. TPR will provide guidance later this year. Given that the year is running out, that should give her a reasonable answer.

The noble Baroness, Lady Altmann, asked whether the Government have made an assessment of the long-term impact of ending QE. I will have to write to her on that—I confess I do not have one in my back pocket.

The noble Viscount, Lord Younger, asked about the future of CDCs. As he will know, Royal Mail launched the UK’s first CDC pension scheme on 7 October. It will provide more than 100,000 employees with an income for life and a cash lump sum in retirement. We have had extensive engagement with several parties wanting to offer unconnected multiple-employer CDC pensions through both not-for-profit trust-based schemes and trust-based schemes intended to operate on a commercial basis. We launched a consultation on draft regulations which closes on 19 November. Those regulations are intended to extend the current CDC legislation, allowing such schemes to apply for authorisation to operate. That engagement continues and, following the consultation, I anticipate regulations will be brought forward, but the exact timetable will depend on what issues, if any, arise from the consultation.

The noble Viscount asked about the pensions dashboard. I will not patronise him by telling him what pensions dashboards are, since he knows what they are. The Pensions Dashboards Programme has been delivering against its revised plan following the conclusion of the formal reset process. In line with that plan, the programme has begun testing the connection journey with a small number of external organisations, which will facilitate wider industry connections expected from next April. Alongside that, it has published an updated draft code of connection, technical standards and data standards to support the pensions industry to prepare for connection. The Pensions Dashboards Programme has also confirmed that GOV.UK One Login will be the identity service provider for anyone using the dashboard service. That has been a matter of interest to noble Lords in days gone by. The pensions dashboard will continue to publish biannual progress update reports. When he was the Minister, the noble Viscount was good enough to hold regular updates for Peers on this matter, and I will be doing the same, so I will invite him to one of them when we are ready to do them.

On the winter fuel payment, we want pensioners to receive all the benefits they are entitled to, including the winter fuel payment, so we have been running a national campaign since September to encourage pensioners to apply for pension credit before 21 December—the last date for making a successful backdated claim and still getting a winter fuel payment this year. In recent weeks, we have seen a 152% increase in pension credit claims received by the department. We are continuing to work with external partners, local authorities, the devolved Administrations and our own campaigns to boost take up.

I think I am probably running out of time as I am getting a nod from the Whip. I am sure I have missed questions, and I apologise for having done that. I am grateful to all noble Lords for taking the time to discuss something in this depth, with such technical competence and in such detail. I hope I have been able to inform and reassure the Committee about the code and our wider strategy. I look forward to us continuing this debate in years to come. We all want to make sure that members who have saved long and hard for their pension get the benefits they have been promised and to which they are entitled. I hope this will be a contribution to that process.

I thank the Minister for her long and detailed response. I think I need to use the formula used by Ministers: “I will read the entry in Hansard”. There was so much information in it, for which I thank her. I also thank noble Lords who came for the debate on Russian sanctions; I hope they found it informative to hear about pensions. The phrase that had particular resonance with me was that used by the noble Baroness, Lady Altmann: “spurious accuracy”. When I was a trainee actuary, we were told specifically that making calculations more complex and difficult did not make them any better. Trying to forecast the future is difficult enough. Making complex calculations does not improve the outcome for members. My major point is that current developments in pensions will require the code to be kept under review in any event, whether they are an increasing appreciation of the risks of climate change or the development of pension scheme surpluses. I welcome the remark about that. These changes accumulate and I hope that the Minister will enjoy further debates and discussions. I look forward, in particular, to the pensions Bill. Not many people say that, but I think we will have some interesting debates. Motion agreed.