Official Report: Minutes of Evidence

The Chairperson (Mr Gildernew): I welcome Mr Justin Wray, who is the interim assistant director of long-term savings at the Association of British Insurers (ABI). I invite Justin to make a brief opening statement, and then we will go to questions from members.

Mr Justin Wray (Association of British Insurers): Thank you, Mr Gildernew and Committee members, for the opportunity to give evidence this morning.

I will briefly set the scene. The ABI represents most pension providers regulated by the Financial Conduct Authority (FCA), including several of the largest defined contribution workplace providers across group personal pensions, master trusts, insurers in the pension risk transfer market and retail pension providers. Our members are also major investors who pay a crucial role in supporting economic growth.

We agree with the Department for Communities that provisions equivalent to the measures proposed in the UK Bill should be put in place in Northern Ireland at the same time as those in Great Britain in order to ensure that parity is maintained across the UK and avoid any adverse effects for pension savers in Northern Ireland. Ultimately, all policy interventions must put the interests of long-term savers first.

The provisions that are being considered in the Pension Schemes Bill are wide-ranging. Taken together, the proposals are set to usher in the biggest pensions reform since auto-enrolment and the pensions freedoms. The ABI is broadly in support of the Bill, and we are pleased to see measures that we have long called for included, such as the power to enable firms to consolidate schemes where that is in customers' interests; a framework to assess funds' value for money; and efforts to find a solution to the small pots problem. While we broadly support the Bill, some provisions will require detailed scrutiny. In addition, the practical sequencing and implementation of the changes will need to be considered.

The main policy area that is covered by the legislative consent memorandum (LCM) is contractual override, which would allow pension providers to move individuals from workplace pension schemes that may be outdated or subscale to ones with more suitable investments and terms and conditions. We are supportive of the overall approach and think that contractual override has the potential to be a game changer. We still, however, seek some changes and additional clarifications in areas such as the scope of contractual override, the nature of the test and the process that is envisaged. We are seeking additional clarification and scrutiny from the UK Government to ensure that there will be optimal take-up. That is set out in the written evidence that we have provided to the Committee. That concludes my opening statement.

The Chairperson (Mr Gildernew): Thank you, Justin. That is very useful.

Your paper focuses heavily on the contractual override element of the LCM. When will the value-for-money (VFM) framework and small pot authorisation be put in place? How crucial is it that the contractual override part comes into force before that VFM framework?

Mr Wray: I will answer the last part of your question first. We regard it as crucial that the contractual override is put in place ahead of the VFM framework. One aspect of contractual override will be to enable insurers to move members from low-value to better-value schemes. If that is done ahead of the value-for-money framework, it will make that whole value-for-money process more meaningful. As for the actual timings, the intention is that the value-for-money regulations will be processed in 2026-27 and the first publication of the value-for-money data will happen midway through 2028.

The Chairperson (Mr Gildernew): I get it to a degree, but why is it so crucial?

Mr Wray: Because, otherwise, the value-for-money exercise will be done on a basis that could soon become outdated. In other words, if there is not the opportunity to move members to better value-for-money schemes first, you can carry out the value-for-money assessment and it will show, perhaps, that a number of schemes are not representing good value for money. If, however, insurers had been able, under contractual override, to move to better value-for-money schemes, that would simply be a more efficient sequencing.

The Chairperson (Mr Gildernew): OK, that clarifies it. Thank you.

Do you have any concerns about pension schemes being changed without the consent of scheme members, which would impinge on their ability to make decisions about their schemes and pensions?

Mr Wray: It is clearly very important that members' interests are paramount at all times and that the ability to move members from one scheme to another or make other changes is subject, at all times, to the safety and security of members' benefits. We are satisfied that, for the most part, the tests that are required before an insurer can move members from one scheme to another are robust, including the requirement that such a change be certified by a person who is independent of the insurance provider — in other words, to maintain the interests of members.

The Chairperson (Mr Gildernew): OK. Can you tell us a wee bit more about the "better outcome" versus "no worse outcome" requirements for the contractual override provision? Are you able to elaborate on that, please?

Mr Wray: Yes. The "better outcome" is for members who would be directly affected by any change — in other words, broadly speaking, those who are likely to be moved or have other terms and conditions changed. The "no worse outcome" refers to members who would not be directly affected by the change; in effect, it says that you cannot make one group better off if you make another group worse off. The members who are not directly affected have to be at least no worse off. From an ABI perspective, that is one area where we would like to see a slight change in order to achieve parity with other trust-based schemes where "no worse outcome" is the test provided throughout.

The Chairperson (Mr Gildernew): OK. I will come to you in a second, Maolíosa.

One of the other issues that we have probed with regard to the LCM relates to the Pensions Ombudsman. How much difference will the clause on the Pensions Ombudsman make? Will it have a big impact on reducing costs and waiting times if courts are avoided?

Mr Wray: Yes. We think that it is a beneficial change. We agree with the provisions in the Bill that refer to the Pensions Ombudsman as a competent court. We think that it will make a difference. I do not have a quantification of the amount, but it seems to us to be a sensible change.

The Chairperson (Mr Gildernew): OK. Thank you.

Mr McHugh: Justin, you are welcome. I appreciate your contribution on this.

The clause on terminal illness extends the relevant life expectancy from six months to a year. How many people is that likely to affect, on average, in the North of Ireland?

Mr Wray: I am afraid that I do not know the answer to that. I can see whether it is possible to obtain the figure and write to you.

We support that change. We think that it is more appropriate to change the definition to a life expectancy of 12 months or fewer, as is proposed in the Bill. I will just add that that change relates only to payments from the Pension Protection Fund. It will not apply to everybody who has such a diagnosis but to those who are in receipt of such payments. The numbers are therefore unlikely to be large, but it will obviously be material for those who are affected.

Mr McHugh: It will be significant for those who are affected; you are quite right.

To what extent do people understand how to access the pensions dashboard in order to utilise it?

Mr Wray: The lack of understanding or awareness of pensions issues is, of course, serious. The dashboard is a good initiative that is intended to help in that regard by putting each individual's pension rights in one place in an easily accessible form. The dashboard is still in the testing phase, so it is not possible yet to say how many people will or will not use it and what benefits they will have from it. That is being worked on at the moment. As a step, it is a beneficial one.

Mr McHugh: To what extent are you developing initiatives to inform the general public? It is a wee bit like the comment, "My today is your tomorrow", as an older person to a young person, but the young person is unlikely to show much interest one way or the other. At the same time, however, it is critical that people have that understanding. There should be an initiative to educate people on the dashboard.

Mr Wray: I could not agree more. As more and more people have defined contribution pensions — in other words, the more the risks are on them — the more important it is that they get an understanding of how their pension works and what their choices are. At the moment, there is a campaign going on, run by the ABI, Pensions UK and others, called "Pay Your Pension Some Attention". You might have been lucky enough to see Ross Kemp advertising that initiative. There is a general push to increase the attention that people pay to pensions. For those who are working on the dashboard, individuals' communication and engagement with it is very much at the front of their minds. They will work on that as the dashboards are being rolled out.

The Chairperson (Mr Gildernew): I have a few more questions, Justin. I welcome your expertise in the subject.

Will you say more on your concern about how contractual override interacts with other regulatory requirements? What does that mean?

Mr Wray: Our main issue is the issue that I have touched on already: the sequencing. It is important to ensure that the contractual override and other changes that are envisaged in the Bill, such as value for money, are done in the right order. It will also be necessary to consider how contractual override will interact with other regulatory requirements, such as consumer duty. All of those put obligations on to providers, and we need to ensure that they work together efficiently.

The Chairperson (Mr Gildernew): Are those properly considered in the LCM? Do you have concerns around that?

Mr Wray: It is not clear at the moment, and it will not be clear until the secondary legislation is published. Quite a lot of the Bill makes provision for further detail to be in secondary legislation. That sort of interaction is something that will need to be considered when the secondary legislation is drafted.

The Chairperson (Mr Gildernew): How would you prefer that to have been dealt with? What type of clause would have assisted that or made it clear in primary legislation? Is that something that you can advise us on?

Mr Wray: It would have been helpful to have had an acknowledgement somewhere in the legislation that there are obligations on providers and that they need to pay attention to all of them but also ensure, perhaps through something like FCA rules or an equivalent instrument, that, in instances where there needs to be reconciliation between them, they can be dealt with in that way.

Ms Mulholland: Thank you so much, Justin. You are clearly a font of information when it comes to this sort of thing.

What do you see as the key differences between the Financial Ombudsman Service and the Pensions Ombudsman? You have welcomed that clause. What is the key benefit of the reinstatement of the position of the Pensions Ombudsman in relation to the Financial Ombudsman Service?

Mr Wray: The Financial Ombudsman Service deals with all financial services, and, as the name suggests, the Pensions Ombudsman deals with pensions issues. There is some overlap in the jurisdiction, but, on the other hand, the legal basis and the compensation payable are different. It is something that we would like to see addressed. It is not in the scope of the Bill, but you are right to highlight it as an issue, because there is a degree of overlap.

Ms Mulholland: This looks at varying contractual terms without consent. Does the LCM remove an element of communication with the individual concerned? Is that a concern of yours?

Mr Wray: I do not think so, because contained in the requirements for contractual override is communication with the members affected and a period in which they have the ability to take a different course of action if the override does not meet their needs.

Ms Mulholland: It says "without individual consent", but there is still the option for the individuals or parties to go against what is being done in respect of the override: is that correct?

Mr Wray: Yes. The Bill uses the concept of a unilateral change notice, but such notice has to be given to all affected members. They will have a period in which they can take an alternative course, if they wish.

Ms Mulholland: Forgive me, but the subject of pensions is a big learning curve for me. You mentioned the clause that relates to the move from six months to 12 months, and you talked about the protection fund. Will you explain a wee bit about that, so that I can understand why that move will not impact on everyone with a life-limiting condition? I know that it is not technically in the LCM, but it would be helpful.

Mr Wray: I am happy to do that. It dates back to the 1990s and before, when most pension schemes were defined benefit schemes that had a sponsoring employer. There were some sad circumstances where a sponsoring employer became insolvent and there was not enough money in the pension fund to pay the benefits of the pensioners. The Pension Protection Fund was established, financed by a levy on all defined benefit pensions, so that, in the circumstance of an employer being insolvent and the scheme being insufficiently funded, payments from the Pension Protection Fund will compensate, up to a ceiling, for the lack of funds in the pension scheme. The provision on terminal illness is simply to enable such payments to also be made for 12 months from diagnosis rather than six months as it was previously.

Ms Mulholland: That is really helpful, thank you so much.

The Chairperson (Mr Gildernew): We are coming near the end. We also have a panel that is coming in.

Will you talk us through the importance of the proposed retrospective actuarial confirmation of benefits changes — that is quite a mouthful, I have to say — and the impact on members of pension schemes?

Mr Wray: Yes. It again dates back to some time ago. There were changes made to defined benefit schemes that required the confirmation of an actuary. There was a case in the UK High Court — Virgin Media v NTL Pension Trustees II and others — a couple of years ago that found that, for one scheme, it was not possible to find the relevant actuarial confirmation and therefore some of the subsequent changes to the scheme were invalid. That is a problem, because anybody who runs a defined benefit scheme and is not able to lay their hands on that actuarial confirmation might find that changes that had been made subsequently were invalid, and that might involve a lot of recalculation of benefits.

I do not speak for the UK Government, but I am pretty confident that they would rather that defined benefits schemes were investing for future growth rather than spending a lot of time recalculating benefits from a couple of decades back. What the provision says is that, "If you can confirm today that you would have met the test a couple of decades ago, even if you cannot find a certificate, that is OK".

The Chairperson (Mr Gildernew): It is to simplify that part of the process: is that right?

Mr Wray: It will simplify it, yes. As long as an actuary today can confirm that his or her predecessor from 20 years ago would have made the certification, subsequent recalculation of benefits is not necessary. It is not a free pass. It is not that, if you did not meet the conditions at that time, you are now deemed to have done so. However, provided you can go back, look at the records and show that you would have met the condition, that is OK.

The Chairperson (Mr Gildernew): Could that retrospective validation disadvantage members or diminish accrued benefits in any way?

Mr Wray: I do not believe so, because the actuary will confirm that the conditions would have been met at that time. I do not believe that any disadvantage will arise.

The Chairperson (Mr Gildernew): Are there any issues around actuaries now potentially not being comfortable with retrospectively signing off on that? Are members of that profession content?

Mr Wray: I think that they are content with the provisions. Clearly, when they get to individual cases, if they are unable to certify, they will not do so. However, I have not heard that they have any problem with the retrospective certification as a solution to the issue.

The Chairperson (Mr Gildernew): OK. Thank you. That is helpful.

Mrs Cameron: Thank you, Justin, for your attendance. Clearly, as Sian said, you are very knowledgeable on the subject, which, to many of us, is too scary to look at, so we rely on expertise.

Can you just outline in a basic way what the consequences would be of not consenting to the legislative consent memorandum? What would that mean?

Mr Wray: The main difference would be that some provisions that will come into force in Great Britain would not come into force in Northern Ireland until the Northern Ireland Assembly had passed its own legislation. Given that many of the provisions, including those on terminal illness, which we have just discussed, are beneficial to members, Northern Ireland citizens would not benefit from them at the same pace as those in Great Britain.

The Chairperson (Mr Gildernew): I am just checking that members have nothing further. Your work here may be done, Justin. We really appreciate it. It is a heavy subject but a very important one, and that level of detail has been really helpful to the Committee today. Thank you very much.

Mr Wray: Thank you, Chair.