Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022
(2 years, 4 months ago)
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Baroness Stedman-Scott
That the Grand Committee do consider the Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022.
Relevant document: 6th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Foreign, Commonwealth and Development Office and Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, I am pleased to introduce this instrument, which brings into pension law various duties of trustees of defined benefit and defined contribution occupational pension schemes relating to the appointment of fiduciary managers and the use and performance review of investment consultants. These duties will replace those currently set out in an order made by the Competition and Markets Authority, the CMA, in 2019 following an investigation into competition in the relevant markets. Compliance with these duties will now be overseen by the Pensions Regulator instead of the CMA.
These regulations contribute to the Government’s objective of improving pension schemes’ administration and governance standards, transparency and decision-making, which will in turn drive better outcomes for the millions of hard-working savers in occupational pension schemes now and for years to come. I am satisfied that the regulations are compatible with the European Convention on Human Rights.
These regulations bring into pension legislation the obligations on trustees of occupational trust-based pension schemes contained in the CMA’s order in relation to the provision of investment consultancy and fiduciary management services. Before setting out more about what the regulations do, it is worth explaining the background to how they have come about.
In simple terms, investment consultancy is the provision of advice to trustees on investment strategy and related matters. Fiduciary management involves the delegation of some investment decisions by trustees to advisers alongside providing advice on investment-related matters. The use of these services has grown over the last decade. The complexity of investments, lack of investment knowledge and challenge of managing defined benefit scheme liabilities has led to an increased dependence on both services. Good investment is a key element in any well-run pension scheme. Trustees are responsible for investment governance and are accountable for any investment decisions taken. They also have a duty to consider proper advice and act in the best financial interests of beneficiaries.
In December 2018, the CMA, following a referral by the Financial Conduct Authority, published its report on its market investigation into the supply and acquisition of investment consultancy and fiduciary management services to and by various investors and employers. The CMA found that among pension schemes there was a low level of engagement by trustees and a lack of clear and comparable information on which to assess value for money.
Baroness Stedman-Scott (Con)
The CMA found among pension schemes that there was a low level of engagement by trustees and a lack of clear and comparable information on which to assess value for money. Trustees were being steered by consultants towards their own higher-cost fiduciary management services, giving them an incumbency advantage. Ultimately, trustees were more likely to pay higher prices for these services than they should. Overall, the CMA found that this was having an adverse effect on competition for these services and likely bringing financial detriment for employer sponsors of defined benefit pension schemes and savers in defined contribution pension schemes.
It is important to note that both services were said to influence decisions affecting pension scheme assets worth over £1.6 trillion and the retirement incomes of millions of people. Any negative impact on scheme outcomes will be significant, and will accumulate and compound over the long term in which pension assets are invested. The CMA’s report proposed recommendations and remedies to encourage better trustee engagement when buying services, and better disclosure of fees and performance. The CMA made it clear that some of these remedies would be implemented by an order. That order was made in June 2019 and came into effect later that year.
The CMA also recommended that the Department for Work and Pensions take forward legislation to bring into pensions legislation the provisions of the order for two specific remedies: first, the requirement to carry out a competitive tender in certain circumstances before appointing, or continuing to use, a fiduciary manager; and secondly, the requirement to set objectives for, and review the performance of, investment consultants appointed by the trustees.
The CMA also recommended that legislation should provide for the Pensions Regulator to oversee these new duties on trustees, rather than leave long-term enforcement action against occupational pension scheme trustees to the CMA. The DWP, on behalf of the Government, committed to do this in early 2019 and consulted on its proposed legislation in summer 2019. However, because of necessary reprioritisation brought on by the Covid-19 pandemic, work on this was delayed until this year.
The regulations before the Committee fulfil the commitment the Government made in 2019 to accept the CMA’s recommendation and to integrate the requirements in the CMA’s order that apply to trustees of occupational pension schemes into pensions legislation. Subject to approval, this instrument will require trustees of occupational pension schemes to set objectives for persons who provide them with investment consultancy services, to review those objectives at intervals of no more than three years, and to annually review the performance of those providers against those objectives. This setting of objectives will enable trustees to monitor the performance of their advisers.
The regulations also require trustees to carry out a qualifying tender process when continuing to use existing fiduciary management providers, or appointing new ones, if the scheme meets the asset management threshold. The threshold is met when fiduciary managers covered by the regulations manage 20% or more of in-scope assets. The regulations also set out what the qualifying tender process is and when it must be carried out. Additionally, through the regulations the Government have defined “investment consultancy provider”, “investment consultancy services”, “fiduciary management provider” and “fiduciary management services” for the first time in pensions legislation.
The Government believe that these duties will encourage trustees to become more engaged with the way services are bought, monitored and evaluated, or to consider more efficient consolidation options. In turn, this will lead to better outcomes for scheme members and employer sponsors of schemes.
For the most part, the regulations replicate the effect of the relevant provisions in the CMA’s order. However, there are some small differences that reflect government policy. One such difference is about the type of schemes that are exempt from the requirement to set objectives. The CMA excluded trustees of schemes that are sponsored or funded by providers of investment consultancy and fiduciary management services from setting objectives for their investment consultant and from tendering for fiduciary management. The regulations bring these schemes back into scope of the requirement for trustees of such schemes to set objectives for their investment consultant. It is government policy that members of such schemes should still benefit from a well-governed, high-performing investment consultant, despite the trustees and the investment consultant being part of the same organisation.
The regulations also do not make any provision about local government pension schemes. This is a matter for the Department for Levelling Up, Housing and Communities and the devolved Administrations in Scotland and Northern Ireland to bring forward their own legislation. As such, for local government pension schemes, the CMA’s order, to the extent that it imposes requirements relating to investment consultants, will continue to remain applicable for the time being.
Finally, this instrument does not create any exceptions from the requirement to tender for fiduciary management services in cases where parties are connected only because they are participating in a joint venture. This is to avoid the risk that, where a scheme sponsor and a fiduciary manager had a joint venture, they would not be required to run, or bid for, a tender. The CMA order contains a limited exception for joint ventures. This change has been made to disincentivise firms from creating joint ventures to circumvent this duty.
As stated earlier, the regulations bring the monitoring and enforcement of these trustee duties into the regulatory remit of the Pensions Regulator. Trustees will be required to provide certain information about the use of investment consultancy and fiduciary management providers in the scheme return which they must complete each year and return to the Pensions Regulator. The information enables the Pensions Regulator to monitor compliance with the duties set out in the regulations. The regulator has said it will update its published guidance to reflect the final regulations ahead of them coming into force.
In conclusion, these trustee duties concerning the way investment consultancy and fiduciary management services are bought and evaluated will facilitate good governance, which will ultimately mean services that are better value for money, benefiting members and the employer sponsors of pension schemes. Of significant importance is that the regulations bring compliance, monitoring and enforcement of the duties under the remit of the Pensions Regulator. I therefore commend this instrument to the Grand Committee and beg to move.
Baroness Janke (LD)
My Lords, I thank the Minister for her presentation and explanation of why the Government are introducing this statutory instrument. The Explanatory Memorandum states that it
“will encourage better trustee engagement, transparency and governance when buying investment consultancy and fiduciary management services. It will require trustees of occupational pension schemes … to set objectives for their investment consultant and carry out a tender exercise in certain circumstances before appointing a fiduciary manager. It will also enable The Pensions Regulator … to oversee the remedies which apply to such trustees and ensure compliance.”
The problem that the regulations are designed to address is focused mainly on smaller occupational pension schemes which need to take advice on their investment strategy. The investigation by the CMA of advice to pension schemes found that there was a low level of engagement with trustees, a lack of information for assessment of value for money, and that customers were steered by consultants towards their own higher cost fiduciary management services giving them incumbent advantage.
The remedies proposed by the CMA are to become part of the new regulations, with TPR ensuring compliance. We are broadly supportive of the measures in the SI but have a few issues for the Minister to address. First, can she reassure us that the new process is not onerously bureaucratic and time-consuming for small schemes? Certainly, the introduction of competitive tendering has in some cases led to a very time-consuming process, so I would like her assurances on that.
What about the cost to smaller pension schemes? The impact assessment has detailed calculations but, probably because it is very long and detailed, I did not find a great deal on the need to empower and train trustees and managers to introduce the new system.
Also, the DWP has a strong view that bigger is better as far as pension schemes are concerned. These regulations are needed to improve the quality of advice to smaller schemes with less experienced trustees. Will the Minister say how the consolidation of DB and DC schemes is going? The Minister urges consolidation and the Government are starting to put in place a “comply or explain” duty on small pension schemes to show that they are providing value for money for members or, if not, to merge into something bigger. Has this been successful? How has it been evaluated? Can she say something about what the Government are doing about the barriers to consolidation? For example, what is the cost of legal advice and consultation with members to wind up a scheme and merge into something bigger? In small schemes, costs could be high relative to the gains from consolidation, so what are the Government doing about that?
We support the proposals and look forward to best-quality advice and higher transparency for members of the scheme. I look forward to the Minister’s response to the points that I have raised.
Baroness Drake (Lab)
My Lords, I declare my interest as a pension scheme trustee, as set out in the register. I thank the Minister for her helpful and clear explanation of the intent of these regulations. I support them, because they integrate into pensions legislation an order produced by the Competition and Markets Authority to address the weaknesses it found in the investment consultancy and fiduciary management markets.
This instrument integrates two of the CMA’s seven proposed remedies for addressing the weaknesses in those markets by placing duties on the trustees of relevant occupational pension schemes: remedy 1 is the mandatory competitive tendering requirement for pension schemes to follow when it comes to fiduciary management services; and remedy 7 places a duty on trustees to set their investment consultants clear strategic objectives. These regulations also put the regulatory responsibility for the oversight of those trustee duties within the remit of the Pensions Regulator.
The case for the order being integrated into pensions regulation was set out very clearly by the CMA in its report on these markets:
“we find there are weaknesses in the demand side based on a low level of engagement by some pension scheme trustees. In addition to this, for those who engage with the market, the information that trustees need to assess the value for money (by which we mean both fee levels and quality) of these services is difficult to access. These two factors reduce the competitive pressure on investment consultants and fiduciary managers.”
Sadly, the CMA’s report and recommendations, which followed a referral from the FCA, which also identified problems, provide yet another example of a necessary intervention to address instances of poor competitiveness in the pension industry market. Poor practices on the supply side by providers and demand-side weaknesses driven by the well-known drivers of asymmetry of knowledge and understanding, customer inertia and low levels of active engagement lead to customer detriment.
In this instance, the demand-side weakness is the low level of engagement by some pension trustees, most likely in smaller and DC schemes. On a read-through of the detail in the CMA report, its very real concern about how these markets are operating becomes apparent. Lack of information and transparency on fees and performance, incumbency advantage and barriers to switching fiduciary manager rank high among those concerns. It is very depressing that we are still seeing examples of those behaviours in the pensions market.
Investment consultants and fiduciary managers have a very influential role through the advice they give and in the exercising of delegated authority to manage investments on behalf of the trustee—I say, as a trustee, that this is why this is so important. If their performance or value is poor, the result is detriment to the pension savers. The nature of the investment advice and fiduciary management markets means that any negative impact on scheme outcomes because of their performance or value is significant and will accumulate and compound because of the long time horizon over which pension assets are invested.
Addressing market weaknesses is not without its challenge. A very perceptive observation in the Secondary Legislation Scrutiny Committee’s 6th Report of Session 2022–23 in reference to these regulations provides me with an opportunity to articulate something that has been worrying me but which the committee has been very perceptive in identifying. It welcomes the additional protections, but adds:
“This is the thirteenth SI relating to the governance of occupational pensions that we have seen in the last 12 months and the Government need to be mindful of the cumulative impact of the costs and administrative burdens on both pension schemes and trustees.”
It is not only in the last 12 months. Over the last few years, there have been several pension scheme Bills and a plethora of regulations. I completely recognise that some of those regulations are very necessary to address weaknesses in the private pensions market, which are well documented in numerous FCA and CMA reports and other reputable sources of data. But in other instances, regulations are needed to correct the impact of public policy decisions and their implementation in the first instance. Suboptimal policy, or suboptimal implementation of policy, is itself now beginning to generate excessive regulations and is increasing that volume.
There are many more examples, but I will take just a few. The Government failed to anticipate the exponential growth in scammer activity that followed the introduction of pension freedoms. It was pretty obvious to most people in this field that, once you tell people that they can take all of their money very easily out of all their pension savings, scammer activity would grow exponentially. Even with the new regulations to address the scam problem, there is ambiguity between the intention of the primary legislation, the regulations and regulatory guidance.
The supposition of active engagement by savers and the requirement to take advice in certain circumstances has not provided the sufficiency of protection for pension savers. As the FCA reported, a significant amount of the advice given was not fit for purpose. It culminated in the steelworkers’ problems. The FCA confirms that consumers often take the line of least resistance in choosing draw-down products. Lack of transparency, complexity and consumer inertia all lead to poor decisions. We then have markets that did not respond with the degree of product innovation that was forecast. The introduction of value for member assessments, although conceptually the right thing to do, did not make for easy comparison between schemes.
All these issues and others have increased or will increase the volume of regulation. They add complexity and less efficiency in consumer and public policy outcomes. This is genuinely worrying me a great deal. Regulatory overloads that miss the primary target take us back to that very perceptive comment by the Secondary Legislation Scrutiny Committee. If the fundamental issue is not correctly analysed, the policy appropriate and the implementation right it will just lead to layer on layer of regulation to try to correct some of these problems in this market, which will never be a very efficient and functioning competitive market for all the reasons we know.
I wanted to take advantage of the comment in the Secondary Legislation Scrutiny Committee’s report, because I suddenly felt not alone. Here was a group of people who probably know nothing about pensions at all but asked, “How many of these things can you lay on people before you create a greater problem than the one you are trying to fix?”
To end on a more positive note—it is not that I do not think that there are positives—I recognise the work of the Minister and officials in increasing the number of eligible poor pensioners applying for pension credit. I understand that the results are very significant, so my compliments on that, having given a list of things that I am unhappy about. I look forward to seeing the figures.
Lord Davies of Brixton (Lab)
My Lords, I thank the Minister for her introduction to the regulations. I always prefer to speak after my noble friend Lady Drake and to say that I agree strongly. It can leave the impression that I might have made the same points as forcibly, so I get the credit without any of the hard work that has been put in.
However, on this occasion, I will reinforce this issue of regulations. Just read the regulations as presented to us: this is not a sensible way to tell people how to run their pension schemes. However, it is too late; we have adopted this pattern and we just have to pile regulations upon regulations. We have the report from the committee, and I hope its views will be borne in mind. There is so much to do, and to do it with regulations requires this continual production of additional regulations, but who really understands them? We require the guidance from the Pensions Regulator, so in fact we have two sets: you can look at the regulations and at the guidance. I wish we had not gone down this road of setting out how pension funds should run.
I can claim some experience here because I was a pensions regulator. I was a member of the Occupational Pensions Board, and we introduced contracting out—you can tell it was a long time ago. We made a much better job of telling people what they could, should and should not do. We introduced this extremely complicated process of contracting out over a relatively short period and we did it through issuing guidance. The guidance was what ruled. Clearly, we had very strong enforcement powers, because if people did not follow our guidance they did not get their certificate, so they had to follow our guidance—I suspect it is not quite the same here. In that sense it was a much simpler task. I really feel that some deep thought needs to be given as to how the requirements on schemes should be set out. Doing it by regulations is manifestly not the way to do it but it is the way we have adopted. We are there now, and it would be very difficult to pull back. However, this has some impact on how the regulations are drafted, presented and handled.
Of course, one problem is that the industry will always be one step ahead, so it is not as if we will ever reach a final steady state of regulations—there will be continued processes. All I am asking for, in support of my noble friend, is that an overall view is taken of the way regulations are introduced and incorporated in the structure of pensions law. There is a much better way of doing it. Thirteen SIs in one year strikes one as absurd.
I conclude with a trivial point. I have always been fascinated by this—I have seen these things for many years, not only since becoming a Member of this noble House. What is the strict distinction between Explanatory Notes and Explanatory Memoranda? I told your Lordships that this is extremely trivial, but I note that “the Pensions Regulator” gets a small “t” in the Explanatory Note and a capital “T” in the Explanatory Memorandum.
Baroness Sherlock (Lab)
My Lords, for those watching at home, I have just managed to pour water all over my speech, so I hope that noble Lords will bear with me if at points it ceases to make any sense.
I thank the Minister for her introduction to these regulations and all noble Lords who have spoken. Like my noble friend Lord Davies, I am delighted to speak after my noble friend Lady Drake—we all are. We all learn something from every time she contributes, and I thank her for her expertise and hard work on this.
Baroness Stedman-Scott (Con)
I thank all noble Lords for their contributions. While some of the participants in today’s debate stand in awe of the brain power on pensions of some of the people in this room, they are not alone. Many of the points raised by noble Lords go much wider than these regulations, and there are many things on which we will have to write to noble Lords to ensure we can answer these important questions. We will do so and put a copy in the Library.
The noble Baroness, Lady Janke, raised consolidation and what plans the Government have to accelerate the pace of consolidation in the DC market. The DWP continues to champion the benefits that consolidation can bring in improved governance, lower cost and enabling schemes to reach the scale needed to access a broader range of investments. Last year, regulations were introduced requiring all DC schemes with less than £100 million in assets to undergo a rigorous value-for-money examination each year, the intention being that schemes that cannot prove value will put members first, make improvements or wind up. Data from the Pensions Regulator shows that consolidation is happening at a healthy rate, but we will continue to keep this area under review to ensure that savers are not left in small, poorly governed, underperforming schemes. In the meantime, we are working with the Pensions Regulator and the Financial Conduct Authority to create their value-for-money framework and metrics that will enable genuine comparisons to be made and encourage competition across the DC market.
The noble Baroness, Lady Janke, asked a question about processes being onerous and bureaucratic for small schemes, and the cost to smaller schemes in terms of charges, et cetera. Trustees of schemes of all sizes have been complying with the CMA’s order since December 2019. They have reported compliance without further issues raised. The CMA investigation found that
“the potential benefits of our remedies package are likely to substantially outweigh the potential costs … even small improvements in quality of these services or reductions in price will produce substantial benefits which will likely increase over time. In comparison, the likely cost of our remedies is small.”
The noble Baroness, Lady Drake, asked what we are doing to improve transparency of pension charges and choices for members. The Government consulted last year on a proposal to move to a single universal charging structure across all providers of qualifying defined contribution pension schemes used for automatic enrolment. Responses to that consultation and other evidence are being considered to determine our next steps. Additionally, as part of the Government’s commitment to protect individuals in automatically enrolled schemes from higher and unfair charges, secondary legislation is being enacted to implement a de minimis threshold of £100 on the value of members’ rights, below which the flat fee element of the combination charge cannot be charged.
I thank the noble Baroness, Lady Drake, for the points that she raised about pension credit uptake. There has been a great effort to promote it to the pensioners who need it. There was a great campaign, resulting in Len Goodman doing a video, which has gone down very well with people and has had a massive effect. He gave the campaign a 10. Having got a 10 from Len, I am hoping that we can get a 10 from your Lordships, and particularly the noble Baroness.
The noble Baroness also raised consolidations on scheme. There are one-off costs within consolidation but, in our view, the long-term benefits of moving to bigger, better-run schemes with a more diverse investment strategy are in savers’ best interests.
I thank the noble Lord, Lord Davies, for his contributions. We will take note of what he said on the regulations, and I apologise for the mistake in the Explanatory Memorandum.
The noble Baroness, Lady Sherlock, asked how Parliament will be informed as to the progress—or lack thereof—addressing the weakness in these markets prior to the publication of the Secretary of State’s report in 2028. The report referred to is the post-implementation review of the legislation. In the interim, the duties that these regulations place on trustees will be monitored by the Pensions Regulator. Reviews between the Pensions Regulator and the DWP will take place on a regular basis.
The noble Baroness also raised an issue regarding trustees. The Secretary of State has announced her intention to make 2023 the year of the trustee. Although final proposals are still being developed, the department is keen to explore what additional support can be given to trustees, and how diversity on trustee boards could be improved.
The noble Baroness, Lady Sherlock, also asked about cost estimates for setting objectives in the CMA final report, similar to the DWP impact assessment. DWP cost estimates for setting objectives are based on information gathered by the CMA as part of its investigation into the investment consultancy markets. The DWP, the CMA and the Pensions Regulator have continued to share analysis throughout the construction of the impact assessment to ensure consistency.
The noble Baroness asked whether the legislation could reduce benefits to members as additional costs will be passed on. Replicating the CMA order places a direct cost to pension schemes, but it is anticipated that schemes will benefit from lower fees, increased quality, greater choice of services and accelerated innovation benefits, which may be passed to members. As highlighted in the CMA report,
“the potential benefits of our remedies package are likely to substantially outweigh the potential costs”.
Since DWP legislation largely replicates the CMA order, it is anticipated that benefits will continue to outweigh costs. However, potential benefits are hard to quantify, which is why they could not be monetised in the impact assessment.