Pensions Bill

Baroness Drake Excerpts

Wednesday 12th March 2014 Lords Chamber

[Lord Lawson of Blaby (Con)]

My Lords, I need not detain the House long because, I am glad to say, my noble friend the Minister has met pretty well in full the points that we made at earlier stages of the Bill. I am extremely grateful to him for that. There is a real mischief in the huge range of costs which bear no relation whatever to investment performance incurred in different pension schemes. It has always been known, but it was documented fully by the Pensions Commission some time back. That we have been able to improve the Bill in this way is a tribute to this House, but particularly to my noble friend the Minister, who has listened carefully, accepted the need to deal with that mischief, and put forward a practical and sensible way of doing it.

There is only one loose end, and although the Minister dealt with it I would like to spend a minute or two on it. The amendment says “some or all” costs, but that is purely a legal technicality and in fact it means all costs, itemised. That is the firm intention. They will be published generally, not just given to the members of the schemes, so that all can see. However, as the Minister said, the provision deals exclusively with defined contribution schemes and not with defined benefit schemes. I understand his reason for that—because it is only in the defined contribution schemes that pensioners are, in effect, from time to time ripped off by investment managers who charge far too much in the way of costs. There are five times as many people in defined benefit schemes as in defined contribution schemes, however, and the money in defined benefit schemes is well over £1 trillion.

Of course, if the same kind of ripping off goes on—obviously it does; there is no difference in the investment manager’s behaviour from one to the other—it is not a victimless crime. The pensioners may not be the victims, but the shareholders in the companies certainly are. The Government cannot desire to see shareholders ripped off when it can so easily be prevented by extending to defined benefit schemes the disclosure and transparency requirements that the Minister will put in place for defined contribution schemes. He says that he will consult on that. I am delighted to hear it, but I very much hope that the result of the consultation will be to require the same disclosure and transparency for defined benefit schemes as for defined contribution schemes.

[Baroness Drake (Lab)]

My Lords, I declare my interests in the area: I am a trustee of the Santander and Telefónica pension schemes, and a member of the NAPF Pension Quality Mark board. As no doubt other noble Lords here today are, I am concerned to understand the extent to which Amendments 2 to 5 provide for full transparency on transaction costs and deliver on the assurances that the noble Lord, Lord Freud, gave on Report. I would therefore like to ask the Minister several questions.

The Minister confirmed that the Secretary of State would be divested of the power to set the requirements for securing transparency of transaction costs in relation to money purchase personal pension schemes, by giving that responsibility to the FCA. As he said, the amendment does not extend the existing powers of the FCA but imposes a duty on it to make rules on the disclosure of information, following consultation with the Secretary of State and the Treasury, to ensure consistency between FCA rules and the regulations made by the Secretary of State. If the FCA response to that consultation is not considered adequate in achieving such consistency, which Minister will be responsible for ensuring that the FCA fulfils its duty in that regard, and with which powers?

There will no doubt be much consultation and lobbying prior to regulations and rules being set, and no doubt various interests will be brought to bear in those considerations. However, does the Minister agree that the draft statement of recommended practice put forward by the Investment Management Association to the FCA does not provide a sufficient set of requirements for full reporting on transaction costs by investment managers?

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[Lord Freud]

My Lords, let me start by dealing with the question raised by the noble Baronesses, Lady Drake and Lady Sherlock, on the way in which the regulation works between two groups. The Pensions Regulator and the FCA work closely together to ensure that the regulatory frameworks for trust-based pensions under the regulator and contract-based pensions under the FCA are aligned and provide for a robust system of governance and fair treatment for members. The Government are not looking to change the current regulatory structure, as was confirmed in the DWP’s Triennial Review of Pensions Bodies, which was published in December 2013. Structuring the duties in this way is necessary to reflect the dual regulation structure and the fact that the FCA is an independent body in statute. Without this approach, there would be no duty on the FCA to make these rules.

In addition to their existing duties to consult, the amendments mean that both the Secretary of State and the FCA will be under statutory duties to consult one another in making regulations and rules, enabling us as far as possible to ensure consistency of approach with the rules following the regulations. There is absolute commitment from the Government and from the FCA to aim for consistency. The FCA would not propose to deviate from government regulations. The aim of a separate duty is not to provide room for inconsistency—far from it; it is about giving the FCA the flexibility that it needs to use its powers and expertise to respond as an independent regulator.

The noble Baroness, Lady Drake, raised a question on hybrid schemes. The regulations will be able to extend the disclosure rules to the DC element of hybrid schemes. The duty is in addition to the existing power in Section 113 of the Pension Schemes Act 1993.

The noble Baroness also raised a question on the relative position of the PRA—the prudential regulator—and the FCA. The FCA, as per its rules, will be consulting on the development of disclosure and requirements and will work closely with both Her Majesty’s Treasury and the PRA. Treasury Ministers are committed to strong disclosure of member-borne costs and believe that the FCA is best placed to make those rules.

On the question of the SORP code, raised by the noble Baroness, Lady Drake, the Government recognise industry initiatives to improve transparency of pension costs and charges, but as the OFT noted, such measures are voluntary and can be piecemeal. That is why the Government believe that transparency measures should be compulsory and standardised.

[Baroness Drake]

The Minister’s response on the SORP is helpful to a point. The Minister is making a distinction between a compulsory and a voluntary regime. My more detailed point was about the proposals as to what there should be transparency on, and the costs involved. I was asking whether the Minister could give an assurance that he accepts that the range of costs proposed in SORP would not be sufficient to meet a full transparency criterion.

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[Lord Freud]

The DB element will be part of the consultation. Depending on that consultation, we will have to decide how to treat that particular aspect.

On the questions around the EU, clearly right now we are free to write these regulations and rules and there are no EU rules to hinder that. However, that might change in the future. One of the attractions of pulling the FCA into this process is that it has technical expertise in this area and is the body negotiating in Europe on relevant EU legislation. It is therefore best placed to work with DWP on determining how costs and charges can be defined, captured, measured and disclosed. By using its own rule-making power, the FCA may be able to respond quicker than the parliamentary process to changes in the market or from the EU.

I think I have dealt with all the issues.

[Baroness Drake]

I hope the Minister does not think I am being pushy, but this is probably the last chance we will have to question him on this before we complete this stage of the Bill. On the issue of EU regulations, the Minister has confirmed that at the moment there are no EU rules constraining the Government from pushing for full transparency on transaction costs. Hopefully, any product from the EU in favour of transparency would work to the Government’s remit. However, one of the underlying concerns is that the earliest there could be any impact from any change that comes out of the European Parliament and from the EU would be 2016, maybe later. People are looking for an assurance—I certainly was asking for one—that the FCA would fulfil its duty without being constrained to await the outcome of any EU discussions and would push ahead to an early timetable consistent with the spirit of the point the Minister made on Report.

[Lord Freud]

I am pleased to be able to confirm that it is not tied to the EU in any way. We will be pushing ahead with this at the speed I indicated, which is—