Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022

Baroness Drake Excerpts

Tuesday 12th July 2022 Grand Committee

[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.