Pensions Bill [HL]

Debate between Baroness Drake and Lord Boswell of Aynho

Tuesday 15th March 2011 Grand Committee

[Lord Boswell of Aynho]

I rise very briefly to support my noble friend Lord German, or at least his line of thinking. I have perhaps one qualification or addition to the presentation that he has given, in relation to the role of trustees. I have already declared to the Committee my interest as a pension trustee. I can assure the Committee that my colleagues and I are taking an interest in the matter of ethical and otherwise acceptable investment schemes as part of our dialogue with the fund managers who represent us and the interests of beneficiaries. I think that a little more could have been said about the role of trustees as a necessary link, in most cases, between the former employees and the beneficiaries on the one hand and the investment managers on the other. This is something that we should all be in, and nobody should cop out of it.

My second and perhaps also substantive point is to support my noble friend’s observations about the business utility of all this. I think that the Committee will know that I have a background in a number of issues connected, for example, with disability and other aspects of diversity. In dealing with the private sector I have found over the years that, on the whole, those businesses that take a mature view and consider their long-term interests actually understand the business case for awareness of these considerations. They are not after the big buck. Their reputation and their business attractiveness benefit, with a long-term beneficial result.

When George Cox was chief executive of the Institute of Directors, I remember doing a number of presentations with him on disability issues. He used to come up with the deathless phrase, “We do this kind of thing because we are the kind of company we are”. That seems to me a very good motto. That is the kind of company that as a trustee I would like to invest in, and that as a beneficiary I would like to feel that my trustees and my investment managers were steering me towards. I do not think that this is a matter of political contention; I think that my noble friend has been right to ventilate it.

[Baroness Drake]

My Lords, I have considerable sympathy with the amendment moved by the noble Lord, Lord German. Notwithstanding the impact of the events of 2008-09 on regulators around the world, which are no doubt focused much more acutely on governance, with the shift from defined benefit to defined contribution pension provision, which the noble Lord referred to, and the imminence of auto-enrolment, the design of the default investment funds and the investment principles surrounding them are going to gain more attention. The issue of how shareholders, particularly institutional shareholders, approach their responsibilities as owners of assets is coming under increasing scrutiny by the Government, regulators, the members of pension schemes and those who discharge fiduciary duties on their behalf.

Corporate governance, principles of stewardship and interactions between institutional shareholders and companies are increasingly considered as a coherent whole in exercising ownership rights. As the noble Lord said, defined contribution schemes in money purchase and in personal pension schemes in future shift the risk on to the individual. Although the Myners principles have improved decision-making, achieving best practice in the investment governance of pension schemes—both trust-based and, particularly, contract-based, which I will come back to—still poses a challenge.

We have seen evidence of that concern in the Pensions Regulator’s recently published consultation on investment governance in DC schemes, which included a table of accountabilities. The table aims to define and clarify the roles and responsibilities of each decision-maker in each part of the investment governance chain, but I read it again last night and, unless I missed this, it does not refer explicitly to social and ethical considerations or to exercising voting rights. Close to my heart, NEST, and its predecessor PADA, published their own document on exercising responsible ownership in a low-charge scheme. Discharging this governance in the context of maintaining low charges is equally important.

As the noble Lord, Lord German, referred to, the Financial Reporting Council published the UK stewardship code in July 2010, which is designed to lay out the responsibilities of institutional investors as shareholders and provide guidance as to how those responsibilities might be met. Pension fund trustees are strongly encouraged to report how they have complied with that code. As a conscientious pension fund trustee, I have attempted to do just that, and my own experience suggests—here I concur with the noble Lord, Lord German—that if the code is to bite, trustees will need a great deal more guidance on how to comply with it if box-ticking is not to continue to be the method of compliance with these standards.

The Occupational Pension Schemes Investment Regulations, which the amendment refers to, say clearly that when setting out their statement of investment principles, trustees should identify,

“the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments; and … their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the investments”.

It is clear that this is an area where guidance and best practice are growing in importance. Because of the political risk that Governments face, with the biggest experience of asymmetrical paternalism that we are about to see, I bet my bottom dollar that this will grow and grow. If you transfer responsibility to the individual, politically Governments have a responsibility to ensure that government frameworks are up to the job.

Clearly, there are issues around how trustees can fulfil these responsibilities. One issue that we must address—I will not dodge it—is how one can be an effective, active asset owner while maintaining low charges, and how one can effectively monitor stewardship policy when one selects passive funds. Although I am absolutely committed to the highest level of governance at every stage of the investment chain, and believe that the ability of trustees to discharge their disclosure requirements in electronic form will help, these things must always be proportionate, because in a DC world it is the individual who bears the charges. I would not want a scenario in which we say that the good news is that we have gold-plated system of governance on disclosure, but the bad news is that it will cost X per cent. Therefore, we need to look at how all the players, including the fund managers, can raise the overall level of governance.

I come back to the providers of contract-based pensions. With the shift away from DB to DC, we are seeing a big shift away from trust-based DC to contract-based provision. Therefore, if we talk only of a model for how the trustees will discharge their governance function in this area, we will miss an ever-growing part of the pension provision market. A big issue, with which I know others are concerned, is who in a contract-based provision world should accept the fiduciary responsibility of designing the default fund or deciding how investment governance should be discharged. This takes us into areas where the Pensions Regulator has no reach. The guidance and regulatory framework must catch up with the shift from trust-based to contract-based provision, because in a contract-based provision world there are no trustees, unless there is a master trust, on whom to place clearly the fiduciary duty. It is clear that the Government will need to look both to the Pensions Regulator and to the FSA or their successors to raise the governance standards in the way that the noble Lord, Lord German, seeks through his amendments.

Pensions Bill [HL]

Debate between Baroness Drake and Lord Boswell of Aynho

Tuesday 1st March 2011 Grand Committee

[Baroness Drake]

I express my sympathy with the sentiments that concern my noble friend Lady Turner in her amendment. As we can see from the previous debate, the acceleration of the equalisation timetable is disproportionate in its impact on the poorest and on those with disabilities, many of whom will have worked in manually demanding professions. I look to speak to that issue in my Amendment 7. Although I have great sympathy with her concerns, I am not sure whether the state pension age is the right mechanism for recognising the disparity in life experience that people have, and it may take some time to reduce that disparity of experience or outcomes as a result of working life experiences. Certainly, initiatives aimed at improving health generally and reducing the disparities between socioeconomic groups and geographies—because that can be quite distinctive as well—are important, because I have a great deal of sympathy with the point made by my noble friend Lady Hollis, who said that when you look closely at the figures, certainly for lower socioeconomic groups, the healthy life expectancy rate of improvement is not as great. One does not absolutely know how that will evolve over time, which is why it is important that the Government retain initiatives aimed at reducing existing health disparities.

Flexibility in working arrangements is also extremely important because, regarding scrapping the default retirement age—of which I approve—and other stated policies to improve the working position of older people, it is one thing to have a policy but it is quite another challenge to deliver the changes and cultures in working practices at the work face to deliver the flexibility in working arrangements that you need for older people. Certainly, changing employers’ practices and attitudes is important. Those may be more effective mechanisms in reducing that disparity over the long term.

Having said that, if ill health disparity persists between socioeconomic groups, and one does not know how that will evolve—in terms of ill health the early signs are that those disparities could persist—a Government may well want to look at the qualifying age for pension credit to deal with those issues, where it is not possible for someone with ill health to address the disadvantaged-income position that they will be in. The Government should certainly remain open to that, depending on how the figures evolve.

[Lord Boswell of Aynho]

I wish briefly to comment on the amendment of the noble Baroness, Lady Turner. She is on to a substantive issue of concern: that there are clear occupational differences which, in a sense, mirror some of the concerns that many of us across the parties would have in relation to differential health outcomes between people with different occupations. In a sense, that supports some of the points that have been made about relative gender disadvantage. We understand why the Bill is conceived as it is, but those are issues that are entirely proper to raise in Committee.

I am not enthused by the text of the amendment, not least because I am not a Treasury official, and I notice that it provides a power to revise but does not explicitly state that there should be a power to revise downwards. Knowing one or two Treasury officials, they might have a go at the opposite. More seriously, there are concerns about whether we should differentiate the pensions and benefits system by different occupational groups, in the way that some of our continental neighbours have done. I may be old fashioned, but I would be reluctant to do that. Whether we could define the categories in any coherent way that did not give rise to further anomalies or whether this is the right approach, I am sure there is a problem which the noble Baroness is right to draw to the Committee’s attention. For example, I am sure that there are lots of issues in the construction industry or agriculture, which I know well, whereby we can try to mitigate and improve occupational health. We should do that, but I am not sure that a vehicle that is about the state pension age is the appropriate one to do it.