Pension Schemes Bill [HL]

Debate between Baroness Jones of Whitchurch and Lord Balfe

Report stage & Report stage (Hansard) & Report stage (Hansard): House of Lords
Tuesday 30th June 2020 Lords Chamber

[Baroness Jones of Whitchurch (Lab) [V]]

My Lords, I am speaking to Amendments 73 and 79, to which I have added my name. I will also speak to the government amendments in this group.

We have come a long way since we first raised at Second Reading the issue of pension scheme obligations to address the risks associated with climate change. I say at the outset that, along with other noble Lords, we have been heartened by the response of the Minister, who, from the very start, has taken our concerns seriously and sought to address them.

Our aim all along has been to protect savers from the risks associated with climate change by requiring UK pension schemes to align their investment activities with the objectives of the Paris agreement, to which the UK Government are a signatory. This requires the Government to hold the rise in temperature to well below 2 degrees centigrade. Our amendments would require regulations to ensure that trustees take account of our international treaty obligations on climate change and publish information about how this is to be achieved.

There is an increasing realisation among financial regulation that such action is necessary, and a number of leading pension schemes are already taking action on this issue. They have already begun to follow the advice of the Task Force on Climate-related Financial Disclosures. This Bill enables us to raise the bar, so that the best practice becomes the standard practice and all funds play their part equally in delivering on their obligations.

Since we started the dialogue with the Minister and her advisers, we have made considerable progress. We very much welcome the government amendments that have now been tabled. They spell out in more detail how the funds should address their exposure to the risk of climate change and assess the impact of their assets on climate change. The most obvious example of this is investment in fossil fuels, but this would require a more comprehensive appraisal of which assets were adding to the problem of global warming and which were contributing to a low-carbon economy.

The government amendments also require schemes to undertake scenario planning on the impacts and risks of different outcomes as we move towards the Paris deadline. We see this as sending a clear signal to the regulators and the pension funds that the Government are not only paying lip service to this issue, but expecting clear change in governance and in investment strategies. Finally, on a similar theme to our amendment, the Government require clear transparency and accountability through reporting to scheme members and the public the actions taken. Again, we welcome this amendment.

Of course, all these requirements will need robust enforcement to ensure effective implementation. I hope that the Minister can clarify the plans of the Pensions Regulator to undertake these functions and can update the House on the progress made across the different types of pension schemes to create a level playing field in their obligations under these provisions.

These are the first steps in driving a UK investment strategy towards delivering on the Paris promise, but this is an important group of investors. I hope that this will send a wider signal throughout the financial markets that business as usual is not an option. There are huge calls for a green economic recovery plan as we grapple with the legacy of coronavirus. Let us hope that all these policies can come together to help deliver that green recovery. In the meantime, I am pleased to support our amendments and the government amendments to this clause.

[Lord Balfe]

In my last speech I omitted to declare my interests, not only those recorded in the register, but also as chair of the European Parliament’s Members’ pension fund—which has a number of beneficiaries in this House—and as manager of the House of Commons fund for former Members of the European Parliament. That is certainly not as big a fund as that of my noble friend Lord Naseby, but none the less is part of the pensions scenario in Westminster. I also advise a number of pension schemes, all fairly small. My amendment, Amendment 80, concerns how small schemes will deal with the duties that will be laid on them by this legislation, and asks the Minister to have their situation firmly in mind when making the regulations.

We often think of pension schemes as huge things, like the British Airways or Lloyds Bank schemes, but the great majority of schemes in this country are quite small. My amendment sets the quite arbitrary figure of £500 million in assets under management, a figure below which the onerous requirements of the amendments put forward in the Bill would not apply. That does not mean that I think small schemes should be exempted from any social concerns. Most of my advice is based on advising small schemes to go into asset tracking, because the evidence, of which there is now a lot, is that active management costs a lot and does not work. The sensible thing, particularly for a small scheme, is therefore to invest in index trackers.

However, being an index tracker does not mean that you cannot have social responsibility. There are index trackers that follow the UN principles of responsible investment, and there are others. We are concerned in this Bill particularly with the environment; I personally am concerned with schemes that follow the principles of the ILO. It is fine to have a scheme which invests in a company that has many trees in its garden that workers paid low wages for long hours can shelter under, but there are many things in this world to concentrate on other than just the environment—I do not want to detract from that, but we need a broader set of principles.

Norway, which has the biggest public scheme in the world, has an ethics committee that looks right across the investment market and advises the Norwegian Government and the scheme on what sort of investment should be avoided. Within the past few days, it has identified as not fit for investment companies that make what are called “autonomous weapons”—in other words, killer robots. So, there are many areas where we need to look carefully at what sort of investments we make.

In the case of small schemes, this is difficult. I advised one such scheme recently. I went to see them and asked, “How many pensioners have you got?” They said, “Oh, 22.” I said, “How do you look after them?” They said, “Oh, X”—naming the person—“in the wages section pays their pension each month when she does the monthly salary run.” I said, “What about the rest?” They said, “Oh, well, the general secretary looks after that. We have a man who comes in twice a year and we pay him, and he keeps us on the right side of the regulator.” This was a scheme with barely three figures’ worth of members in it, and many schemes are like it. We need to look for a way in which such small schemes can transfer their assets without there being any residual liabilities.

One problem is that you can get someone to run your scheme, but if the overall master trust gets into trouble, it can come back to those who have put their schemes in it and make quite unreasonable demands of them. If the number of small schemes is to be slimmed down, there has to be a way of transferring them so that the benefits are guaranteed but there is no comeback for more money. The amount of money required would be actuarily calculated, but it should not be possible to say, “Oh, well, the whole scheme has run into trouble. We know you transferred X years ago, but we now need more money from you”, because it is a direct disincentive.

I shall give another example, of a quite rich London club which, again, has a small scheme. It could quite easily transfer it in—it has huge assets: it could sell one or two of its pictures and cover its pension fund deficit—but it is reluctant to do so in case it received subsequent bills which detracted from the members’ assets. Again, this is something that the Minister and the department could look at in the future. It is outwith this Bill, but it is part of how we need to sort out the pensions legislation and administration for small funds.

My plea to the Government is that when they make the regulations, they remember the small schemes, which probably will not be able to afford the type of administration and advice that big schemes can. They should be encouraged into index trackers, because they are cheap and easy to run and, frankly, return the market, whereas active management charges a lot and does no better. I ask the Minister to look kindly on this amendment. I have never thought of pushing it to a vote; I tabled it to make these points, because I know that she is a sympathetic Minister who would be happy to ask her department in due course to look at the points raised.

Pension Schemes Bill [HL]

Debate between Baroness Jones of Whitchurch and Lord Balfe

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 26th February 2020 Grand Committee

[Baroness Jones of Whitchurch (Lab)]

My Lords, I shall speak to Amendments 52, 74, 75, 76 and 92 to which I have added my name. As the noble Baronesses have said, these amendments refer to the need to strengthen the obligations on pension funds to play their part in meeting the challenge of the climate emergency. We accept that the issue goes wider than this Bill, but we will succeed only if every part of government, including the DWP, industry and the economy play their part, so this pensions Bill does have a part to play.

In relation to pensions, it is vital that a consistent approach is taken across the pension scheme market with the DWP, the Pensions Regulator and the Financial Conduct Authority all requiring contract-based pension schemes and trust-based occupational schemes to demonstrate the same levels of compliance with our climate change objectives; otherwise, there could be adverse competition between the different funds, which we do not support.

I add my thanks to the Minister for acknowledging the importance of these issues when we raised them at Second Reading, arranging to meet us to discuss them further and tabling the Government’s amendment today. As the noble Baroness, Lady Hayman, said, it happened very quickly, and we were very impressed by that. It is fair to say that it is a start, but we do not think that it goes far enough. However, I am sure that we will have a good dialogue on this issue. In the meantime, we have tabled amendments.

I shall be brief as I do not want to echo what other noble Lords have said. Amendments 74 and 76 take out the specific reference to occupational pension schemes so that the requirement would apply to all pension schemes. This is important because, although occupational defined benefit and defined contribution schemes comprise a large part of the pensions market, there is a gradual shift taking place towards contract-based personal schemes. As one model is regulated by the Pensions Regulator and the other by the Financial Conduct Authority, it is vital that we take this opportunity to provide alignment and consistency on the climate change action that they require across that sector.

In the Minister’s helpful letter to Peers explaining the purpose of the government amendments, it did not seem to me that she addressed this lack of consistency. Perhaps she can do that now. Does she accept the need for a joint approach across the regulators to ensure that investment decisions have parity, so that one cannot take advantage of the other or lead to the detriment of members by requiring higher standards of one than another?

Secondly, our Amendment 75 explicitly spells out that the Government’s reference to climate change means the need to align with the objectives of the Paris agreement to hold temperature rises well below 2 degrees centigrade. It is important to have that wording in there because we bandy around the expression “climate change” but it means different things to different people, and we are concerned that it could otherwise be loosely interpreted. That is why we set out a more explicit requirement. We set out the reasons for that requirement at Second Reading. As other noble Lords have said, we are currently on track for 2 to 4 degrees centigrade of global warming by the end of the 21st century, and we know that that will have a profoundly negative impact on the global economy and therefore upon the investments and the financial returns of pension schemes. So it is important that we have a requirement to deliver our Paris agreement commitments. It is not just about us being fluffy and caring about the planet; it is a more hard-nosed issue about the direct interests of savers and our economy. That is why pension funds have such critical role to play. I hope that the Minister will accept the intent and the importance of that amendment.

Thirdly, I was pleased to add my name to Amendment 92, which provides a timescale for the consultation on implementing the recommendations of the Task Force on Climate-related Financial Disclosures. It requires that the consultation will commence within one month and be completed within one year. Obviously we welcome the Government’s intention to consult widely on this issue, and we understand some of the complexities that lie behind all that, but meanwhile the clock is ticking on our Paris commitments and we are failing to step up to the mark on that, so this is one of the many areas where we need to take urgent action but also where we could deliver the biggest impact. I hope that the Minister understands and accepts the need for that consultation and follow-up to take place within a specific timeframe.

Finally, our Amendment 52 returns to the issue that we raised at Second Reading about the need to inform pension savers via the dashboard of the actions being taken by their trustees to deliver on climate change as set out in the UK Stewardship Code 2020 and to align with the Paris agreement. This amendment would add these factors as information that may be required to be provided by regulation. I know that at Second Reading there was some argument—maybe there will be again today—about the information on the dashboard needing to be kept simple in the first instance. We understand that issue, but we also have to acknowledge, as the noble Baroness, Lady Hayman said, that pension savers are concerned about their pension funds propping up fossil fuel extraction, and they are keen to have information so that they can be empowered to take action on these issues. Our amendment has been tabled to explore how best we can achieve that by providing information in a simple and meaningful way to pension savers.

I hope that the Minister will agree that savers need to have access to this information and that the dashboard could be a meaningful way of achieving that objective. I look forward to her response.

[Lord Balfe]

I would like to say one sentence about this. First, could the Minister comment on this situation? I do not have a big role in pensions but in so far as I have, I have been pushing people towards index trackers. An index tracker that conforms to the UN principles for responsible investment is generally accepted. However, at the moment the UN principles do not contain climate change, so to what extent are we putting forward something which would be difficult to implement? Secondly, I wonder whether we are suggesting something which, far from being implemented by the trustees, will be implemented by means of companies, such as one or two I have come across in my life, which will go to trustees and say, “Here you are; for just £500 we can give you a statement of principles which will get you past the regulator”. There is a sense in which we might not be curing a problem at all but creating it, certainly for small pension funds that are largely invested in index trackers and bonds. Even bonds have their problems. In a pension fund where I was once a trustee when I said, “We will probably buy some UK Government bonds”, a member said, “Oh yes, Mr Blair needs the money to bomb Iraq, doesn’t he?”