Pension Schemes Bill [HL]

Debate between Lord Hain and Lord Balfe

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

[Lord Balfe (Con)]

My Lords, this is the first time for two months that I have been in this Chamber. It is a bit emptier than normal but it is good to be back.

I hoped to speak after the noble Baroness, Lady Bennett, because I want to say a few words about her Amendment 33, which is about trustees. It seeks to require trustees to take age, gender and ethnicity into account. I will certainly not support or oppose this amendment but I want to make a few points on trustees and where I think she is trying to get us to. The fact of the matter is that the whole area around the appointment of trustees could do with a close look.

There are a number of problems. The first problem for any pension scheme, particularly a small one, is getting trustees from among the membership. You can always get a professional trustee because they are normally paid £1,000 or more a day for coming to the meeting, so it is not too difficult. The difficulty is getting representatives of the pensioners. The second and even greater difficulty is getting representatives of the pensioners who actually know what they are talking about, because many people are completely bewildered by pensions.

When I read through both this amendment and the amendments about ESG and environmental safeguards, I was reminded very much of pensioners who come to me and say, “All I want, Richard, is for you to pay my pension. I couldn’t care less where it comes from.” I say, “Presumably you wouldn’t like us to invest in gas ovens,” and they say, “Well, no, but you’ve got enough common sense not to do that. You don’t need me to tell you.”

So I come to the point that, when we are looking at the age, gender and ethnicity of trustees, we also need to look at their qualifications and the way in which they are allowed to come forward, because some trustee boards are effectively self-perpetuating because they govern who is allowed to stand. You are invited to apply to become a trustee, and then you are assessed as to whether you are able to become a trustee. Often, people who come forward are not highly professionally qualified, but they are qualified in one thing, which is common sense. My experience of pensions, which goes back quite a long way, is that certainly some members on a board—not a majority—who can demonstrate common sense are extremely good.

I would also like to say that dealing particularly with gender and ethnicity can lead you into many problems. My wife gets a pension from the Workers’ Educational Association pension fund. It got itself tied into complete knots trying to deal with ethnicity and gender. It ended up asking people to vote for trustees who were anonymised. They were anonymised by taking out not only their name, age, gender and ethnicity but also most of the other things about them. So the great game in this case was to look back at previous reports and try to work out which trustee was the anonymised one. Of course, that gets you nowhere and in fact is a bit of an insult to the members who have applied.

So I say to the noble Baroness, Lady Bennett, and to the Minister that this is a subject that is much wider than this amendment, but it is certainly one that needs looking at. The way in which pensioners are represented on the governing boards of pension funds is haphazard, to put it mildly. It varies enormously between funds. Although there is a great cry from professional trustees that you clearly need professionals in the room, I counsel the Minister and everybody else to beware of the cry for the professional. It is very easy to get a professional to sit there and give you advice as an employee or if they are hired for the purpose. You do not necessarily need more than the odd one of them actually on the board. They have nothing great to add than cannot be added by a professional adviser. They do not need a place on the board, although sometimes—note the word “sometimes”—having a professional trustee as a chair can add a certain amount of discipline, knowledge and structure to the way that debates go. But it can be overestimated and, particularly since the pensions industry is dominated by the professionals, there is a great danger that it gets overemphasised because it is precisely the people who write in the pensions papers who are the experts and who then promote themselves for the jobs.

So I welcome the amendment in the name of the noble Baroness, Lady Bennett; I see it just as a probing amendment, laying down a few guidelines that we could look at. I say to the Minister that when there is an opportunity, it would be well worth while to set up some sort of study or working group to look at the way in which trustees are chosen or appointed, how they work and how they are remunerated.

[Lord Hain (Lab) [V]]

My Lords, I thank the Minister for the way in which she introduced these amendments, and particularly for the concessions that she granted on affirmative procedures for the issues that are contained in the government amendments. This is a very welcome response by Ministers to the feeling that was in the House.

I will speak to Amendment 1 and associated amendments in the name of the Minister concerning the authorisation criteria for collective money purchase schemes. I warmly welcome the introduction of these schemes, also known as collective defined contribution—CDC—schemes, as they represent an attractive third way in workplace pension provision, with a capacity to deliver significantly better outcomes for savers than individual DC—direct contribution—schemes. However, in order for the CDC schemes to be widely trusted, we need to get the legislative and regulatory framework right. To give one example, it is vital that the authorisation criteria are appropriate. A balance must be struck in ensuring that requirements are not so cumbersome as to deter employers who might offer these schemes from doing so, while ensuring that there are robust protections in place for employees saving in these schemes.

If we can get this right, there is a significant prize to be had in the introduction of CDC schemes, and the case for this is only strengthened by the current Covid-19 crisis. The virus has had many negative consequences for our society and economy. One of those consequences is directly relevant to the Bill before us today: there has been significant negative impact on the defined contribution pension savings of many individuals as a result of the financial markets’ reaction to Covid-19. I am afraid that, as the noble Baroness, Lady Altmann, so compellingly pointed out, the Bank of England’s recent injection of quantitative easing will make this much worse. A drop in asset values and bond yields has led to more expensive annuities and resulted in pension reductions of around 8% to 10%. This has caused much consternation and led a significant number of people to defer their retirement during this period.

In my remarks at Second Reading, I welcomed the introduction of CDC schemes and cited, among other factors, their enabling of the pooling of risk between savers. This can, in turn, enable higher-yield investment strategies, as well as less volatility and greater predictability for savers. It begs the question, therefore, of how CDC schemes might have fared in comparison with individual DC schemes in the light of the recent crisis and the sharp economic downturn that has so negatively impacted DC pension savers.

Royal Mail, which in conjunction with the communication workers—CWU—has been leading the push for the introduction of CDC for its 143,000 employees, asked its actuarial advisers to look at precisely this question. The resulting analysis, carried out by pension consultants Willis Towers Watson, was conducted in the context of the 20% fall in the global equity market in the first quarter of this year. The modelling looked specifically at how the CDC scheme design proposed by Royal Mail would have been affected. The conclusion reached by Willis Towers Watson was that the CDC would have performed significantly better than an individual DC scheme. In this scenario, a scheme member close to retirement would have been able to retire as planned, with no reduction in their retirement income. This is because the Royal Mail scheme is designed with a certain amount of headroom in contributions, intended to fund future pension increases. As Willis Towers Watson has written,

“it is only if the funding health suffers very materially that the headroom could run out and pensions would be reduced … in the vast majority of scenarios, it would only be the level of future pension increases that would be at risk.”

Even with the severe level of market shock experienced in quarter one of this year, therefore, the modelling shows no effect on current pension levels for CDC scheme members, and that is very welcome. Future pension increases would be impacted, but only by a modest 0.25% per year, as this market shock was nowhere near severe enough to remove the significant headroom that the scheme would hold. In contrast, an individual DC pension saver, due to retire by starting to draw down benefits in the near future, would expect their pension pot to have fallen in value by approximately 10% over the quarter. While they would have the option to keep the pot largely invested, this saver would potentially have to rethink their retirement plans, such as changing their planned pace of drawdown, or even deferring their retirement altogether for a period. Those considering an annuity would find that the price levels had increased by around 8% over the quarter.

This analysis provides a timely and powerful illustration of just one of the benefits that CDC schemes will bring to savers through the pooling of risk and the capability to build up significant headroom to smooth out the impact of shocks, even those as severe as we have recently experienced. CDC therefore represents an attractive third way in workplace pension provision, offering better value and greater certainty for savers than individual DC schemes. With that in mind, I welcome the Government’s commitment to ensuring that the appropriate processes will be in place around authorisation criteria. I commend the Bill to noble Lords, and I hope that we will see its swift passage through its remaining stages in this House and its early introduction and passage through the other place.