Pensions Bill

Lord Lawson of Blaby Excerpts

Monday 20th January 2014 Grand Committee

We need active management of the fees and charges to keep up with an industry that has shown itself in large part not to be trustworthy, which is why we prefer the framework approach. I beg to move.

[Lord Lawson of Blaby (Con)]

My Lords, I will speak to Amendments 63 and 67 in my name, which are linked. I am glad that some time after I tabled these amendments the Official Opposition tabled their amendments, which are very much on the same point. I hope that what I did may have been some kind of a stimulus to them, because we are to a considerable extent on the same point.

There is a difference between the approach that the noble Lord, Lord Browne, takes and that which I take. However, before I explain the difference, I wish to articulate what the problem is. This problem is not confined to the pension area but is well known to those who have studied any economics at all. It is known in the trade as the principal agent problem, where a principal cannot achieve his or her economic objectives without giving an agent responsibility for dealing with it. The incentive for the agent may be very different from the incentive with which the principal originally entrusted the agent to carry out what is needed. Here the principal is essentially the pension fund beneficiary, via the pension fund itself, and the agent is the investment manager. How is this of interest? I would hope that my noble friend the Minister, even if he does not accept either the Labour amendment or my amendments, will agree that there is a problem here that has to be addressed. I hope that he will say how the Government propose to address it.

There are two differences between the approach adopted in the amendment of the noble Lord, Lord Browne, and that adopted in mine. He seeks primarily to regulate various charges made for the carrying out of the investment. He mentioned disclosure, but the issue is mainly the cap on charges and other forms of regulatory charges. There are problems with that approach, which I shall not spell out because I do not want to detain the Committee.

What I have gone for is compulsory disclosure. In a competitive market, compulsory disclosure will go a very long way towards removing the mischief. If there is proper disclosure, there is no need for a cap or the regulation of charges in the first instance. We can then see how it works out. Events may subsequently suggest that there may be some need for regulation but initially the remedy must be to require disclosure. I have mentioned seven types of cost that I believe should be disclosed. The noble Lord, Lord Browne, said that the sector might very inventively find some other form of charge that does not fall within these headings. I think that is highly unlikely. If noble Lords look at the headings, it is difficult to see how any charge could not fall under one or other of them.

The important thing is the principle. The funds are inclined to say, “You don’t need to worry about costs; all that matters is the investment performance of the fund net of costs”. That is not acceptable. The costs are massive in this area. Of course, the investment performance may differ according to what period of time you look at. One fund may have a very good performance during one period and a bad performance during another. One has to look at the costs. Some costs are not revealed at all; some are. Even with the costs that are revealed, there is such a lack of consistency that it is difficult to compare them and to see whether or not they are remotely fair.

There are also other defects in the system. One is, I have to say, one of the many defects of the accountancy profession in this country. According to the accountancy profession, the Investment Management Association is responsible for writing the statement of recommended practice on cost disclosure for fund managers. This is ludicrous. You are asking the foxes to regulate the hen coop, as it were. If my noble friend the Minister looks at this, I am sure that he will find that it needs a remedy.

There is another relevant point. At the end of the day it is not merely the pension fund beneficiaries who are being cheated by these excessive costs—and many of these costs are grossly excessive—but there is also the problem of pension fund deficits. The more costs are ramped up unnecessarily by the pension funds, the worse that will make the problem of deficits. Of course, there is no incentive for investment managers to expose the costs that they are incurring in their recommendations to the funds if they are not obliged to do so. It will only make most of them look rather expensive.

There have been some studies in this area, both here and in the United States. Among the findings of these studies is that there is absolutely no correlation between investment management fees and performance. There is also no correlation between portfolio churn, which creates a lot of income for various people, and performance. There is some evidence, although it is not conclusive, that portfolios are deliberately churned in order to generate commissions. In the United States, a study has been done that shows that most foreign exchange currency pairs are not monitored but that, when they are, the foreign exchange costs paid by funds are halved. There are problems across the board, such as the fact that custodian banks pay lower rates on cash than money market funds or that financial intermediaries can collect excessive rewards.

The FRC has some of these problems in its sights, but it is totally inadequate. I believe that the FCA is pressing fund managers to manage their research procurement, another area of costs that I have identified, in a more defensible and transparent way. However, it is no accident that typically pension funds meet in Manchester and fund managers meet in Monte Carlo. I hope that my noble friends, who have done such an excellent job on this Bill, will take on board that this is a serious problem—the principal agent problem, as it affects pensions—and must be addressed one way or another.

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[Lord Bates]

The noble Lord will therefore know that our position is that we do not comment on speculation in the press, even when it is in the Financial Times, and that the Minister’s announcement, which will be given to the House later this week, will be delivered first to the other place, and therefore we will have to respond to it.

[Lord Lawson of Blaby]

I am glad to hear that Steve Webb will make a statement in another place on this range of issues. Will my noble friend go further and say that the statement will accept the problem of the principal agent position as it affects pension funds, as was outlined in the contributions made by the noble Lord, Lord Browne, and myself, in this debate, and that it will put forward a remedy?

[Lord Bates]

After making deferential remarks to the noble Lord, Lord Browne, I have to make even more deferential ones to the noble Lord, Lord Lawson. The direct response is that I am not privy to the content of that statement, confirmation of which has been received only recently. However, addressing the principal agent problem which he so eloquently outlined for us was at the heart of the consultation process which was launched back in October, and was at the heart of what the OFT was driving at in its review. Therefore, in responding to that consultation, I reassure my noble friend that he will find—I hope—that this offers the reassurances he seeks. If not, he is at liberty to bring this matter back on Report, should he choose not to press his amendment at this stage.

On the definition of charges and transaction costs, Schedule 17 gives the Secretary of State the power to restrict administration charges by regulation. In the consultation we proposed specifying a broad definition of charges to encompass any expense that does not result in the provision of pension benefits for a member. We also asked for views on whether transaction costs should be included within a charge cap. Any charges that are restricted—even those under a possible cap—will have to be defined in regulations. These regulations will, of course, be subject to public consultation and we have accepted the DPRRC’s recommendation that these regulations be subject to the affirmative procedure on first use. Government Amendment 70 will achieve this.

With regard to the noble Baroness’s Amendment 62H on the Henry VIII power in Schedule 17, we have noted the comments and recommendations put forward by the DPRRC. However, we believe that it is vital that the Government’s ability to regulate effectively in this area is not inadvertently undermined by future legislation that could not have been foreseen. We are back to an earlier point.

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Amendment 62G withdrawn.

[Lord Lawson of Blaby]

At what point should I contribute to the discussion on this?

[The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)]

It will be possible for the noble Lord to speak briefly on his own amendment, Amendment 63. He has already spoken but he can certainly respond then.

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Moved by

[Lord Lawson of Blaby]

63: After Schedule 17, insert the following new Schedule—
ScheduleWork-based schemes: requirements for disclosure of charges and other informationThe Secretary of State shall by regulations make provision to require disclosure at least annually of the following management and transaction charges incurred by the administration and management of each investment portfolio managed by or on behalf of a work-based scheme—
(a) fees and performance fees paid to investment managers,(b) commissions and bid-offer spreads paid to brokers,(c) bid-offer spreads paid to foreign exchange counterparties,(d) fees, revenue splits and bid-offer spreads paid to custodian banks,(e) fees paid to in-house or third party scheme administrators,(f) fees paid to professional advisors (e.g. actuaries, legal advisers, auditors, investment consultants etc.),(g) initial charges, bid-offer spreads, exit charges, other fees and rebates charged on investments in pooled funds.”

[Lord Lawson of Blaby]

Thank you, Lord Chairman. You advised me that I need to move this amendment, which I am happy to do even though we have already had the debate on it. I will just say one or two things briefly. First, I thought the debate was very useful and I am particularly grateful to my noble friend the Minister for indicating that the Government accept that there is an issue here that needs to be addressed and that the Minister in the Commons, Steve Webb, will make an announcement about it later this week. Presumably, he will set out what he considers to be the remedy for the problem identified. It would certainly be churlish to persist with my amendment in the light of that. I will wait to see what Steve Webb and the Government have to say and then decide whether that is adequate or that it is necessary to pursue the matter further on Report.

I have two other quick points. First, the Minister said that the degree of specification for costs to be disclosed, as I have in my amendment, was not suitable for primary legislation. He is probably right but I interpret the meaning of that to be that he thinks it is suitable for secondary legislation. This is certainly a matter where legislation is needed and I am perfectly happy to accept his advice that there is a need for secondary legislation.

The other point is that the noble Lord, Lord Browne, suggested that between Mr Webb’s announcement and Report, he and I might discuss the matter to see what we feel about this. I am very happy to do that. This is not a party-political point, but if we think that the Government’s remedy is inadequate—I hope that will not be the case—it may be that he and I can agree an amendment to jointly move on Report in the best bipartisan traditions of this House.

Having said that, unless any Member of the Committee objects, I beg leave to—

[The Deputy Chairman of Committees]

The noble Lord should move the amendment first.

[Lord Lawson of Blaby]

Sorry, I thought I had moved it. I beg to move.

[The Deputy Chairman of Committees]

Does nobody wish to speak?

[Lord Lawson of Blaby]

The silence is eloquent and, in the light of it, I beg leave to withdraw the amendment.

[The Deputy Chairman of Committees]

Perfect.