Occupational Pension Schemes (Administration, Investment, Charges and Governance) and Pensions Dashboards (Amendment) Regulations 2023

Debate between Viscount Younger of Leckie and Lord Sharkey

Tuesday 28th March 2023 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Viscount Younger of Leckie) (Con)]

My Lords, these draft regulations were laid before the House on 30 January. Good investments are central to well-run pension schemes and decisions made by the trustees of those schemes have a significant impact on growing savers’ pension pots. Subject to approval, these regulations will help occupational defined contribution pension schemes—the so-called DC schemes—make greater use of performance-based fees, which are payable to investment fund managers when they deliver healthy returns on their investments. This will put DC schemes on an even playing field with other institutional investors such as insurers, investment companies, defined benefit pension schemes and overseas investors when it comes to accessing the same range of investment choices that come with fees.

The regulations also place new duties on the trustees of most DC schemes to disclose additional information about their investments. They are designed to ensure that trustees reflect on the investment decisions they make, as part of their ongoing fiduciary duty to create a diversified investment strategy that delivers for savers. These regulations continue the Government’s commitment to ensure that millions of hard-working savers in occupational DC pension schemes are receiving the best possible value. I am satisfied that these regulations are compatible with the European Convention on Human Rights.

Let me take a step back and put this in a bit of context. Over the past decade, there has been a significant increase in the use of illiquid asset classes such as infrastructure, real estate and private equity within institutional investment portfolios globally. Meanwhile, DC schemes in the UK have relied on public markets to generate returns and diversify portfolio risk. Pension scheme trustees’ primary focus must always be on delivering an appropriate return to members. But by investing almost wholly in liquid investments such as publicly listed equity and debt, pension savers can miss out on the potential to achieve better returns from being invested for the long term. This is a particular concern in DC schemes, where decisions which reduce long-term returns will affect member incomes in retirement.

Currently, less than 10% of UK DC investments are estimated to be in illiquid assets. The Pension Charges Survey 2020 evidenced that two-thirds of DC schemes had no direct investment in illiquid assets within their default fund arrangements. This is at a time when the UK DC market is growing in scale and in ambition. DC pension schemes currently hold over £500 billion of assets, a figure that is set to double to £1 trillion by 2030. The Australian DC market, in comparison, invests somewhere in the region of 20% of assets, on average. This includes investment in major UK assets such as the King’s Cross redevelopment project and Manchester, Stansted and East Midlands airports.

The DWP has run several consultations to understand the reasons why DC schemes have largely avoided investing in private markets. The feedback received highlighted concerns that performance fees, typically associated with illiquid assets and levied by fund managers, would put schemes at risk of breaching the existing 75 basis-point regulatory charge cap. While the charge cap has successfully reduced costs, it has arguably led to more focus on costs than on the returns that different asset classes can provide. In January, the Minister for Pensions launched a consultation on proposals for a value-for-money framework, which aims to address this. These regulations continue that value-for-money theme. The essence of what we are trying to do here is to make it easier for DC schemes to access a broader range of investment opportunities that could generate higher return outcomes.

I will now say a bit more about the issues highlighted during the consultation. We listened carefully to earlier concerns raised during the consultation that this change to the cap could weaken existing saver protections, and we have acted on this feedback. Regulation 2 of this instrument sets out the criteria that “specified performance-based fees” must meet to be considered outside the charge cap. These include a requirement that fees must be paid only once returns to the scheme have exceeded a pre-agreed rate or amount agreed by trustees and the fund manager prior to investment.

The criteria include additional safeguards that trustees must also agree in advance, and that performance-based fee structures include mechanisms to guard against excessive risk-taking or fund managers being paid repeatedly for the same level of performance. The regulations provide for the use of high-water marks and fee caps, for instance, which are commonly applied in the investment market to give investors this extra level of protection.

The regulations are purposefully silent on what rate of returns or type of fee structure mechanisms must be applied. This is to allow trustees and fund managers to develop and negotiate terms that are in the best interests of savers. Provided that trustees and their advisers apply these terms, such performance fees will not erode retirement pots because they should arise only when savers have received a favourable return on their investments.

The DWP received positive responses to this change, particularly from larger DC pension schemes which said that the ability to remove these fees from their charge cap calculations will make it easier for them to consider new asset classes. The DWP has published statutory guidance to assist trustees with determining the criteria for performance-based fees that can be considered outside the charge cap. The guidance is very clear that trustees should seek professional advice on their investments where performance-based fees are prevalent.

To ensure transparency to members, performance-based fees incurred are required to be disclosed, and the value to members assessed, in the scheme’s annual chair’s statement. To be clear, these changes place no obligation on schemes to agree to investments that come with performance-based fee arrangements if this is not in their members’ best interest.

With any investment there is no guarantee of higher returns. In accordance with existing legal requirements, trustees must invest in a manner calculated to ensure security, liquidity and profitability, and have regard to the need to diversify investments. This provides that trustees are guided on assessing the risk of portfolios and, with this, managing the risk of lower as well as higher returns.

Regulation 3 of this instrument sets out new duties on DC trustees to include an explanation of their policy on investing in illiquid assets in their statement of investment principles. These explanatory statements, covered in the regulations, include whether investments in illiquid assets are held, the types of illiquid assets and why this policy is of advantage to members. Where investments will not include illiquid assets, trustees are expected to give reasons why, along with whether they have plans to invest in the future.

While some of our bigger DC schemes already provide this information, this is not the approach taken by all. Some master trust schemes also disclose information on the asset classes in which the scheme holds investments, but this is not commonplace and most members are not in receipt of this information. The regulations address this by placing a duty on trustees to disclose the percentage of different classes of assets held in the scheme’s default funds. Asset classes covering liquid and illiquid are prescribed in the regulations.

Greater understanding and accountability of the investment decisions made by trustees on behalf of their members will be key to improving value for members across all schemes. The industry’s response to these new duties was that the regulatory burden is reasonable and proportionate while still retaining the wider benefits these changes will bring. It is worth noting that asset allocation disclosure is already mandatory for Australian pension schemes.

The DWP will work with the Pensions Regulator to ensure that trustees are supported with the new duties. Information contained in chairs’ statements and statements of investment principles are monitored by the Pensions Regulator as part of its wider strategy on regulatory compliance.

We will also look closely to monitor the impact of our changes on investment performance. In addition, Regulation 7 of these regulations requires that a review of these regulatory provisions must be undertaken and published within five years of the regulations coming into force.

These regulations also correct a drafting error at cohort 1(b) of the staging profile in Part 1 of Schedule 2 to the Pensions Dashboards Regulations 2022. The error relates to the staging deadline for master trust schemes that provide money-purchase benefits only. While we are not aware of any schemes being affected by this minor error, it is none the less appropriate to amend the Pensions Dashboards Regulations 2022 to resolve this issue as soon as practically possible. With that, I commend this instrument to the Committee and beg to move.

[Lord Sharkey (LD)]

My Lords, as the Minister has said, this statutory instrument contains seven regulations. The first is to do with timings and commencement. We have no comment on this, except to ask why there will be a delay of 21 days in bringing the correcting dashboard regulation into effect.

Regulation 2 excludes specified performance-based fees from the charge cap, and the Explanatory Memorandum sets out the rationale. In paragraph 10.5, the Explanatory Memorandum speaks of

“sufficient safeguards for schemes and members to protect them from excessive charges”

consequent upon this regulation. This is clearly a critical area. The possibility of excessive charges is an obvious concern and was highlighted in the recent SLSC report on this instrument. Can the Minister set out what these safeguards are and on what basis and by whom they were judged to be satisfactory?

Regulation 3 will require schemes to include an explanation of their policy about investing in illiquid assets in their default statement of investment principles, as the Minister said. The taxonomy of asset classes is explained in detail in paragraph 25 of the statutory guidance and is given in Regulation 4(5). This has eight categories and does not attempt to define “illiquid”. In fact, I could find nothing in the instrument and its accompanying documents that approaches a definition. Of course, it may be that I have overlooked it somewhere; I would be grateful if the Minister could guide me on the matter, point to a definition and perhaps explain how it was arrived it and by whom. The chief purpose of this instrument is to remove barriers to investments in illiquid assets, and it would be rather odd if there were no criteria for assessing whether an asset was to be counted as illiquid.

Regulation 4 also requires trustees or managers to report on specified performance-based fees incurred by the scheme.

Regulation 5 requires such disclosures to be made public. This all seems very sensible, but nowhere is there any sense of an upper bound on these specified performance-based fees. In its report, the SLSC made this point.

Since the EM was produced, the DWP has published extensive statutory guidance—22 pages—which states that the rate or amount of these fees is for the trustees and managers of the scheme with support from their advisers and their fund manager to agree based on the nature of the investment proposed. At first reading, this seems a bit like an invitation to a fleecing. The Government were happy to install the charge cap in the first place. What consideration was given to capping these special performance-based fees? Paragraph 76 of the statutory guidance, “Volatility of returns and performance based fees”, states:

“The 2023 Regulations require that specified performance-based fees structures must include mechanisms that offer protections to pension schemes and their members. This is so fund managers are not taking excessive risk or being paid twice for the same level of performance or for performance which turns out to be impermanent.”


I cannot see where that is spelled out in the instrument as a must, and I would be grateful for the Minister’s help in clarifying the matter.

Regulation 6 corrects an error in the pensions dashboard, and we have no comment on that.

Regulation 7 provides for a review of the impact of Regulations 2 to 5 every five years, which seems sensible. We are particularly interested in seeing whether the modification of the charge gap and the disclosure requirements lead to an increase in investment in illiquid assets. The SLSC made this point in its formal recommendation to the House:

“As the fee changes made by these Regulations aim to encourage pension schemes to increase their investment in illiquid assets, the House may wish to ask the Minister how schemes’ subsequent exposure to an increased risk of lower, as well as higher, returns is to be monitored and how trustees are to be properly guided on assessing the risks to the portfolio.”


Those are very good questions, and I would grateful if the Minister could address them.

UK Infrastructure Bank Bill [HL]

Debate between Viscount Younger of Leckie and Lord Sharkey

Committee stage & Lords Hansard - Part 2
Tuesday 14th June 2022 Lords Chamber

[Viscount Younger of Leckie (Con)]

My Lords, these amendments are all connected to parliamentary scrutiny, particularly in cases where the Bill is creating delegated powers, as the noble Baroness, Lady Kramer, pointed out. I will come on to the specific amendments, but it is worth noting at the outset, bearing in mind her remarks, that the Delegated Powers and Regulatory Reform Committee has found no need to comment—in fact, there has been no comment whatever—on the four delegated powers taken in the Bill. Having said that, I will attempt to reassure her now that, along with previous pledges that a letter will be written on other matters, it may be that we can give more detailed reassurances in writing on these complex but important interrelationship issues concerning the bank and the framework document.

I believe that the intended purpose of Amendment 28 in the name of the noble Lord, Lord Sharkey, is to protect the operational independence of the bank and prevent the Treasury changing the bank’s focus in the future. There may, however, be instances where we need to update the definition of infrastructure or the bank’s functions to ensure that the bank can continue to fulfil its objectives as a long-lasting institution. Let me give an example in which the noble Baroness, Lady Bennett—I see she is in her place—may take some pleasure. New green infrastructure technologies may emerge in the future which we would want explicitly to include in the bank’s definition of infrastructure, to signal to the bank and the market that the bank can invest in these technologies.

Amendments 33 and 34 in the name of the noble Lord, Lord Sharkey, seek to strengthen parliamentary scrutiny of the bank’s strategic priorities and plans, which he outlined eloquently. Amendment 33 would require parliamentary approval for the strategic priorities of the bank, which the Treasury produces, before they come into effect. Although his amendment is certainly well intentioned—I listened very carefully to his remarks, as well as those of the noble Lord, Lord Vaux—I do not believe it is required as the Bill as drafted allows for parliamentary scrutiny of the bank’s strategic priorities by requiring a copy of the statement and any updates to be laid before Parliament.

There is a strong precedent for this already: the Bank of England Financial Policy Committee remit letter, the Financial Conduct Authority remit letter and the Ofwat strategic statements are all laid before, rather than approved by, Parliament. This is an appropriate level of oversight, particularly bearing in mind that the bank is a taxpayer-funded, government-backed institution.

Turning to Amendment 34, I would like to clarify the effect of the clause as drafted. It is necessary to read the clause as a whole, rather than just words in isolation, to interpret its effect:

“The Bank must secure that its articles of association provide for the Bank … to publish and act in accordance with strategic plans which reflect the Treasury’s statement”.


I listened very carefully to the remarks of the noble Lord, Lord Sharkey, and as he rightly said we had a detailed discussion of this issue outside this Chamber. However, in our opinion this is sufficient to ensure that the bank acts in accordance with Treasury steers. The bank’s articles must provide for it to do so, creating both the power and the expectation that it should, and being subject to the usual enforcement controls should it fail to do as provided by its articles. I realise that we may not entirely agree on this issue, but this is the response that I give today.

I listened carefully to the remarks from the noble Lord, Lord Davies of Brixton. I first apologise to him for the fact that I gather he has not had some answers to questions that he posed—I am rather mortified to hear that. I know that I have written a good few letters and I am sure my noble friend Lady Penn has as well, but may we look at which answers have not been given?

I will try to give the noble Lord a response anyway to the points that he raised, which were essentially asking what the bank’s relationship is to pension funds. The National Infrastructure Strategy, which announced the UKIB, also set out how there is a huge opportunity for pension funds to support the UK’s infrastructure ambitions. The bank’s policy design document—its blueprint, if you will—set out how the bank will help to structure deals to attract international investments and unlock capital from institutions such as pension finds. I hope that gives some sort of an answer but, again, I will read Hansard and get some further answers to the noble Lord, Lord Davies, if appropriate.

With that, I would be grateful if the noble Lord, Lord Sharkey, would feel able to withdraw his amendment.

[Lord Sharkey (LD)]

I thank everybody who has spoken in this short debate. I am of course disappointed that the Minister is disinclined to allow Parliament any meaningful contribution to the Treasury strategy statements. Laying them before Parliament is emphatically not a way of involving Parliament in any meaningful sense. I continue to believe that the bank would benefit from Parliament’s involvement, and we will continue to think of ways that that might be possible and acceptable to the Treasury.

I am even more disappointed by the Government’s insistence on the two Henry VIII clauses remaining in the Bill. The Minister, as I suspected he might, prayed in aid the DPRRC in his defence of the two powers, essentially on the basis that the DPRRC said nothing about them in its report. I would observe that sometimes even Homer nods. In its report of last November the DPRRC said:

“We will always deprecate the use of Henry VIII powers where they appear to have been included in a bill ‘just in case’”.


In this Bill, these two Henry VIII powers are explicitly there just in case—just in case this Government or a future Government want to adopt a different policy.

Between now and Report, we will want to consider how these very broad and unconstrained Henry VIII powers may be limited in scope or sharpened in purpose and application—and consider, of course, whether they should remain in the Bill at all. In the meantime, I beg leave to withdraw Amendment 28.

House of Lords: Politically Exposed Persons

Debate between Viscount Younger of Leckie and Lord Sharkey

Thursday 25th November 2021 Lords Chamber

[Viscount Younger of Leckie (Con)]

Again, this is further anecdotal evidence that has come forward. In line with the FCA guidance on PEPs, in lower-risk situations a firm may take measures to simplify the enhanced due diligence checks. This should include seeking to make no inquiries of a PEP’s family or known close associates, or taking less intrusive and less exhaustive steps. The oversight and approval of the relationship takes place at a level less senior than board or director level. I hope that the meeting that has been mooted will iron out these issues, but clearly they are there.

[Lord Sharkey (LD)]

As other noble Lords have said, the banks continue to break the guidelines on how to treat UK PEPs and their families. The guidelines were set out four years ago and were very clear. Despite that, Nationwide wrote to my daughter last month—as well as to the noble Baroness, Lady Hayter—asking her for enormous and intrusive financial detail. There was a six-page questionnaire to be filled in, and a warning that if she did not fill it in, her account might be closed. That is a clear breach of the FCA guidelines. Can the Minister say what the point of guidelines is if they are not enforced and what sanctions can be imposed on offenders?

Sharia-compliant Student Finance

Debate between Viscount Younger of Leckie and Lord Sharkey

Thursday 25th July 2019 Lords Chamber

[Lord Sharkey]

To ask Her Majesty’s Government what progress is being made towards the introduction of Sharia-compliant student finance.

[Viscount Younger of Leckie (Con)]

My Lords, the Government remain committed to introducing a system of alternative student finance, known as ASF, compatible with the principles of Islamic finance. We have received advice from the specialist consultants we appointed and will set out plans for implementation as we conclude the post-18 review at the spending review. This will ensure that students in receipt of an ASF package are not disadvantaged compared with other students in receipt of mainstream student support.

[Lord Sharkey (LD)]

That Answer is still vague and still qualified. Why can the Government not make a firm commitment? They have known about this problem since 2013 and have known about the solution since 2014. Every year since then, and again this September, Muslim students will have been disadvantaged. The noble Lord, Lord Young, told the House on 13 March 2017 that the Government were currently working towards a scheme being open to applications within this Parliament, which, then, was due to end in 2020. Can the Minister give the House a firm assurance that the new scheme will in fact be available for the 2021 academic year?

[Viscount Younger of Leckie]

I cannot give the noble Lord a firm assurance on that, but I can say that we continue to work through the complex range of policy, legal and system issues that will need to be resolved in order to develop and eventually launch an ASF product. We should not underestimate the scale of complexity here. We are trying to replicate a system of student finance that delivers the same results as now, whereby students do not receive any advantage nor suffer any disadvantage through applying for ASF.

Scotland Bill

Debate between Viscount Younger of Leckie and Lord Sharkey

Tuesday 24th November 2015 Lords Chamber

[Lord Sharkey (LD)]

My Lords, I can save some time by saying right away that I cannot explain the second no-detriment principle, even though I am a member of your Lordships’ Economic Affairs Committee under the very able chairmanship of the noble Lord, Lord Hollick, whose amendment I support. I believe that it is impossible to properly debate this Bill unless we have before us the details of the fiscal framework. I believe it is impossible because those details will be critical in determining the nature of the relationship between the rest of the UK and Scotland, and the fiscal framework may well have implications for the future arrangements for Wales and Northern Ireland. If the framework is flawed, as it could easily be, it could lead to friction and to regular disputes. Such friction and regular disputes would weaken the union—the exact opposite of the purpose of this Bill.

As the noble Lord, Lord Hollick, said, our committee identified seven problems that need to be addressed. They are all important but the first is the absence of the fiscal framework and the timetable for the Bill. As things stand, it is not certain that your Lordships will have the opportunity to examine the fiscal framework, and it is entirely unclear, this Bill having been through the Commons, how MPs could have any opportunity to debate any proposed fiscal framework in any meaningful way. This matters because the fiscal framework will determine the funding that the devolved Administration will receive from the UK Government. Our report discusses, for example, the question of the adjustment of the block grant for Scotland after the initial settlement.

There are many ways of making that adjustment and we examined three in detail. All three showed significant differences in the size of the block grant received by Scotland. For example, in the longer term, there was an annual difference of £1.3 billion between two of the methods we discussed. Without a statement of underlying principles and without being clear what risks the Scottish Government should take responsibility for, it is not possible to argue coherently in favour of one method over another, but the argument needs to be had. The funding differences can be very, very significant. Without the fiscal framework, we do not know which adjustment method is proposed; we do not know on what basis it is proposed; and we do not know its revenue consequences.

Your Lordships’ Constitution Committee, in its report on the Bill of last Friday, commented on the situation, as the noble Lord, Lord Hollick, noted. It said:

“In the absence of any information about the fiscal framework, it will be impossible for the House to assess whether or not the Bill will cause detriment to all or part of the United Kingdom”.

The word “detriment” of course appears in the discussion of the Bill in another guise. The Economic Affairs Committee concluded, after hearing evidence from experts, that this second no-detriment principle was not workable and that it was in fact a recipe for an unending series of future disagreements about what constituted detriment and about its value. This needs to be dealt with in any fiscal framework. The Government need to explain how they intend to interpret and to implement the second no-detriment principle.

There is also the issue of what borrowing powers will be granted to Scotland. This is obviously a vital question: getting this wrong would put the whole deal at risk. Even framing it in the wrong way would be very damaging. For example, any no-bailout provision would, I think, look like a repudiation of Scotland as a part of the United Kingdom and would, in any case, almost certainly be ignored by the markets. The Constitution Committee quotes the Government on providing the fiscal framework for parliamentary scrutiny. It says that the Government have said that they,

“aim to complete work on the fiscal framework ‘as soon as possible in order to give respective Parliaments time for due consideration of both the Fiscal Framework and the Scotland Bill’”.

It goes on to say:

“It is not clear how the Government expect the House of Commons to give ‘due consideration’ ... when the Commons has already passed the Scotland Bill to the House of Lords”.

No, it is not clear. Perhaps the Minister can explain how the Government intend to allow the Commons this “due consideration” and whether it will include the opportunity to amend. As things stand, it is entirely possible that the only legislature to have an opportunity to scrutinise the fiscal framework will be the Scottish Parliament. This is obviously wrong and completely unacceptable.

As the Constitution Committee and the Economic Affairs Committee suggest, we should consider delaying parts of the Committee stage until after the publication of the fiscal framework. I look forward to hearing the Minister’s plain-English and unequivocal response, making a commitment to arrange matters so that this House can examine the fiscal framework in Committee.

[Viscount Younger of Leckie (Con)]

My Lords, I rise with some trepidation to raise the subject of speeches and time guidelines, which is no reflection on recent speeches. The House may like to know that if noble Lords adhere to the time limit of six minutes for speaking, the debate may finish at a reasonable hour to allow time for the next business.

National Lottery

Debate between Viscount Younger of Leckie and Lord Sharkey

Tuesday 18th December 2012 Lords Chamber

[Viscount Younger of Leckie]

I will stick to my original answer: my understanding is that it is up to the Gambling Commission to decide these matters.

[Lord Sharkey]

But, my Lords, the Gambling Commission itself has recently stated in court proceedings that the Health Lottery was clearly designed to circumvent the proceeds limits, the gambling equivalent of a tax avoidance scheme that exploits loopholes in legislation. Is the Government not about closing such loopholes?

[Viscount Younger of Leckie]

I thank my noble friend for that question, but the holistic approach to the lottery, which includes the National Lottery and the Health Lottery, has proved highly successful and we hope that it will continue. However, the Government will continue to monitor the progress of the operation, particularly of the Health Lottery and the society lotteries.