Pension Schemes Bill [Lords]

Alex Cunningham Excerpts

2nd reading: House of Commons
Monday 30th January 2017 Commons Chamber

[Alex Cunningham (Stockton North) (Lab)]

We have had a good, almost conciliatory debate, but we have also rightly focused on the opportunity that the Government have missed to bring forward an appropriate Bill that addresses the issues surrounding pensions. The Chamber again heard from my hon. Friend the Member for Swansea East (Carolyn Harris) on the plight of the thousands of WASPI women left stranded by this Tory Government, who selfishly and needlessly accelerated the state pension age, leaving many women no time to make alternative provision for themselves in their 60s. If one line was added to the Bill to extend pension credit to the WASPI women—that is our policy—it would have gone a long way to pacifying us this evening.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

The hon. Gentleman has got his mention in; let’s stick to the Bill.

[Alex Cunningham]

So I suppose, Mr Deputy Speaker, that you do not want me to mention the fact that we do not have clarity on the state pension age, either. The Government have already said that they do not have a long-term commitment to the triple lock; we would like to know what their plans are, both on that and, more importantly, for many of our people who work in the most demanding physical jobs, and suffer ill health much earlier in life than those who spend their life behind a desk.

I will not test your patience any further, Mr Deputy Speaker, but we have drifted away from the principles of an effective pension scheme to a muddled view of saving for retirement. Indeed, such is the political hostility towards pensions that they do not get a mention in the latest leaflet produced by the Treasury, “Ways to save in 2017”. There are lots of mentions of different types of individual savings account—cash, junior, help to buy, lifetime and stocks and shares—but not one mention of the word “pension”, or of auto-enrolment.

Although this narrow Bill needs improvement, it is much needed, and we will work with the Government in Committee to help make it fully fit for purpose. Labour is proud of its achievements with auto-enrolment, but we are a long way from finishing the job. The sluggish response of this Government and the last to the development of a regulatory framework for auto-enrolment has left people’s savings at risk for too long. Given what the shadow Secretary of State, my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams), said, our priorities for improving the Bill should be fairly obvious. There should be transparency: members must know what choices they are making, and how much those choices cost—and I mean all the costs in the investment chain. There seem to be conciliatory thoughts on that on both sides of the Chamber.

We also need improved governance and a pension system in which members are more engaged. I am glad to read in the media and published reports that in many cases the regulators and the Government agree with the Opposition. As I said on 9 January, I welcome the one-word commitment from the Under-Secretary of State for Pensions to implement the FCA recommendations to improve transparency in the pensions industry. We will hold them to account for that.

I repeat that members must know how much things cost—they must know how much each investment costs and how much transactions cost. It is not good enough simply to say that a default fund is capped at 0.75% and that people should be content. The industry tells us that it is moving towards greater transparency across all its platforms. We will be pleased to see what it comes up with. I have no doubt that we need to help the industry with appropriate legislation.

In the past, pension fund providers and others involved in fund management have often tried to dodge the issues when asked direct questions about costs, including by saying, “You should be happy to reward performance,” when we know that lower costs give a better net performance. Other hon. Members have spoken about that in the debate. They also say, “We are incentivised to manage costs, so when your funds do well, we get a bigger pay-off,” but we know that 80% of asset manager fees are based on just holding members’ money rather than making it perform well. When people realise that the average compensation of an asset manager, from the most junior to the most senior employee, is £225,000, people have the right to know how they are using the scheme’s money.

The Opposition favour a change in reporting to ensure that pension schemes must report to members on the three headings: administration, investment costs and transaction costs.

I know that the Minister values the cost-collection template, which has been negotiated with the Investment Association by the Local Government Pension Scheme Advisory Board. We must encourage its use by all pension providers. I hope the Minister will confirm his support for such an approach for master trusts.

On member governance, all the investment risk lies with the member and not with the sponsor or the provider. There is an argument to be made that, since the pot belongs to the member and the scheme-sponsoring employer bears no investment risk, governance by scheme members should prevail in number over employers. Some companies choose to operate a trust-based defined-contribution scheme, but most newer auto-enrolled members will not find themselves saving into one. Instead, the vast majority of people will find themselves saving into a master trust or a group personal pension arrangement. In such schemes, member representation on governance boards is far more rare.

We are in a new landscape—we have lost member-nominated trustees, which we had believed to be a clear fiduciary principle. A member perspective adds diversity, which prevents the risk of group-think within boards. Ian Pittaway, chair of the Association of Professional Pension Trustees, has said:

“They’re brilliant in so many areas, they ask difficult questions that other people might be frightened to ask, they’re great on member issues, whether it’s changing benefits of a death-in-service case or something like that.”

In the defined-benefit world, as long as the scheme was well governed and well administered, the member would end up with a reasonable replacement ratio, but in the defined-contribution world, a member’s outcome depends on a host of factors that are currently beyond their control.

There may be resistance to member representation from master trusts, with tens of thousands of schemes and hundreds of thousands or even millions of members, but the industry has proved that it is possible. We will address that more in Committee. Whatever the route to better representation, most in the sector agree that it can only be beneficial for the defined-contribution landscape. There is a clear argument and there are clear demands that the Bill is the best place to start. We look forward to working with the Minister to make it happen.

Yes, we could have debated equally if not more important measures in the Bill, but sadly we are not. It could be many years before we get a chance to pass legislation in those areas. The Bill can both protect and empower the people whose money is being invested on their behalf. The Opposition are therefore happy to see the Bill progress to Committee, where we hope the Minister will be open to the improvements I am sure we can make to the Bill.

--- Later in debate ---

[Richard Harrington]

I congratulate you, Mr Deputy Speaker, on continuing so well the leadership and robustness started by your predecessor in the Chair. I apologise for any offence caused to the Chair. I actually thought I was speaking within the scope of the Bill, but I will of course be led by the Chair and move on to the substance of the Bill.

As I said, the points raised in the debate by Members on both sides of the House have been broadly complimentary. The whole purpose of the Bill is for the Government to be able to respond very quickly to the phenomenal and exponential growth in master trusts over the past two years. That growth was not predicted by the Opposition, who take credit for auto-enrolment—in fact, there was cross-party consensus—and it was not predicted by either the coalition Government or this Government. It happened very quickly and I believe the Government are doing the right thing by responding quickly. I do not accept that the Government have acted too slowly.

I was very glad to receive the support of the shadow Secretary of State, and she made a very relevant point when she explained her view about the expansion of master trusts. We are not allowed to mention the “w” word, as the hon. Member for Bootle (Peter Dowd) calls it from a sedentary position, because that would be outside the scope of the Bill. The regulation has been very considered. Both Labour Front-Bench spokesmen and the SNP spokesman commented on the large amount of secondary legislation. The reason is very clear: we want to consult very quickly with industry and responsible parties on the detail, but this process will not take a long time. We have to get the detail absolutely right, because this is a one-off chance to regulate. There will be a chance for scrutiny by both Houses, because in the first instance the regulations will be subject to affirmative procedure.

Many Government Members, including my hon. Friend the Member for Tonbridge and Malling (Tom Tugendhat), spoke about transparency. We take this very seriously and we are consulting on it. It is not in the Bill, but it is in the spirit of the Bill, because the regulator will be provided with many powers that will help to enforce transparency and members’ rights, which have been discussed.

[Alex Cunningham]

On the specific point of transparency, why is it necessary to start consulting people when we should simply be saying, “We want to know what all the costs are in the entire investment chain”?

[Richard Harrington]

I must explain to the shadow spokesman that we believe in democracy, and part of that is consulting to get it right. We believe this is very important; it has gone on long enough; it needs to be done right. I am sure that the hon. Gentleman did not mean that the Government should just decide what to do without consulting on this hugely complex area within the industry. When it comes to the regulations, let me repeat that we will consult on all of them. I apologise to the hon. Gentleman if consulting is not correct, but we have to get this absolutely right.

[Alex Cunningham]

I certainly agree with consulting, but will the consultation extend to the members of the master trusts and not just the people who manage the members’ money?

[Richard Harrington]

I believe in full transparency and disclosure, but this is a very complex issue. Brevity of disclosure is sometimes clearer to people, helping them to understand all the costs and charges within their pension, rather than giving them 10, 12 or 14 pages. I would like to move on.

One point was made eloquently by both the hon. Member for Ross, Skye and Lochaber (Ian Blackford) and my hon. Friend the Member for Gloucester (Richard Graham) on the question of whether the Pensions Regulator will be properly resourced to carry out the new duty. I can confirm that we have already had extensive talks with the Pensions Regulator, and that it is the Government’s fundamental view that we cannot enact a Bill such as this which deals with improving and expanding on the response without giving the regulator the proper resources that it needs.

I am pleased to say that many Members of all parties have explained that master trusts are an important part of the pensions industry. The Government are filling a gap between personal pensions and insurance-based pensions that are regulated on the one side, and on the other side the evolution of the trust system, for which there is ample pensions law and regulations. There is a significant gap in the market. We are pleased that master trusts have expanded in the way they have, but they need some regulation and attention because companies have been moving into this area simply because there is that gap in regulation. That does not mean that such trusts are a bad thing, and I am delighted to report that we are carrying out this Bill from a position of little failure. This is not a Government responding to catastrophe or calamity when people have lost money; what has happened has been successful, but we need to provide the correct regulatory framework for it.

I can do no better than conclude my speech by citing my hon. Friend the Member for Gloucester, who said that the Bill was simple and important and that everybody should support it. For that reason, I commend the Bill to the House and support its Second Reading.

Question put and agreed to.

Bill accordingly read a Second time.

Pension Schemes Bill [Lords] (Programme)

Motion made, and Question put forthwith (Standing Order No. 83A(7)),

That the following provisions shall apply to the Pension Schemes Bill [Lords]:

Committal

(1) The Bill shall be committed to a Public Bill Committee.

Proceedings in Public Bill Committee

(2) Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Tuesday 21 February 2017.

(3) The Public Bill Committee shall have leave to sit twice on the first day on which it meets.

Proceedings on Consideration and up to and including Third Reading

(4) Proceedings on Consideration and any proceedings in legislative grand committee shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which proceedings on Consideration are commenced.

(5) Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.

(6) Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration or to other proceedings up to and including Third Reading.

Other proceedings

(7) Any other proceedings on the Bill (including any proceedings on consideration of any message from the Lords) may be programmed.—(Mark Spencer.)

Question agreed to.

Pension Schemes Bill [Lords] (Money)

Queen’s recommendation signified.

Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),

That, for the purposes of any Act resulting from the Pension Schemes Bill [Lords], it is expedient to authorise the payment out of money provided by Parliament of:

(1) any expenditure incurred under or by virtue of the Act by the Secretary of State; and

(2) any increase attributable to the Act in the sums payable under any other Act out of money so provided.—(Mark Spencer.)

Question agreed to.

Pension Schemes Bill [Lords] (Ways And Means)

Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),

That, for the purposes of any Act resulting from the Pension Schemes Bill [Lords], it is expedient to authorise:

(1) the levying of charges under the Pension Schemes Act 1993 for the purpose of meeting expenditure arising under any Act resulting from the Pension Schemes Bill [Lords] or any other Act; and

(2) the payment of sums into the Consolidated Fund.—(Mark Spencer.)

Question agreed to.

Pension Schemes Bill [ Lords ] (Fourth sitting)

Alex Cunningham Excerpts

Committee Debate: 4th Sitting: House of Commons
Thursday 9th February 2017 Public Bill Committees

[Ian Blackford]

On the basis of the Minister’s response, I will certainly not push the new clause to a vote. We have received assurances that the Government will look at these issues; I hope they will not only be addressed in the Green Paper, but that there is the possibility of legislation as a result of that. I think we all recognise—there is a consensus on this—that we have to make sure we can resolve this problem for the benefit or incorporated and unincorporated businesses. On that basis, I will happily leave things as they are for now. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 2

Investment Strategy

“(1) A Master Trust, after taking proper advice, formulate an investment strategy which must be in accordance with guidance issued from time to time by the Secretary of State,

(2) The Trust must consult scheme members on—

(a) the Trust’s assessment of the suitability of particular investment and types of investment;

(b) the Trust’s approach to risk, including the ways in which risks are to be assessed and managed;

(c) the Trust’s policy on how social, environmental, and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments;

(d) the Trust’s policy on the exercise of the rights (including voting rights) attaching to investments; and

(e) the right of scheme members to consider non-financial issues relating to their investments and be consulted on these issues.

(3) The Trust must review the strategy at least once a year, and revise if appropriate

(4) The Trust must revise the strategy at any time if there is any significant change to the information included in it.

(5) In the event of (4) above, the Trust must consult with scheme members, and the revise the strategy in the light of comments made.

(6) The Secretary of State may make regulations with a view to ensuring that the information disclosed under subsection (1) is provided in a timely and comprehensible manner.”.—(Alex Cunningham.)

A Master Trust must include an investment strategy which outlines what the Master Trust should consult scheme members on in areas of investment.

Brought up, and read the First time.

[Alex Cunningham (Stockton North) (Lab)]

I beg to move, That the clause be read a Second time.

Welcome to our walk-in fridge, Ms Buck. I had a discussion with the Government Whip, the hon. Member for Winchester.

[Richard Harrington]

On a point of order, Ms Buck. Actually, I do not know whether it is a point of order or a point of clarification. Before we come to the hon. Gentleman’s new clause, am I correct in saying that new clauses 11, 12 and 13 were all withdrawn?

[The Chair]

New clauses 12 and 13 were not called.

[Alex Cunningham]

I was talking about the conversation that I had with the Government Whip about whether we should invoke the Factories Act. He reminded me that, unhelpfully, said law does not apply to the Palace of Westminster. The Minister mentioned kicking a can, and I remember playing kick the can in the street as a young boy. Perhaps you can provide us with a can, Ms Buck, and we can have a game after we debate the next new clause to warm ourselves up.

New clause 2 continues our theme of transparency and member engagement. It is designed to improve the way that master trusts consult their members about their investment strategies and ensure that members are aware of the guidelines that trustees establish for the management of members’ assets. The new clause would modernise the approach to fiduciary—I find that word even more difficult to say than “Lochaber”—management of savers’ assets and update the statement of investment principles approach currently required of master trusts. A master trust would have to have an investment strategy and consult scheme members about that strategy and about socially responsible investment—commonly known as environmental, social and governance issues.

Until now, every occupational pension scheme has been legally required to prepare and maintain a statement of investment principles, which is expected to cover the trustees’ plans for securing compliance with their statutory duties, their policies on investments, risks and returns, and how they will exercise their voting rights. In short, it allows trustees to consider factors that they believe will influence the financial performance of their investments and consult members about those issues. As long as pension funds can show that any investment or policy decision was made on a fiduciary basis and members were consulted, they can avoid the charge that they have not considered members’ best interests.

Public opinion tends to position the average citizen as a helpless bystander in this drama, but in fact it is their money that underpins the entire system. Anyone with a pension is, indirectly, an owner of Britain’s biggest companies. The new clause seeks to create a world in which people feel that their savings give them a positive stake in the economy and a voice in how the companies in which they invest are run. Although we may hope or even expect that scheme members have a say, the reverse is true: power has become increasingly concentrated in the hands of a relatively small number of opaque and unaccountable financial institutions. As the Kay report showed, those institutions often face systematic pressures to act in ways that may not serve savers’ interests. Direct accountability to savers is a vital component of a healthy economic and financial system. As millions more savers are about to enter the capital markets through pensions auto-enrolment, now is the right time to build a more accountable system.

In June 2011, the Government invited Professor John Kay to conduct a review of UK equity markets and long-term decision making. The Kay review considered how well equity markets were achieving their core purposes—to enhance the performance of UK companies and enable savers to benefit from the activity of those businesses through returns to direct and indirect ownership of shares in UK companies. The review identified that short-termism is a problem in UK equity markets. Professor Kay recommended that company directors, asset managers and asset holders should adopt measures to promote both stewardship and long-term decision making. He stressed in particular:

“Asset managers can contribute more to the performance of British business (and in consequence to overall returns to their savers) through greater involvement with the companies in which they invest.”

He concluded that adopting such responsible investment practices would prove beneficial for investors and markets alike. In practice, responsible investment could involve making long-term investment decisions, as well as playing an active role in corporate governance by exercising shareholder voting rights.

I hope that master trusts will want to consider the Kay review’s findings when developing their proposals, including what governance procedures and mechanisms are needed to facilitate long-term responsible investing and stewardship through the funds that they choose for members to save into. The UK stewardship code published by the Financial Reporting Council also provides master trusts with guidance on good practice in monitoring and engaging with the companies in which they invest. The new clause would ensure sure that trustees are guided by the members of the scheme whose money they invest.

In recent decades, efforts to improve the way companies are run have focused heavily on making directors more accountable to their shareholders—for example, the recent introduction of a binding “say on pay”—but the job is only half done. Ownership rights are exercised largely by institutions that are themselves intermediaries. Accountability to the underlying savers who provide the capital remains weak. The logical next step must be for institutional investors to extend the same accountability they expect from companies to the savers they represent.

The UK stewardship code was introduced in the aftermath of the financial crisis to address concerns that shareholders were behaving as absentee landlords. Rather than being enforced by regulators, it is a voluntary code that relies on scrutiny from below to promote compliance, mirroring the corporate governance code for companies. The investment regulations currently require master trusts to set out within the statement of investment principles the extent to which social, environmental or corporate governance considerations are taken into account in the selection, retention and realisation of investments, but savers are left out of the loop. Just as I have argued for greater engagement with members on other issues, I believe it is needed here too.

In addition, accountability should build trust in the system even among those who do not choose to engage, thus encouraging people to keep saving. That is an important consideration in a market where just 7% of retail investors trust investment firms to do the right thing and consumers cite lack of trust as the No. 1 reason for opting out of private pension saving. Practical objections on the grounds that savers are not interested or not capable of engaging with their money simply perpetuate a vicious circle of disengagement. Savers may be put off by the language of investment, but that does not mean they are not interested in where their money goes. The onus must be on the master trusts and the wider investment sector to communicate with savers in a way they find meaningful. Likewise, savers may lack understanding of the technicalities of investment, but there are many matters on which they are qualified to comment, including the way their scheme behaves as an owner of major companies or its policy on social, environment and governance issues.

Transparency is necessary, but not sufficient for a more accountable investment system. Savers must also have the right to engage directly with decisions about their money, in the same way that shareholders engage with companies. Of course, we are not suggesting that all savers should be consulted on every decision. In our view, engagement with savers has three key elements. Savers should have the right to be consulted about investment policies, particularly those that should be firmly grounded in the views of savers, such as socially responsible investment policies. It is sometimes argued that since savers will inevitably disagree, acting on their views can prove difficult, but that objection can be refuted by example: schemes such as the National Employment Savings Trust demonstrate the possibilities of using face-to-face engagement with savers to inform the development of policy. Savers should be able to subject decisions made on their behalf to healthy scrutiny and challenge. While companies are obliged to hold annual meetings at which the board accounts to their shareholders, no such requirement extends to pension schemes.

Making capital markets more answerable to the individuals whose money they invest offers a potential lever for rebuilding trust in the City and for promoting more responsible and long-termist corporate behaviour. Such accountability must be nurtured over time by institutional investors such as master trusts, other pension savers and civil society in general. As Mark Carney said back in 2013, if it is

“finance that becomes disconnected from the economy, from society, finance that only talks to itself and deals with each other, that becomes socially useless.”

We have an opportunity here to change the landscape that sees pension savers as passive uninterested participants by engaging with them on decisions that affect their lives. When I started this speech, I said I was continuing the theme of member engagement. The new clause would extend what currently happens in relation to investment decisions, and I commend it to the Committee.

[Ian Blackford]

Before the hon. Gentleman concludes his speech, I wanted to ask about subsections (3) and (4) of the new clause, which state:

“The Trust must review the strategy at least once a year…The Trust must revise the strategy at any time if there is any significant change to the information”.

Can he explain what form that review would take and what role investment advisers would have, if any, in that review?

[Alex Cunningham]

That is an extremely difficult question to answer. [Interruption.] Everyone can laugh, but the Government talk about regulations and laying down guidance, and I hope that they would be able to provide the necessary guidance.

[Ian Blackford]

This is actually a very serious point. The hon. Gentleman’s new clause would require an annual review, so it is pertinent to ask how that would be conducted and what role, if any, investment advisers would have.

[Alex Cunningham]

There has to be a role for investment advisers, but the crux of my point is that members should have some say in the investment decisions that affect them.

[Ian Blackford]

Can I deduce from that that the hon. Gentleman actually has no idea how such reviews should be conducted?

[Alex Cunningham]

That is not exactly the case. It is clear that we need a set of circumstances in which members are properly engaged, equipped and informed. If they are, they will be able to contribute.

[Craig Mackinlay]

I oppose new clause 2 just as I opposed new clause 1, not least because of practicality. Let us go back to the example of NEST, which could have millions and millions of members—and I envisage that it probably will. How on earth could an investment strategy be decided by 3 million members? That would probably lead to three million and one different investment strategies.

I do not see anything in the Bill that would prevent a scheme such as the one the hon. Gentleman proposes from coming to the market if there was demand for it from several employers and members in those employers. The market could then decide, “I like the look of that scheme, with its huge member involvement.” I see no reason why such a scheme could not evolve if one was called for.

The hon. Gentleman speaks about an ethical investment policy. That is all very well, but I remind him that the Co-op bank took a similar route, and it is not exactly in great shape. I put it to him that when I go to a doctor, I like to see the doctor; I do not particularly want to see the lay members of the NHS trust as well. I feel comfortable leaving this with investment professionals, because they will be judged on their performance. If they do not achieve, employers may look at an alternative master trust.

--- Later in debate ---

[Richard Harrington]

As usual, the hon. Gentleman makes a very sensible suggestion, which should be considered. However, I believe that everything in the new clause is already included in legislation and that it is therefore unnecessary, so I urge the hon. Member for Stockton North to withdraw it.

[Alex Cunningham]

Let me first address the point about size and the ability to organise communications in this sort of situation. If Legal & General can do it, so can others.

The Minister described lots of ideas raised today as laudable. Sadly, all the ideas he supports exclude members. He rejects the idea of members being represented among trustees and the idea of member-nominated directors. His position is that everything should be left to professionals and to the marketplace, and that members may not be able to take part in or understand investment decisions. He admitted that he might not understand those decisions, but there are members out there who do, and it would be helpful if at least some of them could represent their fellow members and challenge some of the things that their trustees are doing.

One further point concerns me. An employer may opt for a particular trust but become dissatisfied with it and move. There are a very large number of employers, and I fear that a large number of them are disengaged. I wonder whether they are acting in the best interests of their employees. I will come to that during the debate on a later amendment. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 3

Annual Member Meeting

“(1) The trustees of an authorised Master Trust Scheme must hold an annual meeting open to all members of the scheme.

(2) The Master Trust must take all reasonable steps to make the meeting accessible to all members, this includes making arrangements for—

(a) scheme members to observe the meeting remotely, and

(b) scheme members to submit questions to trust members remotely.”.—(Alex Cunningham.)

This new clause requires Master Trusts to hold an Annual Member Meeting, and sets out ways to ensure members are properly given the opportunity to be involved.

Brought up, and read the First time.

[Alex Cunningham]

I beg to move, That the clause be read a Second time.

This new clause takes us back to our member engagement theme. It would require master trusts to hold an annual member meeting, and it sets out ways to ensure that members are properly given the opportunity to be involved in that. It is now common practice for pension funds to hold an annual member meeting. Good member communications, provided at the right time and in an accessible format, are vital if members are to engage and make decisions that lead to good outcomes during their retirements. An annual member meeting ensures that trustees and administrators can be made human and accountable.

A Legal & General master trust annual report states:

“In September last year we hosted a Members’ Forum at Legal & General’s office in London. It wasn’t just a first for us, it was the first ever for any scheme like ours. We got a lot out of that meeting, and we hope that those members who attended did so too. Our aim was to get a better understanding of the things that matter most to members, to help inform our plans for the future. We believe we achieved our aim, and the feedback we got from those members was encouraging.”

I am not here to promote Legal & General, but I commend its attitude and its work in this arena.

Trustee boards should regularly review member communications, and when deciding on the format of those communications, should take account of innovations of technology that may be available to them and appropriate for their members. That would allow the more engaged members to hear a presentation from trustees and senior executives about how the scheme has managed their retirement assets over the previous year and what plans the scheme has to deliver a strategy and manage risk into the future on their behalf. If Legal & General can organise such an event, I think others can too—even if they have vast numbers of members.

If others do not do what Legal & General did, how could they have an annual forum? We must not forget that there is no necessity to fill a hall with thousands of people in this technological age. It is possible to reach more people perhaps by combining a live meeting with an online platform, or indeed to hold the whole meeting online. A recording of the meeting could then be made available on the trust’s website, with an opportunity to give feedback.

The Pensions Regulator’s guidance accompanying its new defined-contribution schemes code of practice highlights AMMs as one way that multi-employer schemes can stay close to members. The new clause would bring master trusts into line with the normal practice in the corporate sector and among the growing number of pension schemes.

--- Later in debate ---

I want to avoid the situation that the hon. Gentleman wants in which a scheme is obliged to hold an AGM, because the cost will be passed on to the membership and I cannot see that it will achieve the noble objective that the hon. Gentleman wants. I hope the points I have made sufficiently explain why the Government are of the view that the new clause is not appropriate, and I sincerely urge the hon. Gentleman to withdraw it.

[Alex Cunningham]

I do not have the app jargon either, as the Minister will probably realise. We have talked much about engagement and communication over the past two or three sittings. I remain concerned that there is still no real requirement on the trustees of any of the master trusts to communicate with the people whose money they are responsible for managing. We need to make communications much more practical, and I believe that if member meetings work well for some organisations, they could also work well for master trusts.

I hope that master trusts out there will learn from NEST and from Legal & General, and will understand that member meetings can happen and that they can derive tremendous benefits from their members being much more engaged. I would prefer to see a situation in which it is enshrined in the law and there is a compulsion for people to build on what is already happening out there, to repeat some of it and to see a level of engagement that we have so far not seen, but I do not intend to press the clause to vote at this stage. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 4

Master Trust Schemes: Review of Participation

‘(1) The Secretary of State must, before the end of the period of 12 months from the day on which this Act receives Royal Assent, establish a review of participation in Master Trust Schemes.

(2) The review must consider what steps can be taken to increase the participation in Master Trusts Schemes by the following groups—

(a) carers;

(b) self-employed;

(c) workers with multiple employees; and

(d) workers with annual earnings below £10,000.”

(3) One of the options considered by the review to improve participation must be changes to the terms of auto-enrolment.’. —(Alex Cunningham.)

This new clause reviews options for widening participation in Master Trust Schemes for groups currently facing barriers, in particular groups not currently covered by auto-enrolment.

Brought up, and read the First time.

[Alex Cunningham]

I beg to move, That the clause be read a Second time.

I was pleased to table this vital new clause, which attempts to widen access to master trust saving for those whom this Government have left excluded for too long. As it stands, the Bill does little to build on the success of Labour’s auto-enrolment policy and ensure that saving into master trusts is accessible and encouraged for the number of groups that evidence suggests are not saving adequately for their retirement.

I recognise that the Government have announced a review of the operation of auto-enrolment into master trust saving, but its scope is broad, with few specifics in the terms of reference published yesterday. It is vital that the review specifically addresses the question of how we can improve master trust saving among the groups specified in the new clause. That will ensure that the Bill delivers plans that strengthen security and dignity in retirement. The Minister may already be wondering why I am pursuing the new clause when it appears he has the matter in hand. He may have it in hand, but there is merit in naming some of the very specific groups who most need change and in implementing the recommended changes.

It is a testament to the last Labour Government that 10 million additional workers are estimated to be newly saving or saving more as a result of auto-enrolment into master trusts. It has led to an additional £17 billion of pension saving being put away, mostly by low-income workers. Nevertheless, many excluded groups remain, in part due to the actions of this Government, who increased the triggering threshold at which workers were automatically enrolled into a master trust saving scheme. According to the latest Department for Work and Pensions statistics, 37% of female workers, 33% of workers with a disability and 28% of black and minority ethnic workers are not eligible for master trust saving through auto-enrolment. Critically, those groups are over-represented among low earners, the self-employed, those with multiple jobs and carers—the areas we believe that the Government should focus on in their review, as set out in the new clause. I hope they will.

At the end of last year, the Pensions Policy Institute published a report assessing future trends in defined-contribution pension saving. It is worth quoting the following section of the report in full, as it clarifies the current situation. It states that

“the evidence so far suggests that many households will be unable to maintain their current standard of living when they reach retirement. The advent of auto-enrolment has increased the number of workers saving for retirement, with more active savers now in defined contribution (DC) pension schemes rather than defined benefit (DB). This rise in the number of pension savers is a step in the right direction, but DC plans must continue to evolve in order for them to provide savers with an adequate pension.”

The report goes on to find that the median saving of DC scheme members could yield £3,000 a year as an annuity, which is not a lot of money.

More work needs to be done to improve the adequacy of returns on DC savings, including by looking in more depth at costs and charges, as we have tried to do throughout our consideration of the Bill. Nevertheless, the top-up provided from access to master trust saving through the auto-enrolment scheme is a valuable addition to state pension provision, so it is worth while to ensure that as many low-income groups as possible have access to master trust saving.

I will start with how master trust saving for low-income groups could be improved through the Bill. Taking carers first, while those who leave or reduce their hours of employment to care for loved ones are rightly supported through the social security system, it seems unjust that they will probably miss out on the fuller benefits enjoyed by those who are able to save more into occupational pensions as a result of being able to remain in employment, in spite of the fact that carers engage in valuable labour—work that would otherwise have to be picked up by the state. It is my strong belief that the Government should try to improve the retirement prospects of carers, and master trusts, which have been set up to service large numbers of low-income savers, may be an avenue worth exploring. We would include carers as part of a wider review of groups that are excluded from pension saving.

The same is true of the self-employed. I was personally heartened by the amendment tabled by the hon. Member for Amber Valley. After more than a decade of expansion in that part of the labour market, self-employed people now make up 15% of the workforce. Vast numbers of them are at the very bottom end of the income scale, and there is much evidence to suggest that they are not saving as much as those in other sections of the workforce. Research by the Association of Independent Professionals and the Self-Employed found that four in 10 self-employed people do not have a pension. The New Policy Institute found that the self-employed are not only less likely to participate in pension saving but tend to save less as a whole when they do.

Despite that worrying evidence, there are few obvious means by which the self-employed can begin to build up a savings pot in a master trust. That is just one way in which Britain’s entrepreneurs have been let down and ignored. There is no mechanism to manage the enrolment of self-employed people in master trust schemes. Of course, the fact that there is no employer means that, like informal carers, self-employed people’s contributions cannot currently be topped up. I do not believe that it is beyond the bounds of possibility for an expert review to look into that conundrum. The Labour party remains the party of working people, including the self-employed, and we are keen to explore how they might be encouraged to save into defined-contribution master trust schemes to ensure that they have the dignified and secure retirement that we believe everyone has the right to.

Perhaps moving closer to the existing system of saving into master trust schemes, there is also the urgent question of people with multiple jobs. Under the current system, those whose earnings exceed the earnings threshold but result from multiple jobs are unable to access auto-enrolment into a master trust scheme. It seems that the only logic preventing that group from accessing savings is the administrative barrier posed by their having more than one employer. In other words, there is no mechanism either to establish total earnings to trigger access to auto-enrolment, or to determine the sponsoring employer of a person working multiple jobs. Although that issue may seem overwhelming to the Government, we believe that it warrants further attention—especially given the way the labour market is changing, with as many as 3 million people estimated to be working multiple jobs just to make ends meet.

I turn finally to access to master trust savings for low-income savers. Under the auto-enrolment policy developed by the Labour party, working people would have been automatically enrolled into a master trust scheme once their earnings had crossed the trigger level of just over £5,000, the logic being that people would begin to save towards an occupational pension at the same earnings level at which they began to pay national insurance contributions. However, the coalition Government increased the earnings threshold to £10,000, denying millions of low earners the automatic right to save towards a relatively low-cost occupational pension through a master trust.

The last annual review of auto-enrolment into master trust savings concluded that the lower earnings threshold will be £5,876 and the trigger threshold will be frozen at £10,000. Although that freeze will bring a few more workers into the scheme through inflation, we do not believe that that is happening quickly enough. Given the generational crisis that is developing in our pensions system, more needs to be done to include low earners in savings provision and encourage retirement planning.

In conclusion, we recognise that the upcoming 2017 review of auto-enrolment presents the Government with an opportunity to take seriously the problem that certain groups are excluded from master trust savings. The new clause would guarantee that the Government engaged with these vital issues and those groups in the full and proper way. To be clear, we are not trying to force the Government to implement specific policy proposals after the Bill’s passage, although in the view of our colleagues on the Constitution Committee, that would not be out of step with much of the rest of the Bill. We merely wish to place a statutory requirement on the Government fully and properly to consider as part of their planned review what steps could be taken to widen participation for some of the most vulnerable groups.

I have one very specific question about the implementation of the review’s recommendations once it is completed. We talked about this earlier in relation to another matter. Will the Minister have powers under regulations to implement those recommendations, or will we have to wait for another pensions Bill, which is unlikely during this Parliament? The new clause would help to increase the security and dignity of retirement for groups on the lowest incomes. How can the Minister possibly refuse to guarantee that the review will address these important issues and groups?

[Richard Harrington]

I compliment the hon. Member for Stockton North on his speech. He has quite clearly listened to all the speeches I have made since being appointed to this job. I will point out one or two facts to respectfully disagree with him—and, for once, his style, which I have not done up to now. To make this into a political matter by saying that auto-enrolment was Labour’s idea is not really fair. I may be correct in saying that Lord Turner, who chaired the Pensions Commission, was offered a peerage by three political parties and took one from the Liberal Democrats. The other commissioners were Labour and Conservative. I am not being flippant, but the spirit of our debate has generally not been party political at all.

[Alex Cunningham]

I accept that—okay, we are making a few political points. It was a Labour Government who brought in auto-enrolment, but this Government have successfully encouraged more and more people to invest more and more, which is a very positive thing. I place that on the record.

[Richard Harrington]

That is very reasonable. The hon. Gentleman’s general approach—and mine, I hope—has been not to bring party politics into the debate, because we all have exactly the same objectives.

I have one or two further points to make. The hon. Gentleman mentioned women being excluded from auto-enrolment—not by law but in practice—for different reasons. Actually, the number of women being enrolled is very impressive, although I do not have it to hand. I am pleased to say that I do not think that this is a gender equality issue.

The fundamental point is that the issues that the hon. Gentleman mentioned and that his new clause would address were mostly covered by the Secretary of State in yesterday’s announcement about the extent of the auto-enrolment review. That was not timed to happen just before this Committee sitting; it is just how things worked out. The review will look at the self-employed, who are excluded from the current system, which has gone from nought to a lot very quickly, after all. It will also look at people with multiple earnings under the £10,000 mark from different sources. Incidentally, people paid less than that—I cannot remember the exact figure, but it is just under £6,000—are allowed to enrol, and they get help from their employer and the tax system, although at that level they would not necessarily pay tax. All these things are being looked at. The review will be very comprehensive and will go far beyond what the statute calls for. I will be very pleased to look at its results.

The hon. Gentleman asked whether implementing the review’s recommendations would involve another pensions Bill, which he and Her Majesty have decided we will not be having in this Session. I cannot say, because I do not know what the recommendations are, but some things will need primary legislation and others will not.

Unless the hon. Gentleman has an urgent intervention to make, I will conclude. I have listened carefully to what he said and am glad to have included it all in my speeches, and I am glad that it will all be included in the review.

[Alex Cunningham]

My final intervention is to raise the very specific issue of carers. Will carers be included in the review?

[Richard Harrington]

The review is generally worded. It could include carers—they are not specifically mentioned, but I believe that it will include them, and I would encourage it to include them. However, to include them as a category would be a little unfair on others who may be in a similar financial position.

The hon. Gentleman’s sentiments are absolutely right, as were most things he said in his speech, but I do not think it is appropriate for the new clause to go into the Bill. It is far too early; we have been doing auto-enrolment for only a short time, and we are doing a comprehensive review. Despite his sentiments, I ask him to withdraw the motion.

[Alex Cunningham]

I am pleased to have those commitments on the record, particularly those relating to some of the more vulnerable groups. I appreciate that there are other groups apart from carers, as the Minister said, but carers provide a tremendous service that is probably worth billions of pounds to our country every year, so it is important that we have some form of provision for them. The new clause was always going to be a probing clause. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 7

Enrolment in Master Trust scheme: duty on employers

“Before an employer enrols in a Master Trust scheme they must—

(a) take reasonable steps to ensure themselves that the scheme is financially viable;

(b) ensure the scheme is on the list of authorised Master Trust schemes maintained by the Pensions Regulator (section 14); and

(c) take reasonable steps to ensure themselves that the scheme will meet the needs of their employees.”.—(Alex Cunningham.)

This new clause would require employers to conduct basic checks before signing up to the Master Trust scheme.

Brought up, and read the First time.

[Alex Cunningham]

I beg to move, That the clause be read a Second time.

It is almost as if I am doing an aerobics class; I have already warmed up, even in this cold Committee Room.

New clause 7 would provide employers with a fiduciary duty and a duty of care to members to ensure that the master trust of their choice meets the needs of their staff. The auto-enrolment process in the UK rests on the employer making the choice of scheme for those purposes. The new clause would ensure that, before authorisation, the employer is duty-bound to ensure that the master trust is fit for purpose and has all the necessary information for that choice to have a sound footing.

We need to ensure that the employer has a defined duty to carry out due diligence when choosing a workplace pension. Otherwise, many employers—through expediency or otherwise—will continue to make choices that may not be in the best interests of the scheme’s beneficiaries.

The past 20 years has seen us lurch from one mis-selling scandal to another. Pension transfers, endowments, payment protection insurance and interest rate swaps have all been subject to class actions, and to massive retrospective penalties being imposed on those found wanting in due diligence.

In the US, the employer has a fiduciary responsibility to their staff and chooses their scheme in their best interests. That means that if employers do not take due care in the choice and governance of the plan that they set up for their staff, they are liable to civil prosecution. Employers in the US take fiduciary obligations seriously, not least because scheme members are now taking and winning class actions if they do not.

A class action can focus on the choice of scheme provider, failure to establish suitable investment options and failure to monitor how funds perform as the scheme progresses. Some advisers in the UK, such as Pension PlayPen, think that the information given to employers to choose a workplace pension is insufficient, and that there is little supervision of the due diligence process by regulators, which is in sharp contrast to what happens in America.

The other day, Pension PlayPen stated on its blog:

“The common law includes the concept of an employer’s duty of care to staff, not just for their health and safety but for their financial welfare. This duty of care forms part of a social contract, the implicit responsibilities held by individuals towards others within society. It is not a requirement that a duty of care be defined by law.

An additional worry is that employers do not see this as their choice. Too often we get answers from employers ‘we did what our accountants told us to’. It is as much in the interests of accountants to ensure the employer states why they have chosen their pension as it is the employer’s.”

So what happens when the duty of care and fiduciary obligations go wrong? The only option is the courts. According to a Financial Times article last November, there has been an “explosion” of class actions in the USA on the issue of financial detriment to scheme members. These suits have not yet gained much public attention, due to the reputation of the US legal system, but it is also partly because the legal action is fragmented and spread between different courts, and cases are often settled in private with binding confidentiality clauses. What is more, pensions have the unfortunate reputation of being rather dull, even though the sums involved dwarf those of the multibillion dollar settlements seen in banking since 2008.

However, the basis of the complaints are sound and echo a warning that we have been making about the lack of transparency and engagement for members of schemes. Members may have been charged excessively high fees, the most noticeable or important point being that the investment process may be used to extract wealth.

As in other financial suits, such as PPI suits, the cases claim that financial organisations have used opaque structures, so that transactions extract money that ought to go to members of schemes. In one case, JP Morgan has been sued by a participant for allegedly causing employees to pay millions of dollars in excessive fees, through a scheme motivated by “self-interest”. The plaintiff claims that JP Morgan, as well as various board and committee members, breached its fiduciary duties by, among other things, retaining proprietary mutual funds from the bank and affiliated companies for several years, despite the availability of nearly identical, lower-cost and better performing funds.

Not all of these cases are just related to charges in the investment chain; some are also about administrative processes. A website—401khelpcenter.com—highlights that members of Essentia Health in Minnesota filed a class action lawsuit against the sponsor, claiming that the organisation paid excessive fees to their record keepers.

[Craig Mackinlay]

The hon. Gentleman has mentioned many times the potential for class action, particularly in the US, on various issues. Does he not believe that having the word “reasonable” twice in the new clause that he has tabled actually becomes a licence for class action, rather than closing it down?

[Alex Cunningham]

I certainly do not. I am not a lawyer, but I believe that the new clause is sufficient and does not open the way for such action. What I am trying to do is provide a protection for employers within the scheme, and therefore also for members.

The latest complaint was filed in January against Aon Hewitt Financial Advisors, accusing the company of breaching the Employee Retirement Income Security Act 1974, or ERISA. That is the fourth lawsuit to target the fee arrangement for services provided by a computer-based investment advice programme.

[The Chair]

Order. May I ask the hon. Gentleman to move away from discussing court cases in his comments?

[Alex Cunningham]

I am doing that now. We have a clear warning that if a company fails in its fiduciary obligation, litigation may be an option. We know from the FCA report that implicit costs are opaque and likely to be much higher than those that have been explicitly presented. We believe that it will not be long before legal teams from the US alert their operations in the UK of potential opportunities for litigation. I can see the adverts on TV now: “Problems with your pension fund? Have you been subject to high fees and transaction costs that you never knew were there?”

The most important “don’t” must be, “don’t assign a low priority to your employees’ auto-enrolment choices.” The big lesson of the litigation—albeit US litigation—is that employers must assume that they have that fiduciary duty, as do trustees, and that they always need to have auto-enrolment choices on their radar screens. It is a lesson once again that the lack of transparency in the governance process, the administration process, the investment process and the advice process will lead to the detriment of the member.

To ensure that we can help build citizens’ trust in the system, we must have transparency for employers and members. We must have the information in front of the employer choosing the scheme to protect them and their employees. I commend new clause 7 to the Committee.

[Richard Harrington]

I thank the hon. Gentleman for his contribution with the new clause, but I respectfully give him my opinion that he seems to be fundamentally misunderstanding the whole regulatory system of automatic enrolment. So long as an employer chooses a scheme that meets the criteria—we have been through all the criteria and the whole regulatory and legislative system is behind that—the scheme qualifies for AE. The employer —which may be a he, she or it, if it is incorporated—cannot just decide on any old scheme. There is a significant regulatory hurdle in the Bill.

The employers’ duty is met by scheme choice, because that is what auto-enrolment is. It is not like a defined-benefit type of scheme, where the employer has to ensure that the contributions are enough to be able to pay out what they are contracted to pay out in the scheme documentation. They have to make a reasonable decision based on the whole authorisation regime. I argue that asking for more would be inappropriate and burdensome for employers.

It may help the hon. Gentleman to see my point if he looked at the regulator’s website—he might have done so already—which has comprehensive guidance for employers. Under the new clause, a typical employer would be doing exactly what the hon. Gentleman says is inappropriate: they would basically be doing what their accountant or adviser tells them, because most employers, particularly the small ones, by definition do not have this kind of knowledge. They are not professionals in this area; there are there to run their own business.

I do not understand, whether from a personal or a Government perspective, how asking them to do meaningful checks after they have gone with an approved and regulated scheme would add anything to the process. It is well-meaning, but it is unnecessary and should not be part of the Bill. I sympathise with the intent. The hon. Gentleman is trying to protect members from people acting in a fraudulent way.

[Alex Cunningham]

Perhaps the Minister can address this very simple question: is he satisfied that employers could not be subject to legal action against them if they end up making a bad choice on behalf of their employees?

[Richard Harrington]

As I have explained, their choice on auto-enrolment is restricted to choosing a regulated, authorised scheme. I am not a Government lawyer, or any other type of lawyer, although perhaps I should disclose to my chagrin that I did a law degree 40 years ago.

--- Later in debate ---

[Richard Harrington]

I absolutely agree. In fact, such schemes are often criticised for precisely that reason. They are criticised for being too conservative—in the investment sense, not the political sense—and for missing out a lot of good possible investment decisions, and the thought of that being reviewed by every single employer. I mentioned NEST and its 230,000 employers. I cannot believe that it would be fair to place such a regulatory burden on them when they are choosing from an approved list. The whole purpose of the regulation is that the schemes are approved, proper and regulated.

I am trying to see where the hon. Gentleman is coming from. I hope that he can see where the Government and I are coming from, and why I am not of the view that the new clause would be appropriate. I respectfully invite him to withdraw it.

[Alex Cunningham]

I accept the explanation that the Minister has provided about the employer making a choice from a regulated scheme and the protections included within that. If he is satisfied that employers will not face legal challenge as a result of the choices that they make within a regime where they must choose a scheme on behalf of their employees, and has placed that on record, I am content. I beg to ask leave to withdraw the new clause.

Clause, by leave, withdrawn.

Bill, as amended, to be reported.