Pension Schemes Bill [HL]

Baroness Altmann Excerpts

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

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I signed the amendment of the noble Lord, Lord Vaux, and agree entirely with the principle of both these amendments. I was particularly drawn to the notion of having a threshold and notification, as provided by the amendment of the noble Lord, Lord Vaux. He circulated it for comment and therefore I signed it after some negotiations with him.

Put simply, if the deficit is large and the effort to close it is too small—smaller than the dividend—the payment of the dividend becomes a notifiable event. The sequel to that would surely be what the noble Lord, Lord Flight, has just pointed out: that it be looked at and perhaps in certain cases, though not all if there are other things that could be taken into account, the dividend payment be stopped. The point is that it is brought to the regulator’s notice, rather than the regulator potentially having to look at an awful lot of dividends and payments being made. Indeed, how will the regulator even find out about them? The amendment of the noble Lord, Lord Vaux, solves that little loop of how the regulator gets to know about them and has a reasonable number to look at rather than being overwhelmed.

In our negotiations, we tried to find a formula to keep the momentum going to close the gap, even within the five years, as a lot can go wrong in that period. I got as far as something like “the ratio of the dividend to deficit not being greater than the reciprocal of the remaining years and not conveniently commutative”. I concluded that, if I carried on in that way, I would have to put in a job application to Dominic Cummings.

More seriously—I refer here to the helpful meeting I had with the Minister and officials yesterday—I want to see some specific push in the Bill for the regulator to be tougher, including in setting the contribution schedule for paying down the deficits. As has already been explained by other noble Lords, TPR has come forward with a set of principles, but maybe it needs something to back them up and get them over the line in enforcing them.

In the meeting yesterday, it was pointed out that more powers are being given to the regulator in the Bill and that regulations will be forthcoming. That is well and good, but something has to make sure that the regulator is urged to use those powers and to be strong, especially in standing up to larger and more forceful companies and individuals. We know that the record there is not necessarily all that good. The policy impetus needs to come from government and Parliament; otherwise, there may be more power but no enforced policy shift.

We also know that boards will take advice on these kinds of matters and be told what the market norms are, or at least what other companies have done. If the dial is to be shifted, the advice has to be shifted. The way to ensure that advice is shifted is for there to be an indication of the policy in the Bill, because an adviser cannot go against that in their duty to advise the companies.

It was very good to hear that the new offences that we discussed on Monday—which seems a long time ago now—are wide enough to embrace advisers, but you have to get at what their duty is to those they are advising. There are lots of reasons to have something in the Bill to make sure that the principles already outlined by TPR have that backing to be enforced and have that effect. As I said on Monday, it should not be normal to accept overly long continuation of deficits just because a company is well capitalised.

There can be many claims on and reasons for that extra capitalisation—there may be lots of tentative reasons why they need it. There might be plans to spend it to buy another company. All kinds of things could be going on, and what looks like a good capital margin could actually be shoring up many other things as well as the pension deficit. What is the excuse to the Pensions Regulator? What excuse might be given to other sources? Some of the clever analysts may work out what is going on; the ordinary investor and the ordinary pensioner is unlikely to do so. Therefore, I support the principle of both the amendments: something should go in the Bill to push or shore up the Pensions Regulator in its actions.

[Baroness Altmann (Con)]

My Lords, I rise briefly—I have added my name to one of the amendments—to support the concept that has been so well explained already by noble Lords and to echo the warnings that this is a very important time in our defined benefit pension system, as we still have employers attached to schemes and, in some cases, members contributing. Some schemes are still not completely closed. Once a scheme has closed to new members, it will not be too long before it closes to new accruals and it will effectively be in run-off. While there are still employers with an interest in the scheme and before we get to the period, which will come in the next 10 years or so, when there is no economic interest between the employer and the scheme and it is seen merely as a major liability—with more and more companies looking for ways to get around the deficits—now is the time to be collecting as much money as possible.

Obviously, one does not want to damage the ongoing viability of the employer, but there needs to be more recognition of the fact that the pension scheme is a debtor of the company—not all companies see it in that way—and the choice between dividend payment and deficit funding should not be just between the interest of shareholders and the interest of pension scheme members. The pension deficit has people’s lives attached, so there is a higher importance here.

When one looks at the provisions of the Companies Act 2006, in particular with reference to Amendment 84, Section 830 says that a company should not be permitted to pay out a dividend if it has not made sufficient profit to cover its costs or if there are losses in the company. What is not explicit, but is made explicit in the amendment, which was originally part of my noble friend Lord Balfe’s Private Member’s Bill, is that the accounting measure of the pension deficit does not reflect the actuarial reality as estimated by a scheme actuary, or perhaps by trustees, of the true scale of the obligation—in other words, potential losses—that the company faces. Therefore, redefining the accounting measure and taking account of the actuarial measure would put the payment of dividend on a different plane. That is to be reflected in Section 830A, which would be added after Section 830, in terms of justification for payment of a dividend that might otherwise look viable.

[Baroness Neville-Rolfe (Con)]

My Lords, I look forward to hearing what my noble friend the Minister says about this and whether the sort of concerns that have been expressed are already dealt with somewhere else. A very good point has been made.

I want to ask a question on Amendment 27, in the name of the noble Lord, Lord Vaux. He talks about the value of the assets of the scheme, and my noble friend Lady Altmann made this point; there is a big difference between an actuarial valuation and an insurance valuation in a scheme. If you were to base this on an insurance valuation, you would catch quite a lot of pension schemes, including those which probably could pay some dividends. I was a little concerned about that, and I would like some clarification when we come to wind up on what is intended.

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Moved by

[Baroness Altmann]

28: Clause 110, page 97, line 2, at end insert—
“72B Provision of information: further provision(1) The Regulator may, by notice in writing, require the trustees of a scheme to which section 35 of the Pensions Act 1995 applies to provide information as set out in subsection (5).(2) A notice under subsection (1) may include a requirement for information—(a) to be disclosed to the Regulator on a periodic basis, and(b) in respect of specified periods of time.(3) Where the provision of information is required by a notice under subsection (1), the information must be provided in such a manner, at such a place and within such a period as may be specified in the notice.(4) The Regulator must publish information provided in respect of the provisions set out in subsection (5) on its website within one month of receiving it in a form that is searchable and easily accessible.(5) For the purposes of subsection (1), information to be provided on request of the Regulator is any information set out in—(a) regulation 29A of the Occupational and Personal Pension Scheme (Disclosure of Information) Regulations 2013 (publishing charges and transaction costs and other relevant information), and(b) paragraph 30 of Schedule 3 of the Occupational and Personal Pension Scheme (Disclosure of Information) Regulations 2013.”Member’s explanatory statement
This amendment would place a reporting duty on the Pensions Regulator to publish statements of investment principles (SIPs) under section 35 of the Pensions Act 1995. The amendment would place a requirement on the Pensions Regulator to create a SIP repository, accessible to the public through its website, so that all scheme members could check their scheme’s investment strategy.

[Baroness Altmann]

My Lords, I rise to move Amendment 28 in my name in this group and will speak to Amendment 92, to which I have added my name. I also support a number of the other amendments. The noble Lords who tabled them will obviously rise shortly to expound on their own aspects of this issue.

The main area this group deals with is the environmental impacts that pension funds can have. We have £1.3 trillion of pension assets; they can help tackle climate change. Our country will host the COP 26 in December, at which we will have the opportunity to show world leadership in our thinking on climate change and policies to address these issues.

Climate change, as most of us believe, poses a potentially material risk to pensions and financial assets. The insurer Aviva estimates that investors could lose £2.7 trillion from investment value globally due to climate change. I am delighted that the Government have tabled amendments giving Ministers a power to require pension schemes to disclose how they manage climate-related financial risks in line with the more detailed, granular requirements of the Task Force on Climate-related Financial Disclosures.

I support those amendments, but the Government have said that they will require only large schemes to report in line with the TCFD disclosure requirements. They have not said what “large” means, but I assume it will probably not include schemes with fewer than 5,000 members, for example. These smaller schemes still need to manage the risks to savers’ pensions potentially posed by climate change. Amendment 28 is therefore calling for the Pensions Regulator to create a compliance framework based on a public register of schemes and ESG—environmental, social and governance —investment policies.

In October 2018, the Government changed the law to require UK pension scheme trustees to prepare a policy on how they manage the financially material risks arising from issues such as climate change. Trustees are required to state these policies in their statement of investment principles, a statutorily mandated document which all schemes are required to have. Trustees should have updated these statements by 1 October 2019. Some schemes were required to publish them at that point.

However, the UK Sustainable Investment and Finance Association has reviewed—with the help of the Pensions Regulator—the policies of a representative sample of these UK trust-based pensions. For those schemes, representing 3 million or so savers, its report found clear evidence that “large scale non-compliance” with this requirement exists and that trustees had not been publishing their statement of investment principles. Two-thirds of the schemes in its sample had not published, and of those which had the policies were pretty thin and noncommittal.

It is not exactly clear why trustees are failing to disclose and comply with this new law. The UK Sustainable Investment and Finance Association has suggested that it may be because smaller schemes—schemes with fewer than 5,000 members, let us say—do not have a website, so the administrative burden of publishing these statements and complying with the law has proved overly taxing for them. There has therefore been a recommendation that the Pensions Regulator should be given a duty to obtain these statements of investment principles and publish them on its own website in a central registry. Amendment 28 seeks to insert this into the Bill.

If the Pensions Regulator has the power to obtain and publish these statements of investment principles, it will obviously be able to remove the administrative burden from the schemes. It will also give the regulator a much better ability to monitor compliance with these requirements. It will improve the transparency and scrutiny of the schemes’ policies to manage these environmental, social and governance risks, as well as providing the industry with a resource to find out about and share best practice. Importantly, it would allow scheme members to see their own schemes’ investment policies. These are the reasons why I urge the Minister to consider whether we might be able to insert this provision into the Bill.

The notion of a public register of these statements of investment principles and implementation statements could be a powerful way to drive up trustee awareness of action on the risks arising from climate change. It would allow monitoring and scrutiny of what these schemes currently do better to educate those which may not be compliant—some of these laggards, perhaps —about what the leading trustees and schemes are doing. Campaign groups could scrutinise this. Ministers could also scrutinise and report on the issues that are so important and potentially powerful in allowing our country to be a leader in this field, given the size of our pension assets. They dwarf those of most other countries, particularly in Europe. It could help to fill an important hole in the Government’s overall climate change strategy.

The Government are of course right to mandate that the large schemes are going to do this. As I say, I support the government amendments, but we should also bear in mind that this is a question of protecting all pension savers’ money—not just in the large schemes but in all schemes—from the risk of climate change. Therefore to expose workers in small companies or small schemes to more financial risks from climate change does not seem an effective way forward. We have an opportunity in the Bill to make a real difference. There is scope to help the pensions industry be better able to address the financial risks of climate change and to be better aligned with the interests of savers, who will increasingly be concerned about these issues. This is an opportunity to put our pension funds and pension industry on a more sustainable footing and, if noble Lords will forgive this play on words, it can also include sustainable investments in relation to climate and environmental sustainability.

I have added my name to Amendment 92 in the name of the Baroness, Lady Hayman, and I support Amendments 75 and 89, which talk about requiring schemes to align their portfolios with the Paris agreement objectives. The UK Government need to ensure that pension investment portfolios are aligned with, for example, the UK’s emission reduction targets. Pension funds also need to act to protect their beneficiaries’ savings from these financial risks. For example, research from the leading consultancy Mercer has found that for nearly all asset classes, regions and timeframes, a 2 degree increase in global temperature scenario would lead to much better projected returns than if there was a 3 or 4 degree increase in global temperatures. The requirements in these amendments would not necessarily involve disinvestment from any particular sector; it does not direct how the trustees must invest. It would involve trustees in assessing whether their assets in their portfolios have a clear strategy for, for example, aligning their business model with the UK emissions reduction timeline and taking appropriate action. That would also give the companies clear incentives to develop Paris-compliant business models and invest in low-carbon opportunities, making it much easier for the Government to achieve their own targets.

Amendment 92, in the name of the noble Baroness, Lady Hayman, would help to facilitate this by requiring pension schemes to report against the Task Force on Climate-related Financial Disclosures framework. The amendment would ensure that all pension schemes have to report against the same frameworks, so there is commonality here, and, as I say, it does not dictate that schemes have to pursue a particular investment or disinvestment strategy. It would be left to the trustees. Operational independence, which is, of course, an important part of our system for trustees, is maintained. However, the requirement to disclose how the trustees are mitigating climate risk should also help to drive up standards of trusteeship, as well as protecting these assets and enhancing the UK’s global role in tackling climate change and other related issues.

I beg to move, and I look forward to the debate, other noble Lords’ contributions and the Minister’s response.

[Baroness Hayman (CB)]

My Lords, I added my name to Amendment 28, which the Baroness, Lady Altmann, has just cogently explained to the Committee. I will speak to that, as well as to my own Amendment 52, about the information available for dashboards. I shall also speak to Amendments 74, 75, 76 and 92, which, as the noble Baroness mentioned, seek to strengthen the Government’s welcome Amendment 73, which recognises the salience of climate change to pension funds and to the Bill. I remind the Committee of my interests as co-chair of Peers for the Planet, and that my son works for Make My Money Matter.

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[Baroness Stedman-Scott]

I thank all noble Lords for their amendments and contributions. They have been numerous, but they have been numerous in quality, so I thank them for that. I assure the noble Baroness, Lady Sherlock, and the whole Committee that we are listening and aim to please.

I thank all noble Lords who have taken part in this important debate. In responding, I will first address the three government amendments and then the others in the group. The Government are clear that action needs to be taken to address the risks that climate change brings. The Government announced in the Green Finance Strategy, published last July, that all large asset owners, including occupational pension schemes, would be expected to report on how they address climate change risk, in line with the international, industry-led task force on climate-related financial disclosure, by 2022.

Building on that expectation, the Government are now, through new Clauses 73, 81 and 98, seeking to take powers to require occupational pension schemes to manage the effects of climate change effectively as a financial risk to their investments and to report publicly on how they have done so. New Section 41A inserted into the Pensions Act 1995 confers powers on the Secretary of State to impose requirements on occupational pension scheme trustees and managers to secure effective governance on the effect of climate change on the scheme.

Let me be clear. This does not mean that it is for the Government to direct schemes or set their investment strategies. The Government never have directed pension scheme investment, and do not intend to. Our clear view is that the amendments do not permit us to do that. Amendments 74 and 76, tabled by the noble Baronesses, Lady Hayman and Lady Jones, would amend the new clauses, expanding the remit of these powers and those under new Section 41B beyond occupational pension schemes to include personal pension schemes. Personal pension schemes are regulated by the Financial Conduct Authority, not the Pensions Regulator. To place requirements on personal pension providers through the Bill would create a patchwork of overlapping regulatory oversight, under which providers would have to respond to two separate regulators on the same activity.

The noble Baroness, Lady Hayman, raised occupational schemes. The FCA is currently considering how best to enhance climate-related disclosures by workplace personal pension schemes. The noble Baroness, Lady Janke, also referenced personal pensions.

Turning back to the government amendment, the Government believe it is absolutely necessary that trustees act within their fiduciary duty to protect members’ benefits against the growing physical risks of climate change and the risks of the transition to a lower-carbon economy. However, action taken by trustees and managers should not be limited to avoiding risk but should involve consideration of the investment opportunities that climate change presents, as new Section 41A(2) makes clear.

New Section 41A(3) sets out the kinds of activities trustees and managers of pension schemes may be required to undertake as part of their governance on the effects of climate change. Where such requirements are introduced, our intention is that trustees or managers are doing the determination, review and revision of strategies and targets. It is not a matter for the Government. We will consult on the exact requirements, the timings for introducing them and the scheme in scope.

New Clause 92 seeks to bind the Secretary of State to a specific timeline for launching this consultation and publishing the response. I am very grateful to noble Lords for their compliments about the speed of our action on climate change; I must tell your Lordships that our Secretary of State Thérèse Coffey and Minister for Pensions Guy Opperman are 110% behind this. It was their action, not mine, that put this into the Bill, so I cannot take credit for something I did not do; they deserve all the credit for that. I understand the point of the noble Baroness, Lady Jones, that we should push further. As my great friend William Booth would have said, that and better will do. I understand the point she is making.

I assure the noble Baronesses, Lady Hayman and Lady Jones, in response to their amendment, that the Government intend to launch their consultation on the task force recommendations upon the Bill completing its passage through Parliament, and to respond within a year.

Amendments 52 and 75 and new Clause 89 specifically identify alignment with the Paris Agreement as one of the risk-assessment activities which schemes should be doing. Our view is that the industry is not quite ready for this sizeable step in reporting requirements. The noble Baroness, Lady Jones, raised global warming. Amendment 75 goes further than reporting on alignment to require governance of schemes to align with the Paris Agreement’s objective of global warming of well under 2 degrees Celsius. This would be tantamount to directing schemes’ investments, which the Government have already ruled out. The Government are seeking to ensure effective governance of climate change risk, not to direct trustees’ or managers’ investments.

However, new Section 41A(4) in Amendment 73, taken with new Section 41B, would enable the Government to prescribe reporting on Paris alignment, requiring schemes to consider their alignment with Paris in relation to risk and exposure and to make this information public. At present, there is little consensus on methodologies for reporting on Paris alignment. This area is developing very quickly, which is why the Government are seeking powers to prescribe such reporting in future. We will continue to monitor the development of methodologies and data in the industry, and would put any future proposals on this issue to consultation.

The Government believe that schemes should be doing effective governance, as new Section 41A will allow us to require, and that schemes should publish this information as set out in the task force recommendations. New Section 41B would enable the Government to lay regulations to require this information to be made public, free of charge, including to members.

New Clause 89 would require some of this information on Paris Agreement alignment to feature in the scheme’s published statement of investment principles, or SIP. However, should the amendment be accepted, this would pre-empt the outcome of the consultation. In contrast, new Section 41B of the Government’s amendment takes powers which would enable the Government to introduce publication requirements relating to the degree of Paris Agreement alignment at a later date.

When disclosing information and documents, subsection (3) of new Section 41B in the Government’s amendment requires trustees and managers to have regard to statutory guidance which the department will publish. In requiring schemes to follow this guidance, consistency and comparability across reporting by different schemes will be easier to achieve. Other benefits of publication are ensuring that best practice is shared across the industry and that trustees and managers can learn from those with the most advance climate risk governance.

Amendments 28 and 36 seek to achieve a similar objective by granting the regulator the responsibility to create a repository of statements of investment principles and forcing schemes to provide their SIPs, as well as sections of annual statements, to the regulator. The Government were concerned by the UK Sustainable Investment and Finance Association’s recent research, which showed widespread non-compliance in publishing SIPs. We have urged UKSIF to pass its findings to the regulator, so that it can take swift action. We believe a central repository has a part to play in that, but Amendment 28 does not take into account the growing concentration of the vast majority of members in a small number of schemes. Of more than 5,000 defined benefit schemes, the largest 200 schemes have more than 60% of members. Of more than 3,000 defined contribution schemes, the largest 150 have more than 96% of members. For these members, their own scheme’s website or public pages are the natural places to look for investment information, not a corner of the Pensions Regulator’s website.

Similarly, in relation to Amendment 36, the regulator has already placed the largest schemes under one-to-one supervision and has regular sight of the all the documents referred to. In any event, Amendments 28 and 36 are unnecessary, as I can report that officials at the DWP and the Pensions Regulator have already begun work to identify how a central index of SIPs can be produced. Amendment 97 seeks to put a duty on trustees to consult members each time they review their SIP. However, this imposes unreasonable burdens on trustees. The Law Commission has confirmed in two reviews that trustees are not required to take account of members’ views, although in some circumstances they can. It would be unhelpful to require trustees to solicit member preferences which they had no ability or intention to take into account. Amendments 52, 67A and 67B seek to include information on Paris alignment reporting and consideration of ESG in the pensions dashboard.

We will turn to the dashboard later in Committee, but it is important to highlight here—

[Baroness Altmann]

I am so sorry to interrupt my noble friend. First, I want to draw the Committee’s attention to my interests as set out in the register in connection with pensions, and to the fact that my son works on sustainable transport and reducing transport emissions. Will the Minister write to members of the Committee about the regulator’s plans for creating a central repository? Will it be comprehensive? If DWP and the Pensions Regulator are working on setting this up anyway, would it do any harm to have this measure in the Bill to make sure that it happens?

[Baroness Stedman-Scott]

Of course we will be happy to write to answer the questions that my noble friend has raised.

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[Baroness Altmann]

I thank my noble friend for her comprehensive response. I think she can tell from the comments that we would be grateful for some follow-up conversations. In the meantime, I beg leave to withdraw the amendment.

Amendment 28 withdrawn.

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I hope that this provides the Committee with the necessary clarity, certainty and—

[Baroness Altmann]

I hope my noble friend will forgive me for intervening, but after what he has just said, it is important to put on record that there are potentially significant dangers in launching commercial dashboards at the same time as the publicly funded dashboard. It is likely that that will generate enormous confusion in the consumer. It is entirely possible that consumers will not know which dashboard is which and will be driven to a commercial dashboard, which may not be in their impartial interests. I urge my noble friend to consider carefully that there are really strong and important reasons from a consumer protection perspective to have this publicly funded dashboard first, especially as the Government have devoted so much resource and commitment to providing it.

[Earl Howe]

I say—gently—to my noble friend that I could not disagree more. I cannot see the risks that she has articulated, given all that I have said about putting the necessary consumer protections in place before anyone makes the first move to launch a commercial dashboard. Having said that, I very much respect her knowledge of the landscape and would be happy to have a conversation with her about the risks that she referred to. But having thought about this in some depth myself, I am satisfied that we will not allow a situation to arise where consumers are confused or put at risk by the multiplicity of dashboards. All the dashboards will show the same information. They will not be allowed to show different information. They may set it out differently, but that does not seem to constitute a risk to the consumer or of confusing the end user.

Subject to those remarks, and despite the lack of clarity around the timing of the matters I referred to, I hope that the assurances I have given are sufficient for noble Lords, and that the noble Baroness feels content to withdraw her amendment on that basis.