Pension Schemes Bill

Baroness Bakewell of Hardington Mandeville Excerpts

Wednesday 7th January 2015 Lords Chamber

The amendment will not on its own secure the radical improvement in governance in the pensions industry which pension savers deserve, but it will certainly make a significant contribution.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I, too, support Amendment 22. Savers’ distrust of the pensions industry threatens the success of automatic enrolment. It would be a great disappointment if people chose to save less or to opt out of pensions saving entirely because they have no confidence in those who are managing their money. One key mechanism for improving engagement and building public trust in pensions is increasing transparency, as has already been said. That means letting people know what is happening to their money and helping them to see how their retirement savings connect with the wider economy—not least through being invested in companies that they know well in their daily lives as consumers, employees and local residents.

As well as supporting automatic enrolment, the rights proposed under this amendment would further the Government’s important work since the financial crash of 2008. The Kay review, commissioned by the Secretary of State for Business, Innovation and Skills, sets out a clear challenge to industry and to government to build a culture of trust and confidence within the investment sphere in order to counter the short-termist behaviour that contributed to the crash. Increasing the information that savers can obtain about their money will help to build this culture of trust. An important outcome of the Kay review was the Law Commission being asked to clarify the law around fiduciary duties in the investment sphere. In so doing, the Law Commission clarified that trustees can take into account non-financial factors if they have a good reason to think that the scheme members share a particular view and their decision does not,

“risk … significant financial detriment to the fund”.

Arguably, this assumes that trustees will have some sense of the views of scheme members and will engage in some sort of dialogue between savers and trustees. This cannot happen easily if savers continue to be cut off from important information about their money.

Finally, enhanced accountability to shareholders has been a key plank of this Government’s work to promote more responsible corporate behaviour. We have seen this in the introduction of shareholder votes on executive pay. However, many of the largest shareholders in UK companies are pension funds and insurance companies holding money on behalf of ordinary savers. While shareholder votes may have increased accountability between companies and these institutional shareholders, there is no equivalent mechanism in place between these institutional shareholders and the savers. The amendment is a step towards bridging the gap between these institutions and the people whose money they hold. The rights created would increase the potential for scrutiny of their decisions. This is a logical continuation of the move towards greater corporate accountability.

As my noble friend Lord German has said, the amendment covers four specific areas where transparency can be improved. First, there is the selection, retention and realisation of investments. In practice, a saver could ask his pension scheme what investments it holds in order to understand where his money is. That is key if the saver is to understand the risks to which his investment is exposed.

Secondly, there is the stewardship of investments. Stewardship by shareholders plays an important role in ensuring the long-term success of a company. It involves responsible management of an investment in a company and taking an interest in how it performs in the long term, both financially and in areas beyond the financial. It can be contrasted with the type of short-termist trading of shares which led to the financial crisis. It is very important for pension savings that there is this type of long-term interest in companies, given the long time horizon over which pensions are saved.

For institutional investors, such as pension funds, stewardship will cover practices such as exercising their rights to vote in companies and engaging with companies over corporate governance issues such as high pay and board diversity, and other corporate actions such as the use of sweatshops in their supply chains or the risks associated with expanding into emerging markets. A saver has an interest in knowing how, if at all, his pension scheme is influencing company practices. These practices have an impact on the value of his or her savings and on the way in which major companies influence the world in which he or she lives, and into which they hope to retire.

Thirdly, there is the selection, appointment and monitoring of investment managers and other agents to whom the powers are delegated. This amendment recognises that trustees and managers often delegate their investment and stewardship power to other agents. This delegation does not absolve trustees or managers of responsibility for their agents’ activities. The ways in which agents are selected and the terms under which they are appointed and monitored are all-important. Where trustees or managers take stewardship and engagement with companies seriously, they will ensure that their agents take these issues seriously too. This will be reflected in the way that they choose and monitor managers and the mandates they give those agents.

Fourthly, there is the selection and monitoring of investment funds which are operated by insurance companies or other institutions, and in which the trustees and managers have invested or are considering investing. The amendment also recognises that for insured schemes, the main investment function of the trustees or managers is the selection and monitoring of investment funds. For savers invested in these schemes, it will be important to know how trustees and managers understand the investments that they are making and whether they seek to exercise any direction over these funds.

[Lord Bradley (Lab)]

Because of the lateness of the hour and the excellent way in which the amendment was introduced by the noble Lord, Lord German, and supported by my noble friend Lady Drake and the noble Baroness, Lady Bakewell, and as all the arguments have been clearly laid out, it would not be of any great benefit to the Committee if I tried to elaborate on this proposal. Suffice it to say that we would support any proposal such as this which improves transparency for the public.