Pension Schemes Bill

Baroness Drake Excerpts

Wednesday 7th January 2015 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I am pleased to support Amendment 22, moved by the noble Lord, Lord German, and I commend him for tabling it. The thrust of the amendment is designed to achieve two things: to provide a lever for achieving greater engagement of savers with the investment of their savings, and to help correct failings in the pensions market where the demand side is so weak. It would do this by giving pension savers the right to ask for details on how their money is invested and managed; by compelling occupational and personal pension schemes and investment intermediaries to provide information; and by leveraging transparency to increase scrutiny over those who make the investment decisions.

We know that pensions are not a normal market. Auto-enrolment is designed and built upon the principle of inertia, for a population of savers who do not engage. As the noble Lord said, savers do not choose a product; the employer does. The saver is restricted to a binary choice—to stay in, or to opt out and lose the employer contribution. Savers cannot easily move their pension savings.

These features strengthen the importance of holding agents to account, because that very inertia allows conflicts of interest to flourish. It is difficult for savers on their own to secure improvements in transparency and accountability. The Government need to provide a legislative push. Saver disengagement is a concern for two reasons. First, it helps to feed serious market failings. Secondly, it undermines effective shareholder engagement with the governance of companies in which their money is invested.

When auto-enrolment is bringing 10 million-plus new savers into the pensions system, the case for greater engagement and scrutiny becomes even more compelling. People avoid complexity but, as evidence from both the NAPF and ShareAction reveals, that does not mean they are not interested in what is happening to their money. They want their pension providers to invest in companies that behave well. Why should savers not know how their funds are engaging with companies on important issues, and how shareholder votes are cast at AGMs?

Increasingly, shareholder responsibility is exercised through pension funds and investment intermediaries. We know from what happened in 2007 and 2008, and from the findings of the Kay review, that this model of shareholder engagement can be inefficient for the economy as a whole.

Pension savers do not know how, if at all, their schemes are interacting with the companies in which they invest. As John Kay observed in his review of UK equity markets, such markets are no longer a significant source of new capital for businesses. Rather, their function is to allow savers to share in the success of business. The corporate governance function of shareholders is therefore not a sideshow but a core part of the purpose of modern equity markets. Increasing transparency, scrutiny and saver engagement is good for the saver, the pensions market and the efficiency of the economy.

As a consequence of the Kay review, when seeking to clarify the fiduciary duties of trustees, the Law Commission confirmed that trustees can take into account non-financial factors such as improving members’ quality of life. However, they can do so only if they meet two tests, one of which is that trustees should have good reason to think that scheme members would share the concern. Arguably, that assumes that there is some form of dialogue or engagement between funds and savers. That does not exist now and, given savers’ limited rights to information and the complexity of what they receive from schemes, the amendment would help to build up such engagement. Savers could ask how their money was invested and how rights attached to those investments were being exercised. Savers questioning funds will help to hold investment intermediaries to account and give funds a better idea of the view of their members.

--- Later in debate ---

I am sure that the Minister will be able to explain why the Government have so far refused to lift the restrictions. I urge him to accept the amendment. If he cannot do so today, I hope he will take it away and reconsider before Report the strong case for the restrictions to be lifted not in a few years’ time but before auto-enrolment is complete. I beg to move.

[Baroness Drake]

My Lords, I do not want to spend too much time on this. Obviously I am not unfamiliar with the issue of NEST, and the restrictions on NEST. We are now in a position, in 2015, where the continued bans on the transfer into NEST are clearly to the detriment of pension savers. It will be increasingly difficult to mobilise the argument that continuing those bans is in the pension saver’s interest. It denies many people a good home for their legacy savings and is unquestionably increasing the proliferation of small pots, particularly in the SME community. One of the merits of NEST is that it would reduce the proliferation of small pots. It is not benefiting the employers any more, who want the flexibility to use NEST and bulk transfer the accrued pension savings of their existing employees or scheme members, which they are denied. As far as I can see, the main beneficiaries of the continued ban are still predominantly the private pension providers that benefit from restricting NEST’s market proposition.

The Government have dealt with the EU state aid requirements, which no longer pose a barrier. The desire to get NEST to focus on a target market of small and medium-sized employers has been achieved. The auto-enrolment market is well under way. A cursory look at the figures will show that the private providers have secured a very large proportion of the new pension business, which is likely to grow. NEST is hardly tipping the market against them any more.

It is difficult to see why the Government are taking so long to make a change that would benefit pension savers and, particularly, facilitate efficiency among the employers who are bearing the responsibility of having to establish workplace pensions and cannot pick up what may be a preferred position in NEST because they are left having to run an arrangement for the legacy savings of their existing scheme members or employees.

[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Lord, Lord Bradley, for moving this amendment and the noble Baroness, Lady Drake, for her contribution. As noble Lords will be aware, NEST was established to support automatic enrolment by ensuring that all workers have access to a low-cost workplace pension scheme. Its design, including the annual contribution limit and transfer restrictions, focuses NEST on its target market of low to moderate earners and smaller employers who the market found difficult to serve. Since October 2012, when automatic enrolment began, NEST has fulfilled its role very successfully. I am happy to reinforce the statements made by my noble friend Lord Freud. We think that it has done an exceptional job. It already has more than 1.8 million members and 10,500 participating employers. NEST is doing what it was set up to do—supporting automatic enrolment.

During the winter of 2012 and the spring of 2013, the Department for Work and Pensions undertook a call for evidence. This sought to assess whether there was evidence that the annual contribution limit and the transfer restrictions placed on NEST were preventing it serving the market that it was designed for. The evidence showed that these two constraints were not preventing NEST serving its target market. That said, the call for evidence revealed that the constraints were sometimes perceived as a barrier to using NEST. Smaller employers have limited experience of providing pensions for their workplace. A perception among smaller employers that using NEST is unduly complex could make choosing a scheme unnecessarily complicated. This could damage confidence in automatic enrolment and undermine its aims.

With that in mind and taking account of the evidence, the Government determined that removing the annual contribution limit and the transfer restrictions that we are debating to address the perception of restriction would not be a proportionate response at the time, given the importance of the role that NEST was fulfilling in ensuring automatic enrolment. We conceived that to be its core function and where we thought that it should focus. We therefore concluded that legislation to remove the constraints in 2017 was a balanced approach. I think that it is scheduled to happen on 1 April 2017, which is some two years away.

The noble Lord, Lord Bradley, raised the state aid situation. It is our understanding that we would have to reapply to vary the state aid consent that we have. Bearing in mind that it took us a year to get the original state aid clearance, that is clearly a significant period of time. We will double-check that in light of the comments made by the noble Lord, but I have had that confirmed while we have been debating this matter. We will reassess that, and I will write to the noble Lord and others who have contributed in the debate to confirm that position or otherwise.

Therefore, we consider two issues to be at the forefront of this. The first is that we want NEST to fulfil its core function. We believe it is doing that very well and do not want to disturb that. The second is that 2017 is only two and a bit years away, and we believe it could take a significant amount of time to vary the state aid consent, but we will have another look at that issue. In the mean time, given that I have undertaken to examine that, I ask the noble Lord to withdraw the amendment.