Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021

Baroness Sherlock Excerpts

Monday 6th September 2021 Grand Committee

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for her careful explanation of these regulations. I must say it is a pleasure to see her in person across the Dispatch Box once again, especially on so exciting a subject. I also thank all noble Lords who have contributed today.

There have been so many policy and statutory interventions into the private pensions scheme post auto-enrolment that I have to say that I am slightly with my noble friend Lord Davies here. It is quite hard to follow the long-term strategic objectives and outcomes that the Government are seeking to achieve. I get that this set of regulations is designed to take forward government policy to enable and encourage DC schemes to invest in a more diverse set of growth assets, including private equity and venture capital, in the belief that this will benefit both the British economy and the interests of pension scheme members.

We have heard the headlines today. Trustees of smaller schemes will have to do a more holistic annual “value for members” assessment and, if the regulator does not think that they can demonstrate good value, they will be pushed to wind up and consolidate. Trustees of all relevant schemes will have to give net investment return statements for default and self-selected funds. Then there is an amendment to the charge cap regulations to smooth the impact of performance fees over five years.

As we have heard, the Government in their call for evidence are seeking views on how to accelerate the pace of consolidation of schemes and are looking ahead to the second phase of consolidation for medium to large schemes with assets of between of £100 million and £5 billion. As my noble friend Lady Drake was hinting, £5 billion is way more than small. Obviously, strengthening the regulatory framework in pension schemes is welcome and, presumably, here the aim is to do that through more stringent “value for members” assessments, reporting on investment performance net of fees and the promotion of consolidation into larger schemes to create scale and leverage to deliver value, drive down charges and consider more diverse and innovative investment strategies that will benefit members. However, given the Government’s intention to drive greater consolidation, even of schemes with assets of above £5 billion, we really do not have much detail as to how and when this accelerated consolidation into a much smaller number of very large schemes is going to take place.

My noble friend Lady Drake was pushing into this subject. We need to know what the optimal number of schemes is against which the Government are benching their drive to consolidation. I think the Committee deserves to have a clear answer to that. If we are to be asked to approve one set of interventions after another, it is only reasonable to be given a vision of the end state the Government have in mind once they all work their way through the system.

--- Later in debate ---

[Baroness Stedman-Scott (Con)]

The noble Baroness, Lady Drake, referred to the PM and the Chancellor calling for an “investment big bang” and said that these measures wrongly force schemes to invest in illiquid assets. The Government do not wish to direct trustees of pension scheme investments. Trustees must invest in line with their fiduciary duty; that is, in the best financial interest of their beneficiaries. Instead, we are seeking to remove barriers to investments in illiquid assets. The provisions in this instrument have received support from the pensions industry.

The noble Lord, Lord Davies, talked about default schemes. He is correct that almost all members save into the default arrangement. Those who self-select still receive regular information on charges and are generally engaged. He raised the subject of the threshold for “value for members” assessment being set at less than £100 million, which had increased from £10 million at consultation. He asked whether it would increase further in future. The Government increased the “value for members” assessment threshold following consultation with industry. The reason for this was to capture as many potential poorly performing occupational DC schemes as possible. We have evidence that the smaller a scheme is, the more likely it is to be poorly governed. By our moving the “value for members” assessment threshold from assets under £10 million to £100 million, more occupational DC schemes will have to undergo this rigorous new assessment. This will mean that more members will benefit from improved governance, administration and returns as a result. We will review the assets under the £100 million threshold regularly but have no plans to change it at present.

The noble Lord, Lord Davies, asked how meaningful to members the information would be. The Government are taking forward several measures—dashboards and simpler statements among others. The SI is about how these schemes are governed internally. We are intervening to prevent members languishing in poor schemes.

The noble Baroness, Lady Sherlock, raised a point about CDC. I am advised that we will write to her on that. She also asked what the instrument would mean for the future of look-through and said that the Government had said that they would advise on a policy in July. The instrument does not amend the Government’s policy on treatment of such costs. In our consultation response on improving outcomes for members, published on 21 June, we state that occupational DC pension schemes should continue to look through closed-ended funds as they would all funds of funds and incorporate such costs within their regime of charges levied on members.

If there are points raised by noble Lords that I have not dealt with—

[Baroness Sherlock (Lab)]

I am grateful to the Minister. Could she write to me with that last point, as I did not quite catch the bit about look-through funds and look-through operations of closed-ended funds? I asked two questions. First, my noble friend Lady Drake and I both asked what the Government’s optimal number of schemes is. Would it be one big or enormous scheme—would that be fine? Is it fine to have lots of schemes? Can the Minister give some idea what the centre is in that? The other thing I asked about, which I do not think she answered, was what guidance would be given to trustees or employers who might want to consolidate but were concerned that the moving goalposts would mean that they could end up simply being moved again and, potentially, again. If she did respond to that, I apologise for having missed it.

[Baroness Stedman-Scott (Con)]

I will write to the noble Baroness on the three points she has raised and put a copy in the Library for everybody to see. If there is anything, having looked at Hansard¸ that we have not dealt with, other than that which the noble Baroness raised, I will write to all noble Lords.

This instrument makes several different changes to several different sets of regulations. It has one theme at its core: improving outcomes for pension savers. We have a duty to ensure that those who have engaged in pension saving in their workplace as a result of automatic enrolment can rest assured that their occupational DC pension scheme is on course to deliver the best possible outcome for them. This instrument does this by tackling poor levels of governance, shifting the attention of the market from a narrow focus on cost to overall value, and removing barriers to schemes allocating to a wide range of different assets. I therefore commend it to the House and beg to move.