Draft Occupational Pension Schemes (Master Trusts) Regulations 2018

Jack Dromey Excerpts

Tuesday 10th July 2018 General Committees

[Jack Dromey (Birmingham, Erdington) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Paisley. The priority of every pension scheme should be to provide security and dignity in retirement, with everyone—employers and employees—contributing towards an income in retirement. I am proud of the achievements of a Labour Government in establishing the concept of auto-enrolment, and I also welcome the continuity of approach. As a consequence, as the Minister has said, 9.7 million people are saving towards their pension—something that would not otherwise have happened.

Having said that, for all the progress made, we are a long way from finishing the job. That the Government are moving towards the development of a regulatory framework for auto-enrolment is welcome, but it is not before time. The lack of one has left people’s savings at risk for too long.

We have three key priorities that legislation does not adequately address. The first is transparency: members must know what choices they are making and how much they cost, including all investment chain costs. The second relates to the scale and size of a pension fund’s assets alongside improved governance of the pension system. The third is the need to improve governance, create and support more member trustees, and ensure effective engagement with them.

We badly need simplicity in the system. Members must know, in simple terms, what their workplace pension scheme is, so that they can make the most of what they invest. We must ensure that every person who is auto-enrolled is given the opportunity to understand what pension system they are going into, how much it costs and how much they will get, even if that is more estimation than fact in a defined contribution scheme. They must know how much each investment choice and transaction costs. Only then will they be able to make an informed decision.

Pension fund providers, and others involved in fund management, often try to dissemble or obfuscate when asked direct questions on costs. Such evasive answers reduce trust in providers. Members cannot make the accurate choices needed to improve their investment performance without knowing the cost. That is why we believe that the next stage is for the Department for Work and Pensions to create statutory guidance that requires all DC schemes to use the Financial Conduct Authority’s cost-collection template, which is due to be published in September. Trustees and managers of the schemes would then be able to get to the root data for the first time. If that template is not used, the Government will not be able to meet the objectives they set trustees.

Although we support the draft regulations, because there is no effective regulation of master trusts, the Government’s approach falls short of what is necessary to create the scale required to improve pension outcomes. It would have been better for primary legislation, in particular the 2017 Act, to state directly that if a fund cannot deliver value for money because it does not have the investment scale, it should merge, as in the Australian system, rather than indirectly push up costs for smaller master trusts through that regulation.

It is instructive that in the defined benefit world, the Government are persuaded of the argument that scale delivers better value for the local government pension scheme, through asset pooling, and for the DWP, in the form of the proposed super funds. Why not have a value-for-money regulatory system or an efficiency target whereby master trusts would merge if it is not met?

On the crucial issue of the governance of master trusts, improved governance must mean a trustee status with a package of improved training and dedicated facility time to do the job. Master trusts and independent governance committees lack scheme member input into the investment process. To be frank, they require a drastic overhaul. The voice of scheme members should always be heard.

Although some companies choose to operate a trust-based defined contribution scheme, most new 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. Under such schemes, member representation on governance boards is far more rare.

We are in a new landscape. We have lost something that we had believed to be established as a clear fiduciary principle, namely member-nominated trustees. Most members do not have a say over which scheme they are enrolled into, and even if they believe a scheme is not the best possible fit, they are unlikely to be able to transfer without losing their employer contributions. The big difference between DB and DC is that employers choose the schemes. If someone wants to get their employers’ contributions, they have to go with their choice of scheme.

Better member representation would help to reassure members that they are enrolled in schemes that are well governed by boards that have their best interests at heart. The Association of Member Nominated Trustees believes that it needs employer support, which could come in the form of secondment release from day jobs, and that without such support it will be hard to get people to sign up to the ever-increasing workload and demands of being a trustee.

Workplace pensions must be low cost, with transparent and comparable explicit and implicit fees. There must be an efficiency drive to ensure that every penny in a pension fund is accounted for and used for growing the members’ pot at the lowest possible cost. They must be well governed, with the scheme members at the heart of the process, by well-trained and supported member-nominated trustees. There must be an improved fiduciary duty for members to ensure that they are active investors who use their property rights to improve the performance of the companies they own.

To conclude, we sought in the Pension Schemes Bill Committee to make certain improvements along the lines that I have laid out, and it was a matter of regret that the Government refused to accept them. As a result, many of the people who matter most—the workers saving through auto-enrolment—will not have the means to enjoy retirement in quite the way they had hoped. Although the proposed secondary legislation is unobjectionable and we will not vote against it, the simple fact is that there remain fundamental flaws in the UK pension scheme that, notwithstanding the progress that has been made, particularly on auto-enrolment, lead to too many workers being denied a decent pension. Although the proposed legislation is a step in the right direction, it does not go far enough in fixing them. We urge the Government to move further and faster at the next stages.