Pension Schemes Bill

Lord Bradley Excerpts

Wednesday 7th January 2015 Lords Chamber

[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.

[Lord Bourne of Aberystwyth (Con)]

My Lords, I thank noble Lords who participated in the debate on the amendment and my noble friend Lord German for moving the amendment so ably. The Government are committed to improving transparency in pension schemes and have a robust and thorough work programme during 2015 and 2016 to do so.

My noble friend Lord German has raised a very important issue that this House has long recognised: the need for transparency in pension schemes. I assure noble Lords that this is an issue that the Government take very seriously. Indeed, in their publication Better Workplace Pensions: Putting Savers’ Interests First on 17 October 2014, the Government committed to improving the governance of workplace pensions and transparency surrounding the costs and charges which members are faced with, including better information about transaction costs related to buying and selling investments. I know that this amendment goes much beyond that but it indicates the direction of travel.

Noble Lords will also be aware that this Government have recently consulted on draft legislation which, subject to parliamentary approval, will introduce from April this year new requirements on trustees to improve the governance of trust-based schemes. Trustees will be required to demonstrate that they have complied with new standards of governance by completing a statement, signed off by the chair of trustees, annually. Similar rules are to be introduced by the Financial Conduct Authority to require the newly formed independent governance committees to demonstrate that they have complied with such rules for the contract-based side of the workplace pensions market on a similar timescale. The Government intend to build on this first phase of transparency work. We are committed to consulting further, later this year, on how we propose to introduce transparency on additional costs and charges. The Financial Conduct Authority will also be consulting on similar new requirements in relation to workplace pensions.

Regulations and rules made as a result of the Pensions Act 2014 will significantly improve the transparency of costs and charges in pension schemes and lead to members receiving better value for money. However, I recognise that the proposed amendment would go much further than this. It seeks to place requirements on trustees and managers of occupational and all other personal schemes to provide members with detailed additional information relating to their schemes’ investment functions, over and above what is already required, and additional to the improved transparency of costs and charges information that we intend to introduce from April. The amendment, were it to be accepted, would require trustees and managers to provide investment-related information to members on request where that is reasonable—and there is a rebuttable presumption that it is—which would be additional to existing requirements and would do so before we have consulted with the industry, savers and other interested stakeholders, as we announced we would in our Better Workplace Pensions consultation last October.

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Moved by

[Lord Bradley]

23A: After Clause 45, insert the following new Clause—
“National Employment Savings Trust transfers
In relation to the National Employment Savings Trust, within one month of the passing of this Act the Secretary of State must lift the ban on transfers and the contribution cap.”

[Lord Bradley]

My Lords, the amendment in my name and that of my noble friend Lord McAvoy would require the Government to lift the restrictions on the National Employment Savings Trust—or NEST, as it is commonly known—within one month of Royal Assent. This includes the ban on transfers and the contribution cap.

The Government’s decision not to lift the contributions limit and bulk transfer restrictions on NEST until April 2017 or to lift the ban on individual transfers in and out until October 2015 is cause for real concern. In his Written Statement of 26 September, the Minister said that,

“the European Commission has considered and approved the modifications to the State aid case for NEST”.—[Official Report, 26/9/14; col. WS 167.]

He can therefore see no barrier to lifting the restrictions that apply to NEST within the timescale set out in our amendment. Crucially, I believe it to be in the public interest for the Government to proceed in such a way.

I cannot understand why the Minister is so reluctant to lift the restrictions. I will highlight all the positive statements made by the noble Lord, Lord Freud, in support of NEST. The noble Lord, Lord Freud, said, in a Written Statement on 26 September, that NEST has proved its value. It now has more than 1.5 million scheme members and works with about 9,000 employers. That number is rising. NEST provides a quality, low-cost pension scheme targeted at low to moderate earners and small employers. Its public service obligation ensures that NEST makes sure all employers are able to engage with their automatic enrolment obligations. On 18 November, the Minister reminded us:

“From June 2015 1.2 million smaller employers—those with fewer than 50 workers—will start to engage with auto enrolment. NEST will be critical in ensuring that these small employers are able to access low-cost pension provision for their workers”.—[Official Report, 18/11/14; col. WS 13.]

I think that all sides of the House agree with the Minister on the crucial role NEST has to play in its target market, and with the evidence that it is performing very well.

It is worth expanding on the NEST success story. As the pensions industry acknowledges, NEST provides best practice standards, which have encouraged the insurance companies to improve their standards. It is low cost for employers and employees. It is simple and cheap to administer. It has high standards of governance. As NEST’s website proudly states, it has an “award-winning investment strategy”. Finally, NEST provides an excellent solution for employers with a high staff turnover, such as the catering and construction industries, because the pots remain and can be paid into by the next employer. Can the Minister confirm that he agrees with this analysis: that NEST has proved its effectiveness and worth? If he does, I fail to understand his reluctance to lift the restrictions.

I agree that there was a good case for having restrictions before it was clear how the market would progress, but these restrictions are no longer justified. The auto-enrolment market is now well under way and NEST has not taken all the business, which had been a concern among some. We should therefore examine the impact of failing to lift the restrictions and caps within one month of Royal Assent, as our amendment suggests. The restrictions to date have meant that NEST has been able to get less of that low and medium-earning pension than it otherwise would have done. If this continues, the effect would be to contribute to the increase in the number of small, dormant pension pots. It may also miss out on the benefits of scale. We debated that earlier.

Banning transfers in and out will be a problem for employers. The Department for Work and Pensions’ research found that more than 80% of employers want one provider. That makes sense: it reduces their administrative burden and means that they can provide their staff with pensions that are easier to understand. The ban means that employers who are thinking about using NEST but currently have a pension scheme of any type will be discouraged from using NEST because they cannot transfer in the pension assets in their current scheme. The Government purport to encourage employers to use NEST but, by refusing to lift the ban on transfers in and out right away, the effect is to discourage employers who currently have a scheme elsewhere.

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[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.

[Lord Bradley]

Once again, I am grateful to the Minister for his response and that, if there is lack of clarity over the state aid issue, he will look at it and write to me about the actual position, so that we can apply it to the amendment. I hope that he will be able to do that before Report, so that we may consider whether it is appropriate to pursue the matter further. In the light of his assurances on that point, I beg leave to withdraw the amendment.

Amendment 23A withdrawn.