Pensions Bill [HL]

Lord German Excerpts

Tuesday 15th March 2011 Grand Committee

Moved by

[Lord German]

53: After Clause 23, insert the following new Clause—
“Occupational Pension Schemes (Investment) Regulations 2005
(1) The Secretary of State must publish guidance for occupational pension schemes on the implementation of regulation 2(3) of the Occupational Pension Schemes (Investment) Regulations 2005 (statement of investment principles).
(2) In particular, such guidance must cover the type of information which may be provided under—
(a) regulation 2(3)(b)(vi) (the extent (if at all) to which environmental, social and ethical considerations are taken into account in the selection, retention and realisation of investments), and(b) regulation 2(3)(c), (the fund’s policy (if any) in relation to the exercise of rights including voting rights, attaching to their investments).”

[Lord German]

My Lords, I shall speak also to Amendments 54 and 54A. The first two of these amendments are identical because they relate to two different sets of regulations. In that respect they could be seen as the same, but they relate to two sets of existing regulations. All three are probing amendments because I want to see the Government’s view on these matters, which are important to pension fund members.

The amendments seek to do two things. First, they suggest guidance to help pension funds ensure that they are meeting the spirit of the law, not just the letter, when it comes to explaining their policy on environmental, social and governance issues, and on the exercise of shareholder rights. It is now 10 years since these rights were written in to law. There is a need to go beyond the generic statements that characterise many statements of investment principles to ensure that funds’ policies give their members meaningful information.

Secondly, the amendments suggest enhanced reporting on how these policies have been implemented in practice. I am grateful for the research by FairPensions and others which suggests that general statements to the effect that ESG issues are taken into account are not always matched by effective implementation. In addition, members can find it very difficult to acquire information about the exercise of shareholder rights attaching to their savings—for instance, information on how their fund voted on a particular shareholder resolution. The stewardship code makes it clear that asset managers should disclose their voting records. It also makes it clear that asset owners have a role to play in ensuring effective stewardship. If the purpose of stewardship is to ensure that the assets of the ultimate owners are safeguarded, there must be accountability to these owners on how stewardship responsibilities are being exercised.

Asset manager disclosure alone will not achieve this. Pension funds also need to play their part. There is no reason why this should amount to a huge increase in red tape. In many cases, the pension fund would need only to provide a link on its website to its asset managers’ disclosures. This would be a very small additional burden on funds, but an enormous improvement in accountability for members, whose money ultimately is at stake. The problem is that often funds state simply that decisions are delegated to fund managers, with no transparency about the managers’ voting intentions. Examples have been given to me of funds that do just that. Funds often direct members to their statement of investment principles, which is unlikely to provide any useful information that has been requested on any matter.

The third problem is that funds often respond as though taking into account an environmental issue, which might be the one being questioned, is in opposition to their fiduciary duty to maximise returns—even though the matter in question is solely business-focused, they are being asked only for disclosures about the financial risks associated with the projects, and the questions are backed by a number of institutional investors. This betrays a continued misunderstanding of responsible investment, and of the ways in which environmental, social and governance issues can be material to financial returns. Members increasingly bear the investment risk associated with their pension savings, and should have corresponding rights to scrutinise the management of that risk. This is particularly important given the growth of DC schemes.

There is an increasing consensus that social and environmental considerations are financially material. That is why a report from the United Nations Environment Programme finance initiative highlighted the reasons why trustees are required by law to take advice from investment consultants when preparing their SIPs. The report suggests that a tick-box mentality on the part of these investment consultants is a key reason for the inadequacy of current disclosures. Many consultants still regard the ESG as a client-driven, ethical preference and do not consider that they have a proactive responsibility to raise these issues with pension fund clients.

The amendments require the Government simply to provide guidance. While I appreciate that they have the power to provide guidance, I question whether they should provide guidance rather than simply have the power to provide it, and what matters might be included in that guidance—for example, a generic statement might say that the fact that a fund takes ESG issues into account will not normally meet the spirit of the law; that the statement should relate to the fund’s particular approach to circumstances and issues at stake; and that it describes elements of a best practice statement on social, environment and ethical issues. There are a range of areas that could be included in such guidance. The elements of a best practice statement on the exercise of shareholder rights, for example, might include whether it is the fund’s policy to vote all shares held; whether the fund delegates voting decisions to asset managers; and, if so, details of any specific instructions given to the asset managers, or the circumstances under which the fund reserves the right to make voting decisions itself. The fund’s policy on dealing with any member inquiries, of course, is particularly important as we move forward in this area.

We do not accept that the inadequate application of existing requirements makes for more prolific and prescriptive regulations. We do believe that there is a sensible approach to a set of guidance which will make the role of the fund, and the fund members, more important. We recognise that that guidance would not strictly require primary legislation, and so these amendments are probing in their character.

Finally, part of the purpose of public disclosure is to ensure better accountability to ultimate owners. The average pension saver cannot be expected to know which asset manager their pension fund uses. If only the asset manager discloses, the net improvement in transparency for the saver at the end of the investment chain is likely to be small. In most cases we think that all that would be required is for pension funds to provide that link to their asset manager’s disclosures, probably on their websites. In other words, members should be signposted to the relevant information. On the basis that this set of information would benefit transparency of process and put some flesh on the bones of the existing legislation, I beg to move.

--- Later in debate ---

An elaborate process began in 2001 with the Myners principles. That process has moved on with the Investment Governance Group, which reported in November last year, and the six principles covering three stages of investment governance. It is probably right that this kind of concern is reflected in that process and covers the whole industry rather than particular segments of it. That is where the pressure that the noble Lord has successfully registered with these amendments should go. However, I will take back his points and pass them on to the relevant parts of government. My former close colleague the noble Lord, Lord Sassoon, will hear directly from me. I urge my noble friend to withdraw the amendment.

[Lord German]

My Lords, I thank my noble friend for those comments. I dread to think of the asymmetric paternalism to which we keep referring. We shall probably have to continue to do so now, because if I can interpret my noble friend’s final remarks as meaning that he and the Government will give active consideration to the sorts of guidance that might help the companies, pension funds and their members to achieve the goals that we have elaborated on, I am very grateful indeed.

As the noble Baroness said, the move from pension trustees to contract-based schemes with trustees will change the fabric of the pension world. I hope that the pension fund for which I am a trustee has sought to get these matters dealt with more swiftly. However, given my own experience, I am not certain that the regulations as framed guarantee that members will get access to all the information on voting rights. I am grateful for my noble friend’s comments, which I will take in the spirit that I described. On that basis, I beg leave to withdraw the amendment.

Amendment 53 withdrawn.