Finance (No. 2) Bill (Second sitting)

Ruth George Excerpts

Tuesday 9th January 2018 Public Bill Committees

[Peter Dowd (Bootle) (Lab)]

It is a pleasure to see you in the Chair, Sir Roger. The Minister referred to scams. To some extent, I am glad that he used the word “scam”, because I suspect that if I had used it, people would have said it was Labour again attacking companies, pension companies and investments. It is not the word I would have used, but I understand the point he makes, and it goes to the heart of what we want to discuss today, which is transparency.

Amendment 41 seeks to improve the transparency of master trust pension schemes, to ensure that they are at the forefront of changes taking place across the defined contribution sector. There is an argument to say that one cannot be transparent enough in these sorts of situations. We have had all sorts of institutional dodginess—let us put it no stronger than that—in the past, and whether through endowment schemes, personal protection plans, or the stuff now going on with leaseholds and property, people’s faith in some institutions is, I suspect, being challenged a little. That is why we want to push the envelope, so to speak.

The changes proposed in the amendment are twofold: first, it would ensure that a clear and coherent investment strategy is presented to HMRC before registration, which would go beyond the Government’s proposal; secondly, a clear annual report on the costs and charges being applied to saver pots must be presented to the trustees and, we hope, be made available to savers. We think that that will modernise the approach towards the fiduciary management of savers’ assets, updating the statement of investment principles approach that is currently required by master trusts. It will also bring master trusts in line with wider Government policy on reporting costs and charges—we are finally beginning to see some progress on that, following many years of campaigning by various bodies and organisations, as well as by many Members on both sides of the Committee and by other organisations.

Subsection (2) of amendment 41 requires a master trust to include an investment strategy in its application for registration to HMRC. Until now, every occupational pension scheme has been legally required to prepare and maintain a statement of investment principles, and that is expected to cover the trustees’ plans for securing compliance with their statutory duties, and their policies on investments, risks, returns and how they will exercise their voting rights. The amendment would ensure that such practice is embedded in the master trust sector, and enhanced to encourage trustees to strategically consider—a split infinitive there—factors that they believe will influence the financial performance of their investments, as well as, importantly, looking more closely at socially responsible investment.

We know that companies with strong environmental and social governance credentials have better long-term performance—that goes without saying. A company that is committed to environmental sustainability, and which cares about its staff and is well run and managed should, in the long term, always profit over a company that does none of those things. We have only to look at the Sports Direct share price over the past two years, or at Volkswagen following the 2015 emissions scandal. People react to what they perceive as non-environmentally friendly, or non-socially friendly approaches to their staff or product. Of course, Her Majesty’s Revenue and Customs has an interest in ensuring that the schemes that register with it for taxation purposes have a clear and transparent strategy for guaranteeing pension scheme members a secure retirement. That is a big responsibility for HMRC, and we should support it with the appropriate resources.

As long as pension funds can show that any investment or policy decision was made on a fiduciary basis and consulted on with members, they can avoid the charge that they have not considered their members’ best interests. The amendment will help HMRC to feel confident that the scheme being registered is legitimate, and it will also have secondary effects. Public opinion tends to position the average citizen as a helpless bystander in this drama, when in fact public money underpins the entire system. Anyone with a pension is indirectly an owner of Britain’s biggest companies, and the amendment envisions a world in which people feel that their savings give them a positive stake in the economy, and a voice in how the companies that they invest in are run.

The rise of private pension savings has led to a democratisation of company ownership, but when it comes to control of ownership rights the reverse is true. Power has become increasingly concentrated in the hands of a relatively small number of opaque and unaccountable financial institutions. As the Kay report showed, these institutions often face systematic pressures to act in ways that may not serve savers’ best interests. Direct accountability to savers is therefore a vital component of a healthy economic and financial system. As millions of savers have entered the capital markets through pension auto-enrolment, now is the right time, in our opinion, to build a more accountable system. We are talking 10, 20, 30 or 40 years ahead—let us start now.

In June 2011 the Government invited Professor John Kay to conduct a review into equity markets and long-term decision making. As I recall, the final report was published in July 2012. His review considered how well equity markets were achieving their core purposes: to enhance the performance of UK companies and to enable savers to benefit from the activity of these businesses through returns to direct and indirect ownership of shares in UK companies. The review identified the fact that short-termism is a problem in UK equity markets. Professor Kay also recommended that company directors, asset managers and asset holders adopt measures to promote both stewardship and long-term decision making. In particular, he stressed:

“Asset managers can contribute more to the performance of British business (and in consequence to overall returns to their savers) through greater involvement with the companies in which they invest.”

He concluded that adopting such responsible investment practices would prove beneficial for investors and markets alike. When it is put in those simple terms, who could argue? It seems to me axiomatic.

In practice, responsible investment could involve making investment decisions based on the long term, as well as playing an active role in corporate governance by exercising shareholder voting rights. Master trusts will want to consider the Kay review’s findings when developing their proposals, including what governance procedures and mechanisms would be needed to facilitate long-term responsible investing and stewardship through the funds they choose for members to save in.

The UK stewardship code, published by the Financial Reporting Council, has seven principles and also provides master trusts with guidance on good practice when monitoring and engaging with the companies in which they invest. Amendment 41 seeks to make sure that the trustees are cognisant of these issues, and we hope that where possible they will engage with their scheme members during the decision-making process.

In recent decades, efforts to improve the way in which companies are run have focused heavily on making directors more accountable to their shareholders—for example, the recent introduction of a binding say on pay—but this job is only half done. Ownership rights are exercised largely by institutions that are themselves intermediaries and accountability to the underlying savers who provide the capital remains weak. The logical next step must be for institutional investors to extend the same accountability that they expect from companies to the savers whom they represent. Indeed, such accountability is essential to the success of recent measures to encourage more engaged and responsible shareowners.

The UK stewardship code was introduced in the aftermath of the financial crisis to address concerns that shareholders were behaving as—I think this was the quote—“absentee landlords”. Rather than being enforced by regulators, it is a voluntary code that relies on scrutiny from below to promote compliance, mirroring the corporate governance code for companies. Yet while shareholders are given extensive rights to hold companies to account for their governance practices, savers are not equipped to play the same role in relation to institutional investors. The investment regulations currently require master trusts to set up, within the statement of investment principles, the extent to which social, environmental or corporate governance considerations are taken into account in the selection, retention and realisation of investments, and these policies should be developed in the context of consultation with the scheme members and should enhance the engagement with them over these crucial issues.

[Ruth George (High Peak) (Lab)]

Does my hon. Friend agree that this helps to encourage workers to engage with pension investment, in particular those on low pay for whom auto-enrolment and pension contributions can require a substantial portion of the earnings that they have left over after essential bills? Before coming here, I was engaged in setting up a pension scheme for low-paid nursery workers. It was important to them that they could see how their money was being invested, because they did not have very much of it. The more transparency we have, the more it will encourage such low-paid workers to feel secure that their money is safe and to make the investments that they need to make for their retirement.

[Peter Dowd]

My hon. Friend makes an important point. We want to move away from the passivity and disempowerment that people in that situation feel and towards their having the confidence to engage, if they so choose. We have to ensure that the mechanisms are there for them to choose. It is a little bit like democracy at the end of the day: we have elections, and if someone does not want to participate in them, that is a matter for them, but at least we have them. People are given the capacity to participate, which is no different, in principle, from the point my hon. Friend was making.

As well as better protecting savers’ long-term financial interests, this will be good news for those who believe that part of the current system of capitalism has lost a little bit of its moral compass in certain situations; I alluded to that a little earlier with some of the scams that the Minister referred to. It is a bit like this House, where we have to feel accountable to the people who send us here. Whatever the system is—politics, business or pensions—we have to feel accountable, and more importantly, we have to be accountable.

In addition, savers who feel connected to their money are more likely to see it as a medium for the expression of their values. That goes to the heart of what my hon. Friend touched on, and indeed to the point I made earlier about how transparency and accountability should matter to those whose only concern is making markets work more efficiently. It has to go beyond that. Efficient market theory presumes that consumers act in their own interests. However, in the capital markets, decisions are being made not by consumers but by intermediaries acting on their behalf, so there is a disconnect to some degree there as well.

Moreover, consumers themselves are deeply disconnected from their money, and the opt-out mechanism of pensions auto-enrolment is predicated on that fact. That means that intermediaries themselves are subject to limited market discipline. The pensions market may never be dominated by active and engaged consumers, which comes back to the point I made before, but the more consumers are active and engaged, the better the market will work. I do not think there is any question about that.

In addition, accountability should build trust in the system, even among those who choose not to engage, thus encouraging people to keep saving in effect. This is an important consideration in a market in which just 70% of retail investors trust investment firms to “do the right thing” and consumers cite lack of trust as the No. 1 reason for opting out of private pension saving, which is a real shame.

[Ruth George]

My hon. Friend makes excellent points that are absolutely true while auto-enrolment contributions are 1%, and will be even more true when they rise to 3% and then 5%. We are looking to individuals, often on low pay and often at quite an early stage in their working life, to contribute a substantial sum towards their pension, which is for a time they cannot see, so it is vital that these are transparent decisions for them.

[Peter Dowd]

My hon. Friend again makes an important point, and that arrow goes to the heart of things.

There are practical objections on the grounds that savers are not interested in, or capable of, engaging with their money, which simply perpetuates a vicious circle of disengagement. That is the passivity I talked about earlier—almost an institutional passivity on the part of savers. Savers may be put off by the language of investment, but that does not mean that they are not interested in where their money goes; they are.

Likewise, savers may lack understanding of the technicalities of investment, but there are many matters on which they are qualified to comment, including the way the scheme behaves as an owner of major companies, or its policies on social, environmental and governance issues. We see that to an extent, in an institutional way, in the Church of England, among other organisations; it puts those things at the heart of its approach. Savers should be allowed to do that as well. Indeed, emphasising the positive contribution that schemes are making to a better economy, through their exercise of ownership rights, could be a way to engage people with saving money more widely.

The onus must be on the master trusts and the wider investment sector to take the lead in developing a clear and engaging investment strategy. Making such a strategy a requirement of registration with HMRC will ensure that no master trust will slip through the net. The recent local government pension scheme regulations follow a similar path and require the administration authorities to create investment statement strategies. There is no reason why that good practice cannot be extended to defined contribution schemes.

I turn to the reporting of costs and charges—a subject that my hon. Friend the Member for High Peak touched on, and which is addressed in proposed new subsection (3) in amendment 41. For far too long, the pensions market has had a single glaring dysfunction: no one knows how much a pension pot costs. Members of this House would not go into a marketplace to buy anything without understanding the basic information relating to a product: its price, its essential properties, and the promises made about it. Strangely, this information, which is so fundamental to consumer choice and the operation of any market, remains largely absent in the pension market. Master trusts must establish what each investment choice costs and what their drawn-down product costs. Anything short of that is not helpful for millions of citizens.

We have a duty to ensure that a reporting line is open between a master trust, HMRC regarding a trust’s tax affairs, and the trust’s members on the costs they incur while saving for retirement. Again, Labour Members have campaigned for many years on this issue and it seems that the Government are beginning to catch up, not simply because of what we have been doing but also because of what Government Members and other organisations have been doing. We are not trying to claim all the credit; to some extent, this has been a team effort, right across the piece.

In the consultation on defined contribution pension schemes, under which master trusts operate, the Government requested evidence on how they might improve transparency in reporting information on the transaction costs and charges for members of workplace pension schemes. Amendment 41 would be a clear step forward, in line with the calls that we have been making alongside the industry, trustees, savers and Government Members, for transparency of costs and charges when it comes to pension savings. This issue affects us all.

I am afraid to say that the Government have seen fit to replace action with rhetoric here—a pattern that we see a little bit too often. However, I do not want to push that argument too much. We have to encourage and prod. The architecture to get the data, analyse it and present it is being discussed, with a view to its being built. It can be a platform from which other projects, including the value-for-money analysis needed for all workplace pensions, can be developed—and it can be delivered.

Amendment 41 helps to embed a process that is already under way, thanks in no small way to years of campaigning by many organisations and political parties. There is no reason why the Government should not take this opportunity to do something that is in line with their stated objectives. We must ensure that every person auto-enrolled into a master trust is given the opportunity to understand what pension system they are going into, how much it will cost and how much they will get. To do otherwise would be a clear breach of the fiduciary duty owed to scheme members.

The Financial Conduct Authority’s asset management market review said that evidence suggests that

“there is weak price competition in a number of areas of the asset management industry”,

which has a material impact on investors’ returns through their payment for asset management services. One of the FCA’s conclusions was that there should be a requirement for increased transparency, and standardisation of costs and charges information for institutional investors. That word “transparency” crops up time after time, for good reason.

The Government have agreed to implement the FCA’s recommendations in full. We can enshrine that guarantee in the Bill. Quite frankly, it is a fundamental market failure that no pension fund can understand its cost basis. If one does not understand costs, the investment strategy set out in proposed subsection (2) of amendment 41 cannot be evaluated.

It is also a sensible proposition that a scheme’s outgoings on costs and charges be evaluated during the process of tax registration by HMRC. The risk and responsibility will continue to rest with the pension saver; charges for ongoing administration and investment management will be deducted from their account—another reason why transparency and low charges are important.

If a scheme member loses money in retirement, it is extremely difficult—if not impossible—to get it back again, as their sources of income may be limited and a return to work might not be an option. Ultimately, members could run out of money. That has happened before with some of these schemes. The member is responsible for their decisions and the outcome the scheme generates. It is therefore essential that the member can see the cost of their pension pot. The efficient management of pension funds is critical to ensuring that we stave off a pensions crisis.