Pension Funds

Steve Webb Excerpts

Tuesday 14th December 2010 Commons Chamber

[The Minister of State, Department for Work and Pensions (Steve Webb)]

I congratulate the hon. Member for Dagenham and Rainham (Jon Cruddas) on securing this debate and raising such an important issue for many of our constituents. Pensions are sometimes seen as a bit of a minority sport for anoraks, but the issue of what is happening to our money, and of whether it is being invested well, and in an environmentally and socially beneficial way, matters very broadly, and the more we can do to reduce the barriers that people face in obtaining that information, the better.

As the hon. Gentleman was speaking, I was reflecting on the fact that I bank with Smile, the internet arm of the Co-operative bank. As a member of the Co-operative movement, I periodically receive mailings about ethical investment issues and about the policies of the bank and how they could change. I have some interest in those matters professionally, but even just as a private citizen I find that process quite engaging. The process of raising such issues directly with individuals to enable them to make informed choices without always having to be proactive and to go and dig them out, makes me feel more positive about the institution that I am dealing with.

The hon. Gentleman is right to raise these issues. He mentioned the organisation FairPensions, and I congratulate it on its research, which is often thorough and careful. It is neither broad-brush nor high-level, but it examines the detail of the law and the regulations to determine how things might incrementally be improved. I welcome the fact that he has brought to the House’s attention some of the issues that he and Fair Pensions are concerned about.

I want to respond mainly on the questions of corporate governance and accounting transparency, but I also want to touch briefly on charges. The hon. Gentleman mentioned a figure of 40% of pensions going to pay charges, and that is a figure that we often hear quoted. It is worth correcting the record on what that does and does not refer to. It is certainly not an average or a norm. Someone who pays 1.5% charges through the life of their product might end up losing 40% of the fund on retirement, but there is no reason why anyone with a standard product need pay those charges. The stakeholder cap would start at 1.5% and fall to 1%. The new National Employment Savings Trust—NEST—pension will have an equivalent average management charge of 0.5% a year. Every charge represents a bit coming out of the final return, but people are paying for a service and charges are therefore legitimate provided that they are transparent. It is important not to overstate the extent of charges.

One thing that we hope will happen as a result of introducing the NEST corporation into the market next year, and more fully in the coming years, is that it will have a downward impact on charges across the market. When stakeholder pensions were introduced there was evidence that some charges—which might have been even higher than the figures quoted by the hon. Gentleman—were brought down, and we think that the same will happen again.

That raises the issue of the relevant roles of regulation, on the one hand, and of alternative strategies, on the other. I find a lot of common cause with the points that the hon. Gentleman raised. He is an intelligent and thoughtful contributor to these debates. One of the paradoxes that he raised is illustrated by asking whether further regulation is the solution to regulation that is not achieving what we want it to achieve. Or should we consider better enforcement of existing regulation, or alternative strategies? I suspect that the answer might be a mix of all three. He used powerful terms such as “boilerplate”, “paragraphs”, “dead documents” and “tick-box” mentalities. We do not want to create new tick-boxes. We want to ensure that the spirit of the law and the guidance is adhered to.

The NEST corporation has done some interesting work on attitudes to ethical investment, which is worth sharing with the House. It was actually the predecessor body to NEST, the Personal Accounts Delivery Authority, that conducted some public consultation on how NEST should invest its members’ money. NEST will be a pension fund with the potential to cover millions of people, many of whom will never have had a pension before and who might not be financially sophisticated investors. The target market was asked whether NEST should offer

“an ethical or socially responsible investment fund”.

As the hon. Gentleman might imagine, the research evidence suggests that there was very strong support for NEST offering such a fund, and the corporation is thinking about how it will do that. At the moment, about 40% of defined contribution schemes offer an ethical fund. I appreciate that there is a difference between an ethical fund and transparency in pensions, but there are links between the two.

Back in 2007, my Department looked at the NEST target group, and more than a quarter said that they would invest in an ethical fund regardless of the return. So they thought that they were interested in that idea even if sacrificing a bit of their return was involved. Also, a whisker under half of those surveyed said that they would invest ethically if the returns were equal to other investment types. Perhaps that reinforces the hon. Gentleman’s point that there is a big market out there for such investment funds, and that people are concerned about such things. They might not understand every detail of what is happening to their money or what is going on in the financial markets, but they want to know that their money is, as it were, doing good wherever possible. Some are willing to make a financial sacrifice to achieve that, and many more would rather be in that position than not. That suggests that the issues that the hon. Gentleman has raised are important and mainstream, as he said.

One of the challenges in dealing with this issue is that there are many links in the chain. We have the individual investor who puts money into a pension fund, along with their employer. Then we have the pension fund trustees, the investment managers and the businesses in which the money is invested. At each stage there are issues of transparency and reporting that need to be addressed, as the hon. Gentleman rightly says.

The present legislation on occupational pension schemes is contained in the investment regulations of 2000. It will not be entirely helpful to my case to do so, but I am going to quote exactly what they say. They require a scheme’s statement of investment principles to

“disclose the extent (if at all) to which social, environmental, or ethical considerations are taken into account in the selection, retention, and realisation of investments.”

The regulations also require schemes to disclose

“their policy (if any) in relation to the exercise of the rights (including voting rights) attached to the investments.”

As the hon. Gentleman has pointed out, however, that is a requirement to disclose a policy, but not necessarily individual votes on individual issues. I know that many shareholders do not just want information on a boilerplate policy that might be cut and pasted from somewhere else; they want more specific information on how the scheme approaches its position.

The figures change from month to month, but latest figure that I have seen shows that British pension funds own about £1 in every £7 or £8 of the UK stock market, so they are powerful players. Obviously, they do not often speak with a single voice, so they are perhaps more fragmented than that single figure suggests, but the idea that vast numbers of billions of pounds are not having an influence on company behaviour seems implausible. We therefore have an incentive to have a proportionate regime that maximises the beneficial impact of that activity.

There is a lot going on in relation to corporate reporting. In looking into this in preparation for the debate, I identified at least three different Government consultations and calls for evidence that are now going on, and that are relevant to this area. I shall update the House on where we are with those, starting with the Department for Business, Innovation and Skills, which has been consulting on the future of narrative reporting in order to address the coalition commitment to reinstating an operating and financial review. That policy was dropped a while ago, and the intention is to reinstate it. That consultation has closed and our BIS colleagues will shortly publish a summary of responses with a view to outlining the next steps in the new year.

The three key objectives, with which I think the hon. Gentleman would agree, were as follows. The first was to improve the quality of company reporting to shareholders, the second was to empower shareholders to hold directors to account on their performance, and the third was to ensure that any measures we as the Government introduce will improve the quality and relevance of disclosures; that relates to the point that the hon. Gentleman made.

Our colleagues at BIS are, as they say, exploring all the options—regulatory and non-regulatory—to make sure that companies report on matters that are material to their business and their shareholders, including consideration, where relevant, of social and environmental issues. What our BIS colleagues say is that where existing regulation is not meeting its aims, they will be looking at options to facilitate better and more relevant reporting and to empower shareholders to hold companies to account where the needed information is not provided. There is a welcome and ongoing commitment to empowerment of shareholders and to relevant reporting, not just box-ticking exercises.

That is the first exercise, which in a sense is more mature, within the few months for which the coalition has been in power. The second relates to the point that the hon. Gentleman made in his speech about short-termism. The Department for Business, Innovation and Skills published in October a call for evidence on the extent of short-termism and market failures in UK equity markets, looking at issues and causes and whether the current law is suitable. A whole range of issues is covered by that, including whether investors are increasingly short term and whether—to use a bit of economic jargon—there are principal agent problems in the investment chain.

In a sense, that is how I started my remarks, by saying that we do have a chain: there are concerned citizens, perhaps pension funds, financial intermediaries, and then the companies in which they invest. At each stage, as the hon. Gentleman said, the danger is that each thinks it is the other’s job to do what is necessary: “Is it my job to report or your job to ask?” There is certainly scope for greater clarity on that subject.

One reason why I mentioned the consultations across government and the calls for evidence is that there may be more openness on such issues early in a new Parliament or new Government than when a Government have been in power for a long time and have a settled and rigid position. Clearly, the present Administration has a strong emphasis, where possible, on deregulation, so it would be fair to say that there is not an appetite for net additional regulation. That much is true, but where goals can be achieved proportionately by non-regulatory measures or by a mix of regulation and deregulation so that there is no overall increase, there would be much more openness. I would therefore encourage the hon. Gentleman and, through him, Fair Pensions and others, by saying that if they can suggest measures that have no regulatory burden or minimal regulatory burden, or identify other regulations that could be repealed because they are not effective, their ideas would find more favour, particularly with my colleagues in BIS who have overall responsibility for regulatory policy. I hope that that provides a helpful steer.

Continuing the theme of Departments listening and consulting, the Department for Work and Pensions and I have recently published consultation on guidance on default funds. Once we are in a world of auto-enrolment, people who do not make an active fund choice will end up in a default fund, so it is pretty important to see what such a fund looks like. The guidance that we put out for consultation sets out the standards by which default investment options should operate. The hon. Gentleman will be reassured to know that the key standards are about robust governance, review of the default investment option, transparency of charges and providing appropriate information to members about investment decisions. Those things will help.

In connection with the hon. Gentleman’s comments about the parliamentary scheme, I can tell him that another scheme of which I have been a member is the universities scheme. I recall speaking at a recent conference where a representative of that scheme was present. I raised the issue of scheme members wanting to know what was being done with their money. I mentioned that as a member of that scheme, I did not recall ever getting any very useful information. His answer was, “It’s on the website.” I feel that there is occasionally a need to remind those who manage our money that it is our money. That should make them proactive in communicating with scheme members: asking them what they want would be a positive factor in that respect.

The hon. Gentleman mentioned the Financial Reporting Council and its stewardship code. As he said, it has taken a step in the right direction. Fair Pensions’ own report “Stewardship in the Spotlight” found that the UK stewardship code had already helped to encourage voting disclosure. Examples are provided of several asset management firms that have improved their practices. I think that that is progress, but I take the hon. Gentleman’s point that although it is another link in the chain where things are perhaps improving, we need to look at the whole system. A stewardship code should, in the view of the Financial Reporting Council, be based on the idea of “comply or explain”; in other words, investors should either get on with it and comply, or at the very least explain why they have not done that, so that people can form a judgment on that.

The Financial Services Authority has expressed its belief that the principles of the stewardship code are as applicable to occupational pension schemes as to other types of pension and that, ultimately, occupational pension scheme managers will still be answerable to the scheme’s trustees. The FSA does not consider it unreasonable to require scheme managers to disclose their commitment or otherwise to the code, given the nature of the disclosure requirement.

Finally, the hon. Gentleman asked whether I would raise these issues with the new chair of the pensions regulator. I will be very happy to do that—although obviously, the new chair and the regulator itself are operationally independent of the Department and will form their own judgment. I know that they take a risk-based approach to what they do, so one of their top priorities is ensuring that funds are adequate and deficits are dealt with. They prioritise some pretty basic things like making sure that schemes have proper records of who is in them and how much money they have put in. There is a lot on their plate, but the issues that the hon. Gentleman has raised are important as well. I will certainly flag up his and the House’s interests in such matters when I meet—as I hope I will before too long—the new chairman whom we announced last week.

In conclusion, I reiterate my thanks to the hon. Gentleman, to Fair Pensions and to other campaigners on these important issues. The Government are doing a lot of listening, consulting and calling for evidence. I hope that the hon. Gentleman and others will feed into those consultations so that the feedback that we get will help to shape the way in which we take forward this important agenda. I am very grateful to him for placing it before the House this evening.

Question put and agreed to.