Pension Schemes Bill — House of Lords, 2015-01-07
Topic: Labor
Michael German (Liberal Democrats, Centre to centre-left): My Lords, I am pleased to move Amendment 22, standing in my name and those of the noble Lords, Lord Stoneham and Lord Paddick, and the noble Baroness, Lady Bakewell. The amendment follows the theme of this Government’s action in pensions by empowering savers and giving them choice I make no apology for tabling a comprehensive and detailed amendment. It is intended to demonstrate the breadth of action required in legislation to achieve a high level of transparency in the operation of pension schemes. I am indebted to ShareAction, a charity dedicated to this aim, for its help and its research The amendment provides a general requirement for pension schemes to account to savers for their investment and stewardship decisions; and a right for savers to access meaningful information about how their money is being invested and managed. It is an attempt to set a standard—a floor—guaranteeing savers rights to certain information about how their money is used. In doing so, it aims to rebuild the trust currently lacking between savers and those managing their money The pensions sector is not a perfect market: most savers do not actively choose their pension provider; it is chosen by their employer. Historically, there has been very little switching between products, and by the time poor performance is apparent, usually at the end of the saver’s working life, it is too late for the saver to act in a way to send a signal to the market. Savers feel disconnected from their money and this exacerbates these market imperfections. A disconnected saver is less likely to scrutinise the way in which his or her money is used. The buyer side of the market will continue to be weak, providing no real scrutiny of the industry. We have seen the impact that this has had on the fees and charges that people’s pensions have been subjected to The report of the now noble Lord, Lord Myners, in 2001 observed that good governance and accountability are mutually reinforcing. I agree. The pensions sector may never be dominated by a majority of active and engaged savers but, the more savers are active and informed, the better the market will work Under the current system, savers have relatively few rights to information about their money. This is partly a result of outdated legal concepts. Much of pension law is based on laws that governed a world of private family trusts. More rules were designed for a world dominated by final salary pension schemes, a world that is fast diminishing In today’s system, millions of people are automatically enrolled into defined contribution schemes, and now, potentially, into defined ambition schemes. Under these schemes, the saver takes the investment risk. It is therefore appropriate that such savers have rights to know how their money is being used—which answers the second of the two key questions which savers ask. The first is: "How much money will I get back?". The second is: "Where does my money go?" Currently UK pension schemes are subject to a number of disclosure requirements. However, these do not translate in practice into disclosure of information useful to the average saver. In summary, the current rules, depending on the nature of the scheme, require disclosure of a scheme’s investment policy and annual reports on investments, including high-level information on investment performance. In practice, savers are often sent information that is technical, inaccessible and does not show how high-level policies are enacted The UK stewardship code is one mechanism that was designed for increasing transparency in the financial sector. The code covers issues such as how investors are engaging with companies and how they vote in investee companies. While the Financial Conduct Authority requires asset managers to disclose their commitment to the stewardship code, no equivalent requirement is placed on asset owners such as pension funds and insurance companies. Very few pension funds sign up to the code. This means that there is no real impetus for pension schemes to pass on to savers any information that may be disclosed to them by their asset managers. There is a missing link in the chain of accountability back to the ultimate saver The rights created by this amendment would apply to all pension schemes. It encompasses the trustees or managers of occupational pension schemes and the managers of personal pension schemes. In summary, the amendment would place the trustees or managers under a general requirement to account to their beneficiaries for all actions taken in the performance of their investment functions and to act transparently in that regard. It would require trustees or managers to comply with any reasonable request for information —by "reasonable", I mean not just that it should not involve disproportionate cost but where information is not more readily available—made by or on behalf of a beneficiary, including by an independent governance committee, about decisions being made in key four areas: first, the selection, retention and realisation of investments; secondly, the stewardship of investments; thirdly, the selection, appointment and monitoring of investment managers and other agents to whom powers are delegated; and, fourthly, the selection and monitoring of investment funds in which the trustees or managers have invested or are considering investing Savers should have information to make informed decisions, and information to enable them to fully understand their own position. For example, we all know that when people have concerns about certain corporate practices, they may choose to alter the way in which they interact with those corporations. For example, after the Rana Plaza factory disaster in Bangladesh, many people chose to boycott companies that used the factory, and similar ones, to produce goods. Having taken this stance, many people would have been horrified to learn that the money they saved in their pension each month was actually invested in those companies. Another example is the fact that although many people are concerned about the health risks of smoking, those same people might well be surprised to find that a portion of their savings each month is being invested in tobacco companies This amendment would plug that information gap. It would allow a saver to request information about whether their pension was invested in a particular company or industry sector. What can the saver do with this information? Under the terms of the amendment, they can ask their pension scheme what, if anything, it is doing to influence a company on a particular issue. If a saver is worried about excessive executive pay in companies, he or she can ask the pension fund how it voted in respect of pay packages in companies. If the scheme has done nothing in respect of the issue, perhaps by abstaining from voting or not engaging with a company about it, a dialogue has been started. The pension scheme trustees or managers may not agree that action is needed, but on the other hand they may agree. If other savers have approached them on the same issue, this may prompt them to review the stance, or lack of stance, they have so far taken, and to ask questions of the company or even to consider their exposure to the company—of course, being mindful of their fiduciary duties to their members. Thus, through empowering the saver, we have developed a mechanism for companies to be held to account that works with the market This increased transparency would build on the work the Government have done to improve oversight of companies. The UK stewardship code has been adopted by the majority of asset managers, and it requires reporting on stewardship activities. It recognises that transparency is key to corporate accountability. But as I said earlier, the code has not been widely adopted by pension funds, and very few pension funds relay the information they receive from their managers to the ultimate saver. The amendment would allow a saver to receive this information on request. The release of such information to the saver would not mean that the saver would now move his or her money, as very few pension savers are realistically able to switch products. The effect is much subtler, but just as powerful. In a system where there is no real exit for the saver, the information has given him a voice Parallels can be drawn with the move towards increased transparency on fees and charges in pension schemes. No one is suggesting that savers should not be given greater information on fees and charges applied to their pension savings because they cannot act on it. Instead it is recognised that there is a more subtle, wider benefit in this information being made public: pension providers may be held to account and savers may be better engaged with their savings Transparency is a critical part of reconnecting savers with their savings. This amendment seeks to place in statute the actions needed to give effect to this very important principle. I beg to move.