Pension Schemes Bill [HL] — House of Lords, 2016-11-21
Topic: Domestic Commerce
Jean Lesley Patricia Drake (Labour, Centre-left): My Lords, I shall speak to Amendment 21 and other amendments in the group. Amendment 21 would make it a process requirement under Clause 11 on authorised master trusts when making investment decisions to consider, "environmental, social and governance risks", Most investments in master trust schemes will be longer term and therefore exposed to longer-term risks. Consideration of those risks, which include such factors as climate change, unsustainable business practice and unsound corporate governance, is integral to the long-term sustainability of the investments held. The assessment of these risks should not be seen as an ethical extra but, rather, potential vulnerabilities to the sustainability of the scheme which should be properly understood The Pensions Regulator code of practice strengthened guidance for trustees on consideration of ESG risks, but it is not legally binding and there is no direct penalty for failing to comply. At a recent pensions conference, Andrew Warwick-Thompson, the executive director of the regulator, warned trustees against complacency when assessing ESG issues within portfolios. He commented that the regulator expects trustees to take ESG issues into account, saying, "I would urge any trustee or asset manager out there who still thinks these things don’t matter to wake up and smell the coffee". He referred to research by Professional Pensions which showed that only 18% of responses from trustees, fee managers and pensions professionals thought trustees should be obliged to take ESG issues into account If many in the industry are reluctant to make an assessment of ESG risks, it is hardly an auspicious basis for optimism that a voluntary code will work. As the regulator himself commented: "We need to guard against complacency here" There is increasing evidence showing that companies which perform well on ESG produce better returns for investors. Poor corporate practice has a real effect Master trusts have already grown exponentially against the background of a regulator having insufficient powers, relying instead on exhortations to trusts to embrace the voluntary master trust assurance framework. That did not work. With this Bill the Government are trying to put things right. The regulator expects ESG risk to be assessed. The amendment moves beyond expectation to a process requirement that trustees actually consider these risks. I ask the Minister: will the requirements under Clause 11(4)(d) include a specific requirement to assess ESG risks Amendment 22 requires an authorised master trust to have processes in place for the identification, reporting, managing and minimising of any conflict of interest. How to manage conflicts of interest in a master trust is an, as yet, unresolved problem. It is difficult to assess how this Bill will resolve it because of the policies still to be decided. In 2012 the Pensions Regulator, when investigating potential conflicts of interest in master trusts, commented: "It is very hard to understand how and when they are acting as agents of the provider and when they are acting in the best interests of the member" In 2013 the then Office of Fair Trading raised concerns that some trustee boards were not sufficiently independent of the master trust provider to avoid conflicts of interest and always act in beneficiaries’ best interests. The Occupational Pension Schemes (Charges and Governance) Regulations 2015 introduced stricter requirements on master trusts and although welcome, they are not sufficient to address potential conflicts of interest. Trustees of occupational pension schemes are required to have a process in place to identify and manage any conflicts of interest and there is a regulatory DC code which recommends minimum controls. But they do not meet the conflict of interest challenges in a master trust Market pressure, combined with sound regulation, are important tools in the fight against conflicts of interest. The only trouble is that in the pensions market there is little pressure coming from the supply side, the scheme member—a proposition we have rehearsed so many times in debates in this Chamber and in the other place The Government’s impact assessment identifies the particular risks that master trusts pose, which compellingly support specific regulation for identifying, reporting and managing conflicts of interest. Master trusts develop new types of business structures which alter the relationships between members, employers, trustees and providers, on which occupational pension law and regulation is largely based. There is no requirement to include member or employer representatives on the board, and providers have a significant influence over who they appoint Many master trusts have been set up with a profit motive—something that existing occupational pensions’ regulation does not cater for. As the OFT observed, this is a concern and a complex area as these companies have obligations to their shareholders and other stakeholders and, as with any company, seek to make a profit. IFAs and fund managers may be part of the provider group that set up that master trust The trust deed in a master trust can inhibit the trustees from acting in the best interests of members if the rules fetter their powers. The master trust multi-employer characteristic can increase complexity and, with it, the potential for conflicts of interest. The products they provide are not covered by ECA regulation.