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“Consistent with the level of interest and strength of feeling shown by the Committee in this area I intend to address the issue of responsible investment in PADA’s public investment consultation which is due to take place later this year and which aims to capture the views of the personal accounts scheme target audience.”
Mr. Jones concludes by saying that he hopes that what he says has “provided...sufficient reassurance”. The answer is that it does not. I am delighted that there will be a consultation on this, but I would have thought the appropriate way to proceed would be to consult on the way to deliver these kinds of ethical investment principles in practice under PADA—and the board. All we are asking to do is to put in the legislation the fact that the authority must have regard to the UN principles for responsible investment. That is not an unreasonable thing to require. When personal accounts are up and running, the funds will be a substantial part of investment in this country. That will be the case for the default fund in particular, for reasons that I have mentioned. Therefore, it is important that a message is sent out that the authority will have regard to those ethical investment principles.
If Ministers take the opposite view, it is odd that, as I have mentioned, the Pension Protection Fund is already signed up to the principles. Why would PADA not be so
signed up? It is perfectly legitimate for Mr. Jones and his colleagues to consult on the way in which this matter is delivered—I have given a couple of possibilities—but not on the overwhelming principle. It is perfectly reasonable for this House to say that the principles should apply and to leave the detailed work to the authority.
Amendments Nos. 25 and 26 approach things from a slightly different angle. By proposing to include the word “needs” and the question of “disproportionate cost”, as we tried to do in Committee, the amendments make the point that even where people have their own preferences as to how their money should be invested, both their preferences and their needs should be taken into account. That is because people sometimes make slightly bizarre investment decisions, often for the best possible ethical reasons, when they would be better advised doing something slightly different, or at least spreading the risk in a different way.
As amendment No. 26 sets out, when it comes to offering choice we must address a real issue about disproportionate cost. If any message came across loud and clear from the evidence of Mr. Myners and Mr. Jones to the Committee, it was their obsession with keeping things as simple as possible for personal accounts in order to try to drive down those running costs and administrative costs as far as possible, so that the accounts can deliver a reasonably cheap, easily accessible and easily understood form of investment for retirement. We are not looking at anything remotely like the Swedish model, which I believe has about 200 to 300 different funds, and I commend new clause 12, and amendments Nos. 25 and 26, to the House. If the Liberal Democrats do not take offence, I shall not deal with their amendment No. 39, as I am sure they will do it justice.
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Danny Alexander (Inverness, Nairn, Badenoch and Strathspey) (LD): The hon. Member for Eastbourne (Mr. Waterson) outlined a number of issues. Although the subject was well debated in Committee, there is a reason to return to it now, so I shall thus discuss new clause 12 and amendment No. 39.
Taken at face value, it is easy to misunderstand what the UN principles for responsible investment involve. That is why I concur with a comment made by the hon. Gentleman; although Tim Jones’s letter in response to the Minister’s drawing to PADA’s attention the Committee’s debate certainly suggested that PADA was interested and would wish to consult on the proposal, it is important to recognise that the UN principles for responsible investment are not a set of strongly binding prescriptive principles that must be followed in every detail or else. Rather, they are about having in place the correct toolkit to examine the range of responsible investment issues.
Rather than saying precisely how the toolkit should be used, the principles provide a range of tools for use, and there would, of course, then be an obligation on PADA and, therefore, potentially on the variety of funds themselves, to take the principles into account in making investment decisions. If such a toolkit was not in place, fund managers, for example, would not be able to work effectively with investee companies or to command public confidence that due diligence was being practised.
There is significant public concern about this, and the Minister has rightly recognised that in relation to the
availability of a sharia law-compliant fund. There was a great deal of public concern in respect of the use of environmental green funds and about the operation of other funds of responsible investment. One of the interesting facts to emerge from the briefing and other material that has been provided for this debate—other analyses also confirm this—is that developing a capability to monitor and manage environmental, social and governance issues, all of which are covered under the UN principles, can also increase both returns and financial security.
That business case has already persuaded asset owners and managers with approximately $10 trillion of assets under management to become signatories to the UN principles for responsible investment. Included in that are state funds in France, Norway, New Zealand, Canada and Ireland. As the hon. Member for Eastbourne said, the signatories also include our own Pension Protection Fund, some UK pension funds and a number of major UK asset managers too. That set of principles has not emerged from nowhere, nor is it so outlandish that it could not be adopted. In fact, the principles have been widely adopted by other organisations in the UK and across the world.
Of course the issue of cost in following the UN principles of responsible investment has rightly been a concern for PADA throughout the deliberations on this Bill. The evidence that we have is that the cost to fund managers is relatively insignificant, consisting of the costs of employing a small number of staff to examine the environmental, social and governance issues that might arise. Many fund managers already employ staff in that capacity. Other costs might include subscribing to environmental, social and governance research services, and the UN PRI itself asks for a voluntary contribution, although it is perhaps worth noting that the majority of signatories do not pay. Therefore, the costs to beneficiaries of personal accounts would be relatively small and, given the examples that we have of investments in such areas achieving good returns, could be outweighed by the gains.
In many areas, in both the public and private sectors, the UK is seen as a world leader in responsible investment. I am sure that is why the Pension Protection Fund, among others, has signed up to the principles. Many would consider it to be very strange if a flagship scheme established by legislation—as we hope personal accounts will be—did not sign up to the principles. I look forward to hearing from the Minister why it is that he is not willing to push the issue a bit harder with PADA at this stage.
Mr. Mike O’Brien: I hear the points made by both Opposition spokesmen. It is important that we give full and fair consideration to the UN principles, and that is why I wrote to the chief executive of PADA to ensure that the board did so. I received a positive response. Tim Jones, the chief executive, confirmed that the issue of responsible investment will be explicitly addressed in the investment consultation that the authority will undertake later this year. I am not sure why Opposition Members do not want the consultation to take place before that happens. It would be a better way to approach the issue.
We want to have a discussion on the UN principles, and what better way than to create a consultation process in which the broad principles of the pension
fund proposal and the creation of personal accounts can be discussed openly and fully? The UN principles could then be the focus of that debate. That would be a positive response.
I am especially interested in the views of the hon. Member for Eastbourne (Mr. Waterson) on this matter. One of the key issues that we have considered on personal accounts is the need to ensure that they complement rather than compete with current provision. We also want to ensure that personal accounts do not have advantages over and above other schemes, which is one reason why I was sceptical about some of the proposals made in relation to pay-as-you-save.
However, nor do we want to create a situation in which there are disadvantages. Would the application of the UN principles be a disadvantage? It would be interesting to find out whether the Conservatives regard them as an advantage in some way. If the principles would oblige this particular pension scheme to apply the principles, would they oblige all other pension schemes to comply with them? We have taken the view that the principles are very worth while, but it should be a matter for the trustees to consider, for each individual pension scheme, whether they wish to apply them.
The Conservatives seem to be suggesting that we should oblige a particular pension scheme to take on those principles—in fact that we should oblige not only the pension scheme to take them on, but PADA, which is a delivery authority that does not run a pension scheme but merely sets one up. I am perplexed about what the Conservative party’s policy now is. If we are to oblige this particular pension scheme to have this provision, why not all public sector pension schemes—why not all private sector pension schemes? Is that now Conservative party policy? I would be interested to know.
My view remains that which we set out in Committee. The principles are good and valuable, and we want to see pension schemes take account of them when the trustees regard that as appropriate. We will not force pension scheme trustees to adopt them. We are happy to say to those who are setting up personal account schemes that they should consider the principles. Indeed, we have had a positive response from people who have said that they will consult on the inclusion of the principles in their pension schemes.
We have played a positive role in promoting that approach. We have always held the view that the trustee should decide the principles on which a scheme operates and invests. That has always been part of our law. There are some constraints on trustees, but we have essentially said that the interests of the members are best protected by giving obligations to the trustee, which they have to enforce, that are limited to ensuring that the trustee looks after the best interests of the members.
It now seems that some people are suggesting that we must go further—not with the consent of the trustees, but otherwise. We need to be a little cautious before we do that. As a result of the Committee debates, I contacted Tim Jones, the chief executive. We have had his response and we need to recognise that we have created PADA in order to ensure that it consults properly with the public
in the setting up of one of the biggest pension schemes, if not the biggest, ever created in this country. The aim is that there should be widespread public consultation for the precise reason why up to 9 million people, many of whom are not currently saving, will be signing up to the scheme. If the scheme is to be treated in an entirely different way from any other scheme so that the trustees cannot make decisions about what investment principles they will operate under, that is quite a significant step.
In a sense, I am with the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) in saying that the principles are good and that I hope that in due course the trustees will have regard to them. I can see that argument. We would not have written to the chief executive of PADA if we had not taken the view that it was important that that should be so.
There is a need for the trustees’ independence and expertise in making such decisions to be recognised, too. That is the basis on which pensions have been protected in this country for a long time, and I do not think that we should tamper with it for the purpose of making a change that is, at best, symbolic, given that we already have a clear concession from the chief executive that the matter will be consulted on.
New clause 12 and amendment No. 39 presume that socially responsible investment approaches would be in the best interests of members. However, signing up to the UN principles would require active management of funds, which is more expensive than passive management of funds. It must be for the trustee to decide whether the additional costs are in the members’ best interests. Otherwise, we will effectively be telling the trustees that they must manage their funds in a particular way and ensure that the principles that the UN has put forward are complied with. Let us be clear about this: we will be saying that if there is any extra cost in doing so, it will fall upon the people who contribute to the pension scheme.
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After consultation with members of the public, the trustees may decide that they want to do that. Many of us in the House might well say that that is a laudable thing for them to decide, provided that they have consulted with the scheme’s members, and provided that if PADA has taken a view that it is advisable for the principles to be had regard to, it has itself consulted stakeholders and the public in setting up the scheme.
We are being asked to ignore all that and take a step that we have not taken elsewhere. We are being asked to take a step that goes well beyond and has potential cost implications for some of the poorest contributors that there are likely to be to pension schemes. I do not know whether either Opposition Front-Bench team has made an assessment of the potential costs for such low-paid people. I suspect that they have not, and that they are prepared to impose additional costs on members and potential members of the personal accounts scheme without even considering the implications and without talking to them or consulting them. They should proceed with a great deal of care.
It would be wrong to argue that the scheme should be used to set an example to other companies or pension schemes, as suggested by some Members in Committee. The scheme’s only purpose is to represent the best
interests of its members within the existing legal framework. It is not the right instrument to express Parliament’s general views on investment. We are creating a pension scheme for low and moderate income people. We may have all sorts of views about what we see as a desirable investment policy, but do we really want to impose those views on people on low incomes, whereas we are not imposing them on people in other pension schemes who are much more able to afford to pay for the principles?
Paul Rowen: I think that the Minister is misinterpreting our position, which is that there has to be a choice. Whether it is a sharia-based fund or one that signs up to the United Nations principles, the person who invests the money should be allowed to make the choice. We do not want to impose anything on anybody. We want the Government to ensure that such a choice is made available.
Mr. O’Brien: It should be a matter for the trustees of the pension scheme to examine the various options that they wish to make available to its members. As Paul Myners, the chairman of PADA, quite clearly said in his evidence to the Committee, each additional whistle that is attached to the scheme will have a cost for the members. Keeping it simple is the key to effective delivery of personal accounts. If we do not do that, and if we do not create a scheme that people can know all about without having to make a detailed examination of the principles that will be applied in this scheme but not in others, we will create a whole series of problems for ourselves.
The law already requires the trustees of all occupational pension schemes to state the extent to which social, environmental and ethical considerations have been taken into account in their statement of investment principles. They have to do that now. The legal requirements will apply to the trustee of the personal accounts scheme just as they will in any other scheme.
It is possible today for the trustees of various schemes to choose to adhere to the UN principles in the statement of investment principles that they set out. We would applaud them for doing so, but the Liberal Democrats and the Conservatives appear to be advocating that a significant further step should be taken. Effectively, it would rewrite much of trust law. We all agree that the UN principles are good ones, but the Opposition parties seem to believe that the proposed scheme must be required, by law, to adhere to them, even though no other comparable scheme has to do so. I say to the hon. Member for Rochdale (Paul Rowen) that in every other scheme, it is left to the trustees to decide what is contained in the statement of investment.
Paul Rowen: The Minister once again misinterprets the UN principles. They are a toolkit—that is, a set of values to which trustees should have regard—and not a prescription for investment. The two things are very different.
Mr. O'Brien:
I accept that; it is why I was able to write to Tim Jones and ask him whether he would accept that the toolkit was something that he should bear in mind when he carried out the consultation later this year. However, if the hon. Gentleman believes that the principles do not have implications, I have to tell
him that they do, and that those implications could incur costs that would have to be met by people on low and moderate incomes signing up to join personal accounts.
Opposition Front Benchers do not seem to have thought through what they are trying to achieve with their proposals. Those proposals appear worthy and easy to implement. They seem nice and liberal, if I may use that word—
Mr. O’Brien: I apologise to the hon. Gentleman for suggesting that he might have liberal inclinations on anything. The amendments would appeal to Guardian readers—
Mr. O’Brien: I am sorry for suggesting that the hon. Gentleman might be trying to appeal to such people, but the proposals would look good in a Guardian article. On inspection, it is clear that they would oblige people on low incomes to comply with something that people with higher incomes and better pension schemes would not have to comply with. Opposition Members need to think carefully, as what might look good in T he Guardian for one day could have significant implications for pension scheme members for a long time to come.
Amendments Nos. 25 and 26 would amend the PADA principles in the Bill to require it to consider the needs of members. Moreover, when carrying out its work on investment, PADA would also have to consider whether members’ preferences would result in disproportionate costs. Those are interesting ideas. In preparing its recommendations, the delivery authority will be required to consider the full range of guiding principles set out in what is now clause 70. That clause is at the core of the Bill, because it sets out what we are trying to achieve. It carefully sets out the balancing obligations to which PADA must have regard when we set up and run personal accounts.
We have always been clear that although PADA will be obliged to meet those obligations, when the Personal Accounts Board and the trustee corporation are actually running a pension scheme, the trustees will have to take a view on what principles they believe that they need to comply with in order to protect the members of that pension scheme. That is why we took the view that although PADA will be obliged to comply with the principles in clause 70, we will not impose broad-based principles on the trustees without their consent.
Clause 70 means that the trustees will take into account the investment preferences of potential members when PADA sets up the scheme, but they will have to balance that consideration with other principles, including that of encouraging participation, minimising the charge to members and respecting diversity; there was broad support for those principles when we discussed them in Committee.
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