2.58 pm

The Minister of State, Department for Work and Pensions (Steve Webb): May I begin by congratulating the hon. Member for Dagenham and Rainham (Jon Cruddas) on securing this debate, which raises issues that I know are of real concern for many people? As he pointed out, it is just over a year since we were both here debating the same subject. One of my colleagues who observed our last debate said that she felt that agreement was breaking out violently all over the place. I suspect that we may be in similar territory today, because I have a great deal of sympathy with the points that the hon. Gentleman raised.

To be clear from the outset, I should say that the coalition Government fully support the highest standards of corporate governance and ethical behaviour. We agree that a socially responsible investment strategy is a sound choice for pension schemes, and we recognise the importance of the issues raised by FairPensions. I welcome the fact that the points made by the hon. Gentleman chime with the emphasis that both the Prime Minister and Deputy Prime Minister recently placed on responsible capitalism. Although not directly related to the duties of pension funds, the call by my right hon. Friend the Deputy Prime Minister for much greater corporate transparency and the unlocking of shareholder power indicate the coalition Government’s intention of addressing some of the wider concerns raised by the hon. Gentleman today.

I would like to emphasise the significant contribution that FairPensions has made to inform the debate on these issues. I have had a number of discussions with it and, as the hon. Gentleman said, its director is now a member of our trustee panel and I joined her for a meeting earlier this week. I hope that he will be reassured that that perspective is very much in the room when these issues are considered.

The hon. Gentlemen touched on the important role of the investments of pension funds in fuelling economic recovery in the UK. As he rightly said, the Chancellor announced in his autumn statement that the Government have signed a memorandum of understanding with two groups of UK pension funds to unlock additional investment in UK infrastructure, including the National Association of Pension Funds, the Pension Protection Fund, to which I will return, and a separate group representing pension plans and infrastructure fund managers.

The Government are also establishing an infrastructure investment forum with the Association of British Insurers—the hon. Gentleman mentioned the role of insurance companies—which will explore ways to ensure that capital markets continue to provide an efficient and attractive source of debt finance for infrastructure projects. The Government will target up to £20 billion of investment from those initiatives, which we hope will lead to a step change in the use of pension scheme assets to fuel our economic recovery.

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The hon. Gentleman referred to the FairPensions March 2011 report on fiduciary duty. I entirely agree that that has done a good job in raising awareness about some of the important issues relating to the role of pension trustees in the governance and conduct of firms, and the role of advisers. One of the concerns consistently raised by FairPensions is that the extent of a trustee's fiduciary duty is frequently misunderstood. As he said, I pointed out in the Pension Bill Committee, and am happy to say, albeit in front of a slightly more select gathering on this occasion, that I am absolutely clear that fiduciary duty does not simply mean that someone must maximise short-term investment returns at all costs. I am also clear—again on the record—that those duties do not prevent trustees from considering environmental, social and governance practices. Indeed, as part of the discharge of their fiduciary duty, it would be perfectly reasonable for pension trustees to ask searching questions about the environmental, social and governance practices of those firms their scheme was investing in. There is no reason why trustees cannot take ethical and governance issues into account when making investment decisions, solely subject to their making sure they comply with the legislative requirements relating to scheme investments, and the provisions of their scheme's statement of investment principles.

I come now to the hon. Gentleman’s point about 2012 and the direction in which we are travelling. We have seen only recently the closure of the final salary scheme of a FTSE 100 company open to new members—another mark in the move away from defined benefit pensions—and we are moving into a world of auto-enrolment, which will not exclusively be into contract-based defined contributions, but clearly many of the providers will be structured in that way, and I want to come on to that. As he says, between 5 million and 8 million people will be saving for the first time, or saving more, in a workplace pension. Against this backdrop, the hon. Gentleman’s points about how pension fund assets are managed, and more directly the fiduciary duty of those managing the assets, are very important. I am grateful to the hon. Gentleman for his comments about NEST being a beacon of best practice, and I will certainly look at the examples he gave of the Strathclyde pension fund and the recent Charity Commission guidance, which sounds helpful in this regard.

Looking beyond NEST—obviously the “t” stands for “trust”—clearly a key difference between trust-based occupational pension schemes and contract-based schemes that are used for automatic enrolment is the fact that occupational schemes have trustees who have a fiduciary duty to act in the best interests of the members. As he said, last year the Government issued a call for evidence on the regulatory differences between the two sorts of pension schemes. While some respondents, such as the hon. Gentleman, were concerned that there was no equivalent protection for the investments of members of workplace personal pension schemes, others pointed out that many providers of workplace personal pensions—contract-based—do have alternative arrangements in place, such as governance committees. It does seem to be the case that many employers are increasingly moving towards arrangements for employee engagement through the establishment of such management or governance committees.

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Research by the Pensions Regulator has found that approximately half of employers with a contract-based scheme do have some form of governance arrangement over and above what is legally required. These range from a very informal review on an ad hoc basis by employer representatives, through to more formal arrangements involving a wider range of parties, which may involve employee representatives. I do recognise that that does not wholly equate with a trustee's fiduciary duty, since there is no obligation on an employer to establish such a committee, and where they do exist there is a wide variation in their terms of reference, membership and powers.

In May last year, my Department issued detailed guidance on default funds in auto-enrolment to ensure the quality of a DC pension scheme’s default fund. This will be vital to the success of automatic enrolment as most individuals will not be making a choice about their investment fund and will be enrolled into a scheme's default option. Reflecting on what the hon. Gentleman said, that gives us an opportunity for scale. If the vast majority of people end up in the default funds, and we can get the default funds right, there is potential for good practice to be spread quite widely.

The guidance sets out the standards that pension schemes, advisers and employers should follow to ensure that the default fund is of sufficient quality. Those standards cover charges, governance, risk management, review and communications. The guidance was developed with employers, the pension industry, consumer groups and advisers to ensure not only that it is user friendly but that it strikes the right balance between prescription and allowing flexibility.

On the question of charges, evidence suggests that the vast majority of schemes have appropriately low fund charges, but there is always a possibility that charges could rise to inappropriately high levels in the future. That is why we took powers under the Pensions Act 2008 to regulate and set a charge cap, should charges become inappropriately high, given that even relatively small differences in charges can have a big impact on someone’s pension pot. The hon. Gentleman will know that we extended those powers in the Pensions Act 2011, for which I was responsible.

In the meantime, other initiatives are progressing. Hon. Members might recall that the Investment Governance Group, an industry group jointly sponsored by the Pensions Regulator, the Department for Work and Pensions and the Treasury, has developed principles for best practice in investment governance of work-based pension schemes. That guidance was published shortly before our previous debate and comprises six principles covering the three stages of investment governance: governance structure, investment choices and monitoring, and communications. It is available on the Pensions Regulator’s website. The aim of the principles is to encourage better investment governance and decision making by all stakeholders, and to provide a practical checklist to benchmark a scheme’s investment governance processes against best practice.

Two additional pieces of work from that group might be of interest to the hon. Gentleman. First, the Pensions Regulator is working closely with the National Association of Pension Funds to produce a report on defined benefit case studies, and considering investment strategies and approaches to ethical investments. Secondly, the National

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Association of Pension Funds is assisting the regulator in the preparation of a video podcast on the governance of small schemes, which I think will consist of at least two downloads. I understand that both those products should be ready for publication soon.

Much more recently, on 6 December 2011, the Pensions Regulator published a press release entitled “Six principles for good workplace DC”. This set out the regulator’s principles for good design and governance of DC schemes, and invited the industry to take part in a dialogue on the principles and the detailed criteria that sit underneath them. Publication of those high-level principles is the next step in the regulator’s ongoing engagement with the pensions sector to improve standards of DC provision and ensure that the sector is ready to support auto-enrolment.

I want briefly to mention the Pension Protection Fund. Someone told me recently that, in five to 10 years’ time, the PPF will be the biggest pension fund in the land, which is a slightly depressing thought. It is an operationally independent arm’s length organisation that was set up by Parliament. Like NEST, the investment strategy of the Pension Protection Fund is an example of the Government seeking to promote best practice in investment strategy, in this case through a non-departmental public body. In its statement of investment principles, published in November 2010, the PPF board makes it clear that it will act in the best financial interests of the fund and its beneficiaries in seeking the best return that is consistent with a prudent and appropriate level of risk. The board believes that it must act as a responsible and vigilant asset owner and market participant, and take account of the environmental, social and governance factors that can have an impact on the long-term performance of its investment. There is therefore a stress on long-termism and active engagement by this major owner of corporate Britain. I am sure that the hon. Gentleman will also welcome the fact that the PPF board is a signatory to the United Nations principles of responsible investment, a set of best practice principles on responsible investment.

The hon. Gentleman asked about discussions with the Pensions Regulator. When we debated these issues in December 2010, he asked whether I would be prepared to raise the issue of transparency with Michael O’Higgins, who was then the incoming chair of the Pensions Regulator. I can confirm that I have had a number of discussions with the chair in the past 12 months, and that I have

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drawn attention to the issues raised in the FairPensions report from March 2011, which have been echoed by the hon. Gentleman today.

Surprisingly, trustees are not obliged to disclose information about investments or their investment decisions to scheme members. It seems odd, given that it is our money, that we have so little ability to find out what is being done with it. The Pensions Regulator is therefore working with my Department to consider ways of introducing more transparency into schemes, and ways in which members could be better updated with information on their scheme. I shall be meeting the chair and the chief executive of the Pensions Regulator later this month, when we will discuss the issue further. I venture to suggest that it will be slightly higher on the agenda following the hon. Gentleman’s repeated interventions, for which I am grateful to him.

The hon. Gentleman mentioned the Kay review, which is obviously crucial. Professor Kay is examining UK equity markets and their impact on the long-term performance and governance of UK business. His independent review will consider a number of the issues that have been raised today, and its report is due later this year. Professor Kay kindly came to speak with me about the review on 3 November 2011, and I took the opportunity to raise the concerns raised by FairPensions about fiduciary duty and short-termism. I am hopeful that he will consider them in the course of his work.

The Kay review is examining the extent to which equity market participants are excessively focused on short-term outcomes, and what actions might be taken to address such problems if they exist. It will explore the incentives, motivations and timescales of all participants in the equity markets, as well as the fiduciary duties of pension funds and their role as long-term investors. I assure the hon. Gentleman that we will look very seriously at what Professor Kay has to say. I do not want to pre-empt that at this stage, but I will work closely with my colleagues in other Departments on any issues raised by the review that need to be considered further.

I thank the hon. Gentleman for his persistence. This is an important issue, and I hope that he will continue to raise it.

Question put and agreed to.

3.10 pm

House adjourned.