Pensions Bill

Written evidence from ShareAction (PB 65)

Summary

As set out below, ShareAction is particularly interested in the provisions of the Pensions Bill relating to powers for the Government to impose quality requirements/standards on a sub-set of private pensions. Whilst we welcome the inclusion of these powers, we wish to highlight: (1) the need for the Bill to signpost the important features of good governance and (2) our view that the Bill is not as clear as it could be on how the standards will apply to auto-enrolment schemes.

About ShareAction

1. ShareAction (formerly FairPensions) is a registered charity established to promote responsible investment practices by pension funds and other institutional investors. In particular, we work to encourage active stewardship of listed companies through the informed exercise of shareholder rights. ShareAction also champions greater transparency and accountability to the millions of pension savers whose long-term savings are entrusted to the capital markets.

2. We are a member organisation and count amongst our members a growing number of globally recognised NGOs and trade unions, as well as over 8,000 individual supporters. We help our individual supporters to engage with their pension providers about investment policies and practices. We also conduct research and benchmarking exercises using publicly available information about institutional investors’ policies and practices, in order to inform the market and to promote best practice.

The importance of quality requirements/standards and good governance

3. ShareAction welcomes the provisions in the Bill allowing the Government to impose quality requirements relating to the governance and administration of defined contribution (DC) workplace pension schemes into which a person’s pension may be automatically transferred if they change jobs [1] . If the imposed quality standards are robust, people should not see their pension transferred from a "good" to a "bad" scheme simply because they have moved jobs.

4. Quality requirements are particularly important in the context of auto-enrolment: auto-enrolment will only succeed if the schemes into which people are enrolled are well run and invest people’s savings responsibly. This is particularly vital in DC schemes, where savers bear the investment risk of complex decisions made without their knowledge or input. It cannot be left to the market to raise these standards because the pensions market is not truly competitive: auto-enrolled savers do not choose their pension provider; there is no repeat business; and poor performance may not be evident until it is too late. Quality standards are particularly important in contract-based DC pension schemes, where it is not clear that anyone in the investment chain has the incentive or obligation to protect savers’ best interests.

5. However, the issue of what counts as a well governed scheme needs to be addressed. The current requirements for schemes to meet in order to qualify as auto-enrolment schemes are minimal and we believe that any quality requirements set for automatic transfer schemes must go far beyond these. As a minimum, good governance should include the following mechanisms:

a. Independent structures to embed policyholders’ interests into decision-making, such as boards with duties to act in savers’ interests (as in the Australian system). We welcome the Government’s positive response to the Work and Pensions Committee’s recommendation for ‘governance committees’ to be set up at employer level to oversee contract-based pension schemes [2] . However, this does not preclude the need for governance structures at provider level to ensure savers’ interests are protected.

b. Improved communication between pension schemes and savers, with clear and relevant information being disclosed to savers as well as mechanisms for them to easily obtain information about their savings. We welcome the Government’s acknowledgement of the importance of "good communications and well-presented information" to improve savers’ engagement with their pension savings [3] . It is important not only that comprehensive, information is disclosed, but that it is presented in a manner which is clear for the average saver. We believe that, as well as empowering individuals, increased transparency between savers and their pension fund serves as a disincentive for practices which take advantage of the asymmetry of information in the system.

c. Investment strategies focussed on securing sustainable long-term returns, and not simply on maximising profits on a quarterly basis. Schemes should be required to:

· comply with the UK Stewardship Code [4] on engagement with investee companies;

· have – and report on the implementation of – clear policies on environmental, social and governance issues; and

· disclose how they vote as shareholders at company AGMs, thus promoting better oversight of investee companies and improved accountability to savers.

d. Fiduciary-like duties to be applicable consistently across the market to all those exercising discretion over other people’s money, thus ensuring that savers’ best interests are promoted and conflicts of interest are avoided.

6. In terms of the scope of the proposed quality standards, we believe it is extremely important that these cover all schemes into which people may be auto-enrolled. We note that the Government’s response to the Work and Pension’s Committee states that the quality requirements in the Pensions Bill will "apply to all workplace DC schemes. This means that someone who is automatically enrolled into a DC scheme will receive the same protection as someone who is automatically transferred into one" [5] . This assurance is welcome, but this should be made clearer in the Bill. It is also unclear how the powers in the Bill will interact with the Government’s proposed review of auto-enrolment [6] . If this review recommends changes to the quality standards for auto-enrolment schemes then the Government must ensure that this does not lead to loopholes or undue complexity in the regulation of pension schemes, especially if some schemes will end up being governed by multiple sets of rules. We believe it would be simpler if the quality standards in the Pensions Bill were specifically stated to apply to all auto-enrolment schemes.

July 2013