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Lord Lucas moved Amendment No. 62:

Page 15, line 18, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment when moving Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 28 [Investment powers: duty of care]:

The Earl of Buckinghamshire moved Amendment No. 63:

Page 15, line 22, leave out ("investment functions,") and insert ("functions relating to investment (within the meaning of the Financial Services Act 1986),").

The noble Earl said: My Lords, I hope to inject some excitement into your Lordships' House this evening because we are now dealing with vicarious liabilities. I set the Minister a test and look forward to hearing what that actually means!

We are now dealing with amendments to Clauses 28 and 29, and I shall speak to all the amendments in the group. The combined effect of Clauses 28 and 29 is to curtail severely the delegation of discretions relating to investment decisions and in particular to prevent the trustees from passing responsibility for decisions to fund managers except where the investment is an investment within the meaning of the Financial Services Act.

For example, under the current arrangements, it will not be possible to delegate to an overseas investment house in the United States without landing the trustees in quite a considerable difficulty as regards liability. The same arguments would apply to property.

In short, this group of amendments seeks to enable sensible arrangements for delegating trustee investment functions and to allow them to continue as they do at present. I have mentioned already the difficulties with regard to property managers and overseas investment managers. If the amendments are not accepted, serious difficulties will arise.

The amendments seek to allow the trustees the power to delegate decisions as regards investments to such managers and the trustees will not be responsible for the acts and defaults of such managers if the trustees have taken reasonable steps to satisfy themselves that the managers have the necessary knowledge and experience and that they are acting competently.

The clause does not allow sub-delegation by managers, whereas my amendment seeks to allow that. Among other things, it would permit schemes to continue to use common investment funds where they are appropriate. This amendment needs to be included in the Bill and I commend it to the House. I beg to move.

Lord Ezra: My Lords, I support this amendment which is similar to an amendment which I tabled in Committee. The position is that unless the amendments moved by the noble Earl are accepted, present investment practices by pension funds will be curtailed

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and no additional safeguards will thereby be achieved. I can see very little point in doing that and I hope that the amendments will be accepted.

8.15 p.m.

Lord Mackay of Ardbrecknish: My Lords, I thank my noble friend for explaining his detailed amendments to the House and I thank him also for setting me a test about vicarious liability. I thought that perhaps it had something to do with the behaviour of vicars and in the absence of any bishops on their Benches I thought that I should let it pass at that. But of course, vicarious liability is to do with liability for the actions of a deputy, which is perhaps more boring than my first suggestion but, nevertheless, that is the position.

In considering the issues which my noble friend raised—and as the noble Lord, Lord Ezra, pointed out, he raised the same points in Committee—I agreed to consider further the question of trustees powers to permit sub-delegation among fund managers.

We have also looked further at the issues of whether or not trustees should continue to benefit from any exclusions from liability contained in trust deeds where they delegate discretion to fund managers who do not need to be authorised under the Financial Services Act. That point is also covered in the amendments before us.

As a result of our review of Clause 29 we have concluded that, in respect of sub-delegation, the clause as drafted is too restrictive and we are considering an appropriate amendment. This would make it clear that sub-delegation should indeed be possible. We are also looking carefully at the issue of whether delegation should be possible to persons who are not fund managers in the context of common investment funds—a point raised by the noble Lord, Lord Ezra.

On the second point, the clause as drafted follows the PLRC recommendation in providing a statutory exemption from trustees' vicarious liability in respect of FSA investments managed by persons authorised under the Financial Services Act. The PLRC report did not specifically address the issue of whether trustees should continue to benefit from exclusions to their liability contained in trust deeds when other fund managers, who do not need to be authorised, are appointed to manage non-FSA investments.

The clause as drafted prevents the operation of such exclusions. We have taken careful note of the arguments which have been put to us, both in this debate, in Committee and elsewhere, suggesting that the clause as drafted may go beyond the intention of the PLRC and may have a significant adverse effect on trustees' willingness to make investments outside the scope of the Financial Services Act, even though such investments would be perfectly proper, given a scheme's circumstances. On the other hand, we obviously need to ensure that we do not place scheme members at risk through inappropriate or unregulated investments.

We have come to the view that the clause probably does go too far in limiting trustees' readiness to invest in non-FSA investments and unnecessarily interferes with scheme rules. Therefore, we are looking closely at all of the issues which my noble friend's amendments cover.

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We will then, if necessary, introduce suitable amendments in another place to permit appropriate sub-delegation to occur. We will also give serious consideration to introducing further amendments in respect of non-FSA investments. I trust that this response will enable my noble friend to withdraw these amendments.

The Earl of Buckinghamshire: My Lords, I am extremely grateful to the noble Lord, Lord Ezra, for his support. I thank my noble friend for his constructive reply and I look forward to seeing the amendments when they appear in the other place. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 29 [Power of investment and delegation]:

[Amendments Nos. 64 to 73 not moved.]

Clause 30 [Investment principles]:

Lord Haskel moved Amendment No. 74:

Page 16, line 45, at end insert:
("( ) the exercise of voting rights and other powers conferred by virtue of their investments;").

The noble Lord said: My Lords, in moving this amendment I shall speak also to Amendment Nos. 77 and 78. I am delighted that the Minister seems to be in such an accommodating mood this evening.

Baroness Hollis of Heigham: Long may it last!

Lord Haskel: My Lords, similar amendments were moved in the Committee but the amendments now before your Lordships are altered in order to satisfy the Minister; when he responded to my amendments in Committee we shared a surprising amount of common ground. We agreed that institutional investors have a responsibility for good corporate governance and that that responsibility is crucial to our economic prosperity.

We agreed also that that responsibility is consistent with the trustees' duties to act in the interests of the beneficiaries. We agreed further that active ownership of shares was consistent with best practice. As an example, the Minister gave us the lead taken by the National Association of Pension Funds which recommends that trustees should decide on their voting policy and that that voting policy should be made public. That is the purpose of these amendments.

Indeed, the National Association of Pension Funds recognises the scale of the problem with regard to proxy voting by pension funds. At its conference in February, its vice-chairman, Graham Allen, commented:

    "The statistics on the voting pattern of pension funds are still disappointing and significant further progress needs to be made".

The question, then, is: how can the "significant further progress" of which Mr. Allen speaks be achieved? It seems to me that it could be done by finding clauses in the Bill where the duties in my amendments can simply be incorporated with the duties already in the legislation. Let us take, for example, Clause 31 which deals with choosing investments. The Bill says,

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    "The trustees or fund manager must have regard—

(a) to the need for diversification of investments, so far as appropriate to the circumstances of the scheme, and
(b) to the suitability to the scheme of investments".

That means that trustees and fund managers must "have regard to" the need for diversification and the suitability of investments.

My first amendment neatly adds a third element to the duties of the trustees and fund managers; namely, to "have regard to"—exactly the same words—good, corporate governance. We agree that this is vital for the nation's economy and for the beneficiaries. With the wording, "have regard to", the amendment gives trustees and pension fund managers the flexibility of applying those principles as they arise. For example, when shareholders indicated that bonuses and share options should depend on company performance and that wish was obviously ignored, trustees and fund managers—having regard to the wishes of the beneficiaries—would obviously be required to act. That would have saved the Prime Minister the embarrassment of a U-turn. In future, trustees and managers can adapt to the recommendations of the Greenbury Committee as and when they become known. They will also be able to adapt to the proposals of the Cadbury 2 Committee and introduce them as and when they become known.

By allowing the trustees the option of having regard to their duty, it enables them to ignore shareholdings which are too small, too far away, or matters which are not contentious. They do that by choosing to abstain. Here we have a way in which our purpose can be achieved without what the Minister called in Committee, specific or detailed obligations on pension funds which risk being regulatory and burdensome.

I now turn to the need for trustees and pension fund managers to report their voting intentions and record them. Again, there is another section of the Bill into which that requirement neatly fits. Clause 30 requires trustees of a pension scheme to prepare and maintain from time to time a written statement,

    "of the principles governing decisions about investments for the purposes of the scheme".

Subsection (2) says that the statement must cover, among other things,

    "the trustees' policy for securing compliance ... and ... their policy about the kinds of investments to be held, the balance between different kinds of investments, risk, the expected return ... the realisation of investments, and such other matters as may be prescribed".

The Government have recognised the need to set out those duties and responsibilities of the trustees and fund managers. While carrying out those duties, surely it is neither burdensome nor bureaucratic to add the requirement to state the principles of voting and to keep a record. Let us bear in mind that abstaining is also an option which can be chosen and, indeed, may be the choice on many occasions.

It is important to find common ground in order to incorporate the amendments in the Bill. We all want shareholders to vote. The survey of the National Association of Pension Funds shows that there has been no significant increase in voting at company meetings over the past few years. Speaking at its conference in

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February, the vice-chairman, Mr. Graham Allen, quoted from the annual survey for 1994 of the members of the National Association of Pension Funds, as follows:

    "There is still a very long way to travel before the majority of large UK funds regularly exercise their votes".

The purpose of the amendment is not simply to increase the quantity of voting; the quality is in fact more important. When pension funds vote, all too often they are simply rubber stamping the proposals of company management. For example, M&G announced that it will vote with company management as a matter of policy.

In Committee, the Minister questioned the logic of a duty being imposed on the pension funds only and asked why such a duty should not be placed on individuals and other collective investment vehicles. My response is that individuals act in their own right and can do what they want. Trustees and fund managers hold proxies from individuals, and they have a fiduciary duty to act.

The Minister also asked in Committee why that should apply to pension funds only and why should not other collective investment vehicles have a duty to vote. I believe that the same principle should apply. Indeed, putting such amendments in the Pensions Bill would have a powerful effect on fund managers. If they supply that service to pension fund trustees, they would probably do so for other clients as it enhances the quality of their service. In fact, insurance companies have a reasonably good record. However, we are now dealing with a pensions Bill and pensions represent one-third of all the shares on the London Stock Exchange. It is a good start and we have to start somewhere.

The Minister will remember, while reading the thoughts of Chairman Mao a few years ago, that Chairman Mao said that the journey of 6,000 kilometres started with one step. My proposed amendments take that first step. If we bring the voting process within the framework of the legislation, we recognise, in the words of the Cadbury Committee, that voting rights are an asset which must, like any other asset, be managed with care in the sole interests of the beneficiaries.

With the amendments as now worded, we would not be introducing compulsory voting; we would be advocating compulsory, corporate responsibility. I beg to move.

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