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Baroness Hollis of Heigham: I could just seek to address the specific points, but the issue is so big that I am very happy—if Members of the Committee will be patient with me—to give a fuller answer than I usually do. I am mindful of what we have to cover, and, as all Members of the Committee are, I am trying to expedite proceedings. However, the issue is a serious one and it may be worth spelling out, because the fears expressed by the noble Lords, Lord Higgins and Lord MacGregor, have been widely shared.

Let me set out what we expect trustees to bring with them to the job. The clause requires an individual trustee to be conversant with the documentation of their own scheme and to have the knowledge and understanding of trust and pensions law and the principles of investment and funding appropriate to the functions that they are carrying out. The provisions supplement the existing "duty of care" and the principle of prudence that underpins it.
 
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The "prudent person" principle remains at the heart of pensions, yet trustees may take crucial decisions without either adequate resources or expertise. Some 20 per cent of pension schemes—particularly the smaller schemes—may have trustees who have had no training, whom we are asking to make very difficult and responsible decisions on professional advice.

With regard to the requirements for knowledge and understanding of individual trustees, we are developing a code. We expect them to have knowledge and understanding about pension schemes generally; the law relating to pensions, including tax law, state pensions, ombudsmen, and so on; the law relating to trusts and the concept of "duty of care"; conflicts of interest; the duty to take professional advice; duties on ceasing to hold office; different types of scheme, and how DB schemes work; and so on.

I would be happy to circulate to all Members of the Committee a much wider description of what we would expect, rather than take the time of the Committee—but what I have said has given an outline. Basically, we want to ensure that trustees have the necessary knowledge and understanding to take informed decisions and to subject the advice that they receive from the scheme's advisers to critical challenge, rather than just following it passively. We have found that the trustees of smaller pension schemes are heavily dependent on professional advice and too often abdicate their proper responsibility for the wise investment of the scheme's funds because they lack the necessary knowledge, understanding and confidence and familiarity with their own scheme. The Myners report showed that to be the case.

The clauses have been welcomed by many, particularly trustees, who have realised the importance of knowledge for the effective performance of their tasks. However, there are misgivings. Some fear that the requirements may, as the noble Lord, Lord MacGregor of Pulham Market, said, deter potential trustees, especially those seeking member nomination, from putting themselves forward. However, the clause requires trustees to have only the knowledge and understanding appropriate to the functions that they carry out.

I know that is a matter of balance, but it is not unreasonable to expect people who put themselves forward for member nomination, who will be allowed time off with pay for appropriate training, to take such training. We do not expect trustees to have the detailed technical knowledge of, say, the professional investment manager, let alone be experts, but they should have a good knowledge of how occupational pensions in general and their scheme in particular work. They should know the terms of the trust deed, what the scheme rules say and what policies the scheme has adopted on investment and funding. They also need an understanding of pensions and trust law, of the principles of scheme funding and of different types of scheme. From trustees carrying out more specialist functions—for example, somebody who sits on an investment sub-committee—we would expect appropriately enhanced knowledge.
 
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There have been several pieces of research, including the PricewaterhouseCoopers survey of pension scheme governance. That survey found that 20 per cent of the schemes that replied to the survey had made no assessment of trustees' knowledge and skills. Only 30 per cent were taking steps to close the perceived skills gap. In our DWP/HMT research, we found that, although most schemes provided some initial training for new trustees—one or two days—only a minority, even among larger schemes, provided refresher training. It is clear what is necessary. I have examined some of the training courses organised by the NAPF, OPRA and the trade unions, and it would seem reasonable that, when the Act is in place, people should receive four or five days' initial training and a day every year thereafter. Most schemes—even the best—fall well short of that.

I do not believe that there is a lack of interest or enthusiasm among member-nominated trustees. They want to do the job. They may find it demanding, but they also find it interesting and important. However, there has been no culture of support of the need for training or education. We need to go down that path. OPRA's research on 450 schemes—with a 98 per cent response rate—pointed to similar conclusions. It showed that the trustees of smaller schemes were overdependent on professional advice and that the professionals became the decision makers, not the advisers to the scheme. As we have discussed, we have rectified that.

The powers in Clause 238(2)(b) allow a period of grace for new trustees. That is sensible. The requirement is for knowledge, not education. They may already possess the knowledge, and we do not want to pursue a tick-box approach. It is a difficult line to draw.

The noble Lord, Lord MacGregor of Pulham Market, asked why we required trustees to take advice, if they already had enough knowledge. Trustees will not, by virtue of the provisions, have to be experts, so professional advice will still be required, before the preparation of a statement of investment principle. However, a trustee who was an expert would meet that requirement. I think that that was the question.

I could talk more generally about the development of packages, about OPRA's work or about trade union work. Even in relation to enforcement, the regulator will have a primarily educative rather than punitive role. If a trustee or a number of trustees or the board as a whole demonstrably lack knowledge and understanding, the regulator would intervene in the first instance by suggesting that they acquire the relevant knowledge by appropriate means. Only if that failed would the regulator go through the process of an improvement notice. Essentially, we are trying to change the culture. As I say, even the best schemes need to improve their act to this extent, given the degree of responsibility of trustees and the increased number of member-nominated trustees who may be less familiar with the material.

There is a period of grace; we expect firms and schemes to recognise and endorse the need for training. If the regulator at the end of the day feels that
 
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scheme members are being ill served by the lack of training that trustees have undertaken, the regulator can intervene—if necessary, by a notice. We do not expect the regulator to go down that road, except with the most wilful of schemes. The gradual approach of upping the game is, we think, the right one. I very much hope that employers and trustees, especially member-nominated trustees, will welcome the proposals. I am sure that it is necessary; there is no point in having member-nominated trustees on a board unless they can exercise their duties so that they are value added to the benefit of members. That is what the clauses seek to do.

Viscount Trenchard: Why do those same requirements for knowledge and education not apply to the members of the board of the PPF? Surely it is, in a sense, a vast pension scheme—or it is discharging the functions of a pension scheme.

Baroness Hollis of Heigham: We have had that debate on previous occasions. In practice, the board of the PPF, like the regulator, will recruit professionals including actuaries, accountants, lawyers, and so on. I would expect those people to be well above the level of knowledge that I have indicated for member-nominated trustees. However, they are not operating an insurance or a pension scheme; they are operating a compensation scheme, which means that there are different criteria involved than would apply to ordinary trustees. That requires them to have knowledge of their own scheme rules and investment strategies and to handle some £700 billion-worth of assets in this country.

Lord MacGregor of Pulham Market: I am grateful to the Minister for her reply. I do not disagree with anything that she says; it is important to up the experience in many schemes. It is also a question of getting balance and not going too far, and it will be interesting to see how that works out.

I add one more point. In relation to non-employee trustees, the Minister referred to the Myners report, which recommended that trustees will probably have to be paid a fee, given the level of responsibility, training, experience and skills that they will have to acquire. We will have to recognise that trend in relation to all that we are taking on.

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