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I believe that even though the Government expect that the trustees will start with a number of funds—we are currently told between five and l0—they might well decide that more or perhaps fewer are appropriate. Again, we will be discussing that shortly. It should be their job to take the jobholders’ wishes into account. Muslims, for example, are barred by their religion from receiving interest and might refuse to put money into an interest-only fund. Indeed, such a fund would not normally produce a particularly good return anyway. What types of funds are currently envisaged? Clearly there will be a Sharia fund and a default fund, as well as perhaps a stock exchange tracker fund, as the noble Lord, Lord Oakeshott, suggested last week. There may be an ethical fund, which we will debate shortly, and surely there will be others. As the member ages, it might well be sensible for him to move from one fund into another—possibly from a medium-risk one into something safer. Will transfers between funds be possible or even suggested by the trustees?
Up to now, we have been thinking only of the beginning of the personal accounts scheme. What about the end? We assume that, under the current arrangements, when the jobholder retires he will be bought an annuity. As we know, annuities are a gamble; the value depends on the rate on offer when you retire. That can make a difference of hundreds of pounds, especially if you are a smoker or live in an unhealthy part of the United Kingdom, or even have held a
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That brings me, finally, to diversity, which, as proposed subsection (2)(g) says, the trustees should respect. I would expect that a jobholder in 2040 would have considerably better financial knowledge than one in 2012. One hopes that, with all the information, including money and savings lessons in school, tomorrow’s pensioners will be much more savvy and will be able to understand all the freely available advice. Different groups of investors will have different needs and therefore different requests, not only as to which fund to invest in. For example, they may well realise that fund A is not going nearly as well as fund C. That may be because of the performance of the fund managers or there may be other factors, such as how the fund was set up in the first place. Others may be quite satisfied, especially if they get an annual return showing that their fund has done better than the investment would have earned at interest. There is also the matter of what goes into the annual return and whether there is enough information therein to be really informative. Yet others will doubtless feel the need to opt out for a period, maybe several periods. Yes, there will certainly be different groups.
The trustees need to keep all these things—maximising participation, having minimum burdens on employers, competition with other pension schemes, the cheapness of management charges, the maximisation of returns to members and their preferences, and differences between members’ wants and needs—in the forefront of their minds. To keep these principles there, they should be in the text of the Bill. I beg to move.
Baroness Thomas of Winchester: Because of the short notice of our debating the Bill today, my noble friend Lord Oakeshott is unable to take his place on the Front Bench; he has a prior commitment elsewhere.
I fear that we on these Benches cannot support the amendment because it is too prescriptive. Our approach is that the scheme must be as simple as possible, with no bells and whistles, as the chairman and chief executive have repeatedly and clearly stated.
Lord McKenzie of Luton: I thank each Member of the Committee who has spoken. I say to the noble Baroness, Lady Thomas, that I was aware that the noble Lord, Oakeshott, was unable to make it today. I am sure that she will ably substitute for him.
The noble Lord, Lord Skelmersdale, ranged widely over a number of issues that we shall pick up on in subsequent amendments, so I will not dwell on some of those details in my reply. The proposed new clause would require the trustee corporation to have regard to a set of principles that is essentially a variant on those to which the Personal Accounts Delivery Authority must have regard in exercising its functions. I emphasise that the functions of the trustee corporation are very
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However, we are clear that the principles do not have an explicit part to play in the trustee’s functions, and for very good reasons. The trustee corporation will be charged with running the scheme, as designed by PADA, within the framework of the principles and other requirements of the Bill. The scheme will be set up as a trust-based occupational pension scheme, so the trustee must always act in the best interests of members and beneficiaries. That is the duty of trustees of other trust-based schemes, and will apply here too.
Of course, the principles set out in the amendment appear largely to fall within that overriding duty; most certainly, participation—in proposed new subsection (2)(a)—cost of membership, returns on investment, members’ preferences and diversity do. They are directly related to members and beneficiaries, so will generally come within the duty of the trustee which, as I am sure noble Lords are aware, is embedded in trust law.
That leaves proposed new paragraph (b), which deals with minimising burdens on employers, and proposed new paragraph (c), which covers minimising adverse effects on other qualifying schemes. However, I am afraid that I cannot agree that either is directly relevant to the trustee corporation. PADA is charged with designing a scheme that does not place disproportionate burdens on employers. The trustee will be responsible for running that scheme, as designed by PADA. I see no reason why the trustee corporation, any more than any other set of trustees, should be charged with considering adverse effects on other schemes. The scheme it will be running will have a unique feature making it suitable for its target group and will be designed to complement, not replace, other qualifying schemes. Indeed, both proposed new paragraphs (b) and (c) are in PADA’s principles so will be firmly entrenched in the design of the scheme, as will the others under Clause 70. However, they are precisely about the design of the scheme, not about the running of it, and are therefore not for the trustee corporation. I hope that that distinction is clear.
There are also some serious concerns about the legal and operational implications of requiring the trustee to have regard to these principles, which I shall explain. The job of a trustee is mainly set out in their particular trust instrument, under general duties of trust law applying to all trustees and in additions made by pensions law for all pension scheme trustees. The amendment would impose an extra layer of scheme-specific statutory duties on this trustee, and only this trustee. In substance, this is unnecessary for the reasons I have already explained.
However, we should not assume that such duplication is harmless. The job of legislation is to change the law, and it is therefore always assumed to mean something. Knowingly duplicating duties that already apply, and things which will already be embedded in the scheme,
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The trustee’s main job is to serve the interests of actual beneficiaries. The balance between those interests and the interests of other people will be set out in the trust scheme. These principles would confuse what that duty is, and could upset that balance in unexpected ways. For instance, they could result in suggestions that issues on which key judgments have already been made are reopened; employers’ interests are mentioned, for example, as are the interests of other schemes. These things are all going to be considered in designing the scheme and, in important respects, will already be built into it: contribution limits, transfers and investment choice.
Putting these principles in legislation would create a new opportunity for someone to challenge the corporation on the design of the scheme, and ultimately to do so in the courts. That is not appropriate. These are, first and foremost, matters for PADA, then consultees and then Parliament in designing the scheme itself.
In summary, not only will adding a new and unique statutory burden fail to add anything to what this Bill already achieves, it also risks confusion and complexity that could be really detrimental. I hope that the noble Lord has therefore been helped by that explanation. It would not be appropriate to impose these principles upon the trustee corporation. I ask him to withdraw the amendment.
Lord Skelmersdale: So, according to the Minister, the trustees are to have functions but no principles. These functions are to be given to the trustees by the Secretary of State, and we have absolutely no idea what they may be. It is all very well for the Minister to shake his head—
Lord McKenzie of Luton: It is absolutely not right to say that trustees will have no principles. As I explained, the role of trustees is embedded in trust law in pensions legislation. The scheme that will be set up will be operated by the trustees in the light of those principles, policies and obligations. That is what this is about. To translate the principles of PADA, which is designing the scheme, into the trustees’ obligations is wholly inappropriate.
Lord Skelmersdale: Surely to goodness, the noble Lord is still thinking of the original operation of the trustees. I was thinking much further ahead. I have no doubt that the needs of the trustees will change over the next century or so. Principles and functions are two very different things, as I was about to say when he interrupted me.
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Of course, I readily understand that the trustees will operate under existing trust law and, indeed, any other trust law that happens to come about over the next X years, but the Bill does not give them any principles by which to work. I shall not press the amendment today, but I will think very carefully about it before the next stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Judd moved Amendment No. 112ZDA:
The trustee corporation, and anyone appointed by the trustee corporation to manage the investment of pension money, may disinvest or sell, or not purchase or invest in, securities issued by persons whom the trustee corporation determines on reasonable grounds conducts, or has investments in, business operations that are associated with the commission of crimes against humanity, war crimes or genocide, the content of which is defined in the Rome Statue of the International Criminal Court and adopted into English law by the International Criminal Court Act 2001 (c. 17).”
The noble Lord said: I hope it will be for the convenience of the Committee if I speak also to Amendment No. 112ZDB. I do so in the context of my strong support for the Bill and its purposes. At the outset I pay tribute to the Aegis Trust and other organisations that do much effective work in this sphere of public policy.
The Bill is designed to respond to the needs of the vulnerable in our society. It clearly should not do so on the backs of vulnerable, exploited or oppressed people elsewhere in the world. Either the Bill is about equality, dignity and fairness or it is not. Such principles have universal application or they are not principles at all.
The door to the principles of the amendments was opened by the noble Lord, Lord Skelmersdale, on the previous amendment. Indeed, it is ajar in Clause 70(2)(e). The first amendment in this group would confirm that trustee corporations are allowed to disinvest pension money from companies associated with crimes against humanity, war crimes or genocide. The second would require the trustee corporation to have a written policy on ethical investment, covering such issues as environmental, social, human rights and good governance practices. This would be more than is currently required under the statement of investment principles in the Pensions Act 2004, which simply requires investors to state whether they have an ethical investment policy.
Let me be clear. I am not talking about mandatory principles which investors must take into account. The amendments require investors only to have an independent written policy covering the ethical considerations which motivate their investment decisions. There are three reasons for these amendments. The first, and in some ways the most important, is legal. At present, trustees and institutional investors are not sure beyond doubt that they are permitted to take into account a company’s human rights or environmental record when deciding whether to invest in a corporation. This uncertainty stems in part from a trend in the case law which has tended to underpin the requirement that institutional
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The Pensions Act 2004 allows investors to indicate in their statements of investment principles what, if any, ethical considerations are being taken into account, but this is entirely voluntary. It suggests that investors may take these issues into account but does not clarify whether they may move beyond profit maximisation to take such ethical considerations into account in addition, unless the trust’s mandate specifically mandates such a policy.
Many investors and trustees still believe that they are required to maximise financial returns on an investment-by-investment basis to the exclusion of all other considerations. Read carefully, however, the law seems to require trustees to act for the proper purpose of the trust and not for extraneous purposes. As long as the best interests of the beneficiaries are not compromised, trustees may take ESG considerations into account.
The amendments, while confirming and clarifying the situation would, I hope, encourage investors to engage with companies in which they hold shares. Recommendations from major shareholders will certainly turn a corporation’s thinking towards ethical standards. Investors themselves also need a safe harbour in the event that they do not invest or decide to disinvest because a corporation is involved with the commission of crimes against humanity, war crimes or genocide. As long as the investor acts prudently, and in the best interests of the beneficiaries, and as long as returns can still otherwise be maximised and risk minimised, disinvestment from such corporations should surely represent a safe and responsible investment decision. Investors should not have any lingering doubts and fears that they may face civil, criminal or administrative action because consideration of ESG issues was part of their decision-making process.
The second reason is policy. The amendments are entirely in keeping with the United Kingdom’s commitments to corporate social responsibility, as evidenced, for example, in the sustainable development strategy of 2005, the White Paper on international development in 2000, the international convention on social and economic rights, the United Nations Convention on the Rights of the Child, the Kyoto protocol and subsequent international undertakings on global warming, not least those at the recent G8 summit in Japan, and the European Union code of conduct on international arms sales.
To be consistent with those commitments, the personal accounts system should surely achieve and exceed worldwide best practice in responsible investment. The amendment would enable ethical investment to be part of the strategy of the United Kingdom’s largest public pension fund; it would be an imaginative lead to society as a whole. There would be a clear mandate to the trustees and appointed fund managers to engage
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The third reason is financial. There is much evidence that the effective management of environmental, social, human rights and governance—ESG—issues can have a positive impact on investment reforms and risk management and therefore become a financial benefit rather than a financial cost. It has been demonstrated that ethical good governance and transparent corporate practices can assist in achieving stable returns and long-term profit growth. That has been seen in the sphere of pension funds. A good example is the Co-op ethical fund, which has a more than commendable record among the all-share funds in recent times.
Of course, socially responsible investment is of more and more significance in the value of the reputation of the individual corporations. Indeed, increasing attention is now being given to the alleged negative part played by some corporations and their foreign investment in fuelling human rights abuses across the world. Examples have been the abuse of workers and sweated and child labour in the clothing industry and the representational damage to some of the clothing giants. Another example has been the controversial part played by some of the oil giants in Burma, Sudan, Africa and Latin America. Zimbabwe has given recent grounds for concern in this respect. There is no need to list the corporations by name; they know very well which they are. There is no doubt whatever that the cost to them of such behaviour will be significant. Responsible investors work with corporations to help them to future-proof their profits by, for example, limiting the negative consequences of poor governance, lax safety standards or climate change for their business.
Before concluding, I should identify the limits to my amendments. They do not propose that institutional shareholders should have free rein in making investment decisions. They are a focused guide to investors to evaluate ESG considerations when exercising their fiduciary duties to maximise profit. In the context of the rigid guidelines imposed on investors by that fiduciary duty, they simply underline their legal right to take their preference into account in accordance with the written statement of ethical principles.
The realities of globalisation mean that our choices and decisions affect the lives of people elsewhere in the world more directly than ever before. That is why globalisation makes it imperative that we give our attention to issues that previously too often fell below the moral radar. That is why our investment practices must accordingly change. However, I repeat that both amendments are focused and proportionate to their objectives. They are not mandatory and simply allow investors to take ESG issues into account.
The vital well-being of our pensioners—I take second place to no one in my support for that objective—should never be dependent on the violation of human rights abroad, the degradation of the environment, the acceleration of global warming, irresponsible arms deals and corrupt corporate practices. It would be deplorable if it did. I shall listen very carefully to what my noble friend has to say in response to these
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Lord Skelmersdale: My Amendment No. 113H is grouped with the amendments of the noble Lord, Lord Judd, to whom I listened with great interest and considerable sympathy. As my colleagues in another place have indicated, on these Benches we believe in the need for a proper appreciation of the importance and benefits of ethical investment. It is true that ethically minded and socially responsible funds are not only increasingly common in the private sector, but they are likely to be as profitable as more traditional schemes. However, I noted that the Minister said on the previous amendment that trustees in a corporation will be subject to the obligations put upon the trustees of all pensions firms by law; for example, an ethical policy, as the noble Lord, Lord Judd, said.
However, I cannot support his amendments unreservedly. His Amendment No. 112ZDA envisages giving the trustee corporation an indication that, if another situation such as that in Zimbabwe were to occur, the corporation should consider its investments and perhaps sell any offending companies. Some very large companies are being named as continued investors in that area. It is not at all unlikely that, if personal accounts were up and running, these would be exactly the sort of companies that the trustee corporation would be likely to invest in. However, this policy would not be easy to implement. Any decision to sell out would be complicated and subjective. Pension savings will, after all, be made through funds, rather than directly in shares in any company or companies. It would be no easy matter to determine exactly where the invested money had gone.
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