Amendment 34

Pension Schemes Bill [HL] - Report – in the House of Lords at 3:44 pm on 30th June 2020.

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Baroness Bennett of Manor Castle:

Moved by Baroness Bennett of Manor Castle

34: Clause 46, page 37, line 14, at end insert—“( ) require information to be published relating to actions taken by the scheme with regard to how scheme investments take environmental, social, and governance factors into account.”Member’s explanatory statementThis amendment adds requirements for reporting on broader environmental and social issues. It does not require it to be included on the dashboards, but it could be published elsewhere.

Photo of Baroness Bennett of Manor Castle Baroness Bennett of Manor Castle Green

My Lords, I rise—at least metaphorically—to speak to Amendment 34. I will also refer to Amendments 73 and 79, to which I have attached my name. I pay tribute to the Minister, who has been very generous with her time on those two later amendments addressing the climate emergency. Her department has paid a great deal of attention to them; this is an area on which progress has been made, which is appreciated. It is a positive sign.

However, Amendment 34 addresses the fact that the climate emergency is only one of the critical factors facing our society today. “Environmental, social, and governance” is one of those buzz-phrases that does not exactly trip off the tongue. It means this: how does a company perform as a steward of the natural world and as a part of the society from which it makes, hopefully, its profits? What is its impact on its employees, suppliers, customers and the community in which it operates? We are talking about systems thinking of the kind that lies behind the sustainable development goals, to which this Government and most others around the world have signed up. It means having a decent life within the physical limits of this one fragile planet.

You might say that that is a pretty good goal that we should write into pensions legislation anyway. Even if you do not think that it is something this legislation should try to achieve, if you consider the narrower situation of the direction and risks of investments, there is increasing awareness in the investment community that environmental, social and governance issues are also a very good measure of risk. In some of the great financial and natural disasters of recent times, such as the BP Deepwater Horizon oil well blow-out in 2010 that had such enormous environmental impacts and the Volkswagen “Dieselgate” scandal, we have seen a problem with a company’s actions, but with a narrow focus on the climate emergency and not considering other factors that proved to be a real issue.

On the technicalities of this amendment, I stress that it has taken on board the Minister’s comments in Committee. The amendment then suggested that this information be included in the pensions dashboard; it now proposes that it could be included elsewhere when supplied to the Pensions Regulator—perhaps on its website or the SIP repository.

I know that the noble Baroness, Lady Ritchie of Downpatrick, will say later in the debate on this group of amendments that some of the amendments relate to Northern Ireland and that pension Bills have previously been left to the Assembly. I would appreciate it if the Minister would address that in her response. I would also appreciate a response on the fact that, while the climate emergency is one of the critical issues we face, we are in an age of shocks. There are many others: the nature crisis, the social emergency and the big impacts some of our largest companies are having around the world, as we see in the protests and extreme distress in garment factories in countries such as Bangladesh, India and Cambodia. Pension investors should be able to take account of these issues.

I suggest to your Lordships’ House and the Minister that taking account of the climate emergency is a necessary condition in this Bill, but for the Bill to be sufficient for the 21st century, we also need to include the broader environmental, social and governance issues. I beg to move.

Photo of Baroness Janke Baroness Janke Liberal Democrat Spokesperson (Work and Pensions)

My Lords, I thank the noble Baroness, Lady Bennett, for her speech and her amendment. I also thank the noble Baroness, Lady Hayman, for her work on this issue and the Minister for all her work in achieving the government amendments on this important matter. While I recognise the major progress that has been made, I shall speak in support of Amendments 72 and 74, which are signed by my noble friend Lord Sharkey and myself. I shall speak also in support of Amendments 73 and 79 from the noble Baronesses, Lady Hayman, Lady Jones and Lady Bennett. I had also intended to sign these amendments and I apologise for not doing so.

In Amendments 72 and 74, the intention is to strengthen the obligation to ensure that the regulations of the scheme reflect the importance of the issue. Replacing “may” with “must” in the amendments to the Pensions Act strengthens the requirement on trustees to ensure that there is effective governance of the scheme with respect to the effects on climate change.

Amendment 73 strengthens the regulations and adds to our Amendments 72 and 74 by ensuring that relevant information in relation to climate change must be considered as part of the regulations.

Amendment 79 aims to ensure that the regulations place an obligation on trustees or fund managers to report on and publish how they have taken into account relevant treaties and other government commitments on climate change. The improvements to the Bill already made are very much welcomed, and we support these amendments today in the spirit of strengthening them. It has been well documented that more and more savers are keen that their savings should serve to strengthen ethical policies, particularly on climate change. As a result, they require more transparency on how their savings are invested.

Pension funds have huge economic power and must play their part in meeting our 2050 targets. UK pension funds hold more than £1.6 trillion in assets. The size and influence of pension schemes means they have a vital role to play in ensuring that the UK meets its climate commitments. It is essential that the Bill enables that to happen.

Photo of Baroness Hayman Baroness Hayman Crossbench

My Lords, I remind the House of my interests as a co-chair of Peers for the Planet. I should perhaps also declare that my son works for a new campaign, Make My Money Matter, which is being launched today by Mark Carney and Richard Curtis. It encourages all of us to be more active to ensure that our pension schemes reflect our values and that they protect both our financial and environmental future—an indication perhaps that consumer pressure on issues like climate change in relation to pensions is on the rise from that described by the noble Lord, Lord Balfe. In that context, perhaps I should warn the noble Lord, Lord Naseby, that as a pensioner under the parliamentary fund, I may come and discuss these issues with him later.

As the noble Baroness, Lady Janke, said, I have Amendments 73 and 79 in this group, which are cross- party. I will also speak to government Amendments 75, 76, 77 and 78, which cover the same ground—I know that the Minister would say “cover that ground more comprehensively”.

At this stage, it is appropriate that I join others in thanking and praising both the Minister and her officials for the amount of work and careful consideration they have given to these issues and for their responsiveness to the issues that have been raised. We have moved some distance from the start of the Bill, from a position where there was no provision on climate risks to provisions for a regulatory framework that takes into account our objectives under the Paris agreement and which will ensure that trustees and managers are required to assess and report on their scheme’s alignment with the objective to keep global warming to 1.5 degrees centigrade. That includes assessing and reporting on how their schemes are exposed to the effects of climate change and on how the assets of the scheme themselves contribute to climate change.

Improving disclosure in this way is essential for consumers, who need to understand the risks attached to their personal investments. It is also essential for trustees, as greater transparency will help drive their behaviours and decisions, and trustees will need clarity on what is required of them and a clear signal of the long-term trajectory that the sector will need to follow if we are to achieve our net zero targets.

The two amendments that I have tabled are drafted very simply—some might say simplistically. They are broad and would apply to any regulations made under the Bill. Amendment 73 ensures that, in making regulations, the Government take account of international climate change treaties of which the UK is a signatory. It also ensures in turn that regulations require trustees or managers to take account of such treaties in addition to the existing general provisions to secure effective governance of a scheme with respect to the effects of climate change.

Amendment 79 ensures that regulations can place requirements on trustees or managers to publish information about how schemes have taken into account the objective to keep global warming well below 2 degrees centigrade or any other future targets under international treaties. That is critical, because disclosure will create pressure on trustees to reduce schemes’ contribution to climate change.

As I have said, the Minister has been extremely responsive, and we have had a constructive dialogue about these amendments. She has put down Amendments 75 to 78, which are, I hope, more comprehensive but slightly less comprehensible to the lay person. I will ask a couple of more technical questions, which I would be very grateful if she could respond to.

The first question is on Amendment 75 and addressing climate risk. Although the most significant climate-related risks which pension schemes face long-term are not idiosyncratic to particular companies, sectors or geography, they arise from system-level macroeconomic and financial stability risks caused by the impacts of climate change and a disorderly transition. Yet in fact the three material climate risks to portfolios that managers identify tend generally to focus on the risks associated with the transition to a low-carbon economy over the physical risks of climate change. I therefore hope that the Government will confirm the broadest possible definition of the risks in the Bill, meaning transitional, physical, financial and systemic.

On Amendment 76, I would be grateful if the Minister could confirm that proposed new Clause 41A(4A) and (4B) apply across all the regulations to be made under the Bill, rather than applying only to regulations referred to in new Clauses 41A(3)(b). That is essential if consideration for international and other climate change goals is to permeate the regulatory framework as it should.

On Amendment 76, again I would like some confirmation. There is reference to

“or other climate change goal.”

Can the Minister confirm that that includes our domestic net zero target—I think that was very much the intention—and that there will not be any diminution of our targets?

On Amendment 77, again, the reference is to Article 2(1)(a) of the Paris agreement, but does that encompass provisions in Article 2(1)(c) as well, which relate to financial flows and therefore seem to be relevant?

Lastly—the Minister will be glad to know—on technical issues, can the Minister assure me that Amendment 78 does not limit publication requirements to information on the effects of climate change on schemes but that it also covers the contribution of the assets of schemes to climate change?

These amendments are welcome and important, and I hope that they will make a real difference. However, they are focused on effective scheme management and lean towards addressing the exposure of schemes. Longer term, there needs to be greater emphasis on schemes’ own contribution to climate change, as research indicates that companies’ engagement with their investee companies mainly focuses on disclosure and is much less likely to prioritise engagement to reduce a scheme’s impact on emissions.

There may be an overlap between measures that protect a scheme from the effects of climate change and measures that reduce the impact on climate change, but there could be a considerable gap in practice. It would be helpful, therefore, if the Minister could indicate whether this could be looked at when consulting on the regulations.

At various stages, we have discussed the lack of consistency between requirements placed on larger schemes and other schemes. The Minister has given us assurances that her department is working with the Financial Conduct Authority to deliver a joined-up approach so that the whole sector will be on a level playing ground. I hope she will be able to keep up the pressure on this.

We have had a very constructive dialogue and have taken an important step towards better disclosure via this Bill. However, in future, there will need to be substantial further changes to pension and wider investment policy if we are to avert the worst effects of climate change, not just on the planet but on the financial future of pensioners. We need to extend disclosure responsibilities to companies, and I am very glad that many companies are in fact taking their own action to disclose their plans to get to net zero by 2050. It will be important that, over time, we move on to capital allocation and to requiring schemes to set out how they plan to become Paris-aligned.

Last of all, the Bill highlights a bigger strategic point: the frustratingly piecemeal approach that we have to climate policy. Parliamentarians are having to challenge the Government Bill by Bill. It would be much preferable if the Government could start to assess all legislation for alignment with our Paris and net-zero goals as a matter of course.

I end by once again thanking the Minister and her officials for all they have done to improve the Bill substantially. I look forward to hearing her response on the issues I have raised.

Photo of Baroness Jones of Whitchurch Baroness Jones of Whitchurch Shadow Spokesperson (Environment, Food and Rural Affairs) 4:00 pm, 30th June 2020

My Lords, I am speaking to Amendments 73 and 79, to which I have added my name. I will also speak to the government amendments in this group.

We have come a long way since we first raised at Second Reading the issue of pension scheme obligations to address the risks associated with climate change. I say at the outset that, along with other noble Lords, we have been heartened by the response of the Minister, who, from the very start, has taken our concerns seriously and sought to address them.

Our aim all along has been to protect savers from the risks associated with climate change by requiring UK pension schemes to align their investment activities with the objectives of the Paris agreement, to which the UK Government are a signatory. This requires the Government to hold the rise in temperature to well below 2 degrees centigrade. Our amendments would require regulations to ensure that trustees take account of our international treaty obligations on climate change and publish information about how this is to be achieved.

There is an increasing realisation among financial regulation that such action is necessary, and a number of leading pension schemes are already taking action on this issue. They have already begun to follow the advice of the Task Force on Climate-related Financial Disclosures. This Bill enables us to raise the bar, so that the best practice becomes the standard practice and all funds play their part equally in delivering on their obligations.

Since we started the dialogue with the Minister and her advisers, we have made considerable progress. We very much welcome the government amendments that have now been tabled. They spell out in more detail how the funds should address their exposure to the risk of climate change and assess the impact of their assets on climate change. The most obvious example of this is investment in fossil fuels, but this would require a more comprehensive appraisal of which assets were adding to the problem of global warming and which were contributing to a low-carbon economy.

The government amendments also require schemes to undertake scenario planning on the impacts and risks of different outcomes as we move towards the Paris deadline. We see this as sending a clear signal to the regulators and the pension funds that the Government are not only paying lip service to this issue, but expecting clear change in governance and in investment strategies. Finally, on a similar theme to our amendment, the Government require clear transparency and accountability through reporting to scheme members and the public the actions taken. Again, we welcome this amendment.

Of course, all these requirements will need robust enforcement to ensure effective implementation. I hope that the Minister can clarify the plans of the Pensions Regulator to undertake these functions and can update the House on the progress made across the different types of pension schemes to create a level playing field in their obligations under these provisions.

These are the first steps in driving a UK investment strategy towards delivering on the Paris promise, but this is an important group of investors. I hope that this will send a wider signal throughout the financial markets that business as usual is not an option. There are huge calls for a green economic recovery plan as we grapple with the legacy of coronavirus. Let us hope that all these policies can come together to help deliver that green recovery. In the meantime, I am pleased to support our amendments and the government amendments to this clause.

Photo of Lord Balfe Lord Balfe Conservative

In my last speech I omitted to declare my interests, not only those recorded in the register, but also as chair of the European Parliament’s Members’ pension fund—which has a number of beneficiaries in this House—and as manager of the House of Commons fund for former Members of the European Parliament. That is certainly not as big a fund as that of my noble friend Lord Naseby, but none the less is part of the pensions scenario in Westminster. I also advise a number of pension schemes, all fairly small. My amendment, Amendment 80, concerns how small schemes will deal with the duties that will be laid on them by this legislation, and asks the Minister to have their situation firmly in mind when making the regulations.

We often think of pension schemes as huge things, like the British Airways or Lloyds Bank schemes, but the great majority of schemes in this country are quite small. My amendment sets the quite arbitrary figure of £500 million in assets under management, a figure below which the onerous requirements of the amendments put forward in the Bill would not apply. That does not mean that I think small schemes should be exempted from any social concerns. Most of my advice is based on advising small schemes to go into asset tracking, because the evidence, of which there is now a lot, is that active management costs a lot and does not work. The sensible thing, particularly for a small scheme, is therefore to invest in index trackers.

However, being an index tracker does not mean that you cannot have social responsibility. There are index trackers that follow the UN principles of responsible investment, and there are others. We are concerned in this Bill particularly with the environment; I personally am concerned with schemes that follow the principles of the ILO. It is fine to have a scheme which invests in a company that has many trees in its garden that workers paid low wages for long hours can shelter under, but there are many things in this world to concentrate on other than just the environment—I do not want to detract from that, but we need a broader set of principles.

Norway, which has the biggest public scheme in the world, has an ethics committee that looks right across the investment market and advises the Norwegian Government and the scheme on what sort of investment should be avoided. Within the past few days, it has identified as not fit for investment companies that make what are called “autonomous weapons”—in other words, killer robots. So, there are many areas where we need to look carefully at what sort of investments we make.

In the case of small schemes, this is difficult. I advised one such scheme recently. I went to see them and asked, “How many pensioners have you got?” They said, “Oh, 22.” I said, “How do you look after them?” They said, “Oh, X”—naming the person—“in the wages section pays their pension each month when she does the monthly salary run.” I said, “What about the rest?” They said, “Oh, well, the general secretary looks after that. We have a man who comes in twice a year and we pay him, and he keeps us on the right side of the regulator.” This was a scheme with barely three figures’ worth of members in it, and many schemes are like it. We need to look for a way in which such small schemes can transfer their assets without there being any residual liabilities.

One problem is that you can get someone to run your scheme, but if the overall master trust gets into trouble, it can come back to those who have put their schemes in it and make quite unreasonable demands of them. If the number of small schemes is to be slimmed down, there has to be a way of transferring them so that the benefits are guaranteed but there is no comeback for more money. The amount of money required would be actuarily calculated, but it should not be possible to say, “Oh, well, the whole scheme has run into trouble. We know you transferred X years ago, but we now need more money from you”, because it is a direct disincentive.

I shall give another example, of a quite rich London club which, again, has a small scheme. It could quite easily transfer it in—it has huge assets: it could sell one or two of its pictures and cover its pension fund deficit—but it is reluctant to do so in case it received subsequent bills which detracted from the members’ assets. Again, this is something that the Minister and the department could look at in the future. It is outwith this Bill, but it is part of how we need to sort out the pensions legislation and administration for small funds.

My plea to the Government is that when they make the regulations, they remember the small schemes, which probably will not be able to afford the type of administration and advice that big schemes can. They should be encouraged into index trackers, because they are cheap and easy to run and, frankly, return the market, whereas active management charges a lot and does no better. I ask the Minister to look kindly on this amendment. I have never thought of pushing it to a vote; I tabled it to make these points, because I know that she is a sympathetic Minister who would be happy to ask her department in due course to look at the points raised.

Photo of Baroness Ritchie of Downpatrick Baroness Ritchie of Downpatrick Non-affiliated

My Lords, I first declare an interest as a recipient of the parliamentary pension fund. I support the amendment in the name of the noble Baroness, Lady Bennett of Manor Castle. I will also refer to Amendments 85 to 88 in the Minister’s name, which make particular reference to Northern Ireland.

On Amendment 34, I firmly agree with the noble Baroness, Lady Bennett, that there is a need to ensure that pension schemes take account of climate change treaties such as the Paris Agreement, are fully resilient in relation to such matters and take on board the broader environmental, social and governance issues. As the noble Baroness said, we live in a world where there is a series of climate change shocks, and Covid and other issues with the wider environment and society. Pension schemes therefore have to be fully resilient to deal with these issues.

Pensions legislation in Northern Ireland is normally devolved. As a former Minister in Northern Ireland, with responsibility for benefits and pensions from 2007 to 2010, I used to bring forward similar legislation in the Northern Ireland Assembly, but it was the same because we adhered to the principle of parity. That goes back to the early 1920s when the original Northern Ireland Parliament was established. I worked closely on these issues with the noble Lord, Lord McKenzie, as he was the Minister at the time.

At Second Reading on 28 January, the Minister helpfully explained that the Northern Ireland Office and the Department for Communities wanted the Department for Work and Pensions to take forward combined legislation for Northern Ireland due to the absence of devolution at that time, when they were discussing the legislation back in 2019. It is interesting to note that on the date of the Second Reading in your Lordships’ House, devolution had been restored to the Northern Ireland Assembly. It was restored on 11 January. In fact, this Bill was presented to the Lords for its First Reading on 7 January. In that same week, the final negotiations for the resumption of the Assembly took place, which led to the first meeting of the restored Assembly on Saturday 11 January.

In view of that, I ask the Minister why the Government did not bring forward amending legislation in Committee to allow separate but similar pensions legislation in Northern Ireland. As an advocate of devolution, I firmly believe that should have taken place. We value devolution in Northern Ireland, now that it has been restored. I come from that tradition that was very angry when it was collapsed back in January 2017 and was glad when it was restored.

Did the Minister or her senior officials receive further correspondence from, or have meetings with, the equivalent Minister in Northern Ireland about wishing to bring forward that separate legislation, in view of the fact that devolution was restored? It is interesting that the first stage of the pensions Bill is coming to the Northern Ireland Assembly today, but not this current Bill because the provisions for Northern Ireland are in this legislation. It actually equates to Westminster’s Pension Schemes Act 2017. I can see fairly clearly that the problem is a matter of capacity and space in its timetable.

It is interesting to note that New Decade, New Approach, which dealt with the resumption of devolution, was all about restoring confidence in devolved government. How can this restore confidence in the ability of the local Assembly when it will not pass separate legislation? Very helpfully, the Minister’s amendments deal with the Paris Agreement, and she clearly recognises that pensions legislation must be resilient to those external shocks that have an impact on our environment, on society and on business in general.

It is also interesting to note that the Northern Ireland Assembly will introduce legislation and targets for reducing carbon emissions in line with the Paris climate change accord—as specified in New Decade, New Approach, which dealt with the resumption of devolution—so why could it not take on this new pensions Bill? I tried to raise this with the Northern Ireland Assembly Bill Office and did not get much response. Perhaps the Minister can provide some clarification for me today. I support her amendments and those of the noble Baronesses, Lady Jones of Whitchurch and Lady Bennett of Manor Castle.

Photo of Lord Naseby Lord Naseby Conservative 4:15 pm, 30th June 2020

My Lords, as a trustee of the Parliamentary Contributory Pension Fund, I see it as my duty to take into account anything that may have an impact on the long-term financial performance of the fund and on Members’ pensions. I expect to communicate that to the membership in our annual report, or alternatively when requested.

I do not wish to comment on any of these amendments in detail, but I particularly warm to Amendment 75 from the Government, which seems entirely appropriate.

Photo of Viscount Eccles Viscount Eccles Conservative

My Lords, the noble Baroness, Lady Bennett, opened the debate on this group with a request for more detailed information from collective money purchase schemes, particularly on the environment. That is entirely right and very appropriate when we move on to Clause 124, which is quite another matter. It builds on the 1995 and 2004 Acts, which refer to injunctions on trustees to produce statements of funding. That is a wide request; one can imagine all sorts of matters that trustees would wish to put into their statements.

It is not the same thing at all, however, as focusing on the risk of climate change, which is a much more accurately aimed request. The change risk, of course, is against the background that climate change, as in the use of the English language, is neutral, but I do not think that that is what we have come to mean by climate change. We should be careful not to use language inaccurately. I think that what we really mean is man’s contribution to, or effect on, the climate and what actions the world’s population have taken that affect the climate. That is considered in general to be something about which we should be very concerned. When it comes to considering the environment, who can avoid being incredibly concerned?

In the Government’s approach to how to deal with this matter, climate change is defined in the Bill as relating to Paris, its two-degrees limit on the rise in temperature from pre-industrial periods and other climate change goals. This is potentially a demanding and widely drawn comparison with things that have applied to trustees to date. We have to take care in our expectations of what it is reasonable for trustees to decide as they carry out their role in the interests of their members. They rely very heavily on advice. Their actuaries, who are often rather disregarded figures in the world of pension management and in our debates on pensions, have a wide knowledge of what is going on in pensions as a whole and why it is the way it is.

Trustees have to take very professional investment advice, of course. Like my noble friend Lord Balfe, they may decide that trackers are the best thing for them, but in many schemes, the investment decisions will be very detailed and always based on advice. Those advisers—the investment industry as a whole—can safely be assumed to know that there are huge issues relating to climate change and the environment, so their advice will be shot through with that understanding. Of course, there is also in the life of the trustees the employer, who can also be judged as knowing what is going on and understanding how he would like to see his trustees view these complicated matters.

Noble Lords should rest assured that these are complicated matters. It has been a long time since I was a pension trustee; nevertheless, there was always a huge debate about how to balance your portfolio, what to hold in it and what not to hold. The environment is not a thing for the future, of course; it is a thing for today. It is already part of our life; it affects our daily lives, to the extent that the world is already warmer. Those effects are connected to the temperature that we experience and the environment in which we live. When we come to consider the responsibilities of trustees to their scheme members, however, we need to be a bit cautious about how far down this complicated road we expect trustees to go when their members will be much more focused on their daily lives than on the way in which the powers that be are tackling these very difficult issues.

The Government’s stall is set out in Clause 124 and Amendments 75 to 78, which contain discretionary powers. They leave the opportunity to observe events and gauge responses to the problems we face before taking too much action, and they leave flexibility, as in their reference to other climate policies.

The position taken by the Opposition in their amendments in this group is very different. They want us to move immediately to mandatory conditions, as the two changes from “may” to “must” show very clearly. The references to treaties are not confined to a fairly narrow definition, with the option of other climate change policies; they are very specific. Indeed, if Amendment 79 is agreed to and enacted, it will bring about a major increase in trustees’ responsibilities in times when they will have a very large number of different things to think about because there is such a measure of uncertainty and doubt about where we are. Indeed, when one comes to the specifics, with the Paris Agreement and much else, where would trustees now get advice that they could rely on, and from whom, about the right position to adopt on these difficult issues?

I suppose that there is a difference here between the Government’s approach and the Opposition’s amendments, and that illustrates our dilemma as we manoeuvre our way forward in our complex, consenting democracy. Do we make the conduct of pension affairs more and more a matter of law or do we rely on the knowledge and behaviour of those responsible, retaining the ability to intervene when necessary? As the Prime Minister has been wont to say, common sense, not legal enforceability, should be relied upon to the greatest extent. If we were to have a lot more law, would it be enforceable or would that become something of an illusion?

I support the Government’s cautious approach. I welcome it and I think that it is the right way to go forward for the time being.

Photo of Lord Sharkey Lord Sharkey Liberal Democrat 4:30 pm, 30th June 2020

My Lords, I shall speak to Amendments 72 and 74 in this group. Neither amendment in any way alters any of the important climate change amendments in the group, except in one respect: they require the Government to make something happen.

What the amendments would do is very straightforward: they would simply impose a binding legal obligation on the trustees or managers of an occupational pension scheme of a prescribed description with a view to securing effective governance of the scheme with respect to the effects of climate change. They would also impose an obligation to include, in particular, the risks arising from steps taken because of climate change, whether by the Government or otherwise, and opportunities relating to climate change.

All those things are word for word in the Bill except that they are all governed by the word “may”. Our amendments would replace the two references to “may” with “must”. As the Bill stands, the Government are not actually obliged to do any of those things, or indeed anything at all, in this clause. The word “may” in subsections (1) and (2) is permissive, not directive—a point made by my noble friend Lady Bowles and me in Committee.

The Minister kindly wrote to us all in response on 5 March. She confirmed that the Government intend to take action and were wholly committed to legislating for effective governance of occupational pension schemes with respect to climate change. She concluded by saying:

“Changing the legislation to ‘must’ would therefore make no practical difference, because as a Government we are committed to making regulations under new sections 41A, 41B and 41C introduced by the Government’s amendment.”

This argument works both ways, of course. What can be the basis of the Government’s objection to “must” if they are committed to doing it anyway? What possible reservations, hesitations or changes of mind are being contemplated here? What can be wrong with having legal certainty that what has been promised will actually happen?

There is a parallel in this Bill to our discussions on the MaPS pensions dashboard. The Committee asked why the provision for MaPS to provide a public dashboard was only a “may”, not a “must”. In reply, the noble Earl, Lord Howe, confirmed that the Government were absolutely committed to MaPS providing a qualifying dashboard service. Several Members, including the noble Baronesses, Lady Drake and Lady Sherlock, noted that the Government being committed to MaPS producing a dashboard is not the same thing as saying that they will ensure that there is a MaPS dashboard. The noble Baroness, Lady Drake, made the point that a little amendment—“may” to “must”—would capture the Government’s assurances

“so that the next Secretary of State does not change their mind.”—[GC 186.]">Official Report, 26/2/20; col. GC 186.]

This argument clearly convinced the Government. They have now introduced their own amendments to make a MaPS dashboard a “must” rather than a “may”. I know that we are all very pleased about that.

Can the Government accept the same logic here? If it was right to change “may” to “must” for a pensions dashboard, why is it not right to do the same thing for climate change? I look forward to the Minister’s eager acceptance of the precedent and these amendments.

Photo of Baroness Sherlock Baroness Sherlock Shadow Spokesperson (Work and Pensions), Opposition Senior Whip (Lords)

My Lords, I am grateful to all noble Lords who raised climate issues in relation to pension schemes during our proceedings, especially those involved in the cross-party talks led by the noble Baroness, Lady Hayman, and my noble friend Lady Jones of Whitchurch. I also thank the Minister for listening and moving on from the broad government amendments brought forward in Committee.

This Bill has been on a journey. When it was first published there was no reference to climate change at all. Indeed, from having been given advice from the Library, I understand that climate change has never been included in domestic pensions legislation before in this country, so we are making history here today.

The Labour Benches had two priorities on this: first, to provide clarity on climate risk by ensuring that the Paris Agreement is referenced; and secondly, to ensure that trustees and managers take international climate treaties into account when making decisions. The word “account” is clearly significant. It recalls the Court of Appeal judgment that found that the Government had failed to take into account the Paris Agreement when permitting the Heathrow expansion. That was a good example of the need to make sure that positive action on the international level to combat climate change is not forgotten when Ministers make domestic policy decisions.

Our priorities are reflected in Amendments 73 and 79, but because we have secured cross-party consensus with the Government, they are also reflected in the government amendments in this group, especially Amendments 75 and 76. I will be interested to hear the Minister’s reply to the questions from the noble Baroness, Lady Hayman, about whether these refer also to the physical impacts of climate change and the impact of steps taken to transition towards a low-carbon economy, and for clarification that Amendment 76 includes the UK’s net-zero target.

However, as my noble friend Lady Jones said, we are only at the beginning of a journey to net zero. Divesting pension funds away from fossil fuels is a big challenge. The Government and the industry need to go further and quicker, with aligning investment strategies with domestic and international targets being the ultimate goal. For this Bill, we have reached a good place with broad cross-party support. I look forward to the Minister’s reply.

Photo of Baroness Stedman-Scott Baroness Stedman-Scott The Parliamentary Under-Secretary of State for Work and Pensions

My Lords, government Amendments 75, 76, 77 and 78 seek to amend new Sections 41A and 41B of the Pensions Act 1995, which are to be inserted by Clause 124, introduced by the Government in Committee. The amendments would allow regulations to require that the trustees and managers of occupational pension schemes explicitly consider climate change goals, including the Paris Agreement temperature goal, for the purpose of ensuring the effective governance of their schemes with respect to the effects of climate change. The UK Government and others are committed to the Paris Agreement’s goal of holding the increase in the average global temperature to well below 2 degrees above pre-industrial levels. In fact, the UK is leading the way globally and has committed in law to the target of net-zero greenhouse gas emissions by 2050. We are completely committed to that.

The Covid-19 emergency has triggered the devaluation of many assets across the globe, affecting many investors. Climate change has the potential to bring about a greater, more permanent devaluation that pension schemes need to be prepared for. The Government intend to deliver a recovery from the current Covid-19 emergency that results in an economy that is more sustainable and resilient. Tackling climate change will be a win-win, as many of the actions we need to take to reach our UK climate targets, net zero included, will also support our economy as we emerge from the Covid-19 emergency. The ultimate achievement of the Paris Agreement goal and other climate goals, along with the steps taken by the Government and others to achieve them, are now of greater importance for pension schemes to consider in their overall governance of risk. These amendments would enable regulations to require that scheme trustees and managers take climate change goals and the steps taken to meet them into account.

Amendment 75 makes a minor change to subsection (4) of new Section 41A to make explicit provision for two types of assessments that may be required under subsection (3)(b). Amendment 76 inserts new subsections (4)(a) and (4)(b) into Section 41A. Subsection (4)(a) makes explicit that regulations may require scheme trustees and managers to take into account the different ways in which the climate might change and the steps that might be taken because of those changes. This allows for the assessment of physical and transitional risks respectively—the typical description of risk used by industry. Subsection (4)(b) provides that regulations made under subsection (4)(a) may require trustees and managers to adopt prescribed assumptions about achievement of the Paris Agreement goal and other climate change goals, or the steps that may be taken to achieve them.

The third amendment, Amendment 77, defines the meaning of “the Paris Agreement goal” by specific reference to Article 2.1a of the Paris Agreement. I would like to assure the noble Baroness, Lady Hayman, that Amendment 78 does not limit publication to the effects of climate but includes the effects of assets that contribute to climate change. Pension schemes already have a fiduciary duty to steward their assets, and all schemes have a duty to report on their stewardship policy, including engagement and voting, while from October of this year they will be required to report on how they have implemented their policies.

Finally, Amendment 78 to Section 41B would ensure that trustees and managers may be required to publish information relating to the assessments they make by reference to the Paris Agreement goal or other climate change goals under Section 41A. This includes publication of the contribution of schemes’ assets to climate change referred to in Section 41A(4)(b) as a way of measuring the extent of Paris alignment. Amendments 85 to 88 make corresponding changes to paragraph 12 of Schedule 11 for Northern Ireland.

I turn to Amendment 80. We believe that it is inappropriate to limit the scope of the legislation in this way. I should like to talk about the points made by my noble friend Lord Balfe about smaller schemes. I have been given assurances about such schemes and I can also reassure my noble friend that none of these measures would prevent pension scheme trustees investing in index trackers or seeking to drive schemes towards higher-cost active management. Innovation in the market has led to a blossoming of index-tracking products that take account of climate change risk in different ways. If the trustees of schemes of any size wish to take advantage of these, they can. Members of occupational schemes rarely have a choice of where they save, and they have a right to benefit from the effective governance and reporting of climate change risk, regardless of their employer’s chosen scheme. However, I can reassure my noble friend that these measures are intended to protect benefits through better consideration and management of climate risk.

It is not the Government’s intention to impose needless burdens on schemes. I have already indicated our intention to begin with large schemes and then consider costs and benefits carefully before we extend any requirements to smaller schemes. This also aligns with the direction of travel of the United Nations Principles for Responsible Investment initiative, referred to in the amendment, which already requires signatories to carry out some TCFD-based reporting and has recently consulted on extending reporting requirements.

In relation to Amendment 34, which applies only to collective money purchase schemes, the Government have already legislated to require schemes with 100 or more members to have a policy on financially material considerations, including environmental, social and governance considerations. Schemes offering money purchase benefits will already be required to report annually on how they have followed these policies from October 2020. The Government announced during Committee their intention that collective money purchase schemes will be subject to the same requirements on environmental, social and governance factors, including climate change, as other defined contribution schemes.

On Amendments 72 and 74, the Government have been absolutely clear on a number of occasions, including before the House, that we will be making regulations in this area. The Government produced amendments at speed to introduce this important policy into the Bill in time for consideration in Committee. The reason why Clause 124 exists at all is that the Government wish to take action with regulations to require schemes to have effective governance of climate change.

The noble Lord, Lord Sharkey, raised the issue of changing “may” to “must”, which has been the subject of much discussion in our various meetings. Our position is that such a change is unnecessary and would have no impact on the Government’s course of action.

Finally, I turn to Amendments 73 and 79 in the names of the noble Baronesses, Lady Hayman, Lady Jones and Lady Bennett. I confirm that the government amendments go further than their amendments and achieve the intended clarification of the policy much more effectively. First, the government amendments do not restrict consideration of climate change goals to international treaties to which the UK is a signatory. They will also enable goals set domestically by the UK, including the commitment to net-zero greenhouse gas emissions by 2050, to be taken into account. Secondly, I draw attention to subsection (4B)(a) in the Government’s amendments. While Amendments 73 and 79 seek to require consideration of the Paris Agreement, the Government’s amendments go further and would enable us to require consideration of steps taken towards achieving that temperature goal. This will ensure that the schemes can be asked to consider the likely effects of transition to a low-carbon economy, not just the final-outcome achievement of the Paris goal.

Finally, these amendments require consideration of the entire UN framework convention on climate change in addition to the Paris Agreement, which was adopted under it. This would include treaty objectives that are not relevant to the operation of a pension scheme. Rather, it is the temperature goal of the Paris Agreement, and the steps that Governments and others take as a result, that are of key importance for pension schemes to consider. Our amendments deliver that.

I thank the noble Baroness, Lady Bennett, for reminding us about the social development goals and the importance of climate emergency impacts as well as social impact, which I think is very important. She talked about focusing on the economic recovery from the emergency. The Government’s view is that the economic recovery and our continued commitment to the climate goals are not mutually exclusive. We have grown our economy by 75% while cutting emissions by over 43% over the past three decades. As the economy recovers, not only can schemes continue to take advantage of green investment opportunities that align with the achievement of the Paris agreement goal, but they should—as is the focus of this amendment —protect members against the risks of climate change.

The noble Baroness, Lady Bennett, asked why measures applied in Northern Ireland. Paragraph 12 of Schedule 11 makes provision for Northern Ireland that is equivalent to the provision made for Great Britain by Clause 124. This will ensure that, in accordance with the long-standing principle of parity, the single system of pensions across the UK is maintained, as such agreements made in relation to the proposed amendments to Clause 124 apply equally to the amendments proposed to paragraph 12 of Schedule 11.

The noble Baroness, Lady Hayman, gave me lots of homework, and I hope I am going to get 10 out of 10 for this. She raised the matter of pensions schemes being required to take into account not just the risks outlined in new Section 41A(2)(a) but all climate risks, including those that are systemic, both financial and transitional. The risk referred to in new subsection (2)(a) is not intended to be an exhaustive list; it merely makes clear that risks arising from the effects of climate change include those arising from steps taken because of it. We acknowledge the systemic risk of climate change to industries, national economies and financial markets. Subject of course to consultation, we intend to make provision in regulations for scheme trustees to consider all relevant risks arising from the effects of climate change. Indeed, new Section 41A(3) refers to

“risks of a prescribed description” for precisely this reason. The Government are minded, subject to consultation, to prescribe the whole range of risks cited in the TCFD’s recommendations as those which asset owners should consider.

The noble Baroness, Lady Hayman, also talked about the amendment which brings Article 2.1a into the Bill, but Article 2.1c is also relevant to the pension scheme. The Government consider that Article 2.1a is of primary relevance to pensions schemes and there is an understanding of what taking it into account would mean for trustees and managers. However, our amendments make it clear that regulations may require scheme trustees and managers to take account of other climate change goals as part of ensuring effective scheme governance. This could include the goal in Article 2.1c. The amendments will allow the Government to make regulations that ensure that the whole system of pension saving and investment effectively takes into account a future low-emissions world.

The noble Baroness, Lady Jones, asked me to clarify the Pensions Regulator’s plans to ensure that pension schemes are not paying lip service to ESG requirements. The chief executive of the Pensions Regulator has written to the DWP to confirm that it is taking action. It will follow up on breaches of compliance.

The noble Baroness, Lady Ritchie, asked why Northern Ireland was included in the Bill. Although pensions are a devolved matter, this is an area where Northern Ireland has long maintained parity with Great Britain. There is in effect a single system of pensions across the UK with many pension schemes and, indeed, the regulator, the Pensions Ombudsman, the Pension Protection Fund et cetera operating on a UK-wide basis. Devolved government in Northern Ireland has now been restored. On 1 June, the Northern Ireland Assembly approved the legislative consent Motion on the Bill as introduced. A further legislative consent Motion will be necessary to cover amendments to the Bill which the Northern Ireland Minister for Communities has agreed should extend to Northern Ireland. The process for an additional legislative consent Motion is a shortened procedure and we look forward to receiving the Assembly’s further consent in due course.

The noble Baroness, Lady Ritchie, asked a number of questions about further correspondence and, if I may, I will write to her.

I thank my noble friend Lord Eccles for his many pertinent and well-made points.

The Paris Agreement is clearly central to how we as a nation and a global economy tackle climate change. The Government have been clear on a number of occasions that pension schemes have their part to play. These amendments help to clarify the part that the Government expect them to play, to take account of progress towards the achievement of the Paris and other climate goals in measuring, monitoring and managing the risks and opportunities for their members’ benefits and to publish how they have done so. Even in the current period of uncertainty, tackling climate change must remain the top priority. The Government’s amendments and the associated powers remain as urgent as they are important. I hope that, in the light of the explanations I have provided, noble Lords will not move their amendments.

Photo of Lord McNicol of West Kilbride Lord McNicol of West Kilbride Deputy Chairman of Committees 4:45 pm, 30th June 2020

I have received no requests from any noble Lord to speak after the Minister, so I call the noble Baroness, Lady Bennett.

Photo of Baroness Bennett of Manor Castle Baroness Bennett of Manor Castle Green

I thank the Minister for her answer. Amendment 78 refers to this covering not just the effects of assets but of climate. I will leave it to others to assess the technical details of that, but I have a specific question for her. She referred to the need for larger funds to report on ESG matters. She does not have to give me an answer now, but I wonder whether there will be also a requirement to publish that, so that it is easily accessible by the public and can be publicised.

This has been a very productive and useful group of amendments. I am sure that the House will join me in paying tribute to the noble Baronesses, Lady Hayman and Lady Jones of Whitchurch. They have clearly done an enormous amount of work, some of which I have seen first hand, to get the Government to this point.

The noble Baroness, Lady Hayman, made a very important point when she said that your Lordships’ House would love not to have to challenge the Government, Bill by Bill, to see the climate emergency recognised in legislation and government action. In this aspect, it is crucial to look at the Committee on Climate Change progress report to Parliament from last week. The Minister made reference to the 43% cut in our territorial emissions of climate change gases. That report highlights the impact of consumption emissions, and the reduction is considerably lower when that is factored in.

The noble Baroness, Lady Jones of Whitchurch, said that we want to see best practice become standard practice. There is an acknowledgement that that has to be legislated for and cannot just be assumed. The noble Lord, Lord Sharkey, referred to elements of the Bill still being permissive and not directive. I am sure that that is an issue that the House will return to again and again when we come to the Agriculture Bill. We need to see direction to all to act, because the climate emergency and the biodiversity crisis, along with so many other factors, such as the state of our economy and society, impact on all.

The noble Baroness, Lady Sherlock, referred to Britain’s international role. Understandably, with the impact of Covid-19, attention has swung away from our crucial global role in COP 26. I therefore suggest to the House that everything we do should hold that in consideration. We are in a position where we need to be a global leader, and the world needs us to be a global leader.

In conclusion, it is not my intention to push Amendment 34 to a vote. I beg leave to withdraw the amendment.

Amendment 34 withdrawn.

Clause 47: Powers to extend definition of qualifying schemes