Clause 200 - Requirement for knowledge and understanding: individual trustees

Pensions Bill – in a Public Bill Committee at 3:00 pm on 18th March 2004.

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Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West 3:00 pm, 18th March 2004

I beg to move amendment No. 307, in

clause 200, page 126, line 25, at end insert—

'(6) The trustees of an occupational pension scheme must ensure that persons wishing to become member-nominated trustees are given a reasonable opportunity to obtain the knowledge and understanding required by this section before they put themselves forward for selection.'.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

With this we may discuss the following amendments: No. 308, in

clause 201, page 127, line 14, at end insert—

'(8) A company to which this section applies must ensure that persons wishing to become an individual within the meaning of subsection (3) above are given a reasonable opportunity to obtain the knowledge and understanding required by this section before they put themselves forward for selection.'.

No. 309, in

clause 202, page 127, line 29, at end insert—

'(4) The Regulator must not take any step to enforce the obligations imposed upon individuals under section 200 and upon companies under section 201 until 12 months have elapsed since the individual concerned has been a trustee or begun to exercise any function which the company has as trustee.'.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

Clause 200 requires knowledge and understanding from individual trustees, and that is welcome. The purpose of the amendments is to tease out the Government's thoughts on people wishing to put themselves forward as trustees for schemes when they do not have the knowledge and understanding required. They might wonder how they can acquire the knowledge and understanding that is required by the clause. The amendments would place on trustees an obligation to facilitate the acquisition of the required knowledge by those who aspire to become trustees and to allow trustees a reasonable period of grace after their appointment in which to obtain that required knowledge. The Minister may tell me that, in a practical sense, the amendments are not necessary because the Bill will allow that to happen anyway, but I would be interested to hear his observations.

Although the clause is welcome and its objective is worthy, it is important that it does not in any way deter members from putting themselves forward on account of any lack of knowledge on their part. For those considering putting themselves forward, selection is an uncertain prospect, so candidates will not always be willing to invest the required amount of time in the acquisition of the knowledge needed prior to selection. The confidence of trustees is important, and the gaining of that confidence is the purpose of the clause, but trustees also need to command the confidence of members of the scheme if they are to be put forward as member-nominated trustees. Those two things may not always be confluent in someone

when they put their name forward. The amendments would provide help to prospective candidates and encourage trustee training.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I am inclined to deal with not only the amendments but also more general issues to avoid a stand part debate. That is convenient for the Opposition, but let us see how we go.

There is a real possibility of invoking the law of unintended consequences—something that the Government are very good at. We accept that there is always scope for improving the abilities and experience of trustees. I am not privy to the details, but some of the problems that we have seen might have been avoided or made less serious by well informed trustees. A balance must be struck because the Opposition fear—we are expressing the views of many people who know better than we in Committee do—that there will be an exodus of trustees who, rather like non-executive directors, will consider the potential responsibilities and liabilities versus the rewards and decide that they could do other things with their lives.

Equally, there might be a shortage of new people entering the role. We might have a professional class of trustees who are sufficiently qualified and able to perform the tasks laid before them, particularly in subsection (4). That might be fine for very large schemes, but not for small ones, particularly given the likely costs.

I am not suggesting that there is no problem to address. On 9 March, PricewaterhouseCoopers published a study of UK pension scheme governance. It showed that 65 per cent. of respondents had no governance compliance policy in place. Some 85 per cent. said that they had no individual governance benchmarks to measure the performance of trustees. The survey involved 66 chairmen of major UK pension funds and showed that few have implemented all the recommendations of the Myners report in 2001. Some 45 per cent. of trustee boards have not reviewed their knowledge and skills. The survey suggests a range of actions that pension funds need to take, starting with the development of a Government policy for the scheme, the assessment of skills levels and the rectification of shortfalls in those skills. PricewaterhouseCoopers also says that benchmarks must be established to measure compliance.

The National Association of Pension Funds is setting up an online registry of investment professionals who want to serve as pension fund trustees or to help pension fund investment committees. It says it wants to act as a broker to get people with investment experience into pension funds. That is sensible in principle, although I can see the beginnings of that professional class of trustees. If the Government are determined to go down that line, what kind of yardstick will they impose for the trustees of the future? They will put important requirements on trustees to acquire the knowledge and experience, plus other requirements as might be prescribed, so here we are again; no doubt there will be regulations in due course.

Will there be an approved qualification or course? I was talking to my hon. Friend the Member for Bournemouth, West (Sir John Butterfill), chairman of the trustees of our own pension fund, who told me that he and his fellow trustees are going on a course with the Pensions Management Institute to ensure that they have the relevant skills. I am sure that we are all delighted to hear that. I gather that the course is quite demanding, that it involves a lot of reading and that there is a written examination at the end. Let us hope that they all pass.

I am not suggesting that the Minister can deal with this point on the spot, but there may be some sense later on in setting out the qualifications that would-be trustees would have to obtain to reach what is regarded as the benchmark of what is required. If not, many people will find subsection (4) off-putting.

The CBI has also made representations to us. It believes that a legal requirement concerning knowledge and understanding of the funding of schemes and investment is unnecessary and would

''undermine the willingness of member nominated trustees to serve on trustee boards.''

The CBI believes that

''while training is important, qualifications are not required and will only encourage a tick-box compliance mentality''

and that

''a requirement for qualifications will only deter more people from volunteering''.

It is interesting to glance at the relevant part of the regulatory impact assessment. It hedges its bets and believes that the benefits of the clauses should include a behavioural change. It reckons that in some cases there will be a financial return for employers as a result of better investment performance. That is good. The RIA also says that there will be a one-off, ongoing administrative cost, which will have no disproportionate impact on a particular business sector. It says:

''An increased emphasis on training may have administrative implications for pension schemes and possibly employers. The levels of cost will not only vary with the size of the pension scheme, but will also differ depending on the level of expertise that trustees currently possess and the training that they currently undertake.''

That is not exactly a penetrating insight. Obviously, the less competent or experienced they are now the more training they will need, but what yardstick will be used?

The RIA concludes by saying that the proposal might result in additional start-up costs of up to £1,500 per scheme at a total cost of £17 million for each three-year period. That may or may not be an underestimate. As it rightly says, that is difficult to estimate. How is the Government's thinking developing on qualifications that trustees can obtain to guarantee that they are within the requirements of the clause?

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 3:15 pm, 18th March 2004

I shall address my remarks to amendment No. 309, which is closest in spirit to a proposal that we have sympathy with, which is that a person can become a trustee and have 12 months to reach the standard required under the clause. I am

concerned whether it will be possible to have enough trustees and whether particular people who have something to contribute might otherwise be discouraged or even debarred from becoming trustees.

I am sure that the Government will say, ''Yes, but look at subsection (5), which says that a person only needs to know enough to do the job.'' In other words, whereas subsection (4)(a) seems a little terrifying because a person must have knowledge of the law relating to pensions and trusts—at which point we would all probably give up—subsection (5) says that although that is necessary, the person only needs to know enough to do the job. Who could object to trustees knowing enough to do the job?

My worry is that although it is obviously desirable that the majority of the trustees have that technical legal knowledge, it is less clear whether that should be a requirement of each trustee. The clause applies to all trustees. Why did the Government not draft a requirement that two thirds of the trustees must be technically and legally up to speed with the latest trust law and so on? That would ensure that there was plenty of expertise in the room, but it would not debar retired members or someone who is not expert in trust law from participating. That person could have a perspective as someone who knows the scheme or appreciates the experiences of retired members from which the trustees could benefit when judging what is in the interests of all scheme members. However, that person might not consider it was worth the candle if they had to jump through the hoops.

Given the constantly changing nature of pensions law, we have to recognise that such knowledge would not be a one-off requirement, but a continuing professional development requirement. It would be necessary to keep on top of the subject and people would have to update their knowledge.

We do not want to be misunderstood; we are not saying that we do not think it a good thing that trustees know what they are talking about. We would not want to be parodied in that way. However, the Government have gone to the extreme of applying the requirement to 100 per cent. of trustees in all schemes. Will they consider whether that 100 per cent. requirement is necessarily right? What about two thirds or three quarters of trustees being subject to the requirement? There would then be plenty of expertise in the room, without some people being discouraged.

The requirement clearly applies to all schemes. Do we need to require all trustees of all schemes to satisfy the requirement? Would that not be particularly onerous for very small schemes with a tiny number of members? If such members ran their own scheme and were its trustees, they would have enough incentive to do that properly anyway. Frankly, in such a case, the requirement might be unnecessarily onerous. Should it apply equally to the whole diversity of schemes? We have heard that there are 150,000 different schemes. Many are tiny and some are huge. I am not sure that the regulations should apply equally in all cases.

Without pre-empting the debate on clause 202, I cannot help noticing that two clauses on, the Government have again reserved their power to rip that up. As the hon. Member for Eastbourne might have observed, clause 202(2) states:

''Regulations may provide for any provision in section 200 or 201—

(a) not to apply, or

(b) to apply with modifications''.

I sense that the Government think that they might have got it wrong, or that they are a bit worried and are reserving the right to change it all in regulation, which, again, is a slightly worrying precedent.

Nobody is against well informed trustees, but what would happen if a trustee dies, retires, stands down or whatever, and the vacancy cannot be filled? What if that becomes a regular occurrence? People will look at the requirements and, despite the assurances that I am sure the Minister will give us—that it is only a minimal requirement and that the trustees only have to know enough to do the job properly—they may be put off and there will start to be a shortage.

What would the practical consequences of that be? Is that why there is the possibility of changing the rules later on? Are the Government keeping the door open because they are concerned that a real shortage of trustees might be generated and that there might be a problem for schemes even to operate within the law at all?

I have several key questions. Is it necessary to impose the knowledge requirement on 100 per cent. of trustees? Does that requirement have to apply to the whole diversity of schemes? What will happen if potential trustees think, perhaps as a result of a misperception, ''I am not going to keep myself updated on trust law'', and we have the systematic problem of there not being enough trustees?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

Amendments Nos. 307 and 308, tabled by my hon. Friend the Member for Cardiff, West, are designed to ensure that member-nominated trustees—or in the case of corporate trustees, an individual acting on their behalf—are given the opportunity to obtain the knowledge and understanding required by the Bill before taking up their duties. In addition, amendment No. 309 would prevent the regulator from enforcing the requirement for knowledge and understanding until trustees had been in post for one year. I certainly believe that those amendments are well intentioned.

Slightly different considerations apply in relation to individual trustees and corporate trustees. On amendment No. 307, I accept that it would be desirable for those considering putting themselves forward as member-nominated trustees to have a good idea of the duties and responsibilities of a pension scheme trustee at the outset. However, I do not think that it should be the trustees' responsibility to ensure that they are given that chance. In any case, I am doubtful that developing a concept of ''studying'' to be a trustee would be helpful in encouraging people to put themselves forward for trusteeship in the first place.

However, we entirely accept that it would be unreasonable to require an individual trustee to be compliant with the terms of clause 200 immediately on appointment. That is why we plan to use the regulation-making powers under clause 202 to ensure that any new trustees are given a period of grace. With corporate trustees, there may be a case for not applying the period of grace in certain circumstances, such as for a professional, independent trustee. Under clause 201, the responsibility falls on a corporate trustee as a company to ensure that anyone carrying out trustee functions has the relevant knowledge and understanding as soon as they are required by the company to undertake such duties. That properly reflects the difference in status between an individual and a professional corporate trustee, and we will consult on it when preparing our regulations.

Amendment No. 309 would place a duty on the regulator not to enforce the requirement on trustees' knowledge and understanding for 12 months after they take up duties. Our proposals for a period of grace would achieve much the same result and we will consult on the length of such a period.

On the level of knowledge involved and the fears expressed by the hon. Member for Eastbourne, I shall explain what we mean by conversant with law and by knowledge and understanding. We do not expect trustees to be experts on everything or to have the detailed technical knowledge of a professional. We are not seeking to professionalise the role of the trustee. We want them to have a rounded knowledge of the schemes and I doubt that any hon. Member would oppose that—none of us could present an argument for having ignorant trustees. They need to know what the trust deed and scheme rules say and what other policies have been adopted by the scheme. That is what we mean by conversant.

Trustees also need a good understanding of the theory and practice of occupational pensions, notably legal, funding and investment issues, in so far as they are relevant to the functions being carried out. Trustees with more specialist functions, for example those serving on an investment sub-committee, would naturally be expected to have a greater knowledge of those matters needed to do the job properly. The regulator will set out the knowledge required and how it might be acquired and demonstrated in a code of practice—we discussed codes of practice in an earlier sitting—drawn up in consultation with the pensions industry and approved by Parliament.

Although I realise that an argument is developing that we are seeking to over-professionalise, I hope that Committee members will bring common sense to the discussion. I do not want to draw an exact comparison, but the situation reminds me of the role of school governors. Some years ago it was felt that, given local management of schools and the greater authority and responsibility that the school governing body had, it was appropriate that school governors developed more knowledge and steps were taken in that direction.

I do not buy the argument that if one makes the role of trustee more skilled, people will be deterred from applying. We could argue the reverse that by

emphasising the important role of trustees, highlighting the skills, offering opportunities for training courses and examination—although there will be no requirement to take exams—we build up the role and status of the trustee, which must surely be a good thing.

The hon. Member for Northavon suggested that two thirds of trustees should have the necessary knowledge, but that would not work. Trustees have joint liability and to impose different requirements on them would be inconsistent with the basis of trust law. He also asked what would happen if people did not come forward to become trustees. The common-sense answer is that we would address that if it happened, but, as I have explained, I have no reason to believe that it would. Trustees are important people and will become more important. It is right and proper that they should have the knowledge and skills to do their task properly.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

What my hon. Friend said about dealing with the matter in regulation and allowing a period of grace represents common sense, which combined with erudition, as it always is in his case, is an irresistible force. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 200 ordered to stand part of the Bill.

Clause 201 ordered to stand part of the Bill.