‘(1) Regulations may impose a duty on the managers of a relevant non-trust based scheme to act in the best interests of members when taking decisions of a specified description.
(2) In this section “relevant non-trust based scheme” means a non-trust based scheme that is—
(a) a shared risk scheme, or
(b) a defined contributions scheme under which any of the benefits that may be provided are collective benefits.
(3) Regulations under this section—
(a) may provide for the duty to act in the best interests of members to override obligations that are inconsistent with that duty (including obligations imposed by any instrument, enactment or rule of law), but
(b) do not otherwise affect any duty that might arise apart from this section.
(4) Regulations under this section may provide for the consequences of a manager breaching (or threatening to breach) the duty to act in the best interests of members to be the same as the consequences of breaching (or threatening to breach) a fiduciary duty owed by the manager to the members and, accordingly, for the duty to be enforceable in the same way as a fiduciary duty.
(5) In this section—
“collective benefit” has the meaning given by section19;
“defined contributions scheme” has the meaning given by section4;
“non-trust based scheme” means a scheme that is not established under a trust;
“shared risk scheme” has the meaning given by section3.” —(Steve Webb.)
With this it will be convenient to discuss new clause 14—Fiduciary duty of trustees—
‘(1) The Secretary of State may by regulations—
(a) require any pension scheme, which is not already overseen by independent trustees, to appoint a board of independent trustees; and
(b) set out the powers and duties of a board appointed under subsection (1)(a).
(2) Regulations under this section—
(a) shall be made by statutory instrument, and
(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
(3) The board of independent trustees shall have a fiduciary duty towards members of the scheme overseen by them.
(4) The fiduciary duty set out in subsection (3) shall take precedence over any duty to—
(a) the shareholders in, or
(b) other owners of, the operators of the scheme.
(5) In relation to any matters of member interest, decisions of the board of independent trustees shall be binding on the board of directors or other analogous bodies.”.
In this group of new clauses we are considering the important issue of governance. Who is in charge of a pension scheme and who is looking after the members’ interests is an important issue. New clause 5 relates to the governance of the new forms of benefits and collectives, which we talked about earlier. Obviously the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East will speak to new clause 14; I will make passing reference to it and then respond further to his comments.
The Government have been the first to propose governance standards for all occupational schemes that will come into force from April 2015, subject to the current consultation and parliamentary approval. In parallel, the Financial Conduct Authority is making rules on governance in relation to workplace pension schemes. Just a few weeks ago, on 17 October, in our Command Paper, “Better workplace pensions: Putting savers’ interests first”, we confirmed our plans to introduce governance standards in all workplace pensions. The FCA recently consulted on draft rules for independent governance committees for workplace pensions to ensure oversight of these schemes in members’ interests from April 2015. These proposals are built on an early agreement between the Association of British Insurers and the Office of Fair Trading to establish IGCs and introduce them on a mandatory footing.
Back on 17 October, we published a consultation on draft regulations to place minimum governance standards on occupational schemes, which are money-purchase or have money-purchase elements to them, as part of our wider Command Paper. The consultation ends in a couple of weeks, on 14 November. Subject to parliamentary approval and any further changes, the governance measures in these regulations will commence from April 2015. They are a comprehensive response to the OFT, which, after completing its market study in the summer of 2013, proposed minimum governance standards for workplace pension schemes. What the Government are doing is therefore in line with a careful study by the Office of Fair Trading of the workplace pension market and responds to its concerns.
I will come to new clause 5, but let me say first that the challenge presented by new clause 14 is that it appears to propose two main changes to the governance of pension schemes. It suggests that all pension schemes must be overseen by independent trustees, subject to regulations, and proposes a legal requirement that the board of independent trustees has a fiduciary duty to scheme members that must be prioritised over any duty to the shareholders or other owners or operators of the scheme. The main target of the change appears to be personal pension schemes without trustees, where a fiduciary duty to members does not currently exist.
Let me explain the difference in approach between new clauses 5 and 14. If new clause 14 was accepted, it would require independent trustees to be recruited for tens of thousands of pension schemes. Data from the National Association of Pension Funds show that just under half of the 1,200 schemes that it surveyed in 2013 had independent trustees, so considerable costs could be involved in increasing that figure.
However, we recognise that there is a governance issue, which is why we tabled new clause 5. There is a potential for new risks from the new types of decisions that might need to be taken in non-trust based schemes that provide collective benefits and in shared-risk schemes. To be clear, I am talking about the new sorts of collective benefits that the legislation allows, the governance of which needs to be changed because it is a different sort of governance. As new types of schemes and benefit designs are developed, it is likely that there will be more circumstances in which scheme managers may be taking decisions on the behalf of members or exercising discretions that affect members’ benefits. As a result of the new types of risks that may arise in the new types of shared-risk schemes and schemes offering collective benefits, we want managers to have a duty to act in members’ best interests when taking certain specified decisions. That is the purpose of new clause 5.
The decisions on which we are focusing will generally be taken where the individual member has no ability to influence or control the decision made, but where that decision could have a significant impact on their benefits. The details will be specified in regulations, but such decisions could include the distribution and redistribution of assets between members in schemes that provide collective benefits and, in shared-risk schemes, decisions relating to third-party promises—in particular, decisions about whether to offer or purchase a guarantee, the accurate attribution of the promise to relevant members, and retrieving and allocating any returns on such promises. The need for a new duty obviously does not arise in trust-based schemes, as those trustees are already in a fiduciary relationship with the members of the schemes, but we want a clear requirement to act in members’ best interests in relation to certain decisions in contract-based schemes.
Under the Bill, shared-risk schemes can be trust or contract-based. Collective benefits can also be provided by a trust or contract-based scheme. That issue came up in oral evidence when the director of the Pensions Policy Institute, Chris Curry, was asked questions by both the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East and me. Although Chris Curry said that such schemes generally operate in trust, which can be a good form of governance, he would not rule out the possibility of a perfectly good contract-based scheme with collective benefits. In a sense, that is probably the difference between me and the hon. Gentleman. I have no problem with trust-based governance, which can be very good, but the Government do not want to preclude alternative models, particularly at a time of innovation, simply on principle. It is not the Government’s view that it is impossible for a contract-based form of governance for collectives to be any good.
However, we do want a clear requirement to act in members’ best interests in relation to certain decisions. Where a scheme is operated on a contract basis, scheme managers are currently required to operate under the Financial Conduct Authority’s Treating Customers Fairly principles and to comply with FCA rules. We want to put that beyond doubt for specific decisions. New clause 5 contains a regulation-making power to impose a duty on managers of non-trust-based schemes to act in the best interests of members when taking specified decisions. As a result of the new types of risk that may arise in these new types of shared-risk schemes and schemes offering collective benefits, we want managers to have a duty to act in members’ best interests when taking certain specified decisions.
Specifically, new clause 5 may require managers of non-trust-based schemes to act in members’ best interests, but it does not apply to managers of schemes set up under trust. That duty will apply, crucially, to shared-risk schemes and schemes offering collective benefits. The duty is to members in the plural, so it will include balancing the interests of different groups of members. The duty will not apply generally to scheme managers in non-trust based schemes; it will apply only in relation to certain specified decisions made by managers of non-trust-based shared-risk schemes or schemes that provide collective benefits.
The power under new clause 5 may also provide that the consequences of a manager breaching or threatening to breach the duty to act in the best interests of members will be the same as the consequences of breaching a fiduciary duty owed by the manager to the members and, accordingly, for the duty to be enforceable in the same way as a fiduciary duty. We seek to mirror the fiduciary duties of trustees and apply them to managers in regard to specified decisions. Of course, members will also have recourse to the same civil remedies as those in place for a breach of fiduciary duty in a trust-based scheme. Remedies in respect of fiduciary duty are provided for in common law rather than in statute. They may, for instance, include damages to put a member in the position that they would have been in had the breach not occurred.
We do not believe there is a need for a fiduciary duty to apply in DC schemes that offer only money-purchase benefits. In a sense, that is the nub of the debate. In relation to the issue that we are concerned about in new clause 5, DC schemes that offer only money-purchase benefits are similar to other types of commercial financial products, to which a fiduciary duty does not apply. By contrast, in schemes that provide collective benefits, members will hand over most of the decision making to the trustees or managers who run those more complex schemes. Members will not necessarily be able to exercise choice in relation to the decisions that we are concerned about, such as investment decisions. That will also be the case in some shared-risk schemes. Furthermore, there is already protection for members in DC schemes that offer money-purchase benefits.
I have a couple of other points to make. I want to clarify the role of the new independent governance committees, about which the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East is sceptical. IGCs are a response to the recommendations of the OFT, and they will go beyond the FCA’s Treating Customers Fairly principle. They will challenge providers on the value for money of their workplace pension schemes. That is different from the powers in new clause 5 in relation to schemes that provide collective benefits. IGCs will report on how those schemes meet quality standards on the design and review of default funds, costs, charges and standards of administration. IGCs will have a duty to act in members’ interests. They will have to have a minimum of five members, the majority of whom must be independent of the firm, and the chair will always have to be independent. IGCs will have the power to escalate any concerns to the FCA, scheme members and employers.
I hope I have given the Committee the sense that IGCs are not some sort of fig leaf. The hon. Gentleman tends to dismiss them, but we are setting out clearly in legislation their membership, independence and role, and the crucial part they will play in member protection. IGCs will not be involved in schemes’ day-to-day decision making, but they will have a crucial oversight role. We will not simply leave people in individual DC schemes to get on with it; there will be a complex system of protection for those people under IGCs.
As I am speaking about the power to place managers under a duty, this is an opportune time to clarify something in the record of last week’s debate on clause 33. That clause allows regulations under part 3 to confer a discretion on a person. As an example, I said that where regulations make provision for the methods and assumptions to be used by an actuary, we will leave some discretion about those matters to the actuary. I want to clarify that it is the regulations under clause 33, not the trustees or managers, that would confer any such discretion. However, trustees or managers have the power to delegate investment decisions under new clause 7, as we discussed during the previous debate.
In summary, there are two different views in this debate. We take the view that the new collectives—collective benefits and the new shared-risk schemes—require new forms of governance because individual scheme members will hand over complex decisions to those who are in charge, and those decisions will be made on their behalf with discretion being exercised. That is not the case if someone is in an individual DC scheme, where they will have a pot of money and it will be clear that that is their pot of money. They will get the investment return on it, and they will have choices about how it is invested. That is a very different sort of scheme, and we do not believe there should be a one-size-fits-all approach to governance.
Fabulous. That makes my job much easier.
The Minister began by setting out what new clause 5 does, and he ended by saying that the difference between this side of the Committee and the Government side is over the approach to money purchase schemes, as reflected in the Bill. I want to make a broad observation. We always talk about pensions being too complex and we always hear from all parts of the pensions industry that there is too much regulation. The Minister had a chance to chop down some of the regulatory forest, but adding new clause 5 complicates matters around collective defined contribution schemes when they could have been made much simpler, vis-à-vis our new clause 14.
I will come in detail to what the Minister said, but let me first set out the fundamentals of the argument around governance. Governance is a key thing in a pension scheme. There are many important things, but governance is critical to ensure that savers—members of the pension scheme—get value for money. Let us not forget what the OFT said in its market study: it could not be confident that savers were getting value for money in a contract-based market. It was very clear about that. That is a pretty strong statement from a competition body and it comes when the Government are automatically enrolling millions of people into workplace pensions for the first time.
The reasons are several, but the fundamental reason why the OFT came to its conclusion, as it made clear in its report, is that shareholder interest in contract-based schemes—the interests of shareholders who hold shares in the big contract-based insurance pension companies providing pensions—was predominating over the interests of savers getting value for money. It is not meant to predominate, because we have the Financial Conduct Authority, formerly the Financial Services Authority, regulation about treating the customer fairly, but, in the end, treating the customer fairly is an abstract—a judgment that contract-based schemes make. Given contract schemes’ legal obligation to deliver for shareholders, and in the absence of pensions savers with a strong voice being able to say, “We want to know what our pension charges are and how to compare them with other pension schemes, and we want to be able to make an informed choice about the costs and outcomes of different pension schemes,” that has not happened historically in the pensions market over a long period.
Bearing down on the tension between shareholder and saver interests is key. In a lot of markets, that works perfectly well, because the consumer shops around. There are many examples, and an obvious one is technology: mobile phones, laptops and, increasingly, tablets. Savers are very price sensitive and they can make decisions based on price and quality. Pension savers have found that very difficult to do, because, historically, pension companies have not published enough information, and also, and equally importantly, because the information that they do publish is very hard for an individual saver to understand, unless one is very knowledgeable about investment.
For example, in a debate on the Budget reforms, the Financial Secretary to the Treasury suggested that it is not the Government’s job to interfere in the investment portfolio decisions that individuals make. That was interesting because it spoke to an approach that sees the public as investors in that professionalised sense. Most people have no experience of engaging with financial markets in that deeper sense and we have to recognise that as a starting point for these discussions. The collective provisions in the Bill recognise it because they say that these decisions can be so complex that they have to be entrusted to a range of professionals to make on an individual’s behalf.
As we take the view that there is no simple or obvious way to reconcile that conflict of interest between shareholders and individual savers without trust-based governance, we take the approach that we do in new clause 14. The Minister referred to Chris Curry’s evidence, and he is right—pushed by the Minister, Chris Curry did say that he could not rule out a very good contract-based scheme, but anyone who was listening to Chris Curry would remember that he said that the international evidence strongly suggests that trust is the better approach. Nothing is absolute and finding 100% proof of anything is difficult, but the international evidence, and common sense at some level, should tell one that we are more likely to get tougher, better governance through trustees.
The Minister raised a couple of objections, both fair to some degree but one fairer than the other. The first was the suggestion that we would need many, many trustees because there are so many pension schemes. Our new clause 13 would initiate a response to that problem, but let us not forget that of the 200,000 pension schemes in the UK the vast majority are group personal pensions under the management of four or five—no more than half a dozen—insurance companies. A governance board properly constituted of trustees attached to each one of those major insurance companies would deal with the vast majority of pension schemes in the UK. That is a very important point. Group personal pension is by far the fastest growing form of pension in the UK and most people in the private sector are being enrolled into such pensions. They are individual contracts, but under the auspices of five or six big insurance companies, so a trustee board attached to each of those companies would govern most of the pension schemes in the UK.
Clearly, many people are in group personal pension arrangements, but we understand that 47,000 private workplace schemes are not group personal pensions. Does the hon. Gentleman not think that expecting tens of thousands of schemes to go out and find trustees would be costly? What estimate has he made of the cost?
Let us deal first with that number subtracted from the 200,000 schemes. So, three quarters of pension schemes in the UK that are contract based could be dealt with by setting up half a dozen trustee boards. Secondly, the Minister makes a fair point. Rome was not built in a day. As new clause 13 indicates, giving the regulator powers to force mergers of small schemes is crucial. He has no problem with master trusts, which we will see more of. We have not discussed them in relation to the Bill because so much of it is enabling and permissive rather than prescriptive, but the kind of collective defined-contributions schemes that we are likely to see going forward will be cross-sectoral rather than single workplace or the like, so that would fit well.
In the end, the difference comes down to how serious we think the situation is on the contract-based side as we move into this brave new world of collective pensions. Most, or a lot, of our discussion has been around the complexity of the technical detail of the governance of those schemes. Compare the impact on the Bill of the Minister’s new clause 5 and our new clause 14. At one level, he has given himself a headache as he has created yet another category when it would be much simpler to say throughout the Bill, “Plus these have to govern these schemes.”
Let me say a little more about the Minister’s observations. He says that collective defined contribution schemes, which are money purchase, are the nub of the difference. That is a perfectly fair point of view, but is that worth complicating the Bill and missing the chance to simplify the governance of pension schemes so fundamentally, especially given our view that independent governance committees do not meet the tests necessary to assure savers that they are getting value for money? The Minister says that IGCs will challenge boards on value for money. The chair is independent and they have a majority of independent members. Let us step back from that for a moment: they have no power to compel contract-based pension schemes to implement their findings. They can refer it to the FCA, but they have no power to ensure that the insurance company or the pension provider implements their findings.
The committees are supposed to be independent governance committees, but it is an unusually capacious definition of governance, as they are really quasi-independent advisory committees. That became clear, if it was not clear already, during the evidence session. When I questioned the FCA, its representative conceded that IGCs are a form of advisory board, so they do not provide independent governance. That is not to say that they are not a step forward. The Minister will introduce IGCs and, according to the OFT report, among all the other things going on, he is beginning to grapple with the fundamental question that we have been raising for three years. Given the extent to which the tension between shareholder interest and saver value for money has been resolved historically to the benefit of the shareholder, the measure does not go far enough. IGCs are not independent and do not provide governance.
To develop my point about the trade-off between simplicity and complexity, the Minister says that he is putting in quite a complex system of protection. We need a simple system of protection. One thing that the financial crisis taught us is that a complex system of regulation does not take us very far if the norms under which actors in the financial service industry operate are far removed from that complex system of protections. Unless we can change the incentives structure within the governance of pensions, rather than trying to regulate conflicts out of existence, I do not think we will solve the problem. That might sound techie but what I mean is very simple.
The Minister’s response is to say that he accepts absolutely that there is a tension, and that tension has not always been resolved to the benefit of the pension saver. The OFT makes that clear. However, his response is to put in a complex series of protections, which include giving these committees a little bit of space to try to persuade pension companies to do the right thing at all times, but not the powers to compel them to do so. The reason why we think trust-based governance is the best approach is not because it is perfect. There are examples of small trust-based schemes that have had issues and, I would argue very strongly, in the scheme of things that is much less so than contract-based schemes.
If we want to make this simple we need to give those doing the governing a legal duty always to prioritise the interests of scheme members. That is not needed in the tablet market because consumers are price sensitive. It is not needed in a number of other markets but it is needed in pensions. The Minister will understandably stand behind the OFT’s conclusion that shared that analysis, but called for advisory committees rather than independent governance. We say clearly that, given the analysis of the problem and the inherent conflict that has not been resolved favourably to the saver in contract-based schemes, trust-based is the best way to go. The international comparisons and evidence confirmed to the Committee by the chair of the Pensions Policy Institute made that clear.
There is a fundamental difference between the Government and the Opposition. We accept that the Minister has gone some way towards meeting concerns expressed by us and others, but it is a very complex and bitty solution, and there is an opportunity to achieve clarity.
When considering why a fiduciary duty should be imposed on those managing pension schemes, an important aspect of the conflict between the company’s understandable desire to make as much money as possible and the scheme saver’s interest is that of asset management fees. There are a number of reasons, but a fundamental one is the fact that many of the people who do the asset management are part of the same vertically integrated insurance company. There is a potential conflict right there. The money is moved from the administration side of the pension scheme to asset managers who in many cases work for the same vertically integrated insurer. That is not the insurance company’s fault; it is the way that market has developed. It is our job to ensure that that vertical integration works to the benefit of savers.
In that context, I want to read something that came out today from the respected editor of Money Week, Merryn Somerset Webb, an expert on asset management who also writes in the Financial Times on Saturdays. It is worth quoting because it gets to the nub of the problem of fund managers:
“There are too many actively managed funds—think 4,000. Most underperform their indices (despite surreptitiously tracking them). Most trade more than they should and persist in overcharging while denying they do. I have lost count of the managers who insist I just don’t understand how expensive fund management is, what with the regulation. It is a point: regulation is expensive. But you know what? It isn’t the only thing in the life of a mainstream fund manager that is expensive. Offices in Mayfair are expensive. Broker research is expensive. So is in-house catering… most fund manager founders are great art lovers or great show-offs.”
That is a respected figure in the fund management industry, with a pretty substantial knowledge, analysing and observing it. That is not in itself enough authority to make my case, but that argument on top of the one about people managing contract-based pension schemes often being in the same vertically integrated insurance company as the fund managers, point to a significant conflict of interest.
The hon. Gentleman talks about a conflict of interest, but he will recognise that fund managers under the proposed new regulations have to detail exactly their broker expenses and costs of dealing, so that they are transparent. One should not go too far down that line.
I take the hon. Gentleman’s point but let us not get ahead of ourselves. I spoke to the Minister the other day about that. Getting to the bottom of that we find very murky waters. It was beautifully put by Nigel Lawson’s former adviser, Dominic Hobson, at the NAPF, just before the Minister gave his “Les Miserables” tale. Dominic Hobson runs the respected magazine, Global Custodian. As he said, there is a reason why fund managers meet in Monte Carlo and pension trustees meet in Manchester.
Getting to the bottom of that rent extraction is a very difficult task. We are concerned that in the past the FCA has not shown enough oomph in dealing with this kind of thing, so we will be watching very closely. The hon. Gentleman might not be aware that the Investment Management Association, which had a long conversation with me and other people over the months, has proposed things that should be disclosed. However, it is not at a stage where it is prepared to disclose everything. It might or might not have good reasons, but it is not prepared to disclose all the costs as they accrue to the investment of pension and other assets.
Let us not get too technical. It is forced to disclose the costs of dealing, broker research, offices, corporate meetings and the number of those meetings. If anyone wants to see it, there is a pretty heavy element of disclosure on fund managers these days.
I have to say to the hon. Gentleman that that is not my impression, nor the impression of those who look closely at this industry. There appears to be change coming, which the Minister has promised to put in place. As things stand, much information is not disclosed.
Let us be clear about what is not disclosed, as that is part of the problem. As the hon. Gentleman said himself, let us not get too technical. However, part of the reason why this has not been resolved over the years—whoever has held the reins of office—is that it is technical. As I mentioned to the Minister the other day, interest in cash balances held is not disclosed, nor are the costs around foreign exchange trading. Bid-offer spreads are not disclosed and it certainly is not a statutory requirement to do so. [ Interruption. ] If the hon. Gentleman wants to intervene I am delighted to give way.
There is a problem and, as the hon. Gentleman said, it is technical: very few people understand it. It reminds me of the banks. The things that banks were doing were so complex that it was hard to work out whether even the people doing them understood them. There is a need for politicians and regulators to understand what fund management does in managing our pension assets. That is fundamental to this issue. My argument is that the only way to do the best job possible and to get that disclosure in the most efficient form is through trustee governance, because it takes out that conflict of interest. Even then it will not be easy; there are small trust-based schemes that have been overpaying for fund management for a long time. John Gapper and journalists at the Financial Times did a report on that six or seven months ago. Given that it is a very big job, the question is: what is the right way to try to get that information on the balance of the evidence? It seems to me overwhelmingly the case that, while conceding that 100% proof of anything can be hard to get, the balance of evidence internationally and also working from first principles is that trust-based is more likely to do that.
That is the basis for our new clause. We do not think that the duty to treat customers fairly has been delivered over time. There is ample evidence of that, not least in the flurry of official reports on pensions. There is no doubt that things have improved with the newer pensions, but we must bear in mind the fact that we are starting from a low base. Finally, let me put it on record that that is not because people in the contract-based schemes do not want to do the best job possible; it is just that, faced with working in that space, with a priority to maximise shareholder value, and in the absence of competing pressure from the pension saver, inevitably shareholder value is prioritised.
As should be clear from what I have said, our view is that the answer is not to try, wishful thinking-wise, and assume that the individual saver is going to be able to do that. That is why governance is key. It has to be people acting in the saver’s best interests. One of the positive things about this Bill is that it recognises that, in the form of collective pension schemes. That is very important.
We think there is a significant difference of view. We think that trustee governance is simpler—in the context of simplifying the legislation—and overwhelmingly, when one looks at the evidence, more likely to deliver the governance necessary in collective defined contribution schemes. On that basis, we intend to test the opinion of the Committee.
I am grateful to the hon. Gentleman for his remarks. He has raised some important issues. My slight hesitation is that he portrays the matter as if the Government have suddenly come on board with the Opposition’s agenda. If I refer to the remarks by my hon. Friend the Member for Gloucester this morning, the framework for automatic enrolment was set up with no governance at all in place for contract-based schemes. We have made sure that we have responded positively to the OFT’s report.
There is a timing issue. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East keeps quoting the OFT report, but the IGCs that we are talking about have been introduced in response to that. They were initiated following an agreement between the OFT and the Association of British Insurers, and the OFT thinks that that is the right response to its recommendations. The hon. Gentleman describes a situation without that governance in place and the problems that that brings, but we would not be introducing IGCs if we did not think there was a problem of governance in some of the contract-based schemes.
The hon. Gentleman did not really deal with the effectiveness of independent governance committees. He says that they are quasi-independent, but when we have a committee that has an independent chair, a majority of independent members, time limits on how long people can serve, and limited occasions on which they can be reappointed, the chances of capture by the host scheme are dealt with. He says that new clause 5 complicates things, but all it says is that we have something new: collective benefits. We need a regulatory regime for something that is brand-new. I used the word “complex”, but, as I think a former President once said, I mis-spoke. “Comprehensive” was the word I was struggling for—a comprehensive system of member protection.
New clause 5 says that there is a difference between collectives and individual DC. It stands to reason: in collectives, the people in charge make judgment calls, balance the interests of members, and make decisions that members simply cannot take or be involved in. That is why we need the additional measure of governance. That simply is not the case with individual DC.
Essentially, the hon. Gentleman says that trust is good, and in many cases I would agree with him, but his case needs to be stronger than that. To demonstrate why we should accept new clause 14, he needs to persuade the Committee that contract cannot be good. If he says that everything has to be under trust, we have to sweep away 47,000 contract-based schemes and force them all to have trustees. When I intervened on him at that point, he just said, “Well, most of it is group personal pensions, so that’s all right. We have to start somewhere.” I did not understand his answer to the question. We have 47,000 schemes. New clause 14 would put a burden on the best part of 47,000 pension schemes, and he says, “Well, they can just merge.”
Effectively, 47,000 contracts would be obliged to have trustees. What costs would be involved and what sort of impact might that have on an individual’s pension?
My hon. Friend makes an important point. Whenever we propose additional regulatory burdens, we have to cost them meticulously. That has to be ratified by a business-led committee, and we have to find offsetting regulatory savings. The Opposition’s amendments are a significant burden on large numbers of schemes. I intervened and asked about cost. If the hon. Gentleman has an estimate for the cost of his proposals, I am happy to give way. If 47,000 schemes suddenly have to find trustees, I have no idea where all the people would come from or how long it would take.
The Minister paints a gloomy picture of the pensions landscape that would exist if our new clause were accepted, but he must know that in every single pensions Bill we have had, there has been a recognition—almost universal among the witnesses who have given evidence—that scaling up pension schemes is an absolute necessity. He says that 47,000 pension schemes still have to find trustees, but that is not the case if they are not big enough to give value for money under another of our new clauses. Of course not—they merge. Surely he is on the record as saying that scale matters and that we need more scale. In one sense I am offering the Minister a measure that would enable him to achieve one of his ambitions: to scale up the pensions scheme landscape.
The shadow Minister says glibly, “Why don’t they just merge,” but I wonder whether he has any sense of the cost of such mergers. The other question is: who will they merge with? If there is a small, contract-based DC pension scheme linked to an employer over here and a completely different one over there, will we need lonely hearts adverts to match them up?
I do not quite understand the Minister’s response. There is a broad consensus of opinion among pensions professionals at the sharp end that scaling up is necessary; we have heard that in evidence given to a number of pensions Bill Committees. The Pensions Regulator told us when we were considering a previous pensions Bill that scale matters. Have the Government not thought about these things?
The Committee will be aware that I have given the hon. Gentleman several opportunities to tell us what the cost of his proposal to require 47,000 schemes either to find trustees—from goodness only knows where—or to merge. It is apparent that he has no idea and, frankly, that is not uncharitable. He has not got a clue what the cost of what he proposes for pension schemes. The point my hon. Friend the Member for Gloucester was making was that such costs come out of members’ pensions.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said saying that people were being ripped off while investment managers were going to Monte Carlo and so on. However, he forgets that we are legislating for a charge cap. Going forward, more than 99p in the pound of what people put into their pension schemes will go into their pensions, not the scheme’s running costs. The 0.75% taken from the relatively modest contributions that someone on an average wage will put into an auto-enrolment scheme will be, in some cases, not much more than pennies. We have clamped down hugely on unnecessary costs, but any costs that he would add through his regulatory burden on tens of thousands of schemes would simply come out of members’ benefits.
Is the Minister moving away from his previously stated position that there should be a scaling up in the pensions system and a reduction in the number of pension schemes? That is what his response suggests.
As you know, Mrs Riordan, we will be moving on to another of the hon. Gentleman’s new clauses, which deals with scale, so we will discuss that substantively. It is clear that consolidation is happening organically, but he wants to force the pace at considerable cost to members. We still have not had an answer from him on what the cost of that will be and where the tens of thousands of trustees will come from.
The Minister is right to highlight these issues. It may be worse than that, because there is a shortage of qualified trustees, even for trust schemes. First, to find volunteers will be incredibly hard. Secondly, they have to be trained, which takes an enormous amount of time. Thirdly, some remuneration is inevitably involved in expenses for travelling to meetings.
The operation is enormous. It is not quite of the scale of the 1948 partition of British India, but it has been rather cavalierly wrapped into a short proposal by the shadow Minister. Does the Minister agree that it is curious that we have not heard any presentation of evidence from the 40,000 schemes involved that this is what they want to do, because they think it is needed and because members are crying out for it, let alone any costing?
I grateful to my hon. Friend. My history is not good enough to know whether the analogy with the partition of India is entirely accurate, but I take his point. We are talking about huge costs, which have not been quantified by the Opposition. One reason why the Government have taken regulatory burdens seriously is that previous Governments have piled regulation on regulation without worrying about the cost to schemes, which has had an impact on members’ benefits. That is why we have to take action.
What we want is proportionate good governance. We could spend the rest of the year passing more and more laws and putting in more and more requirements, but they will all have a cost. I think that when Labour was in government, it failed to recognise the flipside to regulatory burden.
We need regulation—we are passing regulations this afternoon—but we need proportionate regulation, not over-regulation. In a sense, the challenge is that we already have these pensions in place. Over time, there has been organic consolidation, which is to be welcomed. However, I do not think that there is evidence for using a sledgehammer and not only saying, “Trust, good; contract, not so good” but that trust is God and is the only acceptable form of pension scheme governance. Crucially—and this is relevant to the Bill—we are in a time of innovation. I want to stress that. We want people to come forward with new models. We want them to come up with collective benefits. We want them to come up with new forms of risk-sharing pensions. Simply to say that there is only one form of governance that could possibly do the job—and that is the proposition put forward by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East—is over-restrictive at this point.
Does the Minister agree that, philosophically, the shadow Minister is starting from a very similar point to most Government Members, which is that it is important that these schemes are managed well? The duty to act is laid out very cogently in new clause 5. It is a shame that the hon. Gentleman has launched into something at the risk of dividing the Committee when there is an enormous amount of consensus. Does the Minister agree that it would be very helpful if the shadow Minister chose not to press new clause 14?
Oddly enough, I do, and equally oddly, I do not suppose that the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East will accept the recommendation. I hope, however, that we can unite, as my hon. Friend says, on new clause 5, because it ensures proper governance of collective schemes providing collective benefits.
Finally, on the issue of IGCs, which the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East wants to dismiss even though it is what the OFT concluded was the right answer to the problems they discovered, the provider’s board has a comply or explain duty in response to recommendations from the IGC. If the IGC is not content with the board’s response, it can escalate to the FCA and to members of the scheme. That is crucial. If I am running a pension scheme and the governance committee in charge of it says, “Unless you sort this problem out, every member of the scheme is going to know that we are not satisfied with the way this scheme is being run,” that is a huge threat. That is like having a hand grenade threatening to go off. They can go to the regulator, they can go to the scheme, they can go to the employer and they can go public. Coupled with the IGC’s duty to act in the members’ interests, this is a practical, direct way of ensuring that members’ interests are acted on. We believe that new clause 5 is proportionate, effective regulation, which is particularly needed for the new forms of collective benefits, but that it is not over-regulation, as is the case with new clause 14.