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.