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.