With this it will be convenient to discuss the following:
Government amendment 6.
Clauses 27 to 44 stand part.
That schedule 2 be the Second schedule to the Bill.
Clause 45 stand part.
Amendment 25, in clause 46, page 36, line 41, at end insert—
“(e) require information to be made available to The Pensions Regulator relating to actions taken by the scheme to ensure diversity considerations are taken into account in the recruitment of the trustee board with regard to—
(ii) gender; and
This amendment is to require pension schemes to send information on the diversity of the trustee board to TPR.
Clauses 46 to 48 stand part.
That schedule 3 be the Third schedule to the Bill.
Clauses 49 to 51 stand part.
Clauses 26 to 51 complete the parts of the Bill that apply to Great Britain, but not to Northern Ireland. I will briefly address the two amendments. Government amendment 6 removes the provision put in primarily by Liberal Democrat peers in the House of Lords to incorporate a specific requirement of fairness. Unquestionably, as with much of the debate that we will have in Committee over the next two days, it is about the ways in which we proceed where the objective is agreed, and the objective is clearly one of fairness. The Government do not feel that clause 27(3) is appropriate, however, and we will seek to overturn it.
Requiring trustees to make such an assessment is likely to generate confusion unless further clarity is provided, and it may result in legal disputes. We have specifically and intentionally avoided referencing fairness in such a way in any of the CDC provisions, but I make clear to the Committee that we intend to use regulations to set out clear principles and processes that schemes must follow to ensure that different types of members are treated the same where justified.
Those requirements would form part of the authorisation process for the CDC schemes, overseen by the Pensions Regulator. Regulations under clause 18, for example, will require CDC schemes to ensure that there is no difference in treatment between different scheme member cohorts or age groups when calculating or adjusting benefits. That is a clearer, better and more effective approach to delivering fairness in practice, and it is supported by the Institute of Faculty of Actuaries.
I also pray in aid—as we have all cited our support for them—the note submitted by the Communication Workers Union and Royal Mail in written evidence to the Bill. They jointly addressed this specific point, saying:
“We welcome discussions on how to ensure the fairness of future CDC schemes. Royal Mail’s scheme is designed to address the possibility of intergenerational unfairness by not using capital buffers and explicitly preventing the trustees from favouring one group over another. The DWP acknowledged this in its 2019 consultation response. When it comes to Lord Sharkey’s amendment, we agree with Government that we should give careful consideration to how reporting on fairness might work in practice and share their concerns with the additional reporting requirements the amendment introduces. We therefore support the Government amendment which removes Lord Sharkey’s amendment from the Bill.”
I suggest that that statement is telling, and I invite the Committee to support the Government amendment.
Before we decide what to do on this amendment, I am keen to hear from the Minister. He suggested that if the clause was allowed to stay as it is— as it was amended by the Lords—it could garner legal challenge. Could he clarify where he sees that legal challenge coming from and why he thinks that is a concern?
If clause 27(3) provides specifically for fairness, it may be open to interpretation and mean different things to different people. The legal advice we have received is that it would be inappropriate to include that in the Bill, and that it is far better to address the matter in detailed regulation rather than through a single word in the confines of the Bill.
The Minister is trying to achieve fairness across cohorts, and different people will have different interpretations of that. Such schemes are reliant on the general performance of the stock market, investment and what is going on in the world economy. Does he agree that fairness is subject to all those swings and roundabouts?
Will the Minister give the Committee some idea of what he would regard as fair, given that annuities were grossly unfair for those who happened to retire at a time when the market was taking a dip? What would he regard as “fairness” in the requirement that he will put in regulations?
Having been a 20-year lawyer, whose last client was a very famous Mr Ed Balls—I had to represent him when he was Secretary of State for Children, Schools and Families, five weeks before the 2010 general election—I am loth to start defining fairness, as a Government Minister, specifically because of the problem that has been identified.
I can say that we are attempting to ensure that members are treated fairly, and that has been part of the central thrust of our work on CDCs from the outset. We have learned from the problems experienced by the Dutch model, which allows schemes to make different benefit adjustments to different groups of members. That transferred contributions from savers to pensioners. The UK system will not work in that way. We intend that regulations under clause 18 will require CDC schemes rules to contain provisions so that there is no difference in treatment between different cohorts or age groups of scheme members when calculating and adjusting benefits. If the scheme design does not do that, it will not be authorised. That goes to the whole proposal under the supervisory regime and the submission.
Further—we will come to the word “bespoke” later in our consideration of the Bill—this is an opportunity for individual schemes. The examples have been given of a small care home scheme coming together, and of the vast might of Royal Mail. Clearly, those are very different organisations. I hope that the regulator will look at them in slightly different ways with an overarching code of principles that allows it to permit such a scheme to go ahead. I will resist the hon. Lady’s kind invitation to provide the exact definition that, we submit, would be one of the problems with clause 27(3).
We are here to tease out what the Government mean in the Bill, ahead of the unamendable regulations that have not yet been written. I hope that the Minister will indulge our temerity in using the Bill Committee to ask some relevant questions.
What the Minister said earlier about the Dutch schemes is correct. By reducing the available pensions, some choices were made between existing pensioners and those who were saving. His tone suggested that he judged that to be unfair. He states that he wants to achieve fairness between cohorts in CDCs, but how will that be done in reality?
I am invited to give a view on the future consultations on the points that the hon. Lady raises. The term “fairness” can be open to interpretation and can mean different things to different people. We envisage that regulations will clearly set out the principles and processes that schemes should follow to ensure that all types of members in CDC schemes are treated the same, where appropriate. Setting the requirement in regulations will give us the opportunity to consult on the approach that is to be taken. I respectfully suggest that rather than defining that in the Bill, the appropriate way forward is to consult, and to use all the opportunities that consultation entails for submissions on what that should look like, so that detailed regulations can then be taken forward.
No; I can merely repeat the answer I have just given, which is that the regulations under clause 18 will require schemes to contain provisions so that there is no difference in treatment between different cohorts or age groups of scheme members when calculating and adjusting benefits. If the scheme design does not do that, it will not be authorised.
I will try to expand on that and give a better answer. There is a two-phase process. In the first phase, a company must come forward to the regulator and seek permission to go down the CDC route; that goes back to the way in which the company and the employees work. A separate set of regulations will then be the framework on which that is judged. I suggest that this is specific to individual companies, because fairness will be different for different organisations and they will be treated in different ways. There is a supervisory regime that must be gone through, and there will be a consultation on regulations regarding how it will be administered. For the present purposes, that is the best I can give to the hon. Lady.
I will now address amendment 25, which is about the actions of the regulator in relation to diversity considerations, taking into account the recruitment of the trustee board. This issue was raised in the other place as a point of debate. The Pensions Regulator is part of an ongoing discussion, and in February this year it launched an assessment of the appropriate way forward, looking at trustee board diversity across all schemes. It plans to set up an industry working group to bring together the wealth of available material and experience to help pension schemes to improve the diversity of scheme boards. I suggest it would be premature to pre-empt the outcome of the regulator’s work in this area. It has indicated to me, unofficially, that it will respond by Christmas. It is certainly the case that this Government has brought forward, on a cross-party supported basis, environmental, social and governance regulations in respect of investment. We would certainly hope that organisations that treat their investments with due account to social and governance matters would also take an appropriate way forward in that respect.
Under clauses 9 and 11, the Pensions Regulator must be satisfied that the persons involved in the CDC scheme are “fit and proper persons” to act in relation to the scheme. If the regulator is not satisfied, authorisation of a CDC scheme cannot be granted. I simply add that clauses 26 to 51 set out the full details. I particularly pray in aid clause 27, which sets out the detail of the supervisory regime.
It is a pleasure to respond to the Minister’s comments. I thank him for laying out the Government’s thinking on the clauses and amendments in this group. I will speak to Government amendment 6 and briefly to amendment 25, tabled by my right hon. Friend the Member for East Ham.
I thank the Minister again for his speech and the arguments that he has laid out for seeking to remove the amendment tabled by the noble Lord Sharkey and cross-party colleagues in the other place, which was agreed by peers in June. The Minister commented that, in his view, some of the concerns could be addressed by the implementation of clause 18. I want to come back to why I am concerned that may not go far enough; perhaps this will be an issue of ongoing debate as the Bill proceeds, and in regulations.
The amendment included by those in the other place was very considered. It spoke about
“the requirement that trustees make an assessment of the extent to which the scheme is operating in a manner fair to all members”.
I believe that is the additional wording in the Bill. It is a very considered amendment, which could only be useful in keeping on the agenda of trustees the important analysis that should take place in relation to decision-making—to be sure about the best possible input and considerations in relation to the performance of the scheme for all its members.
I alluded in my opening remarks to the considerable insecurity that we face as a nation, exacerbated by the impact of covid-19 and its disproportionate impact on different groups and different generations, in terms of the economy and levels of employment and therefore saving into pension schemes. People’s personal finances are likely to be under great strain in the coming years. Not only is there that insecurity, but it is increasingly difficult to encourage young people to save for retirement, with all the other cost pressures in life—paying off debts, for example, or the fact that, at the moment, the average age at which they will purchase their own home is around 34. There are considerable pressures on the personal finances of the next generations, as they plan ahead for their lives.
Thinking about our institutions and how we continue to consider and embed intergenerational fairness should be on Parliament’s radar in all our work. In that context, we see unprecedented public policy challenges in ensuring fairness between different groups in society—from those in hard-hit industries, such as aviation and hospitality, to those affected by the way education is being delivered in the times in which we are living, which could continue beyond the next few months into the next few years, with all that uncertainty. We have also seen that black, Asian and minority ethnic communities have been hit harder by the health and economic impacts of this terrible virus. We can look at income today, but we are really talking about income tomorrow, and the impact on tomorrow of savings today.
It is incumbent on the Government to think about fairness between generations, and how we can stop young people bearing the brunt of the uncertainty and hardship caused by the economic havoc that we are experiencing right now. The impact on them could go unchecked in the medium and longer term. Concern about intergenerational fairness was raised by many respondents to the Government’s consultation on the Bill’s provisions.
Clause 27, as amended in the other place, sought to deal with some of those concerns. It effectively acknowledges that there may be a divergence in interests between different cohorts or sets of members in CDC schemes. Importantly, it does not compel any particular kind of action, but requires trustees to consider fairness and assess the extent to which the scheme is fair to all members. To Opposition Members, that is a very sensible suggestion, and we struggle to understand why it should be controversial for the Government.
I appreciate that the Minister outlined some comments from the CWU and others about the interpretation. He also mentioned treating people in the same way and his interpretation of the current wording of clause 18, which I was just reviewing. If there are different considerations in relation to levels of savings, other ways of joining a scheme or different circumstances, it may be necessary to look differently at different cohorts. Treating people fairly may not always mean thinking of them as the same. When we are thinking about fairness, we may need to be a bit more nuanced in our consideration of different needs and circumstances, and the potential impact of a decision on all cohorts.
Perhaps a different way of interpreting the amendment that was made in the other place would be to see it as enhancing the intention behind clause 18. I repeat that the amendment did not compel any particular kind of action, but made it more explicit what trustees should consider. Baroness Stedman-Scott, the Parliamentary Under-Secretary, said in the other place:
“I welcome the sentiment behind the proposed amendment; it is something to which we want to give further consideration. We need to give careful thought to how such reporting might work in practice and would want to work with trustees, administrators and the regulator to ensure that any such requirement is proportionate, appropriate and clear. We would also want to consult on any such approach to make sure that it is effective. I reassure all noble Lords that we will give this matter careful consideration. Should we need to bring forward such a requirement in regulations, we already have sufficient powers in existing legislation to require schemes to report on fairness in CDC schemes if warranted.”—[Official Report, House of Lords,
I hope that the Minister will continue to keep this issue under review, because we think it is very important for the sustainability of fairness and confidence in schemes. The very considered wording that was proposed and passed in the other place could help the Government in securing the intended outcomes that he described as being behind clause 18. Perhaps he can provide more detail on his plans to incentivise trustees to assess and report on the extent to which CDC schemes are operating in a manner that is fair to all.
My right hon. Friend the Member for East Ham may make a few comments on amendment 25, which is intended to require pension schemes to send information on the diversity of the trustee board to the pensions regulator. We believe in the value of this amendment, which is also supported by other colleagues—the SNP in particular. It is important to ensure that there is a diversity of voices in decision making. The debate about diversity on public and private boards comes in cycles. Diversity on public boards was considered under the last Labour Government, with quotas for diversity in recruitment. This is not a party political matter; a lot of research shows that diversity in decision making leads to better and safer sustained outcomes.
When looking at public funds, for example, the diversity of needs should be understood at the decision-making table. We do not need to rehearse the arguments for ensuring that different voices are represented at decision-making tables, whether that relates to gender, those with disabilities or those from particular minority communities.
The same is true of boards in the private sector. Research undertaken by business schools shows that diversity on decision-making boards has often led to considerably better returns on investment, and indeed shareholder returns. There is no sustained, credible argument that not having diversity on boards leads to better business outcomes.
I do not understand why this would not be an important consideration. Amendment 25 simply says that pension schemes should send information on the diversity of the trustee board to the Pensions Regulator. I am sure my right hon. Friend the Member for East Ham will share more information about how trustee boards are less diverse than other boards. That cannot be right for boards that have an increasingly important role in decisions about funds and investments, and about inclusivity and fairness.
This is not only an important consideration in terms of social justice; it is about the performance of the schemes. It is about recognising the importance of having diverse voices and voices that are representative of those within the schemes and those who may benefit from the schemes in the future. This is a matter of obvious importance that should not raise concerns, and it should be included in the Bill.
I apologise for raising clause 47 in the previous debate; I probably should have waited until now. I am glad we had that debate and I welcome the Minister’s assurance that regulations to enable multi-employer CDCs will come forward within the next year.
I will confine myself in this debate to clause 46 and amendment 25, which stands in my name on the amendment paper. I am grateful to the hon. Members for Airdrie and Shotts and for Gordon for adding their names to it, and to my hon. Friend the Member for Feltham and Heston for the important points she has just made in favour of it. I thank ShareAction for its work on this topic and for the briefing it has provided.
We are all familiar, as my hon. Friend has just reminded us, with the criticism that there is insufficient diversity among directors of FTSE 100 companies. There has been progress, but the Government targets are going to be missed and there is still a long way to go among major company boards. Some 68% of board members are male and only 7.4% are from black, Asian or minority ethnic backgrounds. That proportion falls to 3.3% in the most senior board positions: chair, chief executive and finance director. Only just over half of boards have any ethnic minority members at all.
As my hon. Friend has just pointed out, the position among pension trustee boards is a great deal worse. There are not yet any trustees of CDC schemes, which would be addressed by my amendment. I do not know whether it has been announced who the trustees of the Royal Mail scheme will be, and I certainly have not seen that list, but as we debate the ground rules for trustees of CDC schemes, there are good reasons for ensuring that we do not end up, in this part of the pensions world, in the position we are in with pension trustee boards more generally. I hope that those who are looking at the make-up of trustee boards more generally will take a leaf out of the tenor of the discussion that we are having.
I ask my right hon. Friend to confirm my understanding, which is that when we talk about diversity, we are not simply talking about it being a good thing to have a range of different experiences and backgrounds; all the evidence from across the commercial sector is that diversity increases performance because of the range of perspectives that it brings to bear.
My hon. Friend is absolutely right. She and I took part in a debate on a similar issue around 10 years ago, on the Welfare Reform Bill. She is right on this point, and that is an argument that I want to come to in a moment.
I hope the approach that I am advocating will be applied to other pension trustee boards in the UK in due course, because according to a report on diversity published in March by the Pensions and Lifetime Savings Association, which we used to call the National Association of Pension Funds, 83% of pension scheme trustees are male; 50% of chairs of trustee boards are over 60; a third of all trustees are over 60, while only 2.5% are under 30; 25% of pension schemes have trustee boards that are entirely male; and only 5% of schemes have a majority of female trustees. This is a particularly stark picture if we look at the make-up of pension scheme trustee boards at the moment.
As the Pensions and Lifetime Savings Association comments:
“It seems clear that occupational pension scheme trustee boards have generally not implemented robust diversity policies as effectively as FTSE 100 boards”.
My hon. Friend makes an important and interesting point. If we are to be confident that these new scheme trustees will make decisions that are fair to both the working members of the schemes and to pensioners, it is important that the voices of working age members should be taken fully into account in the trustee board’s decisions. She makes a good argument about why diversity, specifically in respect of age, is important in this context.
It is not as though there is no evidence that diverse trustee boards do a better job. My hon. Friend the Member for Westminster North has just reminded the Committee that there is a substantial, growing body of evidence that diverse company boards make more effective decisions than homogeneous boards. We have talked about age, but we should not forget that the gender pensions gap, which is nearly 40%, is almost twice the size of the gender pay gap. The issues here are stark.
The Pensions Regulator commented on diversity in trustee boards for the first time last year:
“Our view is that pension boards benefit from having access to a range of diverse skills, points of view and expertise as it helps to mitigate against the risk of significant knowledge gaps or the board becoming over-reliant on a particular trustee or adviser. It also supports robust discussion and effective decision making.”
Amendment 25 would require those who put boards together to report to the Pensions Regulator on steps to ensure diversity considerations are taken into account in the recruitment of the trustee board, with regard to age, gender and ethnicity. I know that the Pensions Regulator has set up an industry working group to consider this issue, as part of the consultation that the Minister referred to, and to raise the profile of it. However, to be effective, that group needs data, and this amendment would help to provide it. I think the result of the amendment would be not only greater fairness but better trustee decisions. I commend the amendment to the Committee.
It is a pleasure to serve under your chairmanship, Mr Stringer.
I will confine my brief remarks to amendments 6 and 25. I listened carefully and with interest to what the Minister said about the rationale for trying to withdraw clause 27 from the Bill. I agree that with him that in trying to come up with a legal definition of fairness, it will always be nebulous. There are clear difficulties around that, which is why I do not think the initial intention behind the clause was to provide absolute legal clarity.
I was reassured to a large extent by what the Minister said about the steps that would be taken to set up CDC schemes—by definition, schemes that are obviously unfair will not pass approval. The difficulty I have with that argument is that all that is being asked in clause 27 is that there is a requirement for trustees to make an assessment and nothing further. It is useful to have a process of self-challenge and continuous improvement, looking at aspects of the schemes that are directly under their control and that they can directly influence and alter. It is good to always have that consideration of whether the scheme is operating as fairly as possible for all present and future members and those taking benefits from it. My question to the Minister is, very simply, where is the harm? Even after taking on board all that he says, I still do not see the harm that lies in the Bill as it stands.
Moving on to amendment 25, I hear exactly what the Minister says about the requirement that already exists on trustees to be fit and proper people. My observation is that there are many potentially very fit and proper people who do not currently find themselves on boards, advisory committees or any of the governance structures around pensions, and who could nevertheless make a very good contribution to the running of those schemes.
Speaking from personal experience, prior to being elected as the Member for Gordon, I was a councillor in Aberdeenshire. Through that role, I was one of the Convention of Scottish Local Authorities nominees to the Scottish local government pension scheme advisory board, whose representation was equally split between employers’ representatives, of which I was one, and trade union representatives. The trade union representatives were all extraordinarily capable and represented quite accurately the diversity of the scheme members whose interests they were there to represent. In all honesty, the employers’ representatives perhaps did not represent that quite so well. I played my own part in skewing that representation.
The requirement to report back on the membership characteristics is a very useful tool in trying to understand whether all that is reasonable is being done to ensure that trustees and those in positions of governance on pension schemes are as representative as possible not just of the membership, but of the interests of the membership, and that we are giving as many people as possible the opportunity to fully skill up, participate and play the role that they can do. As things stand, we are missing out on the talents of many fit and proper people. Again, I do not see the difficulty in simply recording and reporting that information as part of the cycle of continuous improvement and self-reflection on whether we are achieving all that we seek to do.
I want to support, or enhance, the comments that have just been made by Opposition Members about the two issues that we are discussing in this group of amendments: amendment 25 on diversity, which was tabled my right hon. Friend the Member for East Ham, and the issue of intergenerational fairness and how it can be properly guaranteed in CDC schemes.
I hope the Minister will reaffirm on the record, in no uncertain terms, his agreement with the principles behind the amendment on intergenerational fairness that was made in the other place, even if he has issues with how one defines fairness in law. I have to say that, in social justice terms, we would have made very little progress in the whole of our society if we quibbled about the meaning of fairness in law. Just because it is difficult to define, it does not mean that we should not assert it or seek to bring it about.
The Minister’s response is a rather a technical answer to the principle that has been asserted by the change that their lordships made to this part of the Bill. His responses to my questions earlier did not fill me with confidence that he knew how the principle would be brought about if the amendment that their lordships put in the Bill was taken out. He simply seemed to say that it was a good thing to assert, and that it would be brought about by regulations that have not yet been written. He could not really give us any thoughts about how it might be guaranteed in the future, although he is asking us to take out an amendment that has actually been made to the Bill. He is asking us to exchange something that is really quite good and not damaging for something that is very nebulous and does not exist yet—it might do at some point in the future—in regulations that will be unamendable. We will have to take them or leave them when they come to the House, so I am slightly worried about that.
As is his wont, my right hon. Friend the Member for East Ham has zeroed in on the issue of diversity on boards and given us some shocking figures about what is happening on pension trustee boards. That ought to raise many alarm bells about potential group-think and about how the decisions made by trustee boards are not representing the interests of the many people who have pension savings in a way that we would find modern or appropriate.
Amendment 25 is a modest amendment. My right hon. Friend is asking only for the publication of information. He is not doing what I might do, which would be much more radical and would probably include all sorts of things, such as quotas and positive action, in order to make a real difference quite quickly. It is a modest amendment. If the Minister cannot accept that it is and does not have the good grace to support it, I will be rather disappointed.
I will try to address some of the issues raised. In respect of the approach of the regulator, the regulations for CDC schemes will require schemes to provide information to enable members to understand the unique risk-sharing features of CDC schemes. That will be underpinned by clause 15, which we have already debated. It requires the regulator to be satisfied that a CDC scheme has adequate systems and processes for communicating with members and others. Regulations will also require that scheme information is made available more widely to other interested parties, including employers, on a publicly available website. The practical reality is that we have learned from the Dutch model, which some argue had intergenerational fairness issues, and are producing a considerably fairer approach.
Perhaps I should have raised this with the hon. Member for Wallasey when she asked what we have set out, but I presume she is aware of the indicative illustrative regulations produced for the purposes of the House of Lords debate. I will ensure that those regulations, which had already been produced, are sent to her. As she will be aware, illustrative regulations produced for debate and discussion are often not the final version. They quite clearly cannot be, because the Government have to consult widely, although at speed—I accept the exhortation to produce them next year—with pension providers, employers, interested parties, lawyers, actuaries and others, before we lay the final regulations. However, it is right to draw the Committee’s attention to a point that I did not make earlier: illustrative regulations that address some of the issues raised by the hon. Lady have been available for many months. While only illustrative, the provisions give a clear indication of the policy intentions.
I have addressed the point about speed and 2021. I endorse utterly the desire for greater diversity and will try to answer a couple of the key questions asked. As I understand it, the trustees of the Royal Mail and CWU scheme have not been identified as yet. Clearly, that is a matter for them as they take that forward, but I suspect that that point is well made and well noted. Self-evidently, all of us agree that diversity is a good thing, and that larger numbers of pension scheme trustees need to be more diverse in many different ways. I take the point that the efficacy of that will benefit not only the scheme but wider society as a whole. The regulator takes this seriously and is already consulting on addressing it on an ongoing basis. It would be premature to pre-empt the outcome of the regulator’s work in this area, which, self-evidently, starts from the basis of considering not only whether the persons putting themselves forward are fit and proper persons, but the key issue of diversity.
Clauses 9 and 11, which we have already debated, mean that the Pensions Regulator must be satisfied that persons involved in CDC schemes are fit and proper persons to act in relation to the scheme. If the regulator is not satisfied, authorisation of the CDC scheme cannot be granted. In respect of that point, it is well noted that the House is concerned about ensuring that, prior to the granting of a specific CDC scheme, ongoing consideration should be given to the working group and also to the issue of diversity. On that basis, I invite the right hon. Member for East Ham not to press his amendment to a vote.