My Lords, I support Amendment 8, which would require trustees or managers of a collective benefits pension to prepare a statement of their investment strategy in connection with any of their investments. The issue here is not that they “may” be required but that they “must” be required—that is the straightforward proposition in the amendment.
The reason I came in when I read the amendment is that it seems to me pretty inconceivable that a collective benefits scheme would be allowed to operate without
the preparation of such a statement, particularly given the way in which such a scheme is managing risk on a collective basis across and between different generations of savers, and where the individuals in the scheme do not have a well defined pot over which they have clear and individual ownership. I have to ask the Minister: when would one ever conceive of a situation where a statement of investment strategy was not required in a collective benefits scheme? An increased return on savings is not an automatic product of collective benefits schemes. Sound governance is the essential ingredient, which must include transparency and clarity on investment strategy.
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These schemes have to function very efficiently over the very long term for successive generations. Saving for retirement is typically a 30-year to 40-year project. Pension savings can become vulnerable, for example, to the irrational exuberances of a given set of trustees or managers at any one point in time as to how certain asset classes may perform. It was, after all, the exceptional equity returns of the 1980s and 1990s that led to the fool’s paradise of irrational exuberance about equity returns, which, when it came to an end because those returns were not sustainable, contributed to the closure of so many defined benefit schemes as the true cost of funding the pension promise was laid bare.
Taking that theme, I think that it would be difficult to have confidence in the targeted benefits required of a collective benefits scheme and the sufficiency of the assets to meet those targets unless there is a clear statement and transparency on the investment strategy being pursued. In a collective benefits scheme it is important to have visibility of the investment beliefs, principles and strategy underpinning the decisions of the trustees or management, of the level of risk and volatility being tolerated and of how those views relate to the characteristics of the membership of the scheme and the obligations to the different age cohorts of members.
The direction of travel of public policy on pension regulation, now that investment risk is increasingly transferred to the individual, is for greater transparency, clarity and accountability on investment decisions taken. With the sharing of risk between ordinary pension savers and across the generations in collective benefit schemes, the case for requiring trustees and managers to make clear statements on their investment strategy is even more compelling. I come back to my point that it is pretty inconceivable that a collective benefits scheme would not be required to prepare and publish such a statement. When could one ever conceive of a situation that would be different?