My Lords, I am pleased to support Amendment 22, moved by the noble Lord, Lord German, and I commend him for tabling it. The thrust of the amendment is designed to achieve two things: to provide a lever for achieving greater engagement of savers with the investment of their savings, and to help correct failings in the pensions market where the demand side is so weak. It would do this by giving pension savers the right to ask for details on how their money is invested and managed; by compelling occupational and personal pension schemes and investment intermediaries to provide information; and by leveraging transparency to increase scrutiny over those who make the investment decisions.
We know that pensions are not a normal market. Auto-enrolment is designed and built upon the principle of inertia, for a population of savers who do not engage. As the noble Lord said, savers do not choose a product; the employer does. The saver is restricted to a binary choice—to stay in, or to opt out and lose the employer contribution. Savers cannot easily move their pension savings.
These features strengthen the importance of holding agents to account, because that very inertia allows conflicts of interest to flourish. It is difficult for savers on their own to secure improvements in transparency and accountability. The Government need to provide a legislative push. Saver disengagement is a concern for two reasons. First, it helps to feed serious market failings. Secondly, it undermines effective shareholder engagement with the governance of companies in which their money is invested.
When auto-enrolment is bringing 10 million-plus new savers into the pensions system, the case for greater engagement and scrutiny becomes even more compelling. People avoid complexity but, as evidence from both the NAPF and ShareAction reveals, that does not mean they are not interested in what is happening to their money. They want their pension providers to invest in companies that behave well. Why should savers not know how their funds are engaging with companies on important issues, and how shareholder votes are cast at AGMs?
Increasingly, shareholder responsibility is exercised through pension funds and investment intermediaries. We know from what happened in 2007 and 2008, and from the findings of the Kay review, that this model of shareholder engagement can be inefficient for the economy as a whole.
Pension savers do not know how, if at all, their schemes are interacting with the companies in which they invest. As John Kay observed in his review of UK equity markets, such markets are no longer a significant source of new capital for businesses. Rather, their function is to allow savers to share in the success of business. The corporate governance function of shareholders is therefore not a sideshow but a core part of the purpose of modern equity markets. Increasing transparency, scrutiny and saver engagement is good for the saver, the pensions market and the efficiency of the economy.
As a consequence of the Kay review, when seeking to clarify the fiduciary duties of trustees, the Law Commission confirmed that trustees can take into account non-financial factors such as improving members’
quality of life. However, they can do so only if they meet two tests, one of which is that trustees should have good reason to think that scheme members would share the concern. Arguably, that assumes that there is some form of dialogue or engagement between funds and savers. That does not exist now and, given savers’ limited rights to information and the complexity of what they receive from schemes, the amendment would help to build up such engagement. Savers could ask how their money was invested and how rights attached to those investments were being exercised. Savers questioning funds will help to hold investment intermediaries to account and give funds a better idea of the view of their members.
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There will be those who argue that the amendment is just more red tape and will be too expensive, but I make several observations. As the noble Lord, Lord German, confirmed, UK pension schemes are already subject to a number of disclosure requirements, but they often result in very technical communications conveying little to the saver. Some pension schemes are seeking to raise their game in accounting for their decisions and in disclosing voting information, but too many are not. Trustees and managers should have a good knowledge of how investments are selected, stewarded and managed, including the exercise of voting rights. If they already have that knowledge—which they should to do their job well—it should not be too onerous to achieve a better and more informative set of communications to members. If schemes decide that they really want to communicate meaningfully with members and start to go about it in a systematic and committed way, the results can be significant without being onerous.
The amendment, so clearly explained by the noble Lord, Lord German, puts a “reasonable” wrap around requests for information. Certain commercial considerations can be weighed in the balance when considering what is or is not reasonable—although I must say that that provision would be better placed in the general duty on trustees and managers rather than restricted to independent governance committees, but that is by the by; it is a detail. The amendment includes a proportionality provision, particularly in relation to costs of providing information in response to requests, and gives delegated powers to the Secretary of State to make regulations. Those regulations could make simple rules about the timeframe and format for disclosures, so the Secretary of State would have a great deal of discretion under the construction of the amendment as to how those regulations would be built.
Not every pension saver would exercise their new rights, but all would benefit from the increased scrutiny by those who chose to do so. It is the release of relevant information that can raise the standard of scrutiny and accountability, not necessarily the volume of individual requests for that information. The very knowledge that occupational and personal pension schemes and investment intermediaries would be compelled to provide information in response to reasonable and proportionate requests should of itself raise the standard of practice among pension schemes as to what is readily provided in easily
comprehensible form as a matter of course to scheme members. That is good for savers, and it is good for the economy.
The amendment will not on its own secure the radical improvement in governance in the pensions industry which pension savers deserve, but it will certainly make a significant contribution.