My Lords, I thank the noble Lord, Lord McAvoy, for moving this amendment. It would impose an additional duty on trustees of pension schemes to consider whether the scheme is of a scale to deliver good value to members and, if not, to consider a merger with another scheme.
The principle of promoting scale to drive value for money for scheme members is one that we can all understand. However, the Government believe that introducing further legislation to ensure that the fiduciary duty of trustees includes a duty to consider whether a scheme has sufficient scale is unnecessary and overburdensome.
In response to my noble friend Lord German, I can confirm that there is already a trend towards larger schemes and away from smaller schemes. We contend that trustees’ existing fiduciary duties already require them to act in their members’ best interests, so it would be unusual if they did not consider this point. In addition, trustees must pay particular attention to four key areas. First, they must comply with governance requirements—for example, they must establish and operate internal controls. Secondly, they must have regard to investment governance and decision-making. Thirdly, they must adhere to administration practices—for example, record-keeping. Lastly, they should seek to prevent fraud—for example, theft or pension scams. Specific legislation would place the financial cost of managing a difficult and complex forced consolidation on members. In many cases it would be in direct conflict with scheme rules which may not permit such transfers and mergers.
A further difficulty with this amendment is the complicated underlying process that trustees would be required to undertake to implement its requirements. The noble Baroness, Lady Drake, put her finger on this in Committee when she said that problems could arise around transfers. Trustees would, for example, be required to find a suitable alternative scheme, assess the scheme’s suitability and undertake independent checks. Again, the costs of that would be borne by members; it could be a costly process if they are required to do that in the way this amendment suggests.
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The amendment would also give the Pensions Regulator a new power to compel a merger if it would be in members’ interest to do so. However, for the Pensions Regulator to use that power in accordance with any methodology it would surely have to be publicly consulted upon and agreed with the Secretary of State. The amendment requires such a methodology to be kept under regular review. That additional measure is totally
unnecessary. Both to stipulate what “sufficient scale” in members’ best interests means and for the Pensions Regulator to measure and police it would be very difficult.
New governance standards from April 2015 will mean that trustees will have a legal responsibility to ensure that schemes are well governed in members’ interests. In addition, the Pension Regulator’s existing regulatory strategy and activities include providing guidance and e-learning resources, and helping trustees to demonstrate that they meet the required standards of their defined contribution quality features. The regulator will also take enforcement action where necessary. That ranges from issuing advice letters, warning letters and statutory compliance notices, to monetary penalties.
In short, this amendment is unnecessary and could be burdensome. There needs to be clarity about the standards of schemes into which small-scale schemes could be transferred or directed; for example, by the Pensions Regulator. Therefore a lot of work would be needed to do this, and it would cost a lot, and we are not of the view that it is necessary or that big is necessarily beautiful. Clearly, on occasion costs could be saved, and it may be that services could be shared—a point touched on by my noble friend Lord German.
Therefore we are not complacent, but we do not believe that proactive government intervention is necessary when it is clear that the number of small schemes is consistently falling and that trustees, providers and employers already have sufficient incentives and responsibilities to ensure that schemes can continue to operate effectively to benefit their members. Our analysis of the current defined contribution landscape shows that effective benefits of scale already operate within the marketplace, including significant consolidation of schemes. We expect that to continue and to accelerate as smaller employers are brought into automatic enrolment.
In Committee there was a consensus that big is not necessarily beautiful and, on occasion, many small schemes deliver very effectively. I am not suggesting that there is any difference between us on that point; I do not believe that we want a single monolithic structure that delivers the equivalent of “any colour as long as it’s black” in the insurance world. However, to come back to the point—that if we believe that small schemes may deliver—I am not quite sure that this sledgehammer is necessary here, because trustees should already be considering these types of issues. Some employers may prefer a smaller scheme that can deliver bespoke investments and communications to their workforce, which a large scheme might not be able to do. We have already seen smaller employers moving towards larger arrangements such as group personal pensions, master trusts and NEST. They can also access the benefits of scale, as I said, by purchasing investment or administration services from a larger adviser.
The Government believe that these flagship reforms we are introducing for the first time, of minimum governance standards to ensure that schemes are well governed with low and fair charges for members, represent the correct approach to drive value for money and better member outcomes. On that basis, I respectfully ask the noble Lord to withdraw the amendment.