The CMA found among pension schemes that there was a low level of engagement by trustees and a lack of clear and comparable information on which to assess value for money. Trustees were being steered by consultants towards their own higher-cost fiduciary management services, giving them an incumbency advantage. Ultimately, trustees were more likely to pay higher prices for these services than they should. Overall, the CMA found that this was having an adverse effect on competition for these services and likely bringing financial detriment for employer sponsors of defined benefit pension schemes and savers in defined contribution pension schemes.
It is important to note that both services were said to influence decisions affecting pension scheme assets worth over £1.6 trillion and the retirement incomes of millions of people. Any negative impact on scheme outcomes will be significant, and will accumulate and compound over the long term in which pension assets are invested. The CMA’s report proposed recommendations and remedies to encourage better trustee engagement when buying services, and better disclosure of fees and performance. The CMA made it clear that some of these remedies would be implemented by an order. That order was made in June 2019 and came into effect later that year.
The CMA also recommended that the Department for Work and Pensions take forward legislation to bring into pensions legislation the provisions of the order for two specific remedies: first, the requirement to carry out a competitive tender in certain circumstances before appointing, or continuing to use, a fiduciary manager; and secondly, the requirement to set objectives for, and review the performance of, investment consultants appointed by the trustees.
The CMA also recommended that legislation should provide for the Pensions Regulator to oversee these new duties on trustees, rather than leave long-term enforcement action against occupational pension scheme trustees to the CMA. The DWP, on behalf of the Government, committed to do this in early 2019 and consulted on its proposed legislation in summer 2019. However, because of necessary reprioritisation brought on by the Covid-19 pandemic, work on this was delayed until this year.
The regulations before the Committee fulfil the commitment the Government made in 2019 to accept the CMA’s recommendation and to integrate the requirements in the CMA’s order that apply to trustees of occupational pension schemes into pensions legislation. Subject to approval, this instrument will require trustees of occupational pension schemes to set objectives for persons who provide them with investment consultancy services, to review those objectives at intervals of no more than three years, and to annually review the
performance of those providers against those objectives. This setting of objectives will enable trustees to monitor the performance of their advisers.
The regulations also require trustees to carry out a qualifying tender process when continuing to use existing fiduciary management providers, or appointing new ones, if the scheme meets the asset management threshold. The threshold is met when fiduciary managers covered by the regulations manage 20% or more of in-scope assets. The regulations also set out what the qualifying tender process is and when it must be carried out. Additionally, through the regulations the Government have defined “investment consultancy provider”, “investment consultancy services”, “fiduciary management provider” and “fiduciary management services” for the first time in pensions legislation.
The Government believe that these duties will encourage trustees to become more engaged with the way services are bought, monitored and evaluated, or to consider more efficient consolidation options. In turn, this will lead to better outcomes for scheme members and employer sponsors of schemes.
For the most part, the regulations replicate the effect of the relevant provisions in the CMA’s order. However, there are some small differences that reflect government policy. One such difference is about the type of schemes that are exempt from the requirement to set objectives. The CMA excluded trustees of schemes that are sponsored or funded by providers of investment consultancy and fiduciary management services from setting objectives for their investment consultant and from tendering for fiduciary management. The regulations bring these schemes back into scope of the requirement for trustees of such schemes to set objectives for their investment consultant. It is government policy that members of such schemes should still benefit from a well-governed, high-performing investment consultant, despite the trustees and the investment consultant being part of the same organisation.
The regulations also do not make any provision about local government pension schemes. This is a matter for the Department for Levelling Up, Housing and Communities and the devolved Administrations in Scotland and Northern Ireland to bring forward their own legislation. As such, for local government pension schemes, the CMA’s order, to the extent that it imposes requirements relating to investment consultants, will continue to remain applicable for the time being.
Finally, this instrument does not create any exceptions from the requirement to tender for fiduciary management services in cases where parties are connected only because they are participating in a joint venture. This is to avoid the risk that, where a scheme sponsor and a fiduciary manager had a joint venture, they would not be required to run, or bid for, a tender. The CMA order contains a limited exception for joint ventures. This change has been made to disincentivise firms from creating joint ventures to circumvent this duty.
As stated earlier, the regulations bring the monitoring and enforcement of these trustee duties into the regulatory remit of the Pensions Regulator. Trustees will be required to provide certain information about the use of investment consultancy and fiduciary management providers in the scheme return which they must complete each year
and return to the Pensions Regulator. The information enables the Pensions Regulator to monitor compliance with the duties set out in the regulations. The regulator has said it will update its published guidance to reflect the final regulations ahead of them coming into force.
In conclusion, these trustee duties concerning the way investment consultancy and fiduciary management services are bought and evaluated will facilitate good governance, which will ultimately mean services that are better value for money, benefiting members and the employer sponsors of pension schemes. Of significant importance is that the regulations bring compliance, monitoring and enforcement of the duties under the remit of the Pensions Regulator. I therefore commend this instrument to the Grand Committee and beg to move.