My Lords, for those watching at home, I have just managed to pour water all over my speech, so I hope that noble Lords will bear with me if at points it ceases to make any sense.
I thank the Minister for her introduction to these regulations and all noble Lords who have spoken. Like my noble friend Lord Davies, I am delighted to speak after my noble friend Lady Drake—we all are. We all learn something from every time she contributes, and I thank her for her expertise and hard work on this.
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In its report on the investigation into the investment consultant markets, published in December 2018, the CMA made a series of recommendations for action by the DWP, the Pensions Regulator, the Treasury and the FCA. In June 2019, the CMA laid its order, which implemented remedies to address weak competition found within the investment consultancy and fiduciary management markets. As we have heard, this instrument integrates into pensions legislation the relevant provisions of that order and brings them within the scope of TPR. The key effect is that trustees of relevant occupational pension schemes will be required to undertake competitive tendering for fiduciary management services for pension schemes if they have not done that before, and to set strategic objectives for their investment consultants.
The noble Baroness, Lady Janke, noted that the stated aim of the policy is to improve trustee engagement, transparency and governance when buying investment consultancy and fiduciary management services. My noble friend Lady Drake was absolutely right to remind the Committee of the crucial role played by investment consultants and fiduciary managers in advising trustees and exercising delegated authority on investments, which gives them real influence over investment outcomes. That makes it really important that trustees are able to access good-quality services and advice and can monitor the performance of their advisers and the value of services delivered.
Trustees also play a vital role as the first line of defence for millions of scheme members. Driving up standards of scheme governance has, understandably, been a priority for TPR. It is notable that the CMA identified instances in which trustees did not meet
TPR’s standards of trustee knowledge and understanding. My noble friend Lord Davies spoke about the importance of clarity in regulation and good communication. Given that the Government have chosen this way to go, are they considering any further initiatives to help trustees to improve their knowledge base, but in a way that does not undermine a diverse population of trustees being represented on trustee boards?
The CMA remedies proposed to address the market weaknesses that it identified were extensive. As well as the regulatory responsibilities placed on TPR and the duties on trustees, the remedies included a requirement on investment consultants to separate marketing of their fiduciary management service from their investment advice and to inform customers of their duty to tender in most cases before buying fiduciary management; requirements on fiduciary management firms to provide better and more comparable information on fees and performance for prospective customers and on fees for existing customers; and a requirement on investment consultancy and fiduciary management providers to report performance of any recommended asset management products or funds using basic minimum standards.
One hopes that these regulations will help to address the failings in the investment consultant and fiduciary management markets, improve trustee governance and get better outcomes for pension savers, but the Committee should be clear about the scale of the challenge. My noble friend Lady Drake and the Minister mentioned some of the concerns in the CMA report about how these markets are functioning. I think it is worth getting that detail down for the record.
The CMA found that features of the investment consultancy market restricted or distorted competition in the supply and acquisition of investment consultancy services by pension schemes. These included low levels of engagement by some trustees, with some lacking the capability to scrutinise properly the investment advice they receive and therefore being less likely to switch, tender or formally review their investment consultancy services—a problem most prominent among small schemes and DC schemes. There was a lack of clear information and standards needed to assess the quality of their investment consultant and a lack of clear and comparable information for customers to assess the value for money of alternative investment consultants.
The CMA had even greater concerns about features of the fiduciary management market, including firms steering customers towards their own fiduciary management service, as we have heard; low levels of customer engagement in testing the market prior to moving into fiduciary management; a lack of clear and comparable information to assess the value for money of alternative fiduciary managers; a lack of clear information for customers to assess the value for money of their existing fiduciary manager; many customers not receiving clear fee information, limiting their ability to assess the competitiveness of the fiduciary management and the underlying funds invested in on their behalf; investment performance being reported on a gross-of-fees basis, which does not reflect the real outcome for the scheme; and barriers to switching fiduciary manager, such as requiring substantial time and incurring high costs. Other than that, it is going swimmingly.
My noble friend Lady Drake is surely right that the nature of these markets means that any negative impact on scheme outcomes could not just be significant but compound across the long timescales to which pension funds operate.
Regulation 4 places a duty on the Secretary of State to review the provisions of Part 6 of the 1996 regulations, as inserted by these regulations, to set out the conclusions of the review in a report and to publish the report. The Secretary of State must publish the first report under this regulation by 31 December 2028, and subsequent reviews must be carried out at intervals of no more than five years. But 2028 will be 10 years after the publication of the CMA report; that is a long time to wait for a report on whether the weaknesses in the investment consultancy and fiduciary management markets have been significantly addressed, given their importance to member value and outcomes and the potential contribution to member detriment if they go wrong. How will Parliament be informed as to the progress, or lack of it, in addressing the weaknesses in these markets before the publication of the Secretary of State’s report in 2028?
I cannot finish without coming back to the comments about the Secondary Legislation Scrutiny Committee, to which my noble friend Lady Drake drew our attention in some detail. As my noble friend Lord Davies said, this is the 13th SI the committee has had in the last 12 months. That is very striking. I have lost track of how much primary and secondary legislation on pensions I have had to do, as I am sure the Minister has. My noble friend Lady Drake gave a very insightful and important assessment of the background and consequences of this barrage of legislation. What assessment has the Minister’s department made of the actual impact on trustees, especially in smaller schemes, of this barrage of changes? I do not just mean the impact assessment on this particular set. What are they looking at across the piece—the impact of the successive wave of legislation on trustees?
Secondly, what will her department do differently in response to the criticism by the SLSC that some of these regulations have been needed to correct the impact of public policy decisions and their implementation in the first instance? My noble friend Lady Drake gave the good example of scams following on from pension freedoms.
Finally, has the Minister’s department worked with the Treasury to consider at a higher level whether their whole approach to this market is working? If you keep legislating, and you keep amending your legislation at ever-diminishing intervals, is it possible that this approach is not delivering for consumers?
Action to address the weaknesses of investment consultancy and fiduciary management markets is welcome, but I will be interested to hear the answers to the many very good questions asked of the Minister by noble Lords today.