HC Deb 18 May 2004 vol 421 cc884-8

'(1) Section 36 of the Pensions Act 1995 (c.26) (choosing investments) is amended as follows.

(2) For subsection (1) substitute—

"(1) The trustees of a trust scheme must exercise their powers of investment in accordance with regulations and in accordance with subsections (3) and (4), and any fund manager to whom any discretion has been delegated under section 34 must exercise the discretion in accordance with regulations.

(1A) Regulations under subsection (1) may, in particular—

  1. (a) specify criteria to be applied in choosing investments, and
  2. (b) require diversification of investments."

(3) Omit subsection (2).

(4) In subsection (3) for "the matters mentioned in subsection (2) and" substitute "the requirements of regulations under subsection (1), so far as relating to the suitability of investments, and to".

(5) For subsection (8) substitute—

"(8) If the trustees of a trust scheme—

  1. (a) fail to comply with regulations under subsection (1), or
  2. (b) do not obtain and consider advice in accordance with this section,
section 10 applies to any trustee who has failed to take all reasonable steps to secure compliance."

(6) After subsection (8) insert— (9) Regulations may exclude the application of any of the preceding provisions of this section to any scheme which is of a prescribed description.".'.—[Mr. Pond.]

Brought up, and read the First time.

3.45 pm

Mr. Pond

I beg to move, That the clause be read a Second time.

Madam Deputy Speaker

With this it will be convenient to discuss the following:

Government new clause 19—Borrowing by trustees of occupational pension schemes.

Government amendments Nos. 166, 167 and 173.

Mr. Pond

New clauses 18 and 19 insert new powers into the Pensions Act 1995 to fulfil our obligations to implement the provisions of the EU occupational pensions directive on pension scheme investments and borrowing. Most of the pensions directive either already exists in UK law or is being incorporated through our own domestic agenda for pensions reform. However, to make transparent our compliance with the directive in respect of how schemes may invest, we intend to make regulations making explicit, in line with article 18 of the directive, the requirement that trustees invest in accordance with the "prudent person approach". On this side of the House, we know all about prudence.

New clause 18 amends section 36 of the Pensions Act 1995 to allow regulations to require trustees or fund managers to consider the additional requirements when making investment decisions. In broad terms, the requirements will include the need for investments not to affect adversely the overall quality of the investment portfolio, for them to be made predominately on regulated markets and for any investment in derivatives to be part of a strategy of risk reduction or efficient portfolio management.

In addition, new clause 19 allows for the making of regulations providing that schemes may borrow money only on a temporary basis for liquidity purposes and prohibiting them from guaranteeing loans. The provisions are not a Trojan horse designed to impose major restrictions on trustees' ability to manage their scheme's investments. Our policy intention is to disturb as little as possible the ways in which schemes may currently invest. By placing the detailed requirements in secondary, rather than primary, legislation, we will be able to consult extensively on the best way of incorporating the directive's requirements without placing undue restrictions on pension schemes and to ensure that the provisions in pensions law are consistent and coherent with the analogous rules for other financial service products. We shall therefore consult further on the details and we plan, as is customary, to consult on the draft regulations.

Amendments Nos. 166, 167 and 173 are consequential amendments to the Pensions Act 1995 required by the insertion of the new powers. Amendment No. 167 is a further consequential amendment that removes the reference to section 3 of the Pensions Act from section 36 of that Act.

Mr. George Osborne

Again, significant changes are being brought in at short notice with little consultation. The new clause introduces rules that affect the way in which pension schemes can invest and borrow. Investment is one of the most important activities that pension schemes undertake. Laughably, the Government say in their explanatory notes that they will consult on this measure extensively, "as is customary". We are getting used to the customary consultation of the Government. This is no way to make good law.

The Government think that they need to take on these regulatory powers to ensure compliance with the EU directive. The Minister for Pensions did not answer my points about the directive in the previous debate because he was so busy dealing with interventions from his colleagues, but we will discuss the directive further in the next group of new clauses.

The purpose of new clause 18 is to write into UK law the "prudent person principle", as the Under-Secretary puts it. He talks about prudence. When the tectonic plates start shifting, it is incredible how junior Ministers get their ducks in a row and start to sniff the wind—[Interruption]—to mix my metaphors, as the hon. Member for Northavon (Mr. Webb) correctly points out.

Is the new clause strictly necessary? The Government need to justify it more than they have done. The English common law—as well as the Scottish common law—already imposes a duty on trustees to act with prudence when making investments. The Government thought that that, in effect, required trustees to act within the terms of the directive, so the Government were satisfied with the status quo. However, they have decided that to ensure compliance with the terms of directive and make that transparent, they will incorporate explicitly the requirements of the directive into domestic legislation.

In other words, the Government think that the status quo is adequate but want to make absolutely, doubly sure, so they will regulate, legislate and gold-plate some more. They will write into UK law some specific considerations—not that we have seen the regulations, which would be far too much to ask. They have indicated that the regulations will ensure that assets are invested in a manner to ensure the security, quality, liquidity and profitability of the portfolio as a whole. There will also be a requirement that assets be invested predominantly in regulated markets and the explanatory notes contain a list of others.

There will be a significant set of rules for pension schemes that will prescribe in legislation—in a way that is not prescribed at present—exactly how schemes invest. We have not seen the regulations; as I say, the Government think that they may not be necessary because the common law principle probably covers the matter. Despite that, they are introducing these new regulations to ensure compliance with an EU directive with which the Government think we comply anyway. It seems to be a waste of our legislative time.

Mr. Webb

There is a distinction between the way in which UK law has hitherto dealt with these matters and the way in which the EU directive requirement will require us to deal with them in the future. The UK law adopts a principled approach, asking what a prudent person would have done, whereas the EU directive is specific and prescriptive and has a list of things that one can and cannot do. I should have thought that the way in which UK law does these things was better because of the general principle underlying the legislation.

Critically, one does not need to be able to guess in advance what the future shape of financial markets and instruments might be. To give an example, we have not seen the regulations, but the explanatory notes give us a hint as to what they might be. The notes contain a reference to "investments in derivatives." Given that derivatives are themselves a relatively modern invention—I use the term loosely—in the future, there will be new financial instruments. Under UK law, we would not have to worry about that because of the prudent person principle. We do not have to pass a new regulation every time there is a new financial instrument to say whether people may or may not invest in that instrument within the scope of a pension fund. However, if we are governed by the EU directive, the Government think that, to be on the safe side, we had better produce regulations that list explicitly what the directive says that we may or may not do.

Presumably—I hope that the Minister can confirm this—the next time the financial whizz kids invent a new financial product, we will need a new regulation and the Government will have to decide for each new financial instrument whether it is the sort of thing that pension funds may invest in. Governments, by their very nature, are not up to speed on the latest financial instruments, so there would then be a lag and any pension fund could say in its defence that it was clear that it was allowed to invest in the new financial instrument because there had not been a regulation on it, and it was not therefore listed as something that pensions could not invest in. There would no longer be general principle at work, but a list of prescribed things that a fund could or could not do.

That seems an inferior way of regulating pensions and I wonder whether the Minister, on the ground that no one is listening, could offer his personal observations on whether the traditional UK law approach—the general principle of prudence—is better than the EU—driven approach in which everything has to be spelled out and specified, with regulations constantly updated to keep pace with change. Does he share my view that the good old UK way was better?

Mr. Tynan

I want to share with the House one of my experiences as a trustee of the pension fund of the Amalgamated Engineering and Electrical Union workers' scheme. I understand that the reason for the new clause is to give more protection to ensure that investments are sound and that a scheme is viable in the long term. When I was a trustee of that scheme, we had a rule—which seemed strange to me, coming from a trade union background—that said that 80 per cent. of the investments had to be in gilts and that 20 per cent. could be in equities. I know that that does not come under the new clause, but it would be interesting to hear the Minister's view on whether we should limit risk by saying that investments in pension schemes should be based partly on gilts, not just on equities, so that there is a mixture to give some protection. That would create an interesting scenario in terms of how fund managers would invest in pension schemes to protect the rights of the workers and employees for whom the scheme was there.

Mr. Pond

I shall deal first with the comments of the hon. Member for Tatton (Mr. Osborne), who suggested that the new clause arrived late in the day. He will understand that we are seeking through it to try to ensure that we are fully compliant with the European directive and, given that the definitive text of the directive was not available to us until last September and that we as a Government are committed to the process of consultation, we inevitably needed time to bring the proposals forward.

The hon. Gentleman is right in one of his contentions: to a large extent, the provision makes little difference to how we operate the regulation of pensions in the UK or the investment decisions that are a matter for trustees within certain bounds, because much of what is in the directive already reflects common practice in the UK. However, we want to ensure that trustees act in a way that is appropriately described as "prudent", although most trustees operate very prudently as matters stand.

That point was also made by the hon. Member for Northavon (Mr. Webb), who suggested that the approach is not sufficiently flexible and that there is a real distinction between the UK approach and that in the directive. If he looks carefully at the directive, he will see that there is much less of a distinction than he perhaps implied. We are seeking to set the boundaries within which trustees may make their decisions, but considerable flexibility is built in. There is very little imposition on pension schemes precisely because the measures in the directive reflect current UK practice. The issue is one of transparency, and the question also arises of whether common law itself is adequate to demonstrate compliance with the directive, rather than changing the way in which we do things. We are advised that, on that basis, we need to introduce these provisions.

4 pm

My hon. Friend the Member for Hamilton, South (Mr. Tynan) asked how risk-averse I thought fund managers and trustees should be and talked about the balance between gilts and equities or, indeed, derivatives. I have no view on this matter, because the decision is one for fund managers and trustees. They must judge what is in the best interests of scheme members to ensure that returns are maximised, but they must do so in a manner that is "prudent". That is why that phrase is so important.

The hon. Member for Tatton complained that my hon. Friend the Minister for Pensions did not respond to his point about surpluses during the debate on the previous new clause. I cannot believe that that is so, and just in case he did not hear the response, I repeat that we are compliant on surpluses. The directive does not require schemes to be funded daily to full buy-out levels. Our surplus requirements come into play only when scheme funding is significantly higher, so there is no compliance issue.

I hope that Members understand that we are introducing these provisions largely through regulation to ensure a proper consultation process, so that there is no disruption to the operation of the scheme, and to provide the flexibility that the hon. Member for Northavon rightly craves.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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