HL Deb 14 December 1992 vol 541 cc394-403

3.9 p.m.

Baroness Lockwood rose to move, That this House takes note of the report of the European Communities Committee on Pension Funds [4th Report, HL Paper 15].

The noble Baroness said: My Lords, the subject of this report is a proposed Council directive on the freedom of management and investment of funds held by institutions for retirement provision. In this country we are more accustomed to referring to such institutions as pensions funds and that is the term that I shall use. Pension funds are of great social and economic importance and the sums involved are stupendous. In its recent report on the operation of pension funds, the Social Security Committee of another place observed that pension funds are, by far and away the most important holder", of shares quoted on the Stock Exchange, holding as they do, almost one-third of all quoted shares", and that in 1989 the market value of their holdings in United Kingdom securities amounted to some £165 billion. In a speech delivered on 2nd July 1990, foreshadowing the present proposed directive, Sir Leon Brittan drew some international comparisons. He said: In the Netherlands, pension fund and life insurance assets represent more than the entire Gross Domestic Product. This is true in the United Kingdom too, and others are not far behind. In most Member States, pension fund and life insurance assets far exceed stock market capitalisation".

Against this background it is easy to see why the European Commission was anxious to ensure that the freedom of capital movement, a prime Community objective, should be confirmed as applicable to pension funds. Hence, this draft directive which is designed to ensure that the Community's internal market operates fully in the field of pensions investment.

As can be seen from the report now before your Lordships' House, the directive was the subject of a short inquiry by the Select Committee's Sub-Committee C—that is, the Social and Consumer Affairs Sub-Committee. The committee also had before it a discussion paper on supplementary social security schemes published by the Commission in July 1991. This discussion paper envisaged cross-border membership of pension schemes. Cross-border membership of pension schemes raises complex fiscal issues, accentuated (as the evidence in the report shows) by member states having such diverse provisions. Consequently, because of its complexity, cross-border membership was not included in the current directive which is much more limited in its scope. Nevertheless, the subject was commented on in much of the evidence, and further moves in this direction are expected.

The directive—which, together with the evidence received on it, is published in the committee's report —addresses two related issues. In the first place, it is concerned with the removal of any national barriers which would prevent pension scheme administrators in one member state from employing an investment manager established and duly authorised in another member state, or which would limit the investment of a pension fund's assets to securities of the member state concerned. Secondly, the directive lays down certain principles which, on grounds of prudence, should be observed throughout the Community in the conduct of pensions investment. These so-called "prudential provisions" are accompanied by requirements designed to prevent member states from using prudential provisions in their own legislation to make pensions investment a captive market for their own government securities or for shares denominated in their own currency.

Although the draft directive itself attracted little public notice in this country, there were two issues much in the public eye which had a direct bearing on it and which were reflected in some of the evidence we received. The first was the issue of subsidiarity. Subsidiarity is bound to figure nowadays in discussion of any proposal for a new directive. Indeed, it sometimes seems to me that, although the underlying issue is undoubtedly crucial, the word "subsidiarity" itself has been rescued from well-merited obscurity in the belief that it can be waved as a magic wand to dispel all unease about the constitutional relationship between member states and Community institutions. Be that as it may, after considering the matter carefully the committee was satisfied that the draft directive was acceptable from the subsidiarity standpoint in that its central purpose of safeguarding cross-border freedom of services and of capital movement for pensions funds could not, in practice, be achieved by national legislation alone.

The directive's provisions are minimal. As we point out at paragraph 12 on page 8 of the report, it will be for member states to apply detailed rules, provided that they are consistent with the principles laid down by this directive, which, in turn, reflects the principles already contained in the Third Life Insurance Framework Directive. The Commission's proposals do not affect the way in which pension fund managers reach their decisions. However, to underline and ensure this, in paragraphs 58 and 73 of the report the committee recommends an extension to Article 4(1). While we recognised the danger that confusion could result from introducing European law into the field of pensions investment, we decided that the advantages of the directive easily outweighed its disadvantages and that it deserved a warm welcome. This was also the general sense of the evidence we collected.

At the time of our inquiry, a great deal of public attention was focused on the report into pension funds produced by the House of Commons Select Committee on Social Security, to which I referred earlier, and in particular on that committee's investigation into allegations of fraud affecting the pensions funds of Mirror Group Newspapers and the Maxwell Communication Corporation. Our own inquiry in no way duplicated that of the House of Commons Select Committee. Indeed, we delayed the commencement of our inquiry to ensure that. Nevertheless, we kept in mind throughout the need to ensure that, apart from constraints essential to the single European market, there should be no interference with the power of member states to use their own legislation to protect their pension scheme members against malpractice in the running of their schemes. As regards United Kingdom law, your Lordships will, I am sure, share our concern, as indicated in paragraph 60 on page 18 of the report, that careful consideration should continue to be given to the questions that were raised in the report that was produced by the Social Security Select Committee in another place.

The draft directive on which we reported is not yet in its final form and continues to be considered by the relevant Community authorities. So as to bring our own views to bear well before the Council of Ministers could reach agreement on a text, a letter (dated 11th March) was sent to the Secretary of State for Social Security by my noble friend Lady Serota, outlining our interim conclusions. This letter is reproduced at Appendix 3 to our report.

We are grateful to the Government for their detailed written response to the report, which has been made available to your Lordships for the debate today. I am delighted to see from that response that, to a very large extent, the Government are willing to endorse the committee's conclusions, and, in particular, that, despite the difficulties, the Government recognise the importance of working towards freedom of cross-border membership of pension schemes. I hope that, in replying to the debate, the Minister will be able to tell us how far consideration of this directive has now been taken by the Council of Ministers, and what prospects there now are of a directive designed to facilitate cross-border membership of pension schemes being brought forward.

As chairman of Sub-Committee C, I should like to thank the witnesses, including the very well informed and co-operative witness from the European Commission, for giving us so much help in understanding the purpose and likely effect of the directive. I should also like to offer my sincere thanks to the members of Sub-Committee C for the patient and objective way in which they tackled this highly technical subject. In particular, I should like to thank the Clerk to the committee, Mr. John Ingram, for his untiring efforts, and Sir Alec Atkinson, our specialist adviser, for his skill in steering us through this very complex maze. I beg to move.

Moved, That this House takes note of the report of the European Communities Committee on Pension Funds [4th Report, HL Paper 15].—(Baroness Lockwood.)

3.21 p.m.

Lord Brain

My Lords, as perhaps the only person batting for the committee in addition to our noble chairman, it is one of those occasions when I hope I can be brief. The noble Baroness, Lady Lockwood, has explained comprehensively and clearly the background to our conclusions and the way in which we worked on the investigation. The Government's reply, when it arrived, largely agreed with the points we made. Although I shall be picking up one or two small points, their reservations seem to be more on emphasis or feasibility than on substance, and they indicate a flexibility which I suspect will be used in future negotiations.

As the noble Baroness said, the directive is really a financial one. It has social implications but its structure is a financial one. It aims to ensure the free movement of capital and financial services throughout the Community. Because each of the 12 member states has a different structure for funding pensions, the only way that the Commission could set about this directive was by using subsidiarity and allowing each state to develop the best way of making investment more flexible and allowing their tax systems to work as they have done in the past. This objective is recognised as being achieved in the directive. The problems that have arisen about cross-border pension funds arise from all these differences. I hope that this is a first step in a long road towards cross-border pensions. It will take time, despite the encouragement of the multi-nationals towards this end.

A pension is a form of deferred income or salary but it is, as the noble Baroness has said, a very significant item of cash flow into investment and, later, out of investment. It needs to be managed in a way that gives confidence to the person earning the pension and the person who is going to receive the pension. The Government Actuary, who was a very helpful witness, spelt this out clearly in his evidence.

The main concern of the committee is in the drafting of Article 4. We have set out a number of points that we think need to be looked at. The Government have accepted one that should be brought in from the preamble. In paragraph 27 of their reply, they take issue with the committee's view that the general principles of prudential investment laid down in Article 4 can be applied consistently across the Community. They have doubts as to whether this is a feasible point. I think that it is, provided one does not define what one means by "prudent". I shall come back to this point in a moment. I am sure that, if a case goes before a court, the lawyers and the judges will have a good definition as to what is prudent within that particular country. I would hope that it is purely a negotiating stance by the Government when they say that they do not wish to become too involved in prudence. I think that the point needs to be looked at.

In paragraph 30 the Government say that they do not accept that one should spell out in detail what "prudent" means. I shall give the House an example. Suppose someone says that it is only prudent to invest in fixed assets. How would one invest in Scottish Hydro or British Gas, whose main assets are either water or gas? That would provide a lawyer's delight. One should leave in the word "prudent" and take care that one gets prudent investment by prudent trustees who will be seeking prudent advice from actuaries and financial advisers. Let it be remembered that a pension fund is an ongoing thing. It is prudent to review progress and to decide that the Ming vase which, as a Coal Board pension fund manager, one bought some years ago has appreciated to the likely maximum. One makes a capital gain and, provided the market has not gone down significantly, as has happened at the moment, one releases one's capital. The same applies to property. "Prudence" is the key word to this directive.

I hope that the directive will now encourage the cash flow from pension contributions to be invested broadly across the industries throughout the Community where it will give good returns. I hope that subsidiarity, which will control it at local level, will mean that it does not have to be invested in so much fixed interest in a particular currency or anything like that. I believe that the Government accept this and I look forward to hearing their reply to the debate.

3.28 p.m.

Lord Rochester

My Lords, like the noble Lord, Lord Brain, I had the pleasure of being a member of the sub-committee which produced this report under the chairmanship of the noble Baroness, Lady Lockwood. Since her period in that office will end very soon, perhaps I may take this opportunity to thank her warmly for the way in which she has presided over our deliberations.

The noble Baroness introduced the report so effectively that my remarks will be very brief. A further reason for brevity is that, as is evidenced by the reply to the report which the Parliamentary Under-Secretary has already given, it may be regarded as a relatively uncontroversial document. Indeed, I recall wondering when we discussed the committee's final recommendation whether it was really necessary to make the report to the House for debate rather than simply for information. In the end our general feeling was that there should be the short debate that we are now having. For my part I wish simply to highlight two or three points.

First, I subscribe fully to the basic objective of the European Commission in putting forward the directive that barriers to cross-border investment and management of pension fund assets should be removed in keeping with the aim of introducing a comprehensive single market in financial services as soon as possible.

I am also in full support of the conclusions contained in paragraph 74 of the report: that, apart from the constraints essential to the operation of a single market, there should be no interference with the power of member states to use their own legislation to protect pension fund members against bad practices in the management of their schemes. As the noble Baroness said, at the same time the committee recommended that in the United Kingdom such matters should be examined carefully in the light of the report of the Social Security Select Committee of another place on the operation of pension funds, following the Maxwell debacle. The Government have set up a pension law committee to review the framework of law and regulation within which pension schemes should operate, and we must now await its recommendations.

I was surprised that in its evidence to us the CBI suggested that the directive should be shelved until consideration had been given to the findings not just of the inquiry recommended by the Select Committee of the other place, but of a working party which the CBI itself was setting up. In my view it would be altogether wrong if, while those disparate deliberations were proceeding, pension fund trustees, administrators and members were to be denied the benefits of the liberalising measures envisaged in the directive.

I am glad to endorse paragraph 54 of the report which welcomes the Commission's proposals to draft a directive to facilitate cross-border membership of pension schemes. I hope that the Commission and the Government will do all in their power to surmount the obstacles that will need to be overcome before that proposal can be implemented, for the prize of so doing will be of great benefit to the increasing numbers of employers who will in future be doing business across borders.

I should like to draw attention to Article 4(2) of the directive. It debars member states from requiring pension funds to invest in particular categories of asset, but does not debar them from limiting the extent to which fund managers can invest in specific kinds of assets such as equities. I support the recommendation that that article should be extended to rule out restrictive national laws of that kind. As the noble Baroness said, such limitations could have the effect of compelling scheme managers to invest only in assets upon which no limitations have been placed such as gilt-edged securities in the country concerned. That is the present position in Germany.

I share the view that that restriction would run counter to the spirit of the directive, and its wider application would adversely affect the investment performance of pension funds generally. It is important that managers of those funds in the United Kingdom and elsewhere in the Community should be left free to determine where to invest the assets of their schemes and in what proportions those assets should be placed in particular forms of investments.

Lastly, I wish to refer to Article 5 of the directive which requires member states to implement the provisions needed to comply with its provisions not later than 31st December 1992; that is, in only a fortnight's time. Such a timetable is clearly impracticable. That is why the report recommends that the article should be revised and the timing of the directive's introduction should be co-ordinated with that of the three connected commercial directives. I should be grateful if the Minister would let us know what is the Government's latest prediction as to the date when it will be possible for the pension fund directive, first, to be adopted, and, subsequently, to be implemented.

3.35 p.m.

Baroness Turner of Camden

My Lords, I should like to take the opportunity from the Front Bench to commend the report produced by the Select Committee (of which I was also a member) and to thank my noble friend Lady Lockwood for the manner in which she chaired the committee's proceedings.

The subject is of course a somewhat specialist and technical one; but I venture to suggest that it is not very controversial, at least not so far as concerns the UK. The Commission's proposal stems from its belief that the establishment of the single market will encourage the development of trans-national companies. In consequence, many companies will employ staff resident in more than one member state. There will be an increasingly mobile workforce. Thus, many employees, when they reach pensionable age, will have worked in more than one member state. As has been said, ultimately that may lead to cross-border membership of pension schemes and arrangements whereby there will be one cross-border pension provider for each trans-national company. That is some way off, for reasons which have been referred to by other noble Lords.

Nearly all the witnesses who came before the committee expressed an interest in the development of cross-border membership. As the report indicates, many of them considered the present proposal a paving measure towards it. Various possibilities were indicated: for example, there could be a European pension fund statute. There was also a suggestion that cross-border membership could be restricted to mobile workers. That clearly has major difficulties. Indeed, the whole matter of cross border membership is fraught with problems since pension provision has proceeded at a different pace and on a different basis in the various member states, and there are also taxation problems.

As the report indicates, the committee considered all those matters and decided that it should limit its investigation to the terms of the draft directive itself. The directive's stated aim is to facilitate the freedom of pension funds to invest their assets where they deem appropriate, and to appoint investment managers as they choose. I should like to state the principles to be adopted because they are important; and, moreover, they are already applicable mainly in the UK. They are as follows: to ensure that assets are invested in a manner appropriate to the nature and duration of liabilities and level of funding, taking account of requirements of security, quality, liquidity and profitability of the pension fund's total portfolio. Secondly, to ensure sufficient diversity of asset investment. Finally, to ensure that self-investment is restricted to a prudent level. They are all ways in which prudent investment is currently looked at within the UK.

As my noble friend said, we had the problem during the investigation that it coincided with public anxiety about the fate of pensioners in the Maxwell schemes. The Social Security Select Committee in another place had been carrying out its investigation, and the Government announced the establishment of the Goode Committee to review the framework of law and regulation within which occupational pension schemes operate. It was scarcely surprising therefore that that matter should figure in the submissions some respondents made to the committee. As the noble Lord, Lord Rochester, has said, the CBI, in particular, felt that consideration of the directives should be suspended while consideration was being given to the report of the Social Security Select Committee. I am glad to say that the Select Committee did not agree to that proposal (neither, incidentally, did the TUC) so the committee proceeded with its examination of witnesses.

The committee was glad that the Commission apparently intends to follow up the directive with another to facilitate cross-border membership. However, the difficulties should not be underestimated. Not all member states have systems of private pension provision based upon funding as we have in the UK. We have developed a framework of law to accommodate this which, while it certainly has its flaws—as has been demonstrated in the Maxwell case —nevertheless has ensured the growth of private occupational pensions in this country which, generally speaking, have served scheme members extremely well. No doubt there will be further refinements and improvements, particularly in the area of the security of members' benefits and expectations, as a result of the Goode Committee Report, when it finally appears.

However, the committee was convinced that matters relating to pension fund security, member participation in the running of schemes, duties of trustees, protection against possible fraud, and so on, should remain within the domain of national legislation. Indeed, the directive does not envisage that this should not be so.

As has already been stated, the committee noted the importance of the principle of subsidiarity and did not want to see a build up of pensions law within the Community which could further complicate what is already a complex area.

The committee came to the view—I think correctly —that the objectives of the present directive could not be achieved by national law alone, since it relates to cross-border freedom of services and capital movement. In general, the respondents who gave evidence to the committee were in agreement with the aims of the directive. Furthermore, they indicated that this directive—limited, as it is, solely to investment of scheme assets—would not add significantly to the complexity of running a UK-based pension scheme. Other member states may have more difficulty in accommodating the directive than the UK, since in some states there are restrictions already as to the manner in which pension funds can be invested.

One of the possibilities raised with the committee was that employers might be tempted to switch from funded schemes to "pay-as-you-go" schemes. Everyone thought that would be a retrograde step. However, the general view of respondents seemed to be that that was not likely to happen.

Trust law has often been blamed for some of the problems that have arisen in recent years, notably in the Maxwell affair; but there is little wrong with the principles upon which trust law is based, since these are intended to ensure a separation of pension fund assets from those of the employer and thus to provide greater security for the pension scheme members.

It has generally been regarded as good practice that the trustees of a scheme should be representative of the members of it. Personally, I should like to see legislation requiring at least one half of the trustees to be elected from the workforce covered by the scheme, with arrangements made for them to be properly trained in order that they may effectively carry out their duties. More openness in the conduct and management of schemes is surely desirable. Had this been the situation in the past, some of the problems we have seen might not have occurred.

This is an issue we shall doubtless need to confront when we come to consider cross-border membership and a later directive designed to facilitate it. Arrangements would need to be made at European level for proper involvement and participation of scheme membership. However, we are not asked to deal with these issues at the moment.

We believe that the directive should be warmly welcomed. We see no problems for the UK pensions industry which, generally speaking, is in favour of freedom of investment as being in the best interests of scheme members, subject to the sensible safeguards indicated in the directive.

As has already been said, the committee believes that there should be some exceptions for unfunded schemes set up by employers for small numbers of higher paid employees, for example, and for small self-administered schemes. It also believes that the timetable for the directive should be revised, for quite obviously it will not now be practicable to comply with it before 31st December 1992.

Thus, we on these Benches support both the directive and the report and await with interest the statement the Minister is to make this afternoon.