Pension Funds: ECC Report (Hansard, 14 December 1992)

§ The Parliamentary Under-Secretary of State, Department of Social Security (Lord Henley)

My Lords, while not leaving the subject of Europe I draw the thoughts of the House back to pension funds and the pension funds directive. I begin by paying tribute to the noble Baroness, Lady Lockwood, and to members of her sub-committee for their careful and detailed examination and consideration of the proposal for a pension funds directive and for the clear and concise manner in which they produced their report. I also say to the noble Lord, Lord Rochester, how important it is to have a debate on this report of the committee. I hope that the debate will show that Her Majesty's Government, the committee and, for that matter, all Members of the House are in great agreement. I also join the committee in welcoming the draft directive.

The directive forms part of a package of liberalising measures to achieve a single market in financial services. Its objective is the removal, subject to prudential safeguards, of national barriers to the investment and management of pension fund assets. It is significant that in implementing this objective the effect on existing United Kingdom pensions legislation and practice will not be large.

Unlike several of our Community partners, we do not generally specify the location or category of investment in which pension schemes must invest their assets, nor do we require those assets to be managed by a UK fund manager. Those who wish to invest abroad, or to use the services of a non-UK fund manager, will already be doing so. That is not always 417 the case elsewhere. Some states have little occupational pension cover. In others, pensions may be provided directly from the assets of the company, without an intervening pension fund, and therefore there are no fund assets to be managed or invested. France operates a pay-as-you-go system, compulsory for all employers and employees, with assets sufficient to meet only the following year's benefit liabilities. Such assets are of course within the scope of the directive.

States which do have funded pension arrangements may currently lay down strict rules on where, and in what type of investment vehicle, pension fund assets are to be invested, specifying limits for each type of investment. They may also restrict fund management to institutions established in the state. The directive will have a major impact on them.

The Government, like your Lordships' committee, look forward to the removal of such restrictions, thereby enabling pension fund administrators in all member states to choose where to invest and whom to employ to manage fund assets. Some of these newly-liberated assets may be invested in London, and pension funds elsewhere in Europe may use the new opportunities to employ UK fund managers.

There is, however, a need for certain restrictions on the freedom which the directive opens up. We accept that pension scheme trustees should be able to use as fund managers only those who have been authorised in their home state to operate in this field. It would be unacceptable for UK pensioners and scheme members to have their pension fund assets managed by someone unable to satisfy the authorities in his home state that he was capable and suitable to do so.

We also see a need for general principles as to prudential investment practice. The noble Lord, Lord Brain, spoke about Article 4, which deals with the general principles of prudential investment. The directive makes provision for general prudential investment principles to take account of insolvency insurance and government guarantees. As the level of each of these varies from one state to another it would be difficult to impose a common application to the different schemes of all states, and that is why the Government have considered that this implementation would be difficult.

I am pleased to note too that the committee disapproved of any suggestion that national legislation should cease to be the basis for determining how national pension arrangements should operate. Adoption of the directive should not interfere with the right of member states to continue to lay down their own rules on pension scheme operation.

Many of your Lordships will know that amendments to the directive recently suggested by members of the European Parliament would impose Europe-wide rules on how pension schemes operate. We cannot accept that the directive should encompass such proposals. Apart from the obvious breach of the principle of subsidiarity, the introduction of such rules for the whole of Europe would run counter to the very reason why national pensions arrangements have developed as they have; that is, to meet the particular needs of employers and employees in each state in the light of that state's tax and social security legislation.

418 As was suggested by the noble Lord, Lord Brain, it would be as inappropriate to impose on British pension schemes constraints designed to deal with the peculiarities of French or German pension arrangements as it would be to impose on Spanish or Greek schemes restrictions to meet the distinctive characteristics of ours.

The House is aware that my right honourable friend the Secretary of State appointed the Pension Law Review Committee, under the chairmanship of Professor Roy Goode, to undertake a review of the framework of law and regulation within which occupational pension schemes operate in the United Kingdom. We are not prepared to see pre-empted the detailed examination which Professor Goode's committee is undertaking. I am glad to see that the committee shares the Government's view and also feels that consideration of the directive should not be delayed pending the report by Professor Goode and his committee, as was suggested by the CBI. The two issues are distinct and should remain so.

Before turning to particular provisions in the directive, I should like to refer briefly to what is left out. The Commission's original discussion paper proposed cross-border freedom, not only of fund management and investment but also of fund membership. That would have permitted a company with operations in more than one member state to establish a single pension fund into which contributions and from which benefits would be paid in respect of employees wherever in the Community they were employed. It was omitted from the directive because of difficulties, not least in the tax and social security fields, which needed to be resolved before it could be adopted.

The Government have already expressed support for the principle of freedom of cross-border membership. The Commission, rightly in our view, believed, however, that it would be preferable to achieve the adoption of the comparatively more straightforward cross-border freedoms in this directive before embarking on a far more complex excursion into cross-border membership. Your Lordships' committee welcomed the Commission's intention to put forward further proposals in this field in due course.

Indeed, as your Lordships will know, the Commission has produced a discussion document to promote debate on the possibility of workers posted by their employers to work in another member state. The Commission suggests that such workers should be allowed to remain in their home state pension scheme. The Government are considering the proposals in the paper and will be responding in the new year. The Government will support the Commission in principle in proposals to deal not only with the posted workers but also with locally-recruited employees. As the noble Baroness, Lady Lockwood, pointed out, there are a number of difficulties to be overcome, particularly in the tax field.

In the light of the Commission communication on supplementary social security schemes, the Government tabled a draft resolution calling on member states to implement measures to remove 419 obstacles to the mobility of workers and on the Commission to report what action had already been taken by member states and to consider whether further action was required. My department, the Department of Social Security, worked hard to achieve agreement to the proposal. However, I regret to say that it could not be accepted by all member states at the meeting of the Social Affairs Council on 3rd December. The draft resolution has therefore been referred back to officials to see whether a compromise agreement can be achieved. I assure the House that we shall continue to work towards adoption of the draft resolution.

I turn to two particular issues raised in the committee's report. The first is the restrictions on self-investment and the second is currency matching. The Government support the principle of restricting the level of self-investment by a pension fund. We introduced regulations for this purpose in March this year. If a pension fund holds too high a proportion of its assets in the sponsoring employer, failure of the company or a drop in its share price means a drop in the value of the pension fund at a time when the employer is not in a position to make good the deficit.

When introducing those regulations we realised that there needed to be exceptions. In particular, the owners of small businesses who are members of small self-administered schemes, conscious of the risk they run, use their own but not their employees' pension rights as capital for investment. To impose on them the normal restrictions on self-investment would create substantial difficulties for their businesses which would need to obtain their working capital elsewhere. We also recognised the need for transitional arrangements for existing self-investment.

Small self-administered schemes and others have sought comparable derogations from the directive, as did your Lordships' committee. I can confirm that we are seeking a derogation from the self-investment restrictions in the directive similar to that in our own regulations.

I turn to currency matching. The directive would permit member states to continue to require pension funds to hold up to 60 per cent. or 80 per cent. of their assets in the currency in which the liabilities arise. We have no such requirement in the UK nor do we consider such a requirement necessary or compatible with the liberalisation which the directive seeks to achieve. I am glad to be able to draw upon the committee's support in seeking its removal. However, several member states who do not agree with us are unlikely to look favourably at the suggestion.

I believe all noble Lords will agree that adoption of the directive will benefit both pensioners and the pensions and financial services sector not only in the UK but throughout the Community. I am glad to have the support of the committee and of the House for the Government's position. During our presidency we have taken the directive forward in a Council working group. In reply to the noble Lord, Lord Rochester, we look forward to its adoption by the Council of Ministers next year with, we hope, implementation by the end of 1994.