My Lords, ensuring that schemes deliver good value for, and are run in the best interests of, their members is a primary concern for this Government, so we welcome this discussion, which was set out with great insight and clarity by the noble Baroness, Lady Drake. We agree that the issues highlighted by these amendments—scale, fiduciary duties and conflicts of interest—are important ones to consider. However, we do not agree that simply encouraging the creation of large, trust-based schemes is the right approach to ensuring good value for members.
We are interested in testing how far scale can help schemes to deliver better quality and lower charges for members. Last year we published a call for evidence on defined contribution quality standards, in which we sought evidence about how a scheme’s size can influence outcomes for members. As noble Lords are no doubt aware, the issue of scale is not straightforward, and most responses to our call for evidence saw benefits to members in both large and small schemes. We are currently considering the responses to the call for evidence alongside the recommendations of the Office of Fair Trading, and will respond in due course.
We would have concerns about compelling schemes to merge in the way that this amendment suggests. Determining what is in all members’ best interests would be extremely challenging for the Pensions Regulator, which simply would not have the capacity or information needed to scrutinise every small scheme and consider whether it should close or merge. There could also be European Court of Human Rights issues in relation to property rights because to force a scheme merger could lead to some members losing out.
Turning to the idea that all schemes should be trust-based, in our call for evidence we set out the importance of ensuring that schemes are governed in members’ interests; of course, we recognise the vital role that trustees play in achieving this. However, we disagree that simply imposing a trust-based structure on all schemes is the way forward. Neither the presence of trustees nor fiduciary duties are a panacea for poor governance. This is shown in the findings of the OFT, which identified governance weaknesses in trust-based schemes of different sizes. The Law Commission’s current consultation on fiduciary duties notes that legal duties are,
“insufficient to ensure good outcomes for members”.
In addition, the amendment suggests that in scheme governance, trustees’ decisions should take precedence over an employer’s decisions in any circumstances. This does not provide any opportunity to balance interests, and would apply even if the trustees’ decisions are unreasonable. Such a broad requirement could lead to significant financial difficulties for employers, which would not be in anyone’s interests.
The amendment moved by the noble Baroness, Lady Drake, highlights the importance of identifying and avoiding conflicts of interest. The Government agree that this is an important area; in our call for evidence we suggested that all schemes should have a governance body that must be able to act freely in members’ interests. The noble Baroness referred to the Australian scheme, as did the noble Lord, Lord Browne. She was very dutiful in reading it over Christmas. I suggest that she would find the Australian pension code less onerous to read if she was reading it in Australia, but she was probably shivering here with the rest of us.
The Australian regulator’s new power is interesting but it is not translatable to the UK pension system. Following the Cooper review, which has been referred to, the Australian pensions regulator—APRA—has been given new powers to drive schemes to merge.
We are interested in this approach and will monitor how it is used and how effective it is, but it should be remembered that the Australian pensions landscape is significantly different from our own. It is our understanding that the APRA does not intend to use the power to target all small schemes but to focus, for example, on cases where there is a link between underperformance and an absence of scale.
The noble Lord, Lord Browne, argued that you need to drive up scale in order to increase consolidation, which has an effect on charges and therefore brings a benefit to members. Scale is not necessarily a determinant of value: bigger schemes are not always better. Consolidation is already happening. For example, in 2012 around half the active members of private occupational defined contribution schemes were in schemes with 10,000 or more members; in 2000 this figure was one in eight. The number of active members in small and medium-sized private occupational defined contribution schemes decreased from 0.3 million to 0.1 million between 2000 and 2012—a reflection of the greater regulatory requirements and burdens that are placed upon scheme managers, as well as the challenge of finding trustees who will undertake the work.
Finally, turning to the comment made by the noble Baroness, Lady Drake, about independent governance committees and whether they would have a fiduciary duty to members, the OFT has recommended a model of independent governance committees to address a number of problems that stem from weaknesses in the buyer side of the market. As part of the consultation on fiduciary duties, the Law Commission has asked about the duties that should apply to members of independent governance committees. Its tentative view is that members should be subject to legal duties to act in the interests of members. We are working with
regulators and stakeholders on requirements for independent governance committees, and will respond in due course.
This has been a helpful discussion but I hope that my responses will enable the noble Baroness, Lady Drake, to consider withdrawing her amendment.