My Lords, I thank the Minister for introducing these regulations and those noble Lords who have spoken. As we have heard, these regulations cover two distinct issues—one minor and the other rather less so. I will do the minor one first; it is a change to correct a drafting error in the Pensions Dashboards Regulations 2022, amending the line in Part 1 of Schedule 2 that specifies which master trusts are required to connect to the pension dashboard by 30 September this year. I do not want to kick a project when it is down, but, to me, that is not the most pressing problem attached to the Pensions Dashboards Regulations 2022. In fact, the Minister recently announced that the entire timetable, which is hard-wired into these regulations, is being scrapped, so the regulations will presumably need to be either repealed or amended. Could the Minister tell us whether the intention is to repeal them or if they are simply going to be amended and when we will know more about that?
On the major provisions in the regulations, the objective behind them is clearly to push pension schemes into investing more of their members’ money in illiquid assets. As we have heard, they will use two basic levers to do that. First, they will require all pension schemes with more than 100 members to explain their policy on illiquid assets and to disclose their schemes’ investments in them; and, secondly, they will exclude specified performance-based fees from the list of charges that fall within the 0.75% regulatory charge cap.
Just to be clear, these Benches would like to see greater investment in ways that will help the transition to net zero and in infrastructure projects that support economic growth, but we have heard today some important questions about the detail of these regulations, and I hope the Minister has some answers ready. First, the question of risk was raised. The noble Lord, Lord Sharkey, is right: I could not find a definition of illiquid assets either, but they clearly cover a wide range of investments. They are not just buildings or infrastructure but, as the Secondary Legislation Scrutiny Committee pointed out, could include art or intellectual property. Some illiquids clearly carry significant risk. This legislation also targets venture capital investments, which often have a high failure rate.
The noble Lord, Lord Sharkey, mentioned the 30th report from the Secondary Legislation Scrutiny Committee, which drew these regulations to the special attention of the House. It expressed concern that, without limits on the proportion of illiquid assets in a pension scheme, the scheme may not be able to deliver the returns that members anticipate. It pointed out that many of those members, of course, have been auto-enrolled by their employer and therefore had no involvement in the choice of their pension scheme investments.
As the noble Lord, Lord Sharkey, pointed out, the committee asked two specific questions that it thought Members of the House might like to put to the Minister. One was about how schemes’ exposure to increased risk of lower returns would be monitored, and the other was how trustees would be guided on assessing the risks to the portfolio. I may have missed this in the Minister’s comments—I heard him talk about advice to trustees on charges, but I am not sure that he talked about advice on assessing risks—so it would be helpful if he would address that.
I want now to look briefly at the proposal specifically to exclude certain specified performance-based fees from the list of charges that fall within the regulatory charge cap. As my noble friend Lady Drake has reminded us, the charge cap was introduced to protect the millions of people who are saving and investing through inertia, so surely there must be a compelling case for the Government to do anything that might weaken that. It is worth pausing briefly to remember that, in 2013, DWP research showed the impact of higher fees on pension savings. An individual who saves throughout their working life via a scheme with a 0.5%—50 basis points—annual charge cap on the value of their pot could lose 13% of their savings to charges. Push that to 1% and they could lose almost a quarter; push it to 1.5%, the figure is around a third. These basis points may sound small but their impact on the value of a fund is really quite significant.
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The Minister mentioned that some two-thirds of defined contribution occupational pension schemes have no direct investment in illiquid assets in their default funds and that meeting the cap on charges is a significant barrier to such investment. I am with my noble friend Lady Drake: I would like to see some hard evidence that the charge cap is the primary barrier to such investments. Can the Minister say how many of those two-thirds were small schemes? If they are small schemes, is not this issue more likely to be addressed by consolidation than by addressing the charge cap?
The noble Lord, Lord Sharkey, said that he would like to see the impact of the charge cap, but the Government are pursuing consolidation for small schemes. If they end up consolidating into much larger schemes, how will the Government know that they can separate out the impact of that from, for example, the impact of any changes to the charge cap? As my noble friend Lady Drake pointed out, some large DC schemes are already holding illiquid investments within the existing charge cap, some without paying performance fees; they are basically leveraging scale to avoid putting higher costs on to savers. It really matters that the Government can provide the evidence that the removal of some consumer protections is necessary to persuade others to go where some schemes have already gone within the existing charge cap arrangement.
I also have some questions about how the Government will ensure value for money for savers when performance fees are outside the cap. I would be interested to hear the Minister’s response to my noble friend Lady Drake on this issue, as well as on her question about how higher costs can be fairly distributed across members
in different circumstances, including those who are close to retirement or those who leave a scheme; that was a really interesting question, I thought.
Regulation 2 clarifies what counts as “specified performance-based fees”, which would be excluded from the cap. I gather that they are, roughly, fees or profit-sharing arrangements that one pays only if investment performance exceeds a certain rate or the value of the managed investments is above a certain amount. However, as the noble Lord, Lord Sharkey, said, the regulations do not prescribe either the rate or the amount—or, indeed, any cap at all. The statutory guidance simply says that it
“is for the trustees or managers of the scheme… and the fund manager to agree based on the nature of the investment proposed.”
When the SLSC raised this matter, it was quite clear that this is an issue. DWP came back on that and said that, if people are investing
“without the full security of the charge cap, trustees and managers are … advised to seek professional advice on, for example, what is an appropriate hurdle rate”.
The department also said that they should consider using
“a high-water mark or a fee cap”.
However, that is only advice. Can the Minister tell the Committee whether he is confident that this will not erode the protection for savers that was provided by the introduction of the charge cap in the first place? If he is confident that trustees can be relied on to make judgments of this complexity now, why was the charge cap needed in the first place? If they cannot be relied on, why is it safe to exclude these fees from the cap? I look forward to the Minister’s reply.