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Pensions Bill

I thank my noble friend Lord Judd for tabling this set of amendments and for the opportunity to debate the important issue of ethical investment. I am bound to say that it is good to have some passion injected into our pensions debates, which can sometimes be quite technical and turgid. The wider subject of ethical investment is of course particularly relevant at the moment, and before I talk more specifically about personal accounts and the amendments, I acknowledge the concerns highlighted by my noble friends Lord Judd and Lord Joffe last week about Zimbabwe and will be very clear about the Government’s position on British business there. Although, to our knowledge, no British company has acted illegally, it is absolutely right that the companies and their shareholders look hard at how their activity in Zimbabwe may be benefiting the regime. We will work with them to ensure that the regime cannot benefit from British commercial activity. We are now in discussions with EU member states with a view to bringing a similar package of concrete proposals for action to the next EU Foreign Ministers meeting on 22 July. These measures might include increasing the number of those on the EU travel ban and assets freeze lists whose actions are contrary to a political settlement, freezing the EU assets of businesses and firms owned or controlled by those on the list, and preventing or making it harder for regime members to attend international events within the EU. Against this background of international concern, I also make it clear that we fully recognise the increasing interest in ethical investment both in Parliament and the wider community. As my colleague the Minister for Pensions said recently at the launch of the national ethical investment week, to which he referred at Second Reading: "““If we are to build a more successful, vibrant, modern economy we can no longer afford to view economic success as being in conflict with social and environmental goals. On the contrary these goals must be seen as integral to economic success and the very essence of sustainable development””." A significant area for ethical investment is pension schemes, and again I assure noble Lords that the Government are sympathetic to the concerns driving these amendments. Increasing numbers of people take an interest in where their money is invested, and it is proper that this should be considered when setting up a new workplace pension scheme on the scale of personal accounts. We should also recognise that ethical investment and sound financial returns are not inevitably in conflict. However, we must also bear in mind the primacy of the trustee of any pension scheme when it comes to making investment decisions. I appreciate that the scale of personal accounts will be significantly greater than that of other schemes but, as for other trust-based schemes, the trustee must have the freedom to make the investment choices that are right for the members. To attempt to restrict this freedom would be to treat the trustee of personal accounts differently from the trustees of all other schemes. That said, I believe I can give noble Lords an assurance of the real importance being placed on ethical investment. First, it has been noted that the law already requires the trustees of pension schemes to prepare a statement of investment principles that sets out the guidelines which fund managers must follow in investing members’ funds. This statement must be made available to members and prospective members and must set out the extent to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments. I should add that this law was of course introduced by the Government in recognition of the importance placed on responsible investment. Secondly, following debate on this issue in the other place, Tim Jones, the chief executive of the Personal Accounts Delivery Authority, confirmed that responsible investment will be explicitly addressed in the investment consultation which the authority will undertake later this year. The consultation will start in the autumn and we hope to respond by next spring. I am sure noble Lords will be aware that Paul Myners, the chair of the delivery authority, only last week stated publicly that PADA, "““will consult [on an SRI fund] and if there is a strong demand, as I anticipate there will be for SRI management, then there will probably be an SRI fund””." I hope that all interested parties will respond to that consultation, as it will of course be considered by the trustee corporation in the development of its statement of investment principles. Thirdly, we have tasked PADA with doing some preparatory work on the investment strategy to assist the trustee. In carrying out this work, PADA will draw on research into the investment preferences of the target group, discussions with interested parties and also draw on the expertise of its consumer and trustee advisory committees. As part of that process, and in view of the powerful contributions that have been made today, I am happy to extend an invitation to my noble friend Lord Judd and other noble Lords who have spoken on this issue today to meet Paul Myners and Mike O’Brien for a further discussion of their views on responsible investment. I know that Paul Myners is particularly keen to engage on this issue. I hope that this has clarified for noble Lords the importance that is being placed on responsible investment. Let me now turn to the specifics of the amendments themselves. The Work and Pensions Select Committee, Paul Myners, and virtually everyone who has commented on personal accounts have emphasised that to be a success, this must be a simple, low-cost scheme. In its preparatory work on the investment strategy, as in all its work, PADA will be obliged to have regard to the principles in Clause 70, and in particular the principle in Clause 70(2)(d), that the costs of scheme membership should be minimised. Amendment No. 113H tabled by the noble Lord, Lord Skelmersdale, would effectively duplicate this provision, and so I do not believe it is necessary. Amendment 112ZDB, tabled by my noble friends Lord Judd and Lord Joffe, and the noble Baroness, Lady Northover, would require the scheme to have a written policy on ethical investment. As I have said, it is not for the Government or indeed any other person to put any specific investment requirement on the trustee. In addition, I have already discussed in some detail the role of the statement of investment principles and the current requirements in relation to that statement. Again, I believe that these would largely be duplicated by the amendment. Amendment No. 112ZDA seeks to give the trustee corporation the right to disinvest from investments associated with, "““crimes against humanity, war crimes or genocide””." In discussing this I should like to give some assurance on what I understand to be the current operation of the law. Noble Lords are correct that there is no such overriding right on the part of trustees. However, I have been assured that there is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial returns, security and diversification. I have already mentioned that the trustees of a scheme are obliged to cover in the scheme statement of investment principles the extent, if at all, to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments. Given that regulation 2 of the investment regulations refers to the retention and realisation of investments, we would say that those regulations would already oblige a trustee to state to what extent it makes such investments, and implicitly also why. This is an obligation on trustees, not simply a right to choose whether to disinvest or to sell such interests. Furthermore, the SIP must be reviewed at least every three years. Apart from this statutory duty, case law also gives trustees guidance. There is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial return, security and diversification. Indeed, it has been observed by commentators in the eighth edition of the Pensions Law Handbook that if trustees wish to make an ethically acceptable investment which will produce a financial return at least as good as that produced by any other investment, there is no reason why they cannot do so. While, strictly speaking, there may be no overriding right to divest shares held in such interests, by virtue of existing statute law, common law and the consequent combination of obligations and latitude for trustees, in our view trustees are able to act in a similar way without a specific legal right to do so. This position applies to all pension scheme trustees, whereas the proposed new clause would apply only to the trustee corporation. It would not be right to impose specific abilities or requirements on that body alone, thereby making its situation unequal to that of other trustees. I therefore hope that, with the offer of further discussions to explore any need to clarify the law on this issue, the noble Lord will feel able to withdraw his amendment. I hope that I have made our position on investment absolutely clear: we take responsible investment seriously but we also take seriously the primacy of the trustee over investment decisions in any pension scheme. It would not be appropriate for the Government or Parliament to impose any guidelines that might restrict the trustee’s independence in carrying out its overriding duty to members, although government has a role in engendering a climate which fosters ethical investment and in ensuring that legislation does not act as a barrier to those who are committed to this. I am grateful to noble Lords for their thoughtful participation in the debate. I am sure that the authority, and the trustees in turn, will wish to consider the representations made. On that basis, I hope that my noble friend will feel able to withdraw his investment and that he will participate in the further discussions that we wish to have, particularly with Paul Myners.