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Pension Funds: Investments and Tax Relief

Volume 831: debated on Thursday 29 June 2023


Asked by

To ask His Majesty’s Government, further to tax relief provided to pension funds, what assessment, if any, they have made of the actions taken by pension trustees to ensure their investments (1) effectively manage climate risk, and (2) comply with treaties on human rights.

My Lords, the Government have introduced legislation and published guidance alongside the TCFD requirements to help pension schemes improve the quality of governance and manage climate risk. DWP committed to review the requirements in late 2023. These reviews will utilise insights from the regulator’s review of early reports and will also consider clarifications of fiduciary duty. DWP also launched an industry-led task force on social factors, which aims to produce a guide for industry by this November.

I congratulate my noble friend the Minister and the Government on their work so far, but as at least 25% of all pension fund assets originated from taxpayer reliefs, does he agree that the Government have ample justification to expect pension funds to invest responsibly, supporting national objectives? Does he share my concern that this seems not to be happening? For example, Corporate Adviser magazine’s February 2023 ESG report shows that the three largest pension providers invest in cluster munitions, even though the UK is recent president and signatory of the international agreement to end their use, and that investment in domestic companies and green projects has been weak. Will the Government encourage or ensure that more of the taxpayer contribution to all pension funds helps UK markets and supports UK sustainable growth and climate and nature protections, to meet social or national objectives?

I hope I can answer a number of the points that my noble friend made. On her general push, she is right: there is a lot more we need to do to encourage pension funds to invest in net zero. The introduction of the TCFD reporting requirements for pension schemes was pioneering; these regulations are still relatively new and it would be premature to judge their effectiveness, but a lot more is happening in this space, as my noble friend will be aware. As well as the task force, we have a stewardship review, which will assess the effectiveness of the guidance, and alongside this the Financial Reporting Council, which works alongside the FCA, my department and the regulator.

What legal authority do the Government have to attempt to create a de facto sovereign wealth fund by manipulating our pension assets? Unlike countries such as Norway, we do not have experience of running a sovereign wealth fund. I feel uneasy. I want the investment to be in this country—that makes sense—but doing it in the way it seems to be being done is fraught with difficulty. Will the Government take extra care over this attempt to manipulate pension funds, because we now have trustees with powers they did not have 30 years ago?

I do not know about manipulation of pension funds, but I can say that there are strong fiduciary duties on trustees. The noble Lord will know that in the green finance strategy, published in March, the Government committed to engaging with interested stakeholders on how we can continue to clarify fiduciary duty through a series of round tables and a working group of the Financial Markets Law Committee. I think it fair to say that many larger schemes consider climate change risk, which I think is the gist of his question, to be financially material; we have made this clear in guidance.

My Lords, debate on how pension fund assets can be used more productively has focused on defined contribution pensions, rather than traditional defined benefit or final salary-type pensions. Given the large sums currently held in defined benefit pension schemes under a very tight regulatory regime, what plans do the Government have to allow such schemes to invest more productively, as other speakers have said in other contexts, while ensuring members’ benefits continue to be secured?

The noble Lord makes an important point about defined benefit schemes, which he will know are still maturing, with decreasing numbers of active contributing members and increasing numbers of pensioner members. It is therefore important that their pensions are properly protected and that these schemes are properly funded. The majority of schemes in the DB sector are well run, plan for the future and manage their risks effectively, but the gist of the noble Lord’s question is that there is still more to be done.

What assessment has been made of the burdens placed on trustees in respect of reporting? This must have a chilling effect on getting people to become trustees of pension funds.

We are not unaware of this. We have carefully considered the balance between the burden of reporting requirements for trustees on climate risk and the need for urgent action in this area. That is why we have introduced TCFD requirements only for the very largest schemes, as my noble friend will probably be aware, which have, let us face it, more capability and capacity. It gives us the widest coverage of pension scheme numbers while minimising burdens on trustees.

My Lords, I draw attention to my interests as recorded in the register and to the fact that I have a son who works in this area. The Minister referred to the complexities and nuances of the clarification of fiduciary duty, an issue that was much debated during consideration of the Financial Services and Markets Bill. What interaction is His Majesty’s Government having with the Financial Markets Law Committee, which is looking at this, and the round tables? Will parliamentarians have the opportunity to be involved in those?

I would hope that parliamentarians have a role in this; I shall certainly get back to the noble Baroness on that point. As she will know, guidance states that trustees can consider climate change, but we acknowledge that there is some ambiguity, which I think is the gist of the noble Baroness’s question. That is why we are engaging with the Financial Markets Law Committee working group, which is discussing further fiduciary duty. The next meeting will take place at the end of the month.

May I encourage the Government to do what they have sought to do, but to recognise too that the speed at which climate change is happening is right at the top end of what the scientists thought? Therefore, the fiduciary duty of pension funds to take that into account becomes the more urgent. I hope that in the review later on in the year, the Minister makes sure that they understand the devastating effects on those investments.

I know that my noble friend is extremely active in this area, and I reassure him that we continue to encourage pension schemes to commit to net zero in a way that works for them. As mentioned earlier, from October 2022 we introduced this requirement in the TCFD regulations, which is specifically to calculate and report the extent to which their investments are aligned with the Paris agreement goal.

My Lords, the Climate Change Committee has just reported that the Government are missing climate targets on nearly every front, which makes it all the more disappointing that they opposed a recent Labour amendment to the Financial Services and Markets Bill that would have required the Treasury carefully to review the case for pension funds investing in green infrastructure while maintaining the soundness of funds. Can the Minister tell the House why?

No, I cannot, but I can say that the introduction of TCFD reporting requirements for pension schemes was pioneering. We are a leader in this field. As I say, these regulations are still very new and there is a lot going on in this space, and we will be reporting by the end of the year.

I refer to my interests as per the register. The FCA, in its consultation on AGM voting, proposes that standardised vote reporting be wholly voluntary, with zero incentives for firms to adopt the framework. However, earlier this month, the noble Baroness, Lady Penn, in her role as the Minister taking the Financial Services and Markets Bill through this House, said that

“the Government will carefully consider whether its recommendations go far enough to address existing issues of transparency, and what further action may be appropriate”.—[Official Report, 6/6/2023; col. 1326.]

It is now clear that they do not go far enough to allow trustees to fulfil their fiduciary duty, so what further action does the Minister think appropriate?

Well, indeed. There is a point of contact, which may be helpful for the noble Baroness, called the UK National Contact Point, which is part of the Department for Business and Trade. It is responsible for promoting the Organisation for Economic Co-operation and Development. It may be helpful to know that considerable guidance has been given for pension schemes in this respect.