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New Clause 30
Custodianship of investments
'.--(1) The trustees or managers of an occupational pension scheme or a personal pension scheme must secure that investments held for the purposes of the scheme are held in accordance with an agreement made between the trustees or managers and an appropriate authorised person ("the custodian") which contains the provisions mentioned in subsection (2).
(2) Those provisions are--
(a) that the investments are held in the custodian's name and he maintains adequate records for identifying them as belonging to the scheme and not to himself or any other person,
(b) that the custodian is required to safeguard the investments,
(c) that all documents of title relating to the investments are kept in the custodian's possession and may not be delivered to any other person except--
(i) to another appropriate authorised person with whom the trustee or managers have made an agreement within this section or in accordance with instructions from the scheme's fund manager, and
(ii) upon a request which is signified in the manner specified in the agreement,
(d) that all arrangements and transactions relating to the investments are conducted and recorded in the manner and within the period so specified,
(e) that adequate arrangements are made for the deposit or investment of money received by the custodian in pursuance of the agreement and for the payment by him of money required for the purposes of the scheme,
(f) that the custodian is responsible for securing that the trustees and managers are fully informed of all matters relating to the investments within a period which is reasonable having regard to the importance of the information,
(g) that, in any case where the custodian is also a person to whom any discretion to make any decision about investments has been delegated under section 38, the functions exercisable by him as custodian are adequately differentiated from those exercisable by him by virtue of that delegation,
(h) that the custodian is liable for any reduction in value in the assets of the scheme arising from any breach of his obligations under the agreement, and
(i) such other provisions as the trustees or managers consider appropriate for securing the safeguarding of the investments of the scheme.
(3) Where an agreement in relation to the investment held for the purposes of a scheme has been made with a custodian in accordance with this section--
(a) except in prescribed circumstances, the custodian shall not be regarded as a trustee or manager of the scheme by virtue only of complying with such provisions of the agreement as are mentioned in subsection (2), and
(b) the trustees or managers of the scheme are not responsible for any act or default of the custodian in the course of exercising his functions as such if they have taken all reasonable steps to satisfy themselves--
(i) that he is an appropriate person to appoint as custodian, and
(ii) that he performs his functions under the agreement competently.
(4) Subject to any restriction imposed by the scheme, an agreement under this section may include provision enabling the custodian to make arrangements with another person for him to exercise any of the custodian's functions under the agreement; and where the custodian makes such arrangements this section shall, except in prescribed circumstances, apply in relation to the other person as it applies to the custodian.
(5) Regulations may--
(a) provide that this section does not apply, or
(b) modify it in its application,
to schemes or investments falling within a prescribed class or description.'.--[Mr. Butterfill.]
Brought up, and read the First time.
Mr. Butterfill:
I beg to move, That the clause be read a Second time.
Mr. Deputy Speaker:
With this it will be convenient to discuss the following: New clause 31--Supplementary provisions concerning custodianship--
New clause 34--Company takeovers: trustees rights--
Amendment No. 83, in schedule 5, page 105, line 9, at end insert--'Minimum funding requirement--
Mr. Butterfill:
I rise to speak briefly to new clauses 30 and 31. They are not new clauses, in that they are not new to the House: they were first debated during consideration of the Pensions Act 1995. Their author was the National Association of Pensions Funds, and they were first proposed by the right hon. Member for Glasgow, Anniesland (Mr. Dewar), now First Minister in the Scottish Parliament. He was absolutely right to propose the provisions, because the issue of custodianship of assets is a vital one.
If we proceed with the two related new clauses in my name, it will make it very much more difficult--not impossible, but very much more difficult--for a future Maxwell to behave in that way. Of course, even an independent custodian must hand over securities if required but, given the responsibilities that custodians
now have under legislation, and given the responsibilities that would be placed on them by the new clauses, they would be required to ask pertinent questions before they gave in to any unusual requests of that nature. Under the new clauses, they would also have responsibility if they did not behave with due discretion in these matters. Such clauses are the only way of preventing a future Maxwell.
The previous Government argued, and the present Government are arguing, that the new clauses are unnecessary for a number of reasons. One is that custodians are now adequately regulated. They are indeed regulated under the Pensions Act and under the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996.
The second reason given is cost. That was dealt with last time. The National Association of Pension Funds estimates that, for the average scheme, the cost of independent custodianship would be one twentieth of 1 per cent. of the total of the assets. That is not an exorbitant amount. It is an amount that any reasonable scheme could bear for the security that would be given to its members.
The third reason given by the Government when the matter was last considered was that there was no legislation in place to regulate the operation of the custodians themselves. The Government said that we would have to wait until the relevant legislation determined how they would be regulated. If the custodians could be regulated, perhaps such a proposal would work.
Well, the custodians are now regulated. The legislation has done its job. The Occupational Pensions Schemes (Scheme Administration) Regulations 1996 have done their job in regulating the activities of custodians, as the Minister confirmed to me. This is the only way in which we can prevent someone from acting as Maxwell acted. There is now no reason why that should not be done. All the pieces of the jigsaw are in place.
It is no use the Minister or others saying that most schemes already have independent custodians--of course they have--and that only small schemes do not have them. In my constituency, small firms have gone bust. The entrepreneur who was running them had appointed his cronies as trustees of the pension fund, and ran off with the money. That can still happen even today, regrettably. Only a measure such as the new clauses can prevent it.
I apologise for detaining the House, but these are important subjects. Amendment No. 83 would amend section 56 of the 1995 Act in a way that would change the operation of the minimum funding requirement.
The amendment's intention is to permit fund trustees to take into account the total return on their assets rather than simply to consider the income that derives from them to match the fund's future liabilities. I admit that the amendment that I tabled is incompetent and does not achieve the effect that I intended. People who are more expert than me have pointed that out. Nevertheless, it is important to debate the subject.
I declare an interest on behalf of all hon. Members: I am a trustee of the parliamentary contributory pension fund. I also acknowledge the assistance that I received from the National Association of Pension Funds, the Institute of Actuaries and especially from Mr. Graham Bishop of Salomon Smith Barney. His research paper "Understanding Bond Markets" has been an invaluable source of statistical information.
I have already emphasised the importance of the 1995 Act in response to the Maxwell scandal. It ensured that funds were maintained at a sufficient level to meet future requirements. The Act authorised the Secretary of State to issue regulations to govern such activities, especially the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996.
Paragraph 7 of the regulations causes particular anxiety. It is headed "Determination and Valuation of Liabilities". Sub-paragraph 3 provides that there is an assumption that all liabilities will be met through investment in gilt-edged securities. That is the crux of the problem. If liabilities have to be met through such investment, and gilt-edged securities are continually decreasing, the yield to the fund will steadily diminish.
I first raised the matter when the original legislation was made. My right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) wrote me a letter--now known in the industry as the Butterfill letter--which relaxed the regulations to permit large funds to invest a specific proportion of their matching in equities rather than gilts.
However, the requirement to match a significant proportion of a scheme's future liabilities by investment in long-term gilts remains. It has created the problems that I now want to tackle. Of course, I know that the Government recognise that a problem exists and that they are conducting a review of the operation of the minimum funding requirement. However, I am worried by rumours that the outcome of the review may consist of little more than proposing an extension of the requirement to invest in gilts to allowing additional investment in high-quality corporate bonds. Unfortunately, that would be a palliative. It would do little more than apply sticking plaster to a gaping wound in the whole system of pension provision; a wound that is getting wider and deeper with every month that passes.
The problem arises not from one factor but from a series, which interact cumulatively to produce a most alarming problem. I shall outline those factors. The first is increasing life expectancy. We all live much longer. Secondly, there is an increase in the demand for gilt-edged securities not merely by pension funds but by insurance companies, which are required by regulation to match their liabilities in their reserving regime. Thirdly, there is a reduction in the supply of long-dated gilts due to an improved inflow of funds to the Treasury as a result of increasing economic activity and significant increases in taxation by the Government as a percentage of gross domestic product.
The last factor may be alleviated. The Red Book shows that the Government may move from a surplus to a growing deficit over the next few years. That factor may therefore be less serious than we anticipate. However, the first two factors are likely to become much more serious for the foreseeable future.
The improved health in our nation is likely further to extend life expectancy and thus the long-term liabilities of funds for such funds will require them to hold a rising proportion of gilts as their members age. That has been exacerbated by the Government's decision in 1997 to remove the ability of pension funds to reclaim advance corporation tax on dividends.
Gilt yields have halved in the past few years and that trend accelerated following the rush for valuations ahead of the 1997 deadline, with the resultant sharp rise in long gilt purchases as the funds decided to strengthen their position. As a result, the 15-year gilt yield fell by more than 30 per cent.--from 7.6 to 4.9 per cent.--in the two years between 1997 and October 1999. The inexorable movement in that direction is exacerbated by the fact that the actuaries to the funds are allowed no discretion in their valuations.
The problem that we face is that the current system forces funds to switch from equities to gilts. That in turn drives down the yield on gilts, which in turn creates a need to purchase still more gilts to match the future liabilities. Thus we are creating an inexorable downward spiral of gilt yields, fed by itself. That is an investment black hole into which an increasing proportion of funds is sucked with calamitous potential results for purchasers, equity investment and our national well-being.
The Government have stated that they are keen to encourage savings for retirement and that an increasing proportion of those savings should be invested in the productive economy, particularly the newly emerging high-tech sector. However, if a fund chooses an investment policy with a higher equity content, which the Government say that they want, rather than matching the equity-gilt balance used in calculating the liability and if gilt yields then decline relative to equity yields, the current value of the "pensions in payment" and the "approaching requirement" segments of that liability, subject to the equity easement to which I referred earlier, will rise relative to the equity-based assets. Thus, the minimum funding requirement ratio of assets to liabilities will deteriorate.
Unless the Government take immediate action to remedy that situation, the results will be disastrous. First, they will not be able to achieve their ambition to persuade UK funds to invest in the productive sector of the economy. That is already apparent as the overwhelming bulk of funds flowing into British venture capital companies arises from investments in those companies by United States pension funds. The Government of that country have created more enlightened rules for investment by pension fund trustees.
Secondly, the yield on long-dated gilts will continue to fall. That creates huge distortions in our funding system where the yield on long gilts is massively lower than that for short-term interest rates. Indeed, although UK short-term interest rates are double those prevailing in the rest of the European Community, yields for 10-year bonds are three percentage points less than those of their German counterparts. Incredibly, we are approaching a position where the Government could find it to their advantage to repay the notorious 3.5 per cent. war loan.
'.--(1) In section (Custodianship of investments) references to an appropriate authorised person are to a person who--
(a) is regulated in the carrying on of business consisting of the holding of pension scheme investments in accordance with such agreements as are mentioned in that section by a body which is a recognised self-regulating organisation for the purpose of the Financial Services Act 1986, and
(b) subject to subsection (2), is not connected with the person who is the employer in relation to the scheme in question.
(2) Paragraph (1)(b) does not apply--
(a) where the employer is an institution authorised under the Banking Act 1987 or a prescribed person and the arrangements made under this section comply with such further requirements as may be prescribed, or
(b) in prescribed circumstances.
(3) Section 2(1) of the Financial Services Act 1986 (power to extend or restrict the meaning of "investment" and "investment business" for the purposes of all or any provisions of that Act) shall apply in relation to the provisions of section (Custodianship of investments) and this section as it applies in relation to the provisions of that Act.'.
'.--In circumstances where the employer changes the trustees will be consulted by the existing employer on any issue that would have any impact upon the pension fund or monies due to it, prior to the transfer.'.
. In section 56 of the 1995 Act (minimum funding requirement) subsection (4) shall be omitted.'.
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