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Lord Haskel: I thank the Minister for that considered response, which I found extremely disappointing. I feel that this whole matter is too important to be left to individual discretion. If we leave it to the individual discretion of busy people it is the kind of thing that they will simply not get round to. By making it a duty to vote it interprets the duties of the trustees of pensions funds as put forward by the Cadbury Report.

The Minister said that the matter was well trailed; that is because there is a lot of interest in it. Only today the DTI published further proposals about best practice in

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British industry. A duty to vote is among the best practices being promulgated by the Department of Trade and Industry. It is all designed to encourage long-term relationships between shareholders and companies. It has been shown time and again that share values increase when shareholders take an interest, partly because the market feels that if shareholders take an interest, then bad management will be jumped on far more quickly.

I do not believe that the provision is regulatory and burdensome. A few companies are coming round to putting it into effect and many pension funds are working along these lines. We have a duty, therefore, to provide a framework in which it can be encouraged. However, at 9.30 in the evening I am not prepared to have a lengthy debate on it. I shall return to it at Third Reading and beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Ezra moved Amendment No. 127:

Page 16, line 11, at end insert:
("( ) In preparing or revising such a statement, the trustees of the trust scheme shall have regard to the timescale over which the liabilities of the trust scheme will fall to be discharged, and accordingly (unless such timescale is of a short duration) such statement shall provide that—
(a) investments are to be evaluated for their expected return over a period commensurate with such timescale; and
(b) investments are not be be made, or realized, by reference primarily or exclusively to considerations of a short-term nature.").

The noble Lord said: In moving Amendment No. 127 I shall speak also to Amendment No. 133. The points I raise follow on logically from the points made by the noble Lord, Lord Haskel. Clause 31 requires trustees to prepare, maintain and periodically review a written statement of their investment policy. The amendment seeks to add to Clause 31 an obligation on the trustees, when preparing or revising that statement, to take a long-term rather than a short-term view.

I am convinced, in view of what the Minister said in response to the noble Lord, Lord Haskel, that I shall be told that this goes outside the limits of the proposals in the legislation and, if dealt with at all, should be dealt with in some other way. But before the Minister takes that stance, perhaps he will reflect upon one or two aspects of the problem.

I am sure that the Minister will agree, and that other Members of the Committee will agree, that short-termism is a defect in the whole British approach to investment. The Bill gives us a chance to do something about it and we should not let it go by without drawing attention to it. It seems to me to be particularly appropriate to do so in the case of pension schemes, whose liabilities are by definition long term in that the trustees have to look ahead to the pension needs of people who are currently employees and may be many years away from retirement. They, of course, will be replaced with young, new entrants who themselves will be looking long term for their pensions.

The nature of the proposed amendment conforms with the general pattern of this part of the Bill in that it simply requires the trustees to have regard to a long-term timescale, except in the case of schemes

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whose liabilities are short-term; for example, where for whatever reason they are being wound up. The general problem of short-termism contains many paradoxical features. No doubt in many cases the chief executives of companies like to take a long-term view but they feel constrained because of the perceived demands of institutional investors for short-term high returns both for capital and income. The ultimate beneficiaries of pension schemes no doubt also take a long-term view.

However, in the middle there is the investment community whose fund managers compete with each other on the basis of quarterly performance league tables. One cannot blame them because they live in a competitive situation. What is needed to put this right is for pension scheme trustees to direct fund managers as to strategic investment criteria, including moving them firmly towards a culture of long-termism. Unless there is a move in some part of the chain I fail to see how we can get away from this problem.

Amendment No. 133 is also about long-termism but ties in almost precisely with the point made by the noble Lord, Lord Haskel, on voting rights. The proposition made in Amendment No. 133 is that voting should not only be undertaken but should be undertaken with a view to long-term objectives.

I move the amendment in order to take advantage of this legislation to help us move away from the short-term culture. I beg to move.

9.30 p.m.

Lord Haskel: I rise to support the noble Lord, Lord Ezra, and to ask the Minister one question. Will he consult with his colleagues in the Department of Trade and Industry, because we are inundated with requests from the Department of Trade and Industry to take a long-term view? As the noble Lord pointed out, this is an opportunity to have this obligation to take a longer term view on shareholders. I should have thought that the Minster's friends in the Department of Trade and Industry would be delighted if he took this opportunity.

Lord Mackay of Ardbrecknish: This has been an important debate. Its subject matter formed a small part of the debate we had at Second Reading, when the noble Lord, Lord Ezra, raised some of the points which he has just made. While I would not deny that it is important for investors to take a long-term view of the position of the companies in which they invest, one has to look at the role of the trustees in a trust fund when it comes to their decisions, which are related, of course, to the interests of the scheme for which they are trustees.

For example, there is a wide range of factors which pension fund trustees must take into account in setting their scheme's investment strategy. Those factors will be influenced by the level of resources available, by the size of the scheme, by the period within which liabilities have to be met, by the relative rates of return on different types of investment and by the relative volatility of different investment vehicles; in short, all the factors already mentioned in Clause 31. Some more mature schemes may be best advised to hold a large percentage of their assets in gilts. I know that the noble Lord, Lord Ezra, appreciates that point. Indeed, it is

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catered for in his amendment. As pension schemes continue to mature, this factor may well have a noticeable impact on the balance of overall pension fund investment, irrespective of the minimum solvency requirement.

These are all highly complex and technical matters, on which trust boards will be obliged to seek professional advice. Their conclusions will depend on their particular view of the wide range of factors mentioned in this debate and on the particular circumstances of their scheme. Our view is that trustees who draw up their investment principles taking account of the points already listed in the clause, will be bound to take account of the considerations mentioned in this amendment.

Amendment No. 133 requires trustees holding securities in public companies to use any voting or other rights held, for the

    "best interests of the trust scheme as a long-term investor".

It then defines "best interests" using criteria which have regard to the

    "promotion of the sustainable growth in value of the company concerned".

Trust law clearly provides that trustees must act in the interests of the beneficiaries of the trust. It is clearly in the interests of everybody to encourage any action which will promote growth in UK companies. However, the introduction of any duty which requires trustees always to consider the interests of any other party before those of scheme members would be inappropriate because it would be incompatible with trust law. Such a requirement could lead to severe conflicts of interest between trustees' duties to scheme beneficiaries on the one hand, and their obligations to other parties on the other.

Of course we want to maintain the current high level of investment by pension funds in UK equities. It is a potent source of finance for British industry. I take the point that pension fund investments in gilts rather than equities could, in certain circumstances, be bad news for scheme members in that it may limit the ability of the scheme to provide discretionary increases. Equally, we must not impose the kind of substantial costs on sponsoring employers which would arise if there was an unnecessarily large shift of pension funds from equities into gilts.

The Committee will be aware that my right honourable friend the Secretary of State had this point very much in mind in determining the appropriate valuation basis for the proposed minimum solvency requirement which we shall be discussing at a later stage. Probably the debate deserves a longer airing. I hope that my brevity has not taken away from the fact that I consider this to be a very important issue. For the reasons which I have briefly outlined, I hope that the noble Lord, Lord Ezra, will feel able to withdraw his amendment.

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