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Additionally, who is to say when the crunch point should come? Many jobholders, if ever they were asked about it, might consider that any investment in Zimbabwe in the past two years or so was unacceptable; whereas for others, that country has only recently gone beyond the pale. These difficulties will be prevalent in every situation. Crimes against humanity are often only clear with the benefit of hindsight, if then. It could thus be too late for an investment decision to have any effect.
Few international companies manufacture and sell one product. For example, the arms companies have in the past 20-odd years diversified into medical equipment. Trustees would have a considerable burden to maintain a detailed knowledge of the ethical implications of their entire portfolio.
The second amendment, Amendment No. 112ZDB, also commands my sympathy. I look forward to the results of the consultation that has been promised on this point. I hope that the Minister can provide more information on when it will be available and when he expects PADA to report on the responses. However, I have concerns about this amendment. What an ethical policy consists of could be endlessly debated. Issues could vary from crimes against humanity, to green issues, to support for international development and so on. There is a clear danger that this amendment could create a single concept of what ethical investment means against which all funds would be measured.
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Finally, I turn to my Amendment No. 113H in this group. It summarises my overriding concern with the noble Lord’s amendments. Personal accounts are not meant to be a flagship pension fund setting a good example to other schemes; they are intended to be a vehicle for an acceptable minimum level of pension saving and their costs should reflect that. The primary aim of personal accounts is not to hold corrupt foreign Governments to account but to encourage and enable low earners to save for their retirement. If there is no option for ethical investment, some jobholders, who otherwise would have stayed enrolled, will opt out. I hope that PADA and, subsequently, the trustees, fully appreciate the importance of Clause 70(2)(f), which states that “diversity ... should be respected”.
I have already discussed an amendment ensuring that that duty will be extended to the trustees. The noble Lord, Lord Judd, almost accused me of poaching; perhaps I am putting that thought too strongly. Without keeping a watchful eye on the costs of investment, personal accounts will fail. A small increase in the administrative costs will inevitably have a serious impact on the final return that a pensioner will receive. Although the investment funds may be rightly sound in themselves, without a cheap and effective organisation managing scheme they will do pensioners no good.
I conclude that there should be several funds, one of which will be a default fund, another a sharia fund, another an ethical fund that is perhaps—I stress that word—based on UN principles. There may well be more but I would go along with the noble Lord, Lord Judd, in as much as I believe that an ethical fund is a necessity.
The Earl of Sandwich: I rise briefly, as a former board member of Christian Aid and Anti-Slavery International, to support the amendments, and particularly that on ethical investment. I agree with the thrust of the first amendment but I recognise, as did the noble Lord, Lord Skelmersdale, that disinvestment from countries such as Sudan or Zimbabwe is an extremely difficult proposition. How do you disaggregate the elements of an investment in a large or small company?
I confess that I have always been uneasy in the past when aid givers tread into high finance, but nowadays it is different. Aid organisations and groups such as the Aegis Trust can muster great expertise in ethically and socially responsible investment. That is now becoming mainstream in the City. My former noble friend, the noble Lord, Lord Jopling, whom I hope will speak, is himself a good example because he embodies a combination of those skills.
I sympathise with trustees who are asked to maximise their investments. I have listened to the arguments about fiduciary duties. However, those should not conflict with an ethical policy; the contrary is the case. These days, no one wants to invest in companies that use the most serious forms of child labour; that has been well exposed recently on “Panorama”, “Dispatches” and other programmes. The ESG practices need not now be seen in a category that is far apart from ordinary investment. More effective management of those issues will surely have a positive impact on investment and represent a financial benefit. It is right that the Bill should include an express commitment to
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Lord Joffe: In supporting both amendments tabled by my noble friend Lord Judd, I shall be brief because my noble friend has dealt comprehensively with all the issues. I will touch on only three matters.
First, I draw attention to British companies that are operating in Zimbabwe, Sudan and Burma, which have recently been criticised by the Government and across all parties. Despite that, if a pension fund were to disinvest from any of these companies on the grounds of its human rights record, that may be considered to be an unlawful decision of the trustees. Surely UK law should be clarified to allow disinvestment when it is entirely consistent with government policy and when not doing so might be contrary to that policy.
I listened carefully to the concerns of the noble Lord, Lord Skelmersdale, in this regard, and I think it is important to differentiate between a mandatory and an aspirational or voluntary requirement. It is proposed that trustees should be given a right, which they may or may not accept. Of course, one assumes that trustees will be responsible and make decisions carefully, and one can visualise a situation where a company will need to disinvest. As my noble friend pointed out, the reputational cost to some companies of carrying on in certain fields is so high that the value of the equity in the company goes down and disinvestment is in the interests of the beneficiaries of the pension scheme. Therefore, essentially, all that is being asked for in this amendment is that, if trustees want to disinvest for very good reasons, they should have the right to do so without being concerned about whether there are legal considerations or arguments against it.
When I referred to companies operating in Zimbabwe, I should have added that I have just received a letter from Anglo American rejecting the criticisms levelled against it and citing facts that support its contention.
Secondly, I refer the Committee to a report of 7 April by John Ruggie, the UN special representative on business and human rights, entitled Protect, Respect and Remedy: a Framework for Business and Human Rights. Professor Ruggie stresses the importance of Governments taking a wider approach across the parties to business and human rights policies. He points out that many companies take a narrow approach to managing the human rights agenda, which is often segregated within a company’s institutional box and kept away from other policy domains that shape business practice, including investment policy. He concludes that this inadequate domestic policy coherence is replicated internationally.
In the debate on the Pensions Bill in another place, the Government’s response to an opposition amendment seeking to sign up to the United Nations principles on responsible investment demonstrated that incoherence in action. The response was that they would applaud trustees choosing to adhere to these principles but that the Pensions Bill was not the place to address such issues, as the fund should be kept as simple as possible with no bells and whistles. I suggest that the fund would not be unduly complicated as a result of permitting
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Finally, in its briefing on the Pensions Bill, the TUC also supports the principle of environmental, social and corporate governance in investment decisions—although not necessarily commitment to the UN principles, because it feels that commitment to a single batch of principles which might change in the future may cause problems. The Pension Protection Fund, set up by the Government, also subscribes to these principles. As my noble friend said, the principles are not prescriptive but voluntary and aspirational, so where better to ensure that ethical investment is part of investment policy than in what is likely to become the UK’s largest pension fund set up by the Government, and when better than at the beginning of the process?
3.45 pm
Baroness Whitaker: In warmly supporting Amendments Nos. 122ZDA and 112ZDB, I declare an interest as a member of Friends Provident’s committee of reference, which advises it on ethical investment. I support these amendments because they clear up confusion and move the positive provisions of the Pensions Act 2004 on so that socially responsible investment, with all its gains in stable returns and long-term profit growth, quite apart from the ethical considerations so eloquently set out by my noble friends, can have a proper framework and protection.
Lord Kirkwood of Kirkhope: I shall add briefly to this debate. This is an extremely important subject and has been put very seductively by the noble Lord, Lord Judd, who argued for it passionately. He has done the Committee a service in bringing these amendments to our attention. I know his record; he is passionate about the work of the Aegis Trust. All sides of the Committee would want to recognise and acknowledge the work that it has done. It is exemplary and has been done over many years. The context in which we are discussing these amendments is the better for what it has achieved.
However, this is not the place to start this debate. Ethical investment is a much wider issue than merely trying to attach it to the fund to which the amendments relate. I would be shoulder to shoulder with noble Lords who have argued in favour of the philosophy behind these amendments when it comes to corporate social responsibility and to requiring investors and the people responsible for investment decisions to be tasked with the long-term global consequences of some of their decisions, but I am frightened by the consequences that these amendments would have on the set-up of these funds.
I was more in favour of these amendments until I heard Mr Tim Jones, the chief executive of PADA, who made it clear to me, in a way that I had not properly understood, that his members cannot afford anything more than a core, stripped-down scheme.
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I hesitate to take issue with colleagues who have spoken, such as the noble Lord, Lord Joffe, who I know knows a lot more about these things than I do, but I feel that including the new clauses in the Bill would be onerous, and not just financially. I give the noble Lord an example of that. My understanding is that if we passed the amendments, we would find it impossible to allow the design of the PADA scheme to include tracker funds. If you go for tracker funds, I cannot see that you could possibly ever guarantee that they were all ethical investments because they are so diverse, by definition—that is their value. If you rule out access to tracker funds, you take a whole raft of initiatives away from the design and build of the new scheme in a way that must be inimical to the long-term objectives for pensions, which we are all trying to get to work.
Also, if I were a member of the trustee corporation and the new clauses were in the parent Bill, in primary legislation, I would have a care about legal challenge. It may well be voluntary, it may be a set of standards that we are asking trustees in the new organisation to aspire to, but people who feel disappointed and think that the new clauses are not being properly respected by the trustees would sue. Ultimately, there would be judicial review and the rest. That is absolutely the last thing that the new set of pension provisions that we are putting together needs.
I am willing to give the Government the benefit of the doubt on the consultation offered. The points made in the other place in the Public Bill Committee were taken seriously by Mr O’Brien, the Minister—
Baroness Whitaker: I am very sorry to interrupt the noble Lord, but does he not accept that the provisions are intended to protect the investor from judicial risk? Previously, you could always be summonsed for not putting first the fiduciary responsibility. The provisions allow you to invest ethically.
Lord Kirkwood of Kirkhope: I understand that perfectly well; the noble Baroness made that clear in her speech. I understand that there is value in that; I absolutely understand that there is value in clarifying the law. She makes a powerful point there that I understand. I am arguing a slightly different point, which is that if you are sitting in the trustees’ chair and have these tests in primary legislation, if you do not measure up to those
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The noble Baroness may be right; I may be right; all I am saying is that that is an extra thing to think about. You would need to get lawyers employed if you were a responsible trustee because trust law requires you to do all that. I think that the risk would be that there will be a bureaucratic legal dimension that would not be necessary if we did not pass the amendments.
My heart is with the noble Lord, Lord Judd, but my head is with the noble Lord, Skelmersdale, and, I suspect, the Minister. The noble Lord, Lord Skelmersdale, was absolutely right to say that we need assurances about the consultation. It must be a properly thought-through discussion about exactly what that will entail. We will want to watch that as the Bill goes through later stages.
I listened to Mr Tim Jones, who has a very difficult and significant policy job to do. His question always is: can his members afford what we are enacting in this House. In respect of the amendments, I do not think that they can.
Lord Young of Norwood Green: I support the amendments in principle, and declare an interest as vice-chair of the Ethical Trading Initiative. I, too, have listened carefully to the debate, and I agree with the previous speaker that there is a bit of heart and head operating in the Chamber. However, I think everyone operates from the same premise that we do not want to undermine the scheme. The reality at the moment is that trustees can take only one decision. They have the fiduciary responsibility, and any departure from that, as we know from a number of court cases that have demonstrated this, leaves them liable to action.
In the 21st century, there should be an ethical investment option. Ethical investment is alive and well and has a proven track record, so no one wants to introduce a responsibility that would undermine this scheme. However, there is a need to consider these issues seriously, and I hope that the consultation that is being offered will be in-depth and that some attempt will be made to move towards this and embrace these principles.
Lord Joffe: I shall pick up a point made by the noble Lord, Lord Kirkwood, to underline the point made by my noble friend Lady Whitaker that the purpose of the amendments is to avoid litigation in the future. By clarifying the law, you automatically ensure that there can be no further legislation.
Lord McKenzie of Luton: 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
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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.
4 pm
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
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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.
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