Baroness Altmann (Non-Afl)

My Lords, I congratulate the noble Lord, Lord Davies, on securing this important debate. I agree with the noble Baroness, Lady Drake: the code is an important document that certainly deserves the attention of this Committee. I apologise to the Minister because this debate may well end up lasting more than the half an hour that was apparently expected; I will try to be as succinct as I can. The overall aim of the defined benefit code is to protect member benefits. The whole point of the code was that, in the past, there had been a kind of free-for-all where employers and trustees could invest and take as much investment risk as they wished. Given other circumstances in the market, hundreds of thousands of members either lost their benefits or were at significant risk of doing so. I welcome the fact that there is now a stronger regulator, the Pension Protection Fund and this kind of code, which is constantly being revised and updated. However, I stress that I agree wholeheartedly with the comments of the noble Lord, Lord Davies, that this particular document, like previous documents, is rather too prescriptive, with excessive requirements placed on trustees, who may or may not need them. It seems to attribute spurious accuracy to an inherently uncertain outcome of events. The kind of box-ticking and groupthink approach that needs to be revised within 15 months of each new valuation will be costly to the schemes, and it is not clear what value will be added if the long-term strategy is unchanged or not likely to change. Some of the issues we are grappling with, in this code and in the defined benefit universe as a whole, are dependent on and the result of the exceptional period of quantitative easing introduced in 2009. It was deliberately designed to drive down government bond yields and, concomitantly, to clearly put a much greater inflation risk on liabilities. That is indeed what happened. Initially, assets did not keep up with liabilities, but the fears of ongoing falls in gilt yields over that subsequent period, as quantitative easing, gilt printing and the driving down of long-term bond yields continued, have made anyone involved in the defined benefit space rather nervous of what are called “non-matching assets”. We had a reversal of conventional thinking about defined benefit pension schemes. They were supposed to invest to take risk and welcome risk placed judiciously. This thinking became: do not take risk or try to beat the gilt market, because the gilt market may beat you and increase your deficit. So a whole groupthink built up around the idea that defined benefit pension schemes should have as much as possible in so-called matching assets, because you want to match your liabilities. The fact is that, if you want good funding, you need to outperform your liabilities—just matching them is not sufficient—but I am not sure that that is reflected very much in the code for schemes that are not in healthy surplus. I welcome the Minister’s comments on the fact that we are talking about estimated liabilities based on expected future values, relative to current mark-to-market actual values for the assets, and on whether the risks of attributing that spurious accuracy to the long-term liabilities have been sufficiently considered. In this regard I declare my interests: I work with some defined benefit pension schemes, and have done so in the past, to advise on investment strategy. It seems to me that part of the thinking going through this defined benefit code is that it is better for all schemes to fail conventionally than for too many schemes to try to do unconventional things that might succeed but incur greater risk. I feel we need more scheme-specific flexibility there, and we need to consider the impact of quantitative tightening and how that will be different for the pension liabilities associated with these schemes. I welcome the differentiation mentioned by the noble Baroness, Lady Drake, and the noble Lord, Lord Davies, between open and closed schemes. I urge the Government to consider going further in allowing and enabling open schemes to take advantage of investment opportunities from a diversified array of risk assets, even in circumstances where there is, perhaps, some nervousness about the sustainability of the employer. There is concern about the stability of the gilt market, but there is also an inherent conflict between that desire for stability and the need for outperformance of liabilities that these schemes could be delivering. If capitalism is not at an end—one might argue that it is—then investing in assets of higher risk than government bonds or the supposedly safer assets should, on aggregate and in the long run, deliver better returns. On top of that, we have a Government who rightly want to use more pension assets to boost the economy. There are assets such as infrastructure, small growth companies and equities as a whole, both domestically and internationally, that could deliver that objective, but they entail risk. That is where I hope the funding code may be further refined.