Baroness Bowles of Berkhamsted (LD)

My Lords, those noble Lords who have examined the Marshalled List will know that Amendment 46A constitutes what was in Amendment 46 but with an extra paragraph (e) in the proposed new subsection; that is the difference. The amendment proposes a small number of matters that value for money “must”, rather than merely “may”, take into account. The Bill ultimately leads to schemes being graded as performing or non-performing, so the framework must be sophisticated enough to reflect long-term investment reality, not just short-term metrics. Value for money is a judgment about appropriateness, risk, purpose and fairness. Paragraph (a) of the proposed new subsection is based on long-term assets requiring a long-term view. I suggest assessments over three, five and 10 years, but that is to illustrate the point, rather than being a fixation. Private assets often show negative early returns and we need a way of understanding valuations through the cycle, especially where valuations drive fees. As more investments are moved into private assets, especially if back books have to be adjusted to meet authorisation percentages, there will be cluster effects. I worry about that and its effect on value for money. How can we check valuations in the private equity context as well? There is a lot of literature around how it is useful to have a market price comparator for what is an otherwise opaque and infrequent exercise. Listed investment companies are routinely used in institutional analysis as a valuation cross-check for private assets because they provide daily pricing for similar underlying exposures and frequent net asset value valuations. For example, the ICAEW’s 2020 report, Fair Value Measurement by Listed Private Equity Funds, notes that listed funds provide observable market prices for benchmarking unlisted investments. The Bank of England has noted in several financial stability reports that market price vehicles, including listed funds, provide useful information about liquidity conditions and valuation dynamics in private markets, particularly when model-based valuations adjust slowly. These valuation and transparency credentials make it all the more extraordinary—and, I dare say, suspicious—that the Bill shuts them out. My second point—paragraph (b)—is that value must be assessed in the context of the nature, spread and purpose of the assets. Long-term infrastructure behaves differently from assets for liquidity or inflation protection. The question is whether the assets are good value for what they are meant to do. Some assets, or the way in which they are packaged, serve hybrid purposes—as listed investment companies have long done—combining private asset exposure with market liquidity. Directly held assets have fewer fees, but selection and achieving wide diversity are more challenging. LTAFs will package a mix of illiquid and liquid assets and it will be interesting to see how it works over time. My third point—paragraph (c)—is that value must be seen in the context of the characteristics of members. Those on lower incomes cannot afford excessive risk or prolonged losses; they are more likely to remain in default funds, and trustees will be mindful of that. A more cautious strategy in lower returns may be entirely legitimate for value for money. Trustees must retain the ability to choose strategies that are appropriate for their members, not strategies that score well on a narrow template. This is particularly relevant because assessments created for the DC default funds may well be adopted more widely. My fourth point—paragraph (d)—concerns the risk of herding. Too much measurement, comparison and advisory consensus can drive correlated strategy. The Bank of England has repeatedly warned about pro-cyclical behaviour and systemic vulnerabilities. A value-for-money framework must not unintentionally reinforce those behaviours; not going with the crowd is sometimes the value-preserving strategy. If we reduce value for money to consensual metrics, we will distort behaviour and risk repeating the mistakes of the charge cap era. My final point—this is the new one, paragraph (e)—concerns fairness between cohorts. Private assets, especially private equity, typically follow a J-curve: early losses or flat value followed by rising value and, often, high late gains. Gaming or late realisation of value scores high in performance fees. That can be emphasised deliberately or just through the valuation timetable. Thus early cohorts end up bearing the set-up losses while later cohorts—these are long-term assets, so it may be 10 or 20 years later—are the ones that benefit from the late-stage gains. This will be exaggerated, too, if there is back-book adjustment. Performance fees and valuation-linked fees distort fairness over time. If value for money is to be fair, these effects need to be managed—as, indeed, they do for the payment of the pensions. Additionally, as funds scale, investment will shift from external vehicles to internal management—the models used in Australia and Canada and, increasingly, by Nest and USS in our own pension funds. It will be important to observe how that affects fees and performance. I strongly support the amendment tabled by the noble Baroness, Lady Altmann, on member services, which I would have added to my essential list if I had thought of it first—but I did not steal it. I have added my name to the amendment of the noble Viscount, Lord Younger, on fee transparency, with the caution, again, that we must not repeat the mistakes of the current cost disclosure regimes, which do not properly recognise where costs are borne. I note that it will take more ingenuity than fee percentage transparency to get the full picture out of private equity. I beg to move.