Contribution
My Lords, I know that this is a technical amendment, and in the last group I disagreed with the noble Baroness, Lady Altmann, but on this one I totally agree with her analysis, particularly her identification of the groupthink that trustees suffer, bamboozled and pressured by the FCA, TPR and actuaries, and sometimes investment managers, to be overly risk-averse in some of their investments. In particular, there is a drive—it is explained that it is prudential and that the regulations require it, which means that we need to look at the regulations—for pension funds to apply an increasing proportion of their assets to liability-driven investments.
If your scheme happens to be in deficit, these LDIs will anchor you in deficit for the rest of time, because that is how they work. That is wrong, because the trustees have no control over what the interest rate, discount rate or gilt rate might be. They can adjust—plus or minus, in the case of gilts—but, ultimately, liabilities are driven by the gilt rates. They have no control over that, but they do have control over how the assets in their scheme are invested for the greatest return.
However, that is not how their schemes are valued at the triennial, which is valued on the gilt rate. As the noble Baroness, Lady Altmann, said, the value of their assets is depressed by virtue of being in a scheme. As people buy out and are forced to buy out—Amendment 33A contemplates what happens when you approach a buyout—schemes are being mugged. Members are being short-changed by this artificial diminution in the value of the assets, which at the moment pass into the hands of an insurance company, as the noble Baroness, Lady Altmann, said. No longer impeded, weighed down or anchored from being in a scheme, they can be let rip. The uplift happens quickly, and there is an immediate profit to the insurance company.
It is perverse that the entire regulatory advisory industry is mandating schemes to go into overly prudent investment products, almost suckering them down so that they have to pay a premium to be bought out, and all the profits go somewhere else. That is not prudence; it is short-changing the members of the schemes and diverting huge amounts of productive capital for the engine of our economy and the private businesses that generate wealth and pay taxes.
Regarding Amendment 33A, it is really important that trustees have imagination and are encouraged to think as widely as they possibly can, asking, “What does this mean? Are we in the appropriate asset mix? Should we be rammed into LDIs because we are chasing a deficit, or should we be invested in growth to pay benefits for members?” That is the dilemma, and this amendment shines a light on it almost for the first time in the Bill. Trustees in as many schemes as I can think of are being misdirected, ostensibly to reduce risks. But they are not reducing risks; they are reducing the sustainability of their schemes and their ability to pay for today’s members, including, most importantly, the youngest members of their scheme, who have the longest to go to retirement. Following the dismal, dead hand of these regulators is prejudicing the ability of these schemes to pay out for their youngest members in 20, 30 or 40 years’ time.
I notice that the noble Lord, Lord Willetts, is not in his place, but he made this point in a previous group. This is the generational problem that we have, between the eldest and the youngest people in the scheme. We need to strengthen and empower our trustees to play their roles simply and straightforwardly and not as though they are not competent or do not feel confident to resist the so-called advice they are getting from regulators, which are acting in groupthink and not in the scheme’s best interest, or the interests of either members or companies.