Over the decades the Labour movement has always championed workers’ rights. But we must also champion the rights of working people as capital holders, as investors in the stock market, especially through their pension savings. This is why today I introduced my investment management (fiduciary duties) bill to the House of Commons. The pensions fund industry is worth over £2tn, or 135 per cent the size of the UK economy. Auto-enrolment – a Labour policy – is introducing up to a further 11 million workers to pension saving.
They are the new capitalists, and they are our people. Often low-paid, these people are not wealthy investors. They are people who work in shops and factories, in small businesses and local government. Reforming the investment industry in their interest to ensure value for money pensions must be a Labour priority.
Today, the major investment decisions which affect companies are taken by asset managers controlling trillions of pounds. That money is our money. We want to know where it is invested, and why.
My bill would ensure that all costs and charges paid to pension fund managers and other intermediaries should be transparently disclosed. My bill would also make it a requirement of pension funds to detail where they invest. And votes taken by asset managers on the remuneration of corporate executives should also be in the public domain. These votes represent our interest, and should not be secret.
In its recent report on pensions – first called for by Ed Miliband – the Office of Fair Trading was unable to gain access to enough information about transaction costs to come to any conclusions. This must change.
All of this matters, because it is unacceptable for fees to eat up as much as 40 per cent of a pension pot over time.
Labour’s shadow minister for pensions Gregg McClymont has led the way in demanding full disclosure of all fees and charges. But Labour is not alone.
Nigel Lawson, chancellor under Margaret Thatcher, has raised his concerns about such fees. He said in the Financial Times of 22 January: ‘The costs are massive in this area. Some costs are not revealed at all; some are. Even with the costs that are revealed there is such a lack of consistency.’
Undisclosed transaction costs include bid-offer spreads to foreign exchange counterparties, payment to custodian banks and fees to pooled funds. These costs sound opaque, because they are opaque. It is a language meant to be opaque and it is a language behind which £2tn is traded. Are such costs necessary? How much do they cost the investor? That is why full disclosure of such fees would be a start. But it is not the total solution.
Simple observation confirms that successful economies can’t exist if suppliers take advantage of their customers, if they don’t act in their customer’s best interest. Competition helps ensure that suppliers do the right thing. But where a service or product is complex, and where the customer can’t know whether he or she is receiving a good service or buying the right product, the onus has to be on the supplier to act in good faith.
We trust that the service we require is delivered to the best of the ability of the person or company providing the service. We also trust the product we purchase works and can do the job. If not, we demand some kind of redress, and do not expect to pick up the repair bill ourselves. Those who act in a professional manner will guard against bad practice.
One place where trust and professionalism are vital is in the financial and investment services industry. But here is the problem. If you are the agent of the agent of the saver you can lose sight of your ultimate customer’s best interest. Nowhere is this clearer than in the way the investments of our pension industry are concerned. Are all these companies run on their behalf to make a decent profit to pay a pension and to do so in a socially responsible way? And because the job of our pension fund manager seems complex and opaque, we need to be able to trust them.
According to the concise Oxford English Dictionary, trust is defined as ‘firm belief in someone or something. Acceptance of the truth of a statement without evidence or investigation’ or to ‘Trust someone: have the confidence to allow someone to have, use or look after.’ We trust in others all the time, especially when we require them to do something we ourselves cannot do. If you are ill and require surgery, you put your trust in the surgeon to look after your best interests.
The General Medical Council lists some of the duties of a doctor as:
– ‘Be honest and open and act with integrity
– Never abuse your patient’s trust in you or the public trust in the profession.’
If you want a solicitor to act on your behalf, the solicitors’ code of conduct states that solicitor must:
– ‘Act in the best interest of each client
– Behave in a way that maintains trust the public places in you and in the provision of legal services.’
Even the gasman, who comes to fix your boiler, has a legal requirement to be signed up to the Gas Safety Register and needs to retrain every five years.
And all these examples I have given are people that, from time to time, we must place our trust in. But they are all governed by legal requirements. They cannot practise if they are not suitably qualified; they can all be struck off if they are found to be negligent.
If this applies to a doctor, a solicitor and a gas fitter, it should apply to financial agents and fund managers. When it comes to your pension investments you have to place your trust in the fund manager for up to 40 years, not just from time to time, and there are no such levels of transparency and accountability. They have a moral duty to be transparent in their actions and be accountable for them. Investors and savers have a right to know what fees they are being charged. Savers have a right to know where their savings are invested. And every practitioner must be able to put their hand on their heart and say they acted in the best interest of those whose funds they invest; and where market forces encourage them to do otherwise they report it.
Ever more regulation is not the answer. What is needed is a new compact. A new understanding of duty. A rediscovery of fiduciary duties. I believe that those whose task it is to look after the money of millions of pension savers should be under a fiduciary duty. We insist on it for pension trustees, but that obligation should not be lost if the management of the fund is delegated to someone else.
We must call on those who manage our funds to do so with our interests ahead of their own. At the core of every decision they take should be the saver’s interest, because it is our money, not theirs, for which they have responsibility. This is the essence of fiduciary duty. Financial institutions need to reflect these duties in the way they practise their craft. That is why fiduciary duties, transparency and accountability are important. Fiduciary duties should be practised not only by pension fund trustees, but by all those who have a responsibility for the savings of others. For pensioners, for example, sustainable financial performance is what counts. This bill is intended to emphasise the importance of the long-term result which is the one that counts for millions of hard-working pension savers in our economy.
I agree with Share Action – just as Section 172 of the Companies Act requires company directors to have regard for the consequences of any decision in the long term, we should require investors in charge of our pension savings to be similarly enlightened.
Those investors should also have regard to the impact of decisions on the financial system and the real economy, and also to take stock of social and environmental considerations and on the implications of any investment activities for the beneficiary.
Phil Wilson is member of parliament for Sedgefield. He tweets @PhilWilsonMP
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