20:05 - Division on Motion E1 (as an amendment to Motion E) - Ayes: 219 / Noes: 144 - Motion E1 agreed.
20:17 - Division on Motion F1 (as an amendment to Motion F) - Ayes: 216 / Noes: 148 - Motion F1 agreed.
20:28 - Division on Motion G1 (as an amendment to Motion G) - Ayes: 211 / Noes: 150 - Motion G1 agreed.
20:40 - Division on Motion J1 (as an amendment to Motion J) - Ayes: 162 / Noes: 151 - Motion J1 agreed.
Lord Katz
That this House do not insist on its Amendment 5, to which the Commons have disagreed for their Reason 5A.
Baroness Sherlock
That this House do not insist on its Amendment 13, to which the Commons have disagreed for their Reason 13A.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I shall speak also to Motions J, J1, K, K1 and L.
As I have previously outlined, we cannot accept Lords Amendment 13 on small pots or Amendment 13B within Motion D1, tabled by the noble Baroness, Lady Altmann, which would extend the dormancy period for automatic consolidation from 12 months to 36 months or 24 months respectively. Extending the threshold would materially lengthen the period for which a pot remained dormant. This would be detrimental both to individual members, who would incur multiple sets of charges for longer, and to the wider scheme membership, which, in effect, subsidises the small deferred pots, which are uneconomic for schemes to administer. We estimate that extending the dormancy period from 12 to 24 months would generate additional industry costs of around £25 million a year, which would most likely simply be passed on to members.
The Government did not invent this scheme. The 12-month timeframe formed part of the proposal that was consulted on in 2023 with stakeholders across the pension industry and consumer representative bodies, and it reflects a supported middle ground. The previous Government concluded that a period of 12 months struck the appropriate balance, allowing eligible pots to be identified for consolidation while seeking to avoid certain situations; for example, where individuals who, for a range of reasons, may have temporarily ceased pension contributions but remain with their existing employer and are likely to return to pension saving. The 12-month figure was not plucked out of thin air; it was a judgment underpinned by consultation and evidence, not speculation. It is supported by a strong set of safeguards, most notably the individual’s right to opt out of consolidation.
Throughout the development of this policy, my department has engaged with a range of stakeholders, including consumer representative bodies. For example, Which? was part of our small pots delivery group, and it welcomed the safeguards that we have put in place, which it agrees are sufficient.
I understand from previous debates that noble Lords, including the noble Baroness, Lady Altmann, have concerns that 12 months might be too short for certain individuals, particularly those who take career breaks, say, for maternity leave or caring responsibilities, and experience fluctuating earnings. But the 12 month dormancy period is triggered only where no contributions have been made for a full year. Periods of paid maternity leave, for example, would see contributions continue, and a pot would become dormant only after 12 months of unpaid leave.
Currently, only pots worth £1,000 or less will be eligible for consolidation. For context, a full-time worker on the national living wage would typically exceed that threshold after nine months of saving. That means that individuals with longer periods of continuous employment are unlikely to have pots that fall into scope. It cannot be a common occurrence that someone who has saved less than £1,000 and then had no contributions for at least 12 months would recommence saving with the same employer once it had entered dormancy. Nevertheless, we recognise that such circumstances could occur. That is why we have built strong safeguards into the policy. Most importantly, every member will receive a transfer notice ahead of any consolidation, giving them a clear opportunity to opt out if they judge that consolidation is not in their best interests.
Finally and crucially, the Bill already requires regulations to set a minimum 12 month period for a pot to be classified as dormant. That threshold could be set at a longer period or extended in future through secondary legislation if the evidence justified such a change.
I think we all agree on the need to consolidate small pots to protect savers and all other members from multiple years of charges on multiple pots eating away at their savings. I hope that the noble Baroness, Lady Altmann, can see that extending the dormancy period would harm the vast majority of members in a known and avoidable way to add further protection for a very small number of hypothetical cases. The best way to protect those cases is through building full and proper safeguards into the policy, which is what this Bill does. After that compelling argument, I hope that she will be willing not to press her amendment, when we come to that point.
Lords Amendment 77 would require the Secretary of State for Work and Pensions to conduct and publish a review of the long-term affordability of public service pension schemes. The Government cannot accept the amendment as it is unnecessary and technically defective. It is unnecessary, as detailed information about the cost of the unfunded public service pension schemes is already publicly available. The OBR undertakes analysis of both the near-term and long-term cost of the schemes, including the Treasury’s central measure of affordability: 50-year projections of pension payments as a proportion of GDP. Contrary to suggestions made in Committee and on Report, the cost of the schemes is forecasted to fall under this measure, from 1.9% to 1.4% of GDP.
On Report, we heard suggestions that savings arising from the Hutton reforms had not and would not materialise. That is simply incorrect. The coalition Government forecasted savings of around £400 billion by 2065 as a result of the substantial reforms made to the schemes in 2014-15, but implementation of the reforms was, in effect, set back because the courts found that the way in which the coalition Government had introduced them was discriminatory on grounds of age. That incurred costs of around £17 billion, but crucially, it will not impact the savings going forward. Those are the key drivers behind the fall in costs over the long-term.
Every four years, detailed actuarial valuations of each of the schemes are undertaken and published. They set out the cost of providing benefits to current staff and the cost of meeting all accrued liabilities. The valuations test the cost of the schemes against the cost control mechanism, introduced by the coalition Government as part of the Hutton reforms, and they provide for benefits to be adjusted if those have deviated from target levels. Pension costs are also set out in the financial accounts for each of the schemes and collectively in the whole of government accounts. This information is produced in accordance with international accounting standards.
The amendment is not necessary because the risks arising from changes to longevity are already managed in the design of the schemes. This came up on Report. The retirement age in the schemes, except those for police, firefighters and the Armed Forces, is the state pension age. In any case, the cost control mechanism would be triggered if costs rose due to longevity improvements that were not managed by changes to state pension age.
The suggestion made on Report was that the fact that some of the public service schemes are operated on a pay-as-you-go basis means that they must be unaffordable, but “unfunded” does not mean “unaffordable”. In general, the Government do not pre-fund future liabilities by holding assets at all. Details of the Government’s policy on whether to hold assets in relation to specific liabilities is set out clearly in Annex 4.16 of Managing Public Money, should anyone want to look it up.
There is clearly an opportunity cost to holding assets in a fund, which are invested with the sole objective of having enough returns to meet future liabilities. Holding funds can create technically allocative inefficiencies across the public sector. The liability can clearly be more efficiently managed in the round with other unfunded liabilities, met out of general taxation as they fall due.
The amendment would not work, because it would require the Secretary of State for Work and Pensions to undertake a review on a matter that does not fall within their responsibilities and for which statutory responsibility sits elsewhere, including with the devolved Administrations.
Comprehensive information is already available, published and regularly updated on the cost of public service pensions. There is demonstrably already transparency on all the points raised by noble Lords during the debates, and the amendment is, in the Government’s view, therefore unnecessary. We will continue to ensure that public service pensions are properly costed, transparently reported and kept under review through existing mechanisms. So, I hope that the noble Baroness will not press her amendment.
I turn to Amendments 78 and 86. These amendments engage Commons financial privilege. The House of Commons has therefore disagreed with the amendment and has not offered any further reason. As noble Lords will know, it is a long-standing convention that this House does not insist on amendments which the other place has rejected on grounds of financial privilege. But I will briefly explain why the Government do not agree with the policy intent. These amendments would not do what I suspect the movers hoped they would, which is to enable the PPF to pay lump sum payments to its members on top of the periodic compensation it provides.
Baroness Altmann (Non-Afl)
My Lords, I thank the Minister for her introduction and her helpful remarks relating to Motion D, which is mostly what I will speak to in my remarks.
The Government say that allowing small pots to be moved without member consent after just 12 months is essential because, otherwise, any longer period would be detrimental to scheme members. I do not think that would stand up to market scrutiny. This is about providers not wanting to have to administer small pots, the economics of which they find rather challenging. As to the idea that if people with small pots move somewhere else or are moved somewhere else, that will lead to lower fees being charged by the pension providers, I think the providers simply making higher profits is the far more likely outcome.
It will not particularly be detrimental to most members, but for those whose money is moved, without their consent and potentially without their knowledge, I have concerns that allowing just 12 months and then shipping the money off elsewhere to another scheme, which could be worse and could perform worse but just happens to be an approved scheme under the regulator’s supervision, would be a rather dangerous thing to approve after such a short space of time. Members may have paused their contributions temporarily, and I point out to the Minister that members who have decided to opt out of auto-enrolment, who will then be re-enrolled after three years, may decide not to opt out but the money that they previously put into the scheme will have gone somewhere else. This to me suggests that the policy needs to be reconsidered.
Yes, of course, we need to look at the economics of auto-enrolment but we have to also balance fairness to members who have paused temporarily, whether it is for unpaid carers’ leave—perhaps a relative who is terminally ill and it has gone on for slightly over the one year, but their money may have been moved before they get back to their employer—with the costs to providers of administering small pots. I do not believe 12 months is the right balance. It is too short.
I just ask noble Lords whether they feel we should allow a bank to move somebody’s money in their account to a different bank because they have not got a lot in there and the bank cannot make any profit on keeping that current account. I do not think we would feel the same—that after just 12 months, without member consent, their money could be shipped off to another bank.
I agree that we have to find some way of administering small pots. I hope that, when the noble Baroness points out that there is a minimum of 12 months being provided for in the Bill and that regulations will set the required time period, after further consultation there is a chance that we will perhaps have a longer period than the current 12 months. On that basis, I hope that the situation for small pots will turn out to be better after regulations than it currently would seem. I will not press my amendment tonight.
Very briefly on Motion K1 in the name of noble Viscount, Lord Thurso, I too am extremely concerned about the problem of the AEAT pension scheme members. I feel that there is an obligation in some way on government to look more carefully and to take careful consideration of the findings of the various inquiries that have happened more recently. I hope that, when the meeting takes place, those of us who are particularly interested in the AEAT situation will be able to have a proper discussion with the Ministers on that issue. I beg to move.
Baroness Neville-Rolfe (Con)
My Lords, Motion J1 reintroduces my proposal for a review of the long-term affordability, intergenerational unfairness, fiscal sustainability and accounting treatment of public service pension schemes. I am trying to help the Government to fill a lacuna in their important work on pensions, so I was taken aback by the Commons’ reason for rejecting it—namely,
“that it is not necessary to duplicate existing information regarding public sector pension schemes”.
The presentation of the liability represented by public sector pensions is widely seen as inadequate, and the PAC itself has expressed concerns—in particular that pension liabilities are not being presented in a way that allows Parliament properly to understand their real costs in the long term.
I will highlight four reasons why a review is needed. First, the cost is huge. As we have heard repeatedly, unfunded pension liabilities represent the second-largest government liability after gilts. Currently, we commit future taxpayers to about £60 billion of new expenditure every year, in the form of a stream of index-linked new expenditure. According to the OBR, the long-term liability is £1.4 trillion, but it may be more as a lot depends on the assumptions made.
Secondly, it is an unfunded pay-as-you-go scheme. The problem with that is that the current generation of older and former public sector workers are taking money from younger generations of workers already weighed down by trying to finance housing, young families and, in some cases, repaying student loans. This is unfair, and it is why I put intergenerational unfairness at the heart of the review.
Thirdly, the coalition did well to reform some public sector pensions following the Hutton review, as the Minister acknowledged, but the new arrangements have turned out to be more costly than expected. Sadly, growth, which helps to ease things, has been modest. Moreover, substantial increases in the pay and size of the public sector make things look better in the short term, as employer and employee contributions increase. However, this is a mirage, as it stores up even more trouble for the future, as greater payouts on higher salaries will be needed as those people in the system retire.
Fourthly, there are serious accounting issues, as we know from the PAC. The scale of liabilities is not clearly visible from the public accounts. Moreover, as I have learned from my unique experience as a civil servant and a Cabinet Office Minister, the costs of future pensions are not properly taken into account in decision-making across the public sector—for example, on restructuring or adding to the workforce. In conclusion, there is a real need to establish whether the system is fair and sustainable, and whether anything could be done to improve things.
I emphasise that I support the work of public sector workers and that I am not making any recommendations. That is for the experts, who would look at the whole area objectively, and it is for the Government to decide what, if anything, needs to be done.
Lord Vaux of Harrowden (CB)
My Lords, I want very quickly to ask the Minister a question on Motions D and D1. I say at the outset that I agree with almost every word that the noble Baroness, Lady Altmann, said. I entirely agree that one year is too short. I have at least two pensions that have not been touched for that long, which would fall into the dormant category; I would not consider them dormant, but there we go.
My concern is that if we start moving people’s small pots around, potentially without their knowledge, we increase the problem of lost pots. The answer to that is the pension dashboard. So my question to the Minister is: will we have the pension dashboard in place, as a method of being able to retrace a lost pot, before we start moving people’s pots around?
Viscount Younger of Leckie (Con)
My Lords, I thank the noble Baroness, Lady Altmann, my noble friend Lady Neville-Rolfe and the noble Viscount, Lord Thurso, for their Motions in this group. In the interest of brevity, I shall focus my remarks only on Motion J1.
My noble friend Lady Neville-Rolfe is fundamentally asking the important question of whether we are being sufficiently clear about the long-term sustainability and transparency of the system as it currently stands. The central concern is this: unlike funded schemes, these pensions are not backed by accumulated assets. They are paid out of current taxation, and that means that the cost is not contained within a fund but passed forward, year by year, to future taxpayers. As the number of public sector employees grows, and as people live longer, those obligations grow with them.
There is also a question of incentives. Decisions about expanding the public sector workforce or adjusting pay inevitably carry pension implications that stretch decades into the future, yet those costs are often diffuse, uncertain and ultimately borne by the Exchequer. Without a clear and accessible understanding of the long-term consequences, it is difficult, if not impossible, for decision-makers to weigh those trade-offs properly. A review would allow us to bring together the evidence, to test the assumptions and to ensure that policy is being made on the basis of a clear and realistic understanding of the facts.
For those reasons, including the four key reasons outlined by my noble friend, I believe that there is a strong case for the review proposed, and I am very pleased to support this Motion.
Baroness Sherlock (Lab)
My Lords, I am grateful to all noble Lords for their questions and comments. I spoke at some length at the start, and I think I answered most of the questions pre-emptively—or tried to—so I will not dwell on them.
On a couple of specifics, and to reassure the noble Baroness, Lady Altmann, and the noble Lord, Lord Palmer, as I stressed, the Bill says a minimum of 12 months simply because we want to be able to respond to any changes. If there is evidence that we need to make it longer, we can; if there is evidence we need to extend it later, we can do so in secondary legislation. It is set up to do that, and I can give her that assurance.
I am not going to get into America. For me, as parallels go, whether we have one or two years’ opt-out and who is the ambassador to the United States are probably slightly separate categories of decisions. Noble Lords will forgive me if I do not go there.
In response to the noble Lord, Lord Vaux, the two policies operate independently but the intention is that dashboards will be available before the small pot consolidation. I reassure the noble Lord, with the small pots he has scattered around, that he will be written to and given the opportunity to opt out, so that they will not be consolidated without his knowledge or against his will. I hope he will look out for that in due course and can then make appropriate decisions.
The noble Baroness, Lady Neville-Rolfe, asked about the presentation of information. The Treasury is exploring options to present pension liabilities on a constant basis. It is important to be clear that any such presentation would be supplementary. It would not affect the underlying liability, as the noble Baroness knows well, or the way they are presented in financial statements, but it would help to add an extra level of clarity to those who are reading them. I think I have made all the arguments around affordability and the nature of them.
I have one final word for the noble Viscount, Lord Younger, who feels there is no way for decision-makers to make appropriate judgments about the affordability of pension schemes without a review such as this. I think he should have more confidence. The coalition Government, of which his party was the leading member, reformed almost all the public service pension schemes and created a new system, and that is what we now have. A lot of work was done then and is being done now. The measures of affordability that I have described are such that the schemes have that corrective factor straight in them. The fact that the information is out there and published will, I hope, be enough. I therefore urge noble Lords not to press their Motions.
Baroness Altmann (Non-Afl)
My Lords, I thank all noble Lords who have spoken. As I said, I will not press Motion D1 to a Division. I beg leave to withdraw the Motion.
Baroness Sherlock
That this House do not insist on its Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88, and do agree with the Commons in their Amendments 88A to 88C to the words restored to the Bill by the Commons disagreement to Lords Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88.
“(5A) Regulations under subsection (4) must secure that a description of asset is prescribed under that subsection in respect of each example mentioned in subsection (5)(a) to (d).”
Baroness Sherlock (Lab)
My Lords, in moving Motion E, that this House do not insist on its Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88 and do agree with the Commons in its Amendments 88A to 88C, I will speak also to Motions F, F1, G, G1 and H.
Motion E deals with Amendment 15 and those connected with it, which sought to remove the reserve power on asset allocation from the Bill. The case for removing the power was pressed firmly in Committee and on Report, led by the noble Baroness, Lady Bowles, and supported by a number of other noble Lords. The Government have always taken those arguments seriously, and I hope our response demonstrates that. However, the Government continue to believe that the reserve power is necessary.
The collective action problem in the defined contribution market, where competitive pressure on costs discourages providers from diversifying even when they recognise it would benefit their members, is well-evidenced and has been acknowledged by the industry itself. The Mansion House Accord represents a welcome voluntary commitment, but the risk is real that individual providers defer action until others move first. The reserve power exists to underpin those commitments, giving each provider confidence that the rest of the market will move too.
This collective action problem is not simply a theoretical concern or a government preoccupation. Last autumn, signatories to the Mansion House compact—a predecessor agreement on private markets investment, negotiated under the previous Government—published their own progress update. What was the single biggest barrier to delivering on their commitments? In their words,
“market dynamics continue to focus on minimising cost instead of maximising long-term value”,
and that without intervention to shift that culture,
“‘too much focus on cost’ remains the key barrier”.
That is the collective action problem in a nutshell: providers recognise that greater diversification can benefit their members but competitive dynamics hold them back from acting on it.
However, I gave undertakings during the passage of the Bill to reflect on the concerns raised by noble Lords, and I have done so. The amendments in lieu before the House today respond directly to those concerns in two important respects. First, the Government have placed a cap in the Bill so that regulations may require not more than 10% of default fund assets to be held in qualifying assets overall or more than 5% to be of a UK-specific description. This is a significant step. The Government have always been clear that the power is a backstop to the Mansion House Accord, which applies those specific targets to DC providers’ main default funds and no more.
I heard the argument—pressed particularly by the noble Viscount, Lord Younger of Leckie, and the noble Baroness, Lady Stedman-Scott, in amendments that they tabled, with the support of others—that that commitment should be written into primary legislation rather than resting on ministerial assurance alone. This amendment does exactly that. It gives the industry and savers alike the confidence that no Government can use these powers to go beyond the accord’s percentage commitments.
Secondly, the Government have established a principle of neutrality between asset classes. These amendments remove the ability for regulations, should they try to do so, to weight the requirement towards any single category of private asset, and require that qualifying asset descriptions are prescribed across each of the private market categories set out in the Bill—so the Government could not, for example, concentrate the entire requirement in infrastructure, still less direct it into a particular sector or company. This responds to a type of concern expressed by noble Lords during the Bill’s passage about the breadth of the power and the risk that a future Government might use it for purposes unrelated to the accord. The neutrality requirement, taken together with the established principles of public law to which any secondary legislation must conform, provides a robust constraint against such misuse.
Lord Lucas (Con)
My Lords, it is utterly ridiculous that only 5% of UK pension funds are invested in the UK. The figure was 50% when I was a pension fund manager. The difference is entirely down to us as politicians. The solution is not to compel financial managers to do things; it is to understand what we did to make this happen and undo at least some of it. If the Government want quick access to priorities, they should turn to the members. The members believe in this country. Their interest is in it being a prosperous country, with lots of investment coming into it. Give them more influence over what pension funds do. They should not go for this government mandation; it is a dead end and, at its heart, poisonous.
Baroness Sherlock (Lab)
My Lords, I am grateful to all noble Lords for their comments. Having spoken at some length at the start, I will not respond at length. I shall just pick up a few points.
On the question on fiduciary duty, nothing in the Bill disapplies trustees’ existing duties of loyalty, prudence and acting in members’ best interests. Those continue to apply in full. Were this power ever to be used—I repeat, the Government do not expect to use it—and the asset allocation requirements were in place, the savers’ interest test allows a scheme to seek an exemption if it can show that compliance would cause material financial detriment to members. Not only would they be enabled to do that but we would expect the fiduciary duty to require the trustees to make such an application to the regulator. Trustees are not directed to invest in any specific asset or project, and if they believe that the requirements are not in the members’ best interests, again, they should apply for an exemption.
The neutrality amendments provide a meaningful constraint. The Government must prescribe qualifying asset descriptions across each of the private market categories in the Bill, so they could not load an entire requirement into a single asset class, let alone a pet project or specific investment. Any future Government who attempted to define qualifying assets in a way designed to serve their own policies or a pet project, rather than savers’ interests, would clearly be vulnerable to legal challenge on rationality grounds.
I am not going to debate this at length since the noble Lords have made clear their intention to test the opinion of the House irrespective of whatever I say. I have just two other comments, on scale. I take the point made by the noble Baroness, Lady Stedman-Scott, that the Government should be pragmatic. I completely agree. My problem with her amendment is that it is not practical, so I cannot be pragmatic in trying to apply an amendment that is really clear in the matter of scale but would simply be too difficult to apply, because it is not clear what the nature of the test would be and it would end up getting bogged down in the courts for years, giving the regulator an impossible job. That simply does not work.
I have made the point about competition in our previous, long debate, and I do not doubt we will return to it again should the Bill not all disappear tonight. In the light of that, I hope that noble Lords feel able not to press their amendments.
Baroness Bowles of Berkhamsted (LD)
My Lords, we have heard continued disagreement with mandation and coercion from across the House. As the Minister has said, we do not need to re-rehearse all the things that we have already said, but something that stuck in my mind from a previous stage was when the Minister said that if we did not have mandation, it would rest on good faith alone. That is the whole point: I think there is good faith in the City to deliver on this, and not to trust it, exactly as the noble Lord, Lord Remnant, has said, damages relationships and any good faith and trust in government. This is therefore doubly, trebly and quadruply a bad thing for the Government to have suggested, and I hope they will have a change of mind. I wish to test the opinion of the House.
Baroness Sherlock
That this House do not insist on its Amendments 26 and 37, to which the Commons have disagreed for their Reason 37A.
Baroness Sherlock
That this House do not insist on its Amendment 35, to which the Commons have disagreed for their Reason 35A.
Baroness Sherlock (Lab)
I beg to move Motion G.
Motion G1 (as an amendment to Motion G)
Baroness Sherlock
That this House do not insist on its Amendment 43, to which the Commons have disagreed for their Reason 43A.
Baroness Sherlock (Lab)
My Lords, I have already spoken to Motion H. I beg to move.
Baroness Sherlock
That this House do not insist on its Amendments 77 and 85, to which the Commons have disagreed for their Reason 85A.
Baroness Sherlock (Lab)
My Lords, I have already spoken to Motion J. I beg to move.
Motion J1 (as an amendment to Motion J)
Baroness Neville-Rolfe
Leave out from “House” to end and insert “do insist on its Amendments 77 and 85 to which the Commons have disagreed for their Reason 85A.”
Baroness Sherlock
That this House do not insist on its Amendments 78 and 86, to which the Commons have disagreed for their Reason 86A.
Baroness Sherlock (Lab)
My Lords, I have already spoken to Motion K. I beg to move.
Baroness Sherlock
That this House do not insist on its Amendments 79 and 87, to which the Commons have disagreed for their Reason 87A.
Baroness Sherlock (Lab)
My Lords, I have already spoken to Motion L. I beg to move.