Pension Schemes Bill

Baroness Altmann Excerpts

Report stage
Thursday 19th March 2026 Lords Chamber

Moved by

[Baroness Altmann]

49: Clause 22, page 24, line 19, leave out “12” and insert “36”
Member's explanatory statement
This amendment would only classify an unused pension pot as “dormant” if it had been left alone for at least three years, not just after one year.

[Baroness Altmann (Non-Afl)]

My Lords, I will not detain the House too long on this amendment. It is a small amendment, but it is very important for members of pension schemes in auto-enrolment, particularly women.

The proposal in the Bill is to move small pots, under £1,000, which are considered dormant—in other words, they have had no contributions paid in and no contact from the member with the provider for 12 months—to a consolidator scheme without member consent. My argument is simple: 12 months is simply not long enough to consider that a scheme that has not had contributions paid into it is dormant and that that member has no interest in the scheme. Imagine a woman, for example, who stops work for a period to care for loved ones or elderly parents, partners or children. They may stop contributions for quite a while longer than a year, but their pension could be moved if the provider had not been able to contact them, and their money would be put into a consolidator scheme approved by the regulator over which they had no control.

Amendment 49 would extend the period before which somebody’s pot could just be taken away from one year to three years; and Amendment 50 would extend it to two years. This would give time for the Government’s correct aim of improving data accuracy to take place. We know that most pension schemes have huge errors in their data and do not always know even how to contact a member. It would also allow time for providers and trustees to trace members and for the pensions dashboard to start and members to be able to find their pots themselves.

I understand that pension providers do not want these small pots and they may make a loss on them, but they should not just be able to get rid of them with such unseemly haste. I hope the Government may accept the spirit in which this amendment is meant, which is to protect members while obviously still allowing the pots to be moved once it is beyond doubt that they are indeed dormant. I beg to move.

[Lord Fuller (Con)]

My Lords, once again, we have another policy designed by civil servants sipping lattés in that rather agreeable ground-floor coffee shop at 1 Horse Guards Road, safe in the knowledge that that regular monthly salary, their generous taxpayer-funded pension and their ability to work from home a couple of days a week provide that comfortable lens through which they view the world outside.

But outside, in the real world, there are whole armies of people who do not do the nine to five; they live by their wits, self-employ and undertake seasonal work or term-time employment—the men or women for whom the Labour Party was established and who salt money away for their retirement when they can.

Many of them work hard and ask their accountant to do the books at the end of the year. It might take some time. Neither the worker nor the accountant work to strict 12-month timescales. It might take three months to finalise the numbers in one year, nine months in the next. That is the untidy way in which the real world works.

To legislate to confiscate someone’s pension after 12 months, as if it was fly-tipped by the side of the road to be swept into the dumpster of some poorly performing default scheme, amounts to theft and an abuse of trust that undermines confidence in the pension system.

I totally endorse Amendment 49 in the name of my noble friend Lady Altmann for another reason as well: throughout the canon of pensions legislation, we have a three-year carryback, where people can make up their pension deficit over three years. This amendment is entirely consistent with that. Consistency, simplicity and understandability are the watchwords with which we should proceed.

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[The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)]

My Lords, I thank noble Lords—at least, most noble Lords—for their contributions to that little debate. It is probably worth saying at the outset what this is about. Anyone who listened to the noble Lord, Lord Fuller, would assume, first, that theft was involved; secondly, that pots were being taken away from people; and, thirdly, that they were being taken away from hard-working, self-employed businesspeople. None of those things is true. These are pots where people have had a series of jobs, they have moved on and they have left small-value pots scattered around in different places, on which they are paying often quite significant charges, and the value of those pots is diminishing.

The policy was consulted on not by civil servants sitting in Horse Guards Parade but by the previous Government in 2023. This is the proposal that was consulted on by the previous Government and I happen to think that they got this right. So too did the range of opinion that was consulted, and I will say more about that in a moment.

The intention behind the policy is to capture the rights-dormant small pots and have them transferred to a consolidator, which will be clearly classified by the regulator as being one that has been classed as having value for money, and only to such a pot. The intention is to capture the right small pots that are genuinely dormant while avoiding transferring pots belonging to members who remain actively involved with their pension saving. Of course, no eligibility test will operate perfectly in every circumstance, but we believe the current 12-month period provides the right balance between effective consolidation and member protection. I shall explain why in a moment.

The noble Baroness, Lady Altmann, wants to extend the period to 24 or 36 months. That would significantly extend the period during which a pot remains dormant. This is not about industry; it is about risking detriment, both to individual members, who would continue to face charges for longer, and to the wider scheme membership, who, in practice, subsidise these small deferred pots. Either of those extensions would delay the consolidation of genuinely dormant small pots, leaving inefficiencies in the system for longer, resulting in—

[Baroness Altmann (Non-Afl)]

My Lords—

[Baroness Sherlock (Lab)]

Go on. It is going to be a long day.

[Baroness Altmann (Non-Afl)]

If a pot has been forgotten about for many years, this problem will not exist even with my amendment because it will have been dormant for over three years, if it was left behind from a long time ago. I am concerned about the people who are working at the moment who may take some time off, and to give them a better chance.

[Baroness Sherlock (Lab)]

If the noble Baroness could have just a bit of patience, I am just coming to that. I ask her to bear with me for a moment.

Either of the noble Baroness’s proposals to extend the period of dormancy would delay the consolidation of genuinely dormant small pots, leaving inefficiencies in the system for longer, resulting in higher costs for schemes and for members through higher charges.

Where someone holds several small pension pots across multiple schemes, they will find themselves subject to multiple sets of charges over a number of years. The longer the dormancy period, the longer that members will face those charges. It is well recognised that many schemes apply a flat-fee charge structure, particularly those most affected by the proliferation of small pots, and that can compound the issue. For example, a saver with three separate small pots held across three schemes, each applying its own annual flat-fee charge, could see those charges accumulate over an extended dormancy period. If the period were lengthened to 36 months, they could face four more annual charges. Given the relatively low value of many small pots, such cumulative charges represent a significant risk of detriment to the member.

On the point about people taking a career break with the intention of returning to work, in the majority of cases such members will be adequately protected by the 12-month dormancy window. The noble Baroness, Lady Stedman-Scott, mentioned maternity leave. This was looked at carefully during the consultation. Where someone is on paid maternity leave, employers should carry on paying pension contributions. Where contributions are being made, the pots are not dormant, so any period of dormancy would not start until no contributions were paid, and those pots would not be subject to dormancy criteria and would not be consolidated.

Anyone taking an unpaid break that lasts longer than 12 months would find that the system included various safeguards. First, every member will get a transfer notice before consolidation takes place, giving them a clear opportunity to opt out if they judge that consolidation is not in their best interests. As we develop the delivery design, we will look to explore different forms of communication to understand how they can best support members’ engagement with the process.

Secondly, under Clause 115, the Government are taking a power to require employers to provide updated information to schemes periodically. We will consult on how that should operate, but if subsequent evidence shows that career breaks present a genuine issue, we could simply require employers to notify schemes where a break was planned or under way. Where appropriate, that would allow such pots to be made exempt from consolidation under regulations made under Clause 25.

However, the current evidence does not indicate that this is expected to be a widespread problem. As I said earlier, the 12-month timeframe formed part of the proposal consulted on with stakeholders across the pensions industry and consumer representative bodies in 2023 and represents a supported middle ground—long enough to ensure that pots are genuinely dormant, but not so long as to delay consolidation unnecessarily. It is essential that the policy maintains the right balance between operational efficiency and member protection. Just to be clear, the Bill currently requires the regulations to set a minimum of 12 months for a pot to be classified as dormant. That means that if evidence suggests that extending the period is necessary, that period could be set at a higher level or it could be extended subsequently through secondary legislation.

We all want to avoid negatively impacting individuals who take periods of unpaid leave, but if we think about it, applying a blanket extension to the dormancy criteria cannot be the right way to provide that protection. A more appropriate approach is to design the policy framework with the necessary safeguards built in from the outset, and that is what we have done. Introducing a universal increase to the dormancy period would exacerbate the risk of detriment for everybody involved.

Finally, government Amendment 51 is a minor and technical change. It replaces “specified” with “prescribed” in Clause 23 to ensure consistent terminology throughout the Bill. The amendment improves clarity and brings the clause into alignment with the drafting used elsewhere in the measure. In the light of what I have said, I hope that the noble Baroness will withdraw her amendment and that the House will support government Amendment 51.

[Baroness Altmann (Non-Afl)]

My Lords, I thank the Minister for her reply. What she describes sounds very good in theory. My amendment is designed to address the issue that that theory does not work in practice in the kind of pensions world that we have right now. There will be improvements, but they are not in place yet. There is no compensation for a member whose pot is moved away to a worse scheme. They may have higher fees or they may have lower fees. They may get better performance, they may get worse performance. It should be incumbent upon all of us to make sure that there is as much protection as possible. If somebody has not paid in for years, the three-year limit will be fine because they will have exceeded it. Therefore, I wish to test the opinion of the House on Amendment 49.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, we debated Clause 40 and the new FSMA Section 28C issues thoroughly in Committee. I am grateful to all noble Lords who contributed and to those who have spoken to me since. The amendments in this group would remove the reserve power that would allow the Government to mandate asset allocations for workplace pension savers. We will vote on Amendment 52, which is a consequential amendment, but it carries with it the business amendments—the thing that it is really about. These are Amendment 78, which would delete Section 28C, and Amendment 96, which would delete the now redundant savers’ interest test and all associated references.

My objection here is one of principle. Why should government override trustees? We all know that UK pension funds have invested too little in UK assets and private markets, but we also know why: regulatory interventions, the charge cap and pressure into low-cost indices and gilts have made it difficult to invest in anything that requires governance or research. The track record of intervention is not good, yet this clause proposes more intervention. It is described as a back-up to the Mansion House Accord, to be used if industry does not deliver. But if industry does not deliver it will not be out of obstinacy; it will be because the opportunities are not there at the right price or at the right risk. Mandation does not solve that; it simply overrides fiduciary and professional judgment. Even the threat of mandation is intended to do the same.

If regulated for, this clause would reverse the burden of proof and raise the evidential bar for trustees. Trustees, who already must act in members’ best interests, would additionally have to show the regulator that the mandated allocation would cause material detriment to be exempted from allocation. That is a very high bar, flying under the guise of a savers’ interest test. We would be placing trustees under a new adjudicator of fiduciary duty that has no fiduciary responsibility itself, and a Government with an inherent conflict of interest—and, if I may say, no technical or regulatory qualification. Spending workers’ pensions instead of raising taxes is not fiscal discipline; it is concealment.

The power itself is extraordinarily broad. There is no time limit, no percentage, no end date, and a rather dodgy exemplary asset list—available to any future fancy. Nothing prevents a Government from choosing their preferred assets, including those that no one else will touch, and compelling 22 million savers to invest in them. That is not the route to pension security.

For all these reasons, the only responsible course is to remove this power, and I intend to test the opinion of the House. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I fully support everything that the noble Baroness, Lady Bowles, said. I am very sad to be in the position of needing to do so, because I support the Government’s aim of helping pension schemes to put more money into UK investments and growth. However, the way in which it is being done is the issue here, with unlimited powers and not incentives but diktats. If you threaten a pension scheme that, unless it does what you want, it cannot auto-enrol workers in this country then clearly that is not any kind of carrot; it is just a big stick. Incentivisation is normally what we do to encourage pension investments, and it is what we should be doing. One of my amendments would achieve that, but if the noble Baroness, Lady Bowles, is successful with Amendment 52, we will not need to go into those details.

I hope that the Government, even at this late hour, will rethink their approach to have a two-step approach: to have a voluntary agreement and commit to do certain things, but then the second step would be, if the voluntary agreement was not stuck to or if schemes did not do any of the things that they said that they were going to do, that they would force schemes to do what they wanted anyway. That is not the way to make the best of people’s pensions, and I hope that the Government will think again.

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[The Lord Bishop of Hereford]

My Lords, I speak in favour of Amendment 55, in the name of the noble Baroness, Lady Noakes. There is a questionable theory of change in the Bill—that bigger pension schemes are necessarily better, suggesting the minimum scale of £25 billion. While scale certainly creates advantages, Australian experience suggests that funds can be run at less than this size and still provide value and good outcomes for members. However, concentrating the market into a few megafunds introduces a new system of risk, of schemes that become too big to fail and so are effectively the state’s problem.

Also, megafunds are unlikely to allow for nuance and specialism, such as faith-based funds. Unfortunately, the understanding of faith-based funds in the commentary on the Bill seems to be limited to Sharia-compliant funds and exclusions. The understanding of and engagement with the nuances of faith-based investing in the Bill commentary are superficial at best. There may be perfectly good arrangements with faith-based or ethical distinctiveness; such arrangements may perform well for members in financial and non-financial terms and be significantly smaller than the threshold envisaged. The distinctiveness that they offer might easily be lost in generic megafunds. This amendment makes the important point that absolute size and performance for members need not be correlated.

[Baroness Altmann (Non-Afl)]

Obviously, I support Amendment 55 and a number of the other amendments in this group, but I urge the Minister to consider the dangers of trying to engineer a few large schemes while at the same time knocking out new entrants and competition. From now to 2030, if a scheme is not yet at the £25 billion scale requirement, it will find—and it is finding, such as in the case of Penfold—that it cannot get new business. The employer cannot be confident that it will reach the £25 billion in time, and knows that it could potentially have to change provider. This requirement is undermining innovation and competition in the market right now, and may continue to do so. I hope that the Minister will recognise the dangers.

I apologise to the House, as I should have declared my interests. As stated in the register, I am a non-executive director of a pensions company and an adviser to a pension master trust.

[Lord Palmer of Childs Hill (LD)]

My Lords, I think that everybody in your Lordships’ House wants good investment, whichever side of the House we are on. If you are investing, with apologies, sometimes faith is not enough—you have to see what happens in the market. It is about the choices that are made.

These amendments would allow pension schemes to demonstrate a strong investment performance or innovation in members’ services and administration to be exempt from the scale requirements set out in the Bill, and would introduce greater flexibility on how scale is assessed, including recognising assets held across multiple arrangements.

The amendments reflect concerns that the Bill places disproportionate emphasis on size rather than outcomes, risks disadvantaging smaller or newer entrants and may reduce competition and innovation in the pensions market without clear evidence that larger schemes consistently deliver better returns for members. Amendment 77 would allow exemptions to scale requirements if the regulator deemed that there was no evidence of improved outcomes for members in the case of a proposed merger to meet the scale requirements. This would make sure that members’ interests are protected. On these Benches, we support Amendment 77, and if it comes to a vote, we will support it.

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Moved by

[Baroness Altmann]

112: Clause 42, page 56, line 24, leave out “a non-scale default arrangement” and insert “several non-scale regular arrangements”
Member's explanatory statement
This amendment, and another in the name of Baroness Altmann, seeks to ensure pension schemes are not excluded from the market for going beyond ‘one-size-fits-all’ approaches and can design arrangements for different cohorts of membership. It also seeks to clarify the language used in relation to these arrangements.

[Baroness Altmann (Non-Afl)]

My Lords, Amendments 112 and 113, which I shall not press to a vote, are designed to ensure that we try to keep the needs of pension scheme members at the heart of all the policy changes that we make. For me, pensions have always been about people; they are not just about money.

In relation to the clause that concerns restricting the creation of new non-scale default arrangements, these amendments seek to permit default arrangements below scale—for example, where a company seeks to identify different types of member and put together a default arrangement that is specifically suited more to that type of member than to the traditional one-size-fits-all policy that pension schemes so often seem to be based on, and that certainly do not suit many of the members who are put into them.

I hope that the Minister will help me understand why the Government want to have just one default arrangement—potentially with just one common investment strategy—rather than encouraging more of a pension market that can serve individual groups of members with different needs. That could include those who are in poor health and who might need a different approach, or those who may not know when they are going to retire and therefore a life-styling fund that takes them out of higher return investments would not be appropriate for them.

The idea of pension companies asking members about themselves, beyond just looking at their chronological age, seems to be rather alien. However, I hope it could become much more common, given the digital enabling that is available to pension companies. That would allow them to ask two or three relevant questions, including about someone’s health or whether they have a final salary pension alongside this scheme that they could rely on instead. That is the intention behind these amendments, and I look forward to the Minister’s response.

[Viscount Younger of Leckie (Con)]

My Lords, this amendment speak to a principle that we on these Benches have returned to throughout our consideration of the Bill: the framework we are putting in place must reflect the reality of outcomes, not simply a rigid set of predetermined requirements. This amendment recognises that many schemes quite properly design different default arrangements for different cohorts of members. That is not a weakness; it is a strength. It reflects an understanding that savers are not all the same, and that good outcomes often require a degree of tailoring.

Where such schemes are performing well and delivering strong outcomes for their members, they should not be penalised simply because they do not conform to a single uniform model. In that sense, this amendment is important. It does not undermine the objective of improving scale where that is beneficial, but it ensures that we do not lose sight of the ultimate goal, which is—returning the same theme—better outcomes for savers.

[Baroness Sherlock (Lab)]

My Lords, I thank the noble Baroness, Lady Altmann, for introducing her amendments. I covered quite a bit of this ground in my response to the previous group, which was quite long, so I will not repeat that—I hope that the noble Baroness will not mind.

As I set out in the previous group, Chapter 4 of the Bill relates to default arrangements and the fragmentation in schemes that are in the market. To reiterate, the measures in this chapter do not cap or limit the number of default arrangements, nor do they impact on the ability of a new entrant to enter the market. I previously mentioned innovation, which features in the new entrant pathway, but what we want to see is default arrangements being created to meet member needs. That is why we are introducing a range of measures for them to need regulatory approval before they begin to operate.

On Amendment 112, I understand that the intent is to allow a scheme to have

“several non-scale regular arrangements”.

However, it is not clear what is meant by a “regular” arrangement in the description, as it is not defined.

[Baroness Altmann (Non-Afl)]

I did not go into detail for reasons of time. However, my intention with the word “regular” was to get away from the standard industry jargon of “default fund”, which has quite negative connotations for an ordinary member. Therefore, having the word “regular”—or “standard”, or whatever we want to call it—would be much better for the pensions industry than the negative term “default”. Most people would ask, “Why would I want to default on my money? I want to do something good with it”.

[Baroness Sherlock (Lab)]

The noble Baroness should not worry about time—it is only 3.45 pm. We have all the time in the world, so I am very happy to carry on debating this.

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I understand the point the noble Baroness made, and I think we share the overall objectives, but I hope that she can see that the Bill, as defined, accommodates the intent behind her amendment and that she can withdraw it.

[Baroness Altmann (Non-Afl)]

I thank the Minister for her response, and I beg leave to withdraw the amendment.

Amendment 112 withdrawn.

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[Baroness Altmann (Non-Afl)]

My Lords, I have the pleasure of supporting these amendments. I am very pleased that the Government have made the decision to improve flexibility and help the working of these new superfunds. We do not yet know quite how they will go, so I thank the Government and fully support the amendments.

[Viscount Younger of Leckie (Con)]

My Lords, I shall speak briefly to this group of amendments. At the outset, I recognise that a number of these amendments are either technical or consequential. It is entirely right that the Bill should be internally consistent and operable in practice.

However, Amendment 117 raises a more substantive issue on which I would be grateful for some clarification from the Minister. This amendment alters the way in which the protected liabilities threshold for superfunds is determined, moving to a model in which the threshold is defined as a percentage set out in regulations. I know that we are on the cusp of closing proceedings on the Bill today, but I am afraid that I have a number of questions on this.

First, will the Minister set out clearly what problem this amendment seeks to address? What deficiency has been identified in the current approach? Secondly, what assurance can the Minister give that this change will not weaken the level of protection afforded to members? Is there any scenario in which this more flexible, percentage-based approach could permit lower funding levels than would otherwise have been required? Thirdly, how does the Secretary of State intend to determine the appropriate percentage? Will there be a minimum floor or is this entirely to be left to future regulations? Finally, given the importance of this safeguard, can the Minister explain why it is not being set out in the Bill and what level of parliamentary scrutiny will apply to the regulations that determine it?

Flexibility can be valuable, but when it comes to member protection it must be accompanied by clarity and by robust safeguards. I look forward to the Minister’s response.

Pension Schemes Bill

Baroness Altmann Excerpts

Report stage
Monday 16th March 2026 Lords Chamber

Moved by

[Baroness Altmann]

24: Clause 11, page 14, line 7, at end insert—
“(14) Value for money regulations must include criteria relating to member service quality, including—(a) accuracy of recorded contributions;(b) reliability of valuation data;(c) efficiency of administration;(d) jargon-light communications in plain English;(e) availability of education or guidance for all members;(f) specific support for vulnerable members.”Member’s explanatory statement
This amendment seeks to ensure that value for money assessments consider the quality of member services and communications, as well as data and administrative accuracy.

[Baroness Altmann (Non-Afl)]

My Lords, I will speak to various of my amendments in this group. We have moved on now to value for money. Of course, I fully support the Government’s aim of moving from talking about cost as the only arbiter of whether a scheme is good, and low cost being the measure of good, to looking at a much wider area of benefits for members in terms of value for money.

The particular amendments that I tabled, which I also tabled in Committee, focus on language in particular. I am grateful to the noble Baroness, Lady Bowles, for her support for Amendments 24 and 25. These amendments are trying to outline more clearly what criteria a scheme that is good value for money should be able to fulfil, so that it is much clearer what “value for money” means beyond whether it is low cost, and indeed beyond the aims of just saying whether a scheme has been performing well.

Ultimately, when we are discussing the value of a pension scheme with members, one thing that has in the past not typically factored into the thinking of the industry is the idea that the scheme might encourage members to understand pensions and give them a better idea of what the pension fund does and the benefits it can bring to them. So often in the past, there has been a reliance on member inertia, where they do not have to do anything and the pension is done for them.

The aim of the various requirements I suggest in Amendment 24 is to make the accuracy of contributions important. At the moment, schemes are generally riddled with data errors. I know that the Pensions Regulator has been looking at this recently, but part of the assessment of a good scheme should be whether its administration is capable and competent in managing scheme assets and recording the contributions correctly. I therefore suggest assessment criteria that includes reliability of the valuation data and efficiency of administration. Those are other areas that I hope will form part of the value-for-money judgments, and I hope that a requirement that regulations must include them will be included in the Bill.

I have also included what I call

“jargon-light communications in plain English”.

So often when you get a pension statement, or when anyone talks about pensions, it is in jargon that makes no sense to ordinary human beings. It is pension speak, which everyone in the pensions industry automatically understands, but, unfortunately, when the member gets their information about pensions it is usually something that they ignore, throw away or put in a file for later, rather than looking at what it means.

That leads on to my next point, which is the

“availability of education or guidance for all members”.

Members of the scheme would then have a provider that tries to help them understand what is happening to their pension fund.

Along with that, of course, would be specific “support for vulnerable members”. To some extent, vulnerable members are better taken care of, but I argue that, when we are looking at value for money—I stress that the Government are right to suggest that we need to look at value for money—there are important areas that should be in the regulations. I am trying to highlight them here.

The remainder of the amendments look at the language that will be used to assess value for money, apart from Amendment 32,which I will come back to. The other amendments deal with the Government’s assessment of whether a scheme is good value—which in the Bill is called “fully delivering”, though I am not sure that that is the kind of language that an ordinary person would relate to when thinking a scheme is good value. I am suggesting that rather than “fully delivering”, why not use “good value”? By the same token, when a scheme is judged to be “not delivering”, could we not say that it is “poor value”? That is what the ordinary person would immediately relate to when they look at what a value-for-money assessment says.

I appreciate that the Government and the consultations around this have looked at different red, amber and green ratings—RAG ratings—such as light green, dark green and so on, but I am trying to signal that there are ways in which we could talk about pensions that would resonate much better with the ordinary person. I hope that the Government might consider that.

The pensions industry, of course, loves its jargon and is very wedded to it, but I am not sure that it helps encourage people to want to put more money in pensions, for example—an aim which I believe the Government want. It would be more achievable if pension providers spoke to ordinary people in language that they understand—and their members are ordinary people, such as workers and so on.

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[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords who have spoken this evening. I am grateful to the noble Baroness, Lady Altmann, for her support on the principle of the shift to value for money. Before I move on to the detail of her amendments and others, I say to the noble Lord, Lord Lucas, that I am not going to get in between him and my noble friend Lord Davies in fighting it out on who got us here. Of particular relevance to this debate is that we would probably all agree on the need to move from cost to value—and that is only one of the things that has been going wrong. If we have pension funds competing for business with employers on cost rather than value, we are never going to move to the kind of scale that we want to see, which is a consolidated pensions market with large and better-performing pension schemes, improving the opportunity to invest in a wider range of assets and, I hope, taking us in a direction that would make the noble Lord happy.

I start with Amendment 24. I recognise the consistent commitment of the noble Baroness, Lady Altmann, to improving outcomes for members, particularly through better service quality and clear communications for vulnerable members. The Government entirely share these aims. Where we differ is that we think that the Bill already provides the necessary powers to deliver them. Let me explain why.

Service quality is a core part of the VFM framework. The Bill ensures that these metrics remain central to assessments, while allowing detailed definitions to be set in regulations so they can evolve with member expectations and industry practice. Clause 12 makes it clear that trustees may be required to disclose data on service quality. However, defining a comparable quality of service is complicated, as I am sure the noble Baroness will appreciate. We have consulted with industry on appropriate metrics and how these should be measured to ensure that they represent the nuances involved in determining quality, without inadvertently disadvantaging those arrangements—for example, with a less engaged member demographic.

Defining this through regulations provides us with the scope to develop comparable data in this area in an adaptable, consultative and proportionate way, while still acknowledging the technical nuance required here. For these reasons, while fully supportive of its intent, we cannot accept the amendment as the Bill already provides the powers needed to achieve its aims.

I turn to another matter for the noble Baroness, Lady Altmann, I fear. Her Amendment 32 would limit the Government’s ability to specify the consequences for intermediate ratings unless received for at least three consecutive years. I listened carefully to what the noble Baroness said, but the Government cannot support the amendment. Reducing reporting for such schemes risks missing early warning signals that changes are needed to protect savers. We believe that thorough, regular reporting ensures the long-term health and security of pension schemes for all members.

As the noble Baroness said, Clause 16 gives the Secretary of State discretion to set different consequences for different grades of intermediate rating. As proposed in recent consultations, amber-rated arrangements would face consequences, while light-green arrangements would not. A three-year threshold would mean potential problems going unchecked for too long. Instead, we propose giving schemes up to two VFM cycles to make improvements. We believe that is the right approach, and essential to protecting members.

Turning to Amendment 44 from the noble Baroness, Lady Stedman-Scott, while I appreciate the desire for a statutory timetable, we cannot accept this amendment, as a fixed 12-month deadline risks pre-empting the essential consultation and undermining the co-ordinated regulatory process which is already under way. Our published road map aims for the first data disclosures and assessments in 2028, based on 2027 data. Providing clear powers in the Bill, with the technical detail and timelines set out transparently in secondary legislation, remains the most proportionate approach here. A government amendment, to which I will come later, deals further with this. Industry’s responses to the latest VFM consultation will inform draft regulations and guidance.

Moving on to the group of amendments from the noble Baroness, Lady Altmann, on simplifying language in VFM assessments with a view to making them more intuitive for members to understand, this is another area where we completely agree with the aim but disagree with the proposals. Let me explain. “Fully delivering”, as set out in the Bill, is a more objective term, which is aligned with the structure of the framework. The language in the Bill has to allow regulators to make clear, consistent and, crucially, legally robust determinations, and “fully delivering” gives them the scope they need to apply the framework as intended. By contrast, the term “good value” risks weakening regulatory clarity by introducing a term that is broader, more subjective and less tightly aligned with the evidence-based metrics underpinning VFM assessments. Given what will flow from these assessments, clarity is crucial.

The same argument applies to amendments looking to change the terminology of “not delivering” to “poor value”. Crucially, these statutory terms will not be used in public-facing communications. Instead, members and employers will see the simple and intuitive RAGG ratings—red, amber, light green and dark green. Simplicity and accessibility will be appropriately delivered, without sacrificing the robustness required in the legislation. That is why we cannot accept the amendments.

I turn to the amendments tabled by the Government. As drafted, Clause 122, “Commencement”, provides that the value-for-money measures come into force on the day on which the Bill is passed. Our amendments allow the VFM provisions to be commenced via regulations. This provides the Government with greater flexibility to introduce elements of the VFM framework in stages, following detailed design work and informed by consultation. That brings the VFM clauses in line with other parts of the Bill which are commenced by regulations. The FCA and TPR have recently concluded their consultation on the VFM framework, and we are using the valuable insights and feedback from industry to shape final proposals in order to ensure that the regime is fit for purpose across both the trust-based and contract-based sides of the market.

We recognise that introducing the VFM framework is a significant undertaking for industry that requires adjusting to the administrative and data obligations to which it will be subject. I want to be clear that it is and remains the Government’s strong intention that the first VFM data disclosures and assessment reports will be required in 2028. However, this amendment provides us with the option, if necessary, to stagger the introduction of parts of the framework to allow more time for industry and regulators to adjust to its introduction.

In Committee, we debated amendments from the noble Baroness, Lady Altmann, on reporting requirements for intermediate schemes. The consultation paper from the FCA and TPR sets out our proposed approach, which is to require improvement plans for amber-rated but not light-green-rated arrangements, and action plans for red-rated arrangements. Templates will help keep requirements proportionate. Taking the flexibility to smooth the introduction of different elements of the framework, should that emerge as a pragmatic way forward, enables us to continue working closely with industry to fully understand the potential implications of the VFM measures. I hope that this provides the House with reassurance that we recognise the potential burden for industry. This has informed our approach—to reach a balance between ensuring that members receive the value they deserve, and that industry is in a position to comply with these new requirements.

Lastly, I clarify that government Amendments 36, 37, 38, 39 and 26 to Clauses 18 and 12 are of a minor and technical nature and correct consistency mistakes. In light of all that I have said, I hope that noble Lords will feel able not to press their amendments and to support those in my name.

[Baroness Altmann (Non-Afl)]

My Lords, I thank the Minister for her remarks. I also thank all noble Lords who have spoken in support of my amendments, in particular Amendment 24, which I had hoped the Government might be a little more favourable towards than they seem to have been. I understand that the Minister says that the Government have consulted industry and that has fed into the production of the Bill. I hope that the Government will also consult consumer groups and members because it is they who really need to understand the value-for-money framework. It is those groups that I was addressing with my proposals because from the point of view of industry it looks rather different, perhaps, from how it does from that of the ordinary workers who are having their money put into the pension.

I understand that the Government do not wish to accept Amendment 24 but it will, I hope, still help provide a framework for some further discussions as we develop the value-for-money framework. I beg leave to withdraw the amendment.

Amendment 24 withdrawn.

Pension Schemes Bill

Baroness Altmann Excerpts

Report stage
Monday 16th March 2026 Lords Chamber

[Baroness Altmann (Non-Afl)]

My Lords, I have added my name to Amendments 2, 4 and 5, so I will speak to those. I support the noble Lord, Lord Fuller, in his Amendment 1. The addition of the Pensions Regulator, alongside the FCA, is very important. I must declare my interest as a non-executive director of a pensions administration company and as a board adviser to a pensions DC master trust.

Amendments 2 and 5 are really important in the context of the Local Government Pension Scheme. The LGPS is an unusual type of defined benefit scheme; it is not like any of the others which are funded, because it is underwritten by the Government. It does not pay a levy to the Pension Protection Fund and the Government completely underwrite all liabilities, so of course the trustees are able, perhaps, to feel that they can take more risks than a defined benefit scheme, which is supported only by an employer which may fail and the members end up in the PPF. Having said that, unless the Government wish to change the Local Government Pension Scheme into another unfunded public sector scheme and just take all the assets in—which they could do—surely it is important to ensure that the trustees can make investment decisions that they believe are best, rather than the Government suggesting they know better and telling them what to do.

Amendments 2 and 5 both address restrictions on the ways in which the Local Government Pension Scheme can invest, whereby it has to choose to belong to one asset pool and that is it—it could not participate in another pool, even if it felt that that other pool had attractive attributes. I understand the Government’s intent—they would like pension schemes to support both local and national projects, as would I—but it should not be that you can support only the local projects that happen to be part of the asset pool that you must belong to. That is bound to turn these into discrete pools, rather than diversified pools where the trustees have a much freer choice.

The Government may be muddling the idea of scale with the idea of diversification. Both are important and both can deliver better outcomes for members, but trustees have to be able to choose which managers they believe can do the best for them. Quite frankly, usually it is the case that any one pool cannot be the best at everything. There will always be the need, as the noble Lord, Lord Fuller, said, for specialist expertise to be offered to pension schemes.

Amendment 4 is in the name of the noble Baroness, Lady Noakes, and she excellently explained what she intends it to do. The idea is that the Government should not dictate specific assets that pension schemes can invest in.

Although I have no problem with the Government incentivising particular types of investment, whether by offering better returns or different tax reliefs for investing in the ways the Government might wish—they might encourage a local pension fund to invest in its local area—the idea of mandating it with no option but to follow seems a step too far. I hope the Minister will understand that there is support for the ideas the Government wish to achieve, and which lie behind the stipulations in the Bill. It is just that the powers extend so far that we have no idea what might come next on mandation.

We are not talking about incentivising. We are talking about forcing schemes to invest in ways that Ministers see fit, rather than supporting the economy in general in ways that the trustees and their managers decide would deliver the best outcomes for the scheme.

[Lord Palmer of Childs Hill (LD)]

My Lords, first, I have to declare an interest because after 28 years as a councillor in the London Borough of Barnet, I am in receipt of a modest local government pension. I sometimes forget to declare that and I do so now. We have been lucky to have incisive speeches from the noble Lord, Lord Fuller, the noble Baroness, Lady Noakes, my colleague and noble friend Lady Bowles and the noble Baroness, Lady Altmann. After them, I almost want to ask, “Is there anything else one should say?”, but as a politician, I will do so.

This has been a useful debate on the future governance of the Local Government Pension Scheme, and there is a common theme running through it: the need to protect fiduciary responsibility while ensuring that governance is modern, credible and transparent. The amendments in this group range from consultation requirements to the possibility of participation in more than one asset pool, and to the important question of whether Ministers should be able to steer investments towards particular assets and places. I hope that Amendment 4 will be moved at the end of this debate; I would certainly want to support that amendment, if the noble Baroness decides to move it.

We on these Benches recognise that pooling can bring efficiencies and expertise, and we generally welcome the provisions on the Local Government Pension Scheme in the Bill, but bigger is not always better simply because it is bigger. Flexibility matters: if one pool has genuine expertise in a special asset class, there is an argument for allowing schemes to benefit from that knowledge, rather than being locked into a single route for all purposes. Equally, if powers are to be used over asset pools, proper consultees matter. It is hard to object to hearing from bodies such as the Government Actuary’s Department and the Pensions Regulator before directions are given. These are basic disciplines of good administration; I only hope that the Local Government Pension Scheme uses those provisions.

Our wider concern remains the same one raised repeatedly in Committee: that the Bill is too ready to create broad powers first and to explain the practical boundaries later. On the Local Government Pension Scheme, that is particularly sensitive because we are dealing with very large sums, long-term liabilities and members who expect prudence—that was probably why they went into local government in the beginning—not improvisation. So our test is straightforward: does the provision strengthen scheme governance, preserve proper fiduciary decision-making and protect members from political or poorly evidenced intervention? Where it does, it deserves support; where it does not, Ministers still have work to do.

The amendments in this group are pretty modest. As we go through the Bill, we will come to other amendments that would go further. The Minister and her colleagues should think again about whether these amendments improve the Bill. They are not against the Bill or the Government; they are prudent. They would provide fiduciary powers and the power to use them. I invite Ministers to take a step back and consider giving their support to these early amendments and asking their colleagues in the other House to do so. These are reasonable amendments. As I say, later in this debate there will be other amendments that go further. I would like to hear that Ministers feel there is some credibility in the amendments in this group, particularly Amendment 4.

--- Later in debate ---

[Baroness Altmann (Non-Afl)]

My Lords, I support this amendment. This is an important time to talk about the contribution rates to the Local Government Pension Scheme. When funding has changed so substantially in a very short period of time, having an interim review clearly makes sense, for not only the local authority but the council tax payer.

As we heard in a previous debate, we are seeing councils with significant surpluses continuing to spend council tax income on pension contributions to schemes that do not need them because they are in significant surplus. Further, fixing contribution rates in a three-year cycle underestimates the timeframe that has gone into the setting of those rates, because the valuations on which those rates are based were done more than three years before the third year of the cycle. It takes about a year for the scheme valuation to be done and the contribution rates to be set, so they could easily be four years behind. A lot can happen, and has happened, in that timeframe.

I hope the Government will accept that this principle of allowing councils to be more flexible with the revenue that they receive from council taxes could benefit local authorities and the country. We know that councils have been forced to increase council tax due to their inability to meet their basic spending commitments. If the amount that councils spend on pension contributions could instead be spent on social care, or other local authority needs, they would require less money from local residents—which would improve the local economy, as tax rates would not be so high—and central government. The pressure on public spending could therefore be ameliorated.

I know that there is a principle of trying to achieve what is referred to as stability in contribution rates, so that they do not change too much from one year to the next. However, when there are significant changed circumstances, forcing schemes to fiddle the assumptions on which the scheme funding is based so that local authorities can somehow justify maintaining contributions to a fund that, in the private sector, would not need the money and would normally be having a contribution holiday, strikes me as not serving the best interests of either the local or the national economy. A review of how pension contribution rates are set at local authority level is probably long overdue, given the big changes that we have seen, and could help the Government with some of the funding strains that they have been feeling, and their desire to improve growth.

If a local authority is spending, say, 20% or more of its council tax revenue on putting money into a pension scheme that does not need it, and if that pension scheme is underwritten by the Government anyway, so its members’ benefits are not at risk, you have a very different scenario from that a private sector employer’s trustees might be facing: if the contributions stop and the employer gets into trouble, there is nothing much that can be done to ameliorate the position for members. That risk does not really exist in a local authority pension scheme. As I say, there is no contribution to the Pension Protection Fund and no underwriting; this is guaranteed by taxpayers.

Therefore, if you are raising taxpayer revenue from council tax, why not simply use it where it is needed, rather than putting it where it is not needed for now? You can always come back later and impose contributions when or if the funding position changes, but the scheme is not going to run out of money in any short-term period; that is not how pension schemes work. I therefore hope that the Government will appreciate the logic of this amendment, which was so ably moved by my noble friend on the Front Bench.

[Lord Katz (Lab)]

I thank the noble Viscount, Lord Younger of Leckie, for his amendment, and I share the interest in ensuring that interim valuations are accessible and transparent for all employers in this scheme.

Amendment 12 proposes changes to Regulation 64A of the Local Government Pension Scheme Regulations 2013, which concerns valuations carried out outside of the triennial valuation cycle. In Committee, I committed that the Government will consult on changes to Regulation 64A this year, and we will consider the matters raised as part of that consultation.

I reiterate the point I made in Committee: any changes to regulations need to be properly considered to avoid unforeseen consequences. The views of employers, funds and other sector groups are vital to this process, and amending legislation now would prevent them contributing to the policy design and therefore ensuring our ability to get the best possible outcome. There is clearly value in having a mechanism that allows employers to review contribution rates, especially where employer covenants or liabilities change significantly, but this must remain consistent with the triennial valuation and be workable for all participants across the sector.

Amendment 12 aims for additional transparency, in a similar vein to the other amendments we have discussed this afternoon. The noble Viscount should note that the policy on interim valuation contribution reviews is set out in the funding strategy statement, on which employers are consulted.

The noble Baroness, Lady Altmann, spoke in detail about the time lag of valuations and the impact of events in the financial cycle. As everyone will be aware from geopolitical events, markets can vary from one day to another. Simply requesting a valuation on the basis of a change in the day’s markets would be excessive, and indeed many funding strategy statements state this. The current regulations provide for interim valuations on the basis of changes in liabilities or covenant. The risk of liabilities not being met is that the burden goes up not for the Government but for the council tax payer, as a council that may not be in a good financial position, as the noble Baroness says, needs to increase council tax to cover liabilities. The Government do not underwrite the scheme. Your Lordships’ House should remember that 50% of LGPS employer contributions are not from local authorities, so we are not talking about a situation where it is exclusively local authorities that would cope with the change.

I said in Committee—and I could have said this in response to the previous group as well—that it is marvellous to see the Benches opposite show concern now about the funding of local authorities. We are concerned about it, and we were concerned about it for the previous 14 years when the Benches opposite were in government and had a differing view of imposing austerity on local government. I will say no more, and I apologise to your Lordships’ House—I could not help myself, having been very good on the previous group.

I hope my response demonstrates that the Government have considered the points raised through this amendment carefully. I therefore ask the noble Viscount, Lord Younger of Leckie, to withdraw Amendment 12.

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Moved by

[Baroness Altmann]

13: Clause 9, page 10, line 36, at end insert—
“(6A) Prior to making modifications to scheme rules in line with this section, trustees must commission and consider relevant formal actuarial advice regarding the impact of surplus distribution on scheme funding and future member or employer benefits and must consider alternative approaches for dealing with a surplus that include—(a) running the scheme on without new contributions,(b) transferring to a superfund, and(c) buying annuities.”Member’s explanatory statement
This amendment would require trustees to ensure they have had formal advice about surplus distribution before changing scheme rules, and the impact of alternative ways to deal with scheme funding.

[Baroness Altmann (Non-Afl)]

My Lords, Amendment 13 is in my name. I shall also speak to Amendment 15, which is very similar. I also support the aims of Amendments 14 and 16 to 19, which seek to make sure that members’ interests are taken into account when trustees distribute, or consider distributing, a surplus to employers.

Amendment 13 seeks to build on the important discussions we had in Committee. I thank the Minister for her thoughtful responses to those discussions. I appreciate the Government’s commitment to ensuring that defined benefit pension schemes can contribute to economic growth through the prudent and efficient use of their substantial surpluses. With around £1.2 trillion in private sector defined benefit assets—and that is on prudent measures—the potential for positive impact is huge, given the estimated £240 billion surplus from those 4,500 schemes.

Trustees who have stewardship over these assets on behalf of around 9 million scheme members are now being encouraged to make strategic decisions which could reshape some schemes for the future and deliver broader benefits, potentially both to members and to the economy. The Bill is correct in encouraging that to happen. Of course, trustees have significant responsibilities when they assess a scheme’s surplus and whether to it pay out or to preserve it. As the noble Lord, Lord Davies of Brixton, has so often reminded us, a surplus is merely a reserve—a buffer against future bad markets, perhaps. In some schemes, the extent of that surplus is so significant, with the employer having put in so much money during the past few years, because of the impact that quantitative easing had for so long on pension schemes’ liabilities, that it is perhaps appropriate for trustees to consider whether employers should be able to get some of that money back, especially if they could invest some of it into their business and help grow the strength of the employer behind the scheme.

As trustees have these greater responsibilities, my amendment seeks to ensure that the relevant comparisons are being made before any surplus is distributed, so that the trustees have considered the available options. The current Technical Actuarial Standard 300 would properly inform them. This would include not just paying out a surplus but running the scheme on for the benefit of the members. It could also include possibly finding a new employer sponsor who could manage the scheme with a greater strength behind it and take advantage of the surplus to some degree both to enhance member benefits and to return some money to the employer.

The noble Lord, Lord Davies, may well tell us that these technical actuarial standards and the reports, such as TAS 300, are already in place, so why do we need the amendment? I am informed by significant areas in the pension industry that advise many DB schemes that, although there is a requirement for these reports, trustees do not always take note of them. They are not even always presented to the trustees. This is under the aegis of the Financial Reporting Council, which does not have sufficient resource to enforce the standards that it would, perhaps, otherwise wish to do.

This amendment makes it clear to trustees that they must consider the broader actuarial advice—not just asking whether they should pay out the surplus and how much they should pay out but considering the other options that would be available. Many trustees will consider paying out a surplus alongside a scheme buyout, for example. This actuarial report would help to inform the trustees of the potential benefits and improvements to members that could be achieved by not buying out and by running the scheme on, for example.

At the moment, for each £1 billion of buyout funding that exists in a scheme, if they buy out, approximately £150 million to £250 million then goes to the insurance company in profit because it takes in the money but then rerisks it but invests in higher return assets—so it makes that profit. It is entirely feasible to imagine that a scheme that carries on could itself get that extra profit by running the investment policy in a kind of low-risk way, just as an insurance company would do, but that money could then go to the members or be shared between the members and the sponsor.

--- Later in debate ---

I am grateful for all noble Lords’ contributions. However, for the reasons I have outlined, I hope the noble Baroness feels able to withdraw her amendment and I ask that noble Lords support Amendment 21 in my name.

[Baroness Altmann (Non-Afl)]

My Lords, I thank the Minister for her thoughtful and considered response. I also thank all noble Lords who have supported my amendment, including the noble Lord, Lord Davies, and the noble Viscount, Lord Thurso. I had hoped that the noble Lords on the Opposition Front Bench might be willing to support me if I were to press this to a vote, but it sounds as if that is not the case. I hope that the Government will be successful in ensuring that when pension scheme surpluses are paid out, members are considered carefully. I know that the Minister considered this would be unnecessary bureaucracy. I have to say that it is a requirement, but one that is not always adhered to, and the mechanisms for overseeing it do not seem to have been working.

More particularly, what I had hoped this amendment could help achieve was not only helping the trustees meet member benefits but, in many circumstances, potentially improving member benefits beyond what is currently payable. Yes, they need appropriate advice but, given the state of pension schemes, there is a significant opportunity to improve the amount of money paid to members alongside the decisions to pay out surpluses. Therefore, if the noble Viscount, Lord Thurso, decides to move Amendment 14 and test the opinion of the House, I certainly would be minded to support him. However, I beg leave to withdraw Amendment 13.

Amendment 13 withdrawn.

Pension Schemes: Ministerial Powers

Baroness Altmann Excerpts

Wednesday 11th March 2026 Lords Chamber

Asked by

[Baroness Altmann]

To ask His Majesty’s Government what assessment they have made of the need for Ministers to possess powers (1) to direct specific investment allocations for private sector workers’ pension funds or (2) to make investment in Government directed assets a condition of approval for automatic enrolment pension schemes.

[Baroness Altmann (Non-Afl)]

My Lords, in begging leave to ask a Question of which I have given private notice, I declare my interests as set out in the register.

[The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)]

My Lords, the Pension Schemes Bill contains a reserve power on asset allocation, designed as a backstop to the voluntary commitments made by the pensions industry under the Mansion House Accord. The Government do not currently expect to use this power. Were this power ever exercised, schemes that cannot meet the requirements without causing material financial detriment to their members would be able to apply for an exemption under the savers’ interest test. The power is time-limited and subject to consultation, parliamentary approval and robust safeguards.

[Baroness Altmann (Non-Afl)]

My Lords, I thank the Minister for that Answer, but I am afraid that if the Government’s main argument for including these powers is that they do not expect to need to use them, and will use them only if pension schemes themselves decide that they do not believe it is wise to achieve the allocations that the Government want them to, I have even greater concerns about those powers. I urge the Government to think again about overriding trustees’ decisions about what assets to invest in.

In particular, the Government are trying to take unlimited powers in the Bill to prescribe a percentage, but we do not know what that percentage might be, and to invest in assets, but we do not know which assets they will be. Even those who brokered the Mansion House Accord, such as Pensions UK and the ABI, are saying that they wish this to be reconsidered. Do the Government really believe that they know better than the investment industry how pension schemes should invest? Do they not consider that this is an example of the problems that the Government might have in excluding from the Bill some of the ideal vehicles which could be used to invest in the very assets that the Government say they want to support?

[Baroness Sherlock (Lab)]

As the noble Baroness well knows, we have been discussing this matter for some weeks now in Committee and will be discussing it again on Monday, when we come to the matter on Report. Let me give her a brief answer to the points she has made. I know that she agrees with the Government’s objectives, because she herself has advocated previously—indeed, in Committee—that we make pension tax relief contingent on 25% of new investment being allocated to UK assets. I know she wants the same thing that we do.

To be really clear, the power is being taken as a reserve power to back the voluntary, industry-led Mansion House Accord, which said that by 2030, 17 of the largest pension schemes in the private pensions sector would be investing 10% of their relevant default funds into private investment, with half of that in the UK. The expectation is that having done that, the industry will do it. The reason for taking a reserve power is, as the noble Baroness knows very well, that the challenge in the UK is too often schemes compete on cost and not on value. There is always a risk that for some small competitive advantage, somebody may want to try to separate off from that, so the reserve power is signalling clearly to the industry: this is the direction of travel, so let us stay with it. All we are doing is backstopping that.

Pension Schemes Bill

Baroness Altmann Excerpts

Committee stage
Thursday 5th February 2026 Grand Committee

[Lord Wigley (PC)]

My Lords, I support Amendment 203ZB, in the name of the noble Lord, Lord Davies of Brixton. I shall also address the government amendments in this group. I have signed the noble Lord’s Amendment 203, which we will come to later, recognising that he has professional expertise far greater than mine in dealing with these matters and believing that he comes to these issues, as I am certain he does, from a position of recognising that one group of workers in particular—those of Allied Steel and Wire in Cardiff—were extremely badly treated over 20 years ago, about which I spoke earlier in our deliberations.

I listened with interest and concern to the explanation given by the Minister for introducing these amendments, and I am far from certain as to whether, when enacted, the discretion to which she referred will give former employees of Allied Steel and Wire any of the redress which they seek for the pension loss they suffered with regard to their pre-1997 employment. Are we today recognising the fairness of their claim but not providing any vehicle by which it can, in fact, be met? That is my fear.

In Committee in the other place, my Plaid Cymru colleague, Ann Davies MP, introduced two amendments to provide indexation for compensation under FAS and the PPF to cover both pre-1997 and post-1997 service, and to reimburse members for the annual increase they should have received. The Government rejected those amendments, saying they would not work. Ann Davies MP came back on Report proposing a new clause to provide indexation. The Government rejected that clause so, in considering these and possibly later amendments, I ask the Minister whether their combined effect will do anything at all to give the pre-1997 pensions full indexation and not limit them to the 2.5% cap which Ministers supported in the other place? Will they do anything to reimburse those members for the annual increases which they never received?

[Baroness Altmann (Non-Afl)]

My Lords, I support and have added my name to the amendment from the noble Lord, Lord Davies. I support all his remarks, especially on the only excuse for not recognising that people need pre-1997 indexation going forward. There is a wrong that is being corrected; therefore, that wrong probably applies even more to benefits from the past. One of the reasons why I say “even more so” is because the members who have the most pre-1997 accrual are the oldest—by definition, they must be. They have much less time left to live and many of them have, sadly, already passed away. Therefore, to right this wrong by promising people money in future that they may never see, or will see almost none of, does not seem a solid way of righting a wrong.

I understand—I will go through this in more detail in the next group—that the Financial Assistance Scheme, for example, is supposedly funded by public money, while the PPF itself and employer contributions, in the form of the levy, provides the money for PPF compensation, but £2 billion from the scheme was transferred to the public purse. Thankfully, when we were trying to improve the Financial Assistance Scheme in 2005, Andrew Young recommended stopping annuity purchase, which had been happening and, unfortunately, transferred much of the money to insurers rather than putting it towards the Government to pay out over time. Nevertheless, the Financial Assistance Scheme itself represents some of the biggest losers and the ones with the most pre-1997 accrual.

Therefore, I urge the Government to recognise that the cost of the requirements in the amendment from the noble Lord, Lord Davies, are easily affordable from the PPF reserve—£14.5 billion is available. The cost estimate for this retrospective addition to the pre-1997 accruals that were not paid in terms of inflation uplifts could be around £500 million out of the £14.5 billion, depending on how the arrears are paid. I would be grateful to the Minister if she could confirm some of the Government’s estimates for what this would be; I have looked at the PPF’s estimates.

I add that the Financial Assistance Scheme does not only help those who affected by insolvency. The European court case was about insolvency, but the MFR protected employers who just wanted to walk away from their schemes before the law changed. Paying in only the MFR was hopelessly inadequate to afford the pensions. There was a brilliant campaign by the unions that went to the European court, and the Government had a great fear that they would lose that. Prior to that, we had an appeal by the workers of Allied Steel and Wire and many of the other schemes to the Pensions Ombudsman, who found in their favour and against the Government, and to the Public Accounts Select Committee. Then we had to go to the High Court, taking a case against the Government, and we won. We also went to the Court of Appeal, taking a case against the Government, and we won on behalf of those whose schemes had failed, whether the employers were insolvent or not, which means that they are all now included.

Even so, the Financial Assistance Scheme and the PPF have not recognised the pre-1997 inflation losses that have left many of these members with half their pension, or even less in some cases. I hope that the Government will look favourably on the amendment. I welcome it, and I am very grateful to the Minister for the recognition that we need to do something—there may be further consideration of that; we will come back to it in subsequent groups—to recompense for the losses of the past.

[Lord Palmer of Childs Hill (LD)]

My Lords, I wish only to say that I agree with the comments from the noble Baroness, Lady Altmann, and the lengthy exposition from the noble Lord, Lord Davies. I give them my support.

This group deals with technical amendments in the main, but they go to a question of basic fairness for pensioners whose schemes have failed. There are eight amendments in the Minister’s name, which shows that Bills can be amended, because the Government are amending their own Bill. Their amendments are no less important than those proposed on this side of the Room or those proposed by the noble Lord, Lord Davies, on the other.

The Government have accepted the principle of restoring inflation protection for pre-1997 service in the PPF and the FAS. These amendments ensure that the policy operates as intended, covering cases where the schemes technically add indexation rules that did not apply to all pre-1997 service.

The concern here is consistency and completeness. As has been said by other speakers, without these clarifications, some pensions will fall through the cracks due to historic scheme design quirks, rather than any distinction of principle. Any schemes that were and will be proposed will have quirks that are going to be found out in due course. I ask the Minister to confirm that the Government’s intention is to deliver equal treatment for those with equivalent service histories and that no group will be excluded because of technical anomalies.

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Moved by

[Baroness Altmann]

186A: Clause 108, page 119, line 38, at end insert—
“(2A) After paragraph 28, insert—“Lump sum compensation
28A (1) In all cases which qualify for an increase in periodic compensation under paragraph 28(2A) to (2I), the person may also qualify for a lump sum payment or payments, the amount of which must be—(a) related to the loss of inflation protection on pre-1997 pension benefits, and(b) paid by the Pension Protection Fund out of excess reserves,in recognition of the years of pension increases that were unpaid since the failure of the pension scheme.(2) The Secretary of State may issue guidance about lump sum payments under this paragraph.””Member’s explanatory statement
This amendment seeks to make provision for lump sum payments from the Pension Protection Fund to persons who qualify for an increase in periodic compensation for pre-1997 service to compensate for unpaid increases in the years since the failure of the pension scheme.

[Baroness Altmann (Non-Afl)]

My Lords, the amendments in this group are designed to give the Government another way of recognising the injustice that has occurred, which their very welcome amendments recognise for members who have lost their pre-1997 inflation protection. I am trying, through this route, to give the Government a way of increasing the amounts paid to people who have lost out on pre-1997 indexation in the past without the striking costs that the Minister suggested would be involved in retrospection and arrears for everybody in the PPF and the Financial Assistance Scheme.

The method by which this could be achieved is to offer lump-sum payments which do not increase the base cost of the pension but do recognise the losses suffered in the past. I hope that the Minister and her colleagues might be able to look favourably on this suggestion, which is another way in which the Government could put right what they have already recognised is a serious wrong.

If my amendments are accepted, the Pension Protection Fund reserve could be used alongside the Government’s welcome Amendments 186 and so on in the previous group. For anyone who is going to receive the prospective inflation protection in the future, the PPF reserve will or could be used to pay a lump sum to be determined related to the losses that they have suffered. That will be a one-off, or it could be over two or three years if so desired, to recognise the past problem to help the oldest people in a practical way and to ensure that there is some modicum of fairness, particularly for those who have the most pre-1997 accrual, who, as I have said, are the oldest.

My Amendment 203ZA is the same proposal for the Financial Assistance Scheme, but subsection (3) of my proposed new clause would allow specification, in consultation with the Pension Protection Fund, as to how this will be funded. Obviously, there is a significant reserve in the Pension Protection Fund. It has written to members, suggesting that there is affordability, and the ability to pay for some element of retrospection—again, to be determined. By the way, the Minister suggested that people would get what they paid for but, of course, with a 2.5% cap on CPI increases, many of them would have paid 5% going forward. So, it is not full retrospection or prospective protection for pre-1997.

I know that the Minister is proud of what the Government are doing, and I welcome it too, but her words that it does not go as far as some affected members would want are absolutely correct. I would say that it does not go as far as some affected members deserve, in the course of an argument about fairness and justice.

Are there any government estimates for the cost of these lump-sum payments, either one-off or spread over two or three years? It is probably easier administratively to make it a one-off, so that only one payment is required. That would also need to be protected in the same way that the new payment in other schemes is protected in terms of the tax system, so that it is not treated as an income in that particular year. If the Government were minded and able to accept the principle of recognising the past in a different way from the suggestion from the noble Lord, Lord Davies, which I also support if that were possible, it would not add to the long-term costs of running the Pension Protection Fund or the Financial Assistance Scheme. It will be a one-off recognition of the past and the future liabilities would be based on the pension as proposed now.

Do the Government have estimates for any possible size of payment that would be acceptable, so that we could then work backwards to finding a lump sum that could be paid and afforded out of the PPF’s obviously significant reserve? There is far more money than is required; it is just sitting there, whereas these pensioners really need the pensions that they paid for and are getting nowhere near. I hope the Minister might be able to help, or I am happy to meet and see whether we can work through some figures that might be acceptable as a way forward to recognise the past and satisfy a number of the people who are seriously ill and may not live to next April or much beyond it and feel so aggrieved—having campaigned with me for years to help people, get the PPF started and improve the Financial Assistance Scheme—that they are not getting the recognition that younger people who are benefiting from their hard work will get. I beg to move.

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[Viscount Younger of Leckie (Con)]

My Lords, I will speak to Amendments 187A, 188A, 189A and 203ZA tabled by the noble Baroness, Lady Altmann. She has long been a formidable and principled advocate for pension savers and much of the Committee will be sympathetic to the underlying concerns that she raised in her remarks. In particular, her consistent focus on member protection, governance and long-term security has materially shaped the debate on pensions policy over many years—and rightly so.

However—the Committee might expect me to say this—while I share the noble Baroness’s objectives, I am not persuaded that the amendments, as drafted, strike the right balance in this instance. I listened carefully to her remarks and her constructive suggestions as to how such payments could be made in the form of lump sums, whether through several lump sums or another way. As ever, she is constructive and positive, and I accept that. These amendments would use the Pension Protection Fund and the Financial Assistance Scheme to make retrospective lump-sum payments to compensate for unpaid historical indexation. We think that that would represent a significant shift in principle.

I listened carefully, as I always do, to the remarks from the noble Lord, Lord Davies of Brixton, who called retrospection a red herring. I was not absolutely sure what he meant by that. As I see it, retrospection is just that: retrospection. I think that it describes the payments in the way that it is meant to do. However, the PPF was designed as a forward-looking safety net, not as a mechanism for reopening past outcomes or making retrospective compensation payments. The Minister, to be fair to her, made this clear in her closing remarks in previous groups.

Such an approach would raise serious concerns about cost, complexity and consistency. Although we are somewhat clearer about costs from the helpful remarks from the Minister in the previous group, I am still uncertain—as, I think, other Members of the Committee are—about what the overall costs would be and what the impact would be on the levy and on other contributors. That uncertainty makes me cautious about supporting these amendments, which risk turning a clearly defined insurance mechanism into an open-ended compensation scheme. I suspect that the Minister—without wanting to steal her thunder—may take a similar view in her response, judging from her remarks in the previous group.

[Baroness Altmann (Non-Afl)]

The noble Lord just said that this would impact on the levy, but if there is a one-off payment, it would not affect the scheme going forward. Therefore, it should not impact the levy at all; it is a lump-sum payment rather than an increase in the base pension payable going forward.

[Viscount Younger of Leckie (Con)]

As ever, that is a very helpful clarification, but I will leave it up to the Minister to answer that. I stick with my view that we are not persuaded by these amendments. Perhaps there is more debate to be had. I have said all that I need to say; I am afraid that I am unable to support these amendments.

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[Baroness Altmann (Non-Afl)]

My Lords, I thank all noble Lords who have spoken. I thank those who have supported this group, and I hope that I might be able to persuade colleagues on this side to offer their support.

I understand the Minister’s dilemma, but I have to ask: what is the PPF reserve for? It is just money sitting there, way above what is needed for the current liabilities, before you take into account new schemes that themselves will have assets attached, and the vast majority of schemes are in surplus at the moment anyway.

There was talk of the cost, complexity and consistency involved in these proposals. The cost we know, because one can design the lump-sum payments to fit the desired cost envelope. The complexity is actually far lower than the Government’s current proposals because they are a one-off payment related to past losses, which will have to be calculated anyway if one is going to do anything of this nature.

Consistency is particularly important here, otherwise we will be treating members of the Pension Protection Fund or the Financial Assistance Scheme very differently based on their age, in effect. Those who are young will get better protection. Those who are older—and need it most, I argue, because they have lost most—get little or nothing from the Government’s welcome proposals. So, at the same time as the Government are designing their forward-looking acknowledgment of the need for pre-1997 uplifts, I hope that we might be able to persuade them that, alongside that, there is an overwhelming case for some recognition of the past.

[Lord Davies of Brixton (Lab)]

Does the noble Baroness agree that her scheme would work the other way round, because older members will tend to have more pre-1997 service that younger members, whose pre-1997 service will be relatively limited? A scheme along the lines she proposes will have some element of generational fairness.

[Baroness Altmann (Non-Afl)]

I thank the noble Lord. I would certainly say that there is a significant and obvious element of fairness in this proposal for lump sums to be paid. I argue that it would level the playing field, because those who have lost the most at the moment will continue to lose the most, whereas if you recognise the past losses and the forward uplifts are still being paid then you equalise, to some degree, the fairness and the losses between people of different age groups.

I hope that we can come back to this matter on Report and that we might have a meeting to discuss the potential for something of this nature to be introduced in the Bill. In the meantime, I beg leave to withdraw my amendment.

Amendment 186A withdrawn.

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I understand that in this instance there is MoD underwriting for the scheme: could that be confirmed? Does this mean that all discretionary benefits will be honoured equally, as they might have been under the previous scheme? If something is to be at least as good, we must expect that the discretionary benefits will be as good. If in some way the funding base is not as good, then a different kind of discretionary decision might apply. I hope that the Minister can say that “at least as good” means what we think it means in common parlance. If it is not, then we ought to have more time to think about the details of these amendments.

[Baroness Altmann (Non-Afl)]

My Lords, I have Amendment 203ZC in this group, but unfortunately the Committee has not received a copy of my amendment.

[Lord Davies of Brixton (Lab)]

It is on a separate sheet.

[Baroness Altmann (Non-Afl)]

Good. I now have it and I want to check that everyone else has it too. That is my first question dealt with.

In speaking to this amendment, the aim is to enable members of pension schemes that have gone into the PPF after their assessment period to be extracted, with regulations laid that will govern the terms on which they can be extracted. This is particularly relevant to the AEAT scheme: I know that we will come to this in later groups, with a requirement for a review of the situation. My amendment is trying to facilitate a practical resolution to the problems faced by the Atomic Energy Authority scheme. There are parallels with the Atomic Weapons Establishment or AWE scheme: employees originally had a scheme similar to and in fact derived from that of the UK AEA.

The AWE staff and their pensions were transferred to the private sector, and in 2022 the Government granted a Crown guarantee to the private company scheme. However, members of the AEA scheme were told that the scheme that they were encouraged to transfer to in 1996 would be as secure as that provided by the Atomic Energy Authority public sector scheme. This was not the case, though, because it was not offered a Treasury guarantee. It would appear that the Government Actuary’s Department failed to carry out a proper risk assessment of the various options offered to those members in 1996. Indeed, they were apparently specifically told not to worry about the security of the scheme to which they transferred all their accrued benefits. Of course, all these accrued benefits are pre-1997.

What happened after that is that they went into a private sector scheme. It was a closed section of that scheme, only for the members who transferred their public sector rights into it. The public sector rights had full inflation protection for pre-1997 and members paid an extra 30% or so contribution into that private sector scheme in order to conserve the inflation protection. However, as part of that, the pension they were saving for, the base pension, was lower than the one for those members in the open scheme who had joined not from the public sector. They were working on the principle that that their scheme was secure and that they would be getting the uplifts of inflation. When it failed—the private sector company went bust in 2012—and they went into the PPF in 2016, they suddenly discovered that they had paid 30% more for inflation protection, which was gone. And because they had paid 30% more for that protection and were accruing a lower pension, a 180th instead of a 160th scheme, their whole compensation was lower than that of everybody else who had not had any assurances from the Government that transferring their previous rights into a private sector scheme would generate these kinds of losses.

This is probably the worst example I have seen of government reassurance and failed recognition of the risks of transferring from a guaranteed public sector scheme into a private sector scheme. This amendment seeks to require the Government to lay regulations that would transfer members out of the PPF, those members of the closed scheme, if they wish to. I am not forcing anyone to do so within this amendment. You have to offer them the option of going or staying if they are satisfied with the PPF. Also, a sum of money may need to be paid to the PPF, which would take away the liability and thereby reduce PPF liabilities, but also sets up an alternative scheme that could be along the lines of the AWE arrangements, for example. That would potentially be another option. On privatisation, the Government received a substantial sum of money from the sale of that company, the private sector takeover of the commercial arm of the Atomic Energy Authority. That delivered less money than was paid to the private sector scheme to take over the liabilities. Therefore, the Government have money to pay with, which they have never really acknowledged.

I hope that this amendment is a potentially direct way to help the AEAT scheme, if the Government are minded to consider it. It builds on a provision that is already in the Pensions Act 2004, which talks about situations whereby there is a discharge of liabilities in respect of the compensation, which this amendment would be doing. It prescribes the way in which subsection (2)(d) of Section 169 of the Pensions Act 2004 could be used to help the AEAT scheme.

I have also been approached by a private sector employer whose scheme failed and went into the PPF. At the time, the employer did not have sufficient resources to buy out more than the Pension Protection Fund benefits for his staff. He now is in a position to do that and would like to do so but, at the moment, he cannot get his scheme extracted. He is willing to pay an extra premium to do that, in pursuance of a moral duty to try to give his past staff better-than-PPF benefits. That is what this amendment is designed to achieve. It is built on the connection between AEAT and AWE, but could also help other private sector schemes if the employer feels—it would normally involve smaller schemes—that there is a moral obligation that they can now meet, financially, to recompense members at a level better than the PPF, once the assessment period is over and the resources have gone in, and to take it back out again.

[Baroness Stedman-Scott (Con)]

My Lords, this group concerns the proposed transfer of the AWE pension scheme into a new public sector pension arrangement, as set out after Clause 110 in government Amendments 194 to 202, with the associated measures on extent and commencement in government Amendments 223 and 224.

At first glance, these new clauses are presented as technical and perhaps little more than an exercise in administrative tidying up, reflecting the fact that AWE plc is now a wholly government-owned company. However, on closer inspection, several questions come to mind. This represents a material transfer of long-term pension risk and does so in a way that raises serious questions around principle, process and precedent.

On an IAS 19 accounting basis, AWE plc reported a defined benefit pension deficit of £97 million as at 31 March 2025. The company has already made significant one-off contributions: £30 million in March 2024, following an earlier £34.4 million in March 2022. These payments form part of a recovery plan agreed with the trustee and the Ministry of Defence, and the position is subject to ongoing review. This is an active funding challenge, one that should be considered carefully.

The provisions before us establish a bespoke statutory framework for a single named company. They provide for the creation of a new public sector pension scheme, the transfer of assets and liabilities, the protection of accrued rights, specific tax treatment, information-sharing powers, consultation requirements and arrangements for parliamentary scrutiny. All of this is meticulously itemised and carefully drafted.

Yet my concern lies not with the drafting but with the policy and constitutional choice that sit beneath it. We are told repeatedly that members’ rights will be preserved; that phrase carries considerable weight. The question is a simple one: which rights precisely are being preserved? Are we referring solely to rights accrued through past service or does that protection extend to future accrual as well? Does it encompass accrual rates, indexation arrangements, retirement age and survivor benefits or are members’ entitlements merely frozen as a snapshot at the point of transfer? What happens if the rules of the receiving public sector scheme change in future? These questions go to the heart of both member security and parliamentary responsibility. They deserve answers in the Bill, not assurances in principle or reliance on mechanisms that may evolve long after this Committee has given its consent.

There are also practical questions that remain unanswered. How exactly will trustees be formally discharged of their responsibilities? Additionally, does this change relate to DC members? Will each defined contribution pot be automatically converted or will past defined contribution rights be crystallised, with future accrual taking place under a defined benefit structure? For scheme members, these questions go to the very heart of retirement security.

I also question the decision to legislate company by company. This new clause is not objectionable because it concerns pensions; it is objectionable because it concerns one named corporate identity. Primary legislation should set rules of general application.

If the policy rationale here is sound, and if it is right that the pension schemes of wholly owned government companies should be transferred into the public sector on certain terms, that principle should be capable of being expressed generally and should not be hard-coded for AWE alone. Otherwise, we will face an unhappy choice in the future: if AWE’s status changes again, Ministers must either live with an outdated statute on the books or return to Parliament with yet another Bill to amend it. Neither outcome represents good lawmaking.

There are also practical questions that I hope the Minister will address. Will members receive individualised benefits statements, comparing their position before and after the transfer in clear, comprehensible terms? What support will be made available for members who need independent guidance, rather than reassurance from the scheme sponsor itself? Will there be formal consultation with scheme members and recognised unions, and will the responses to that consultation be published?

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[Baroness Sherlock (Lab)]

My Lords, I will start by discussing Amendment 203ZC and then come to the other amendments.

Amendment 203ZC would add new provisions to the Pensions Act, which would mean that, if an alternative sponsor provided a sufficient premium, a cash payment or alternative arrangement could be provided for members of that scheme that secured better benefits than the PPF level of compensation. The amendment seeks in particular to help members of the AEA Technology pension scheme. As we have heard, AEAT was formed in 1989 as the commercial arm of the UK Atomic Energy Authority—UKAEA—and was subsequently privatised in 1996. Employees who were transferred to AEAT joined the company’s new pension scheme, and most of them opted to transfer their accrued UKAEA pension into a closed section of the AEAT pension scheme. In 2012, 16 years later, AEAT went into administration, and the AEAT pension scheme subsequently entered the PPF.

I express my sympathy for all AEAT pension scheme members; I recognise their position. I am pleased to say that on pre-1997 indexation in PPF, which is an issue for AEAT members, we have listened and acted. Those with pre-1997 accruals and whose schemes provided for pre-1997 increases, which includes AEAT members, will benefit from this change.

However, the Government do not support this amendment. The noble Baroness outlined some of the issues around AEAT, but this case has been fully considered. We set this out in our response to the Work and Pensions Select Committee inquiry on DB pensions. These investigations included, but are not limited to, reviews by three relevant ombudsmen, debates in the Commons in 2015 and 2016 and a report by the NAO in 2023. This matter has also been considered by previous Governments in the period since AEAT went into the PPF, all of whom reached the same conclusion.

AEAT members have asserted that upon privatisation, insufficient funds were transferred into the scheme. As I understand it from historic responses, this amount was based on the financial assumptions at the time, and the trustees of the scheme agreed the transfer value. Members have also outlined that, given the amount transferred to the PPF, with investment, they could now be paid their full pension. However, the PPF does not work that way; let me explain why.

When schemes enter PPF assessment, evaluation is generally undertaken to determine whether there are enough assets to secure at least PPF-level benefits. Sufficiently well-funded schemes can come out of the assessment supported by PPF-appointed trustees to secure greater benefits than PPF compensation. Schemes that are funded below this level are transferred into the PPF. The PPF does not permit transfers out because it does not work as a segregated fund where individual scheme contributions are ring-fenced and can later be transferred out. That is due to PPF investment policies because the only grounds on which that might happen would be, for example, if PPF investment policies were such that they then became better funded.

The reason that does not work is that the PPF is a compensation scheme operating in the interests of all its members. It is not a collection of individual pension schemes. Funds transferred in from underfunded schemes and insolvency recoveries, alongside the levy and investment returns, are all brought together. Allowing members of schemes that have entered the PPF to transfer back out would undermine its ability to provide compensation for all its members and for future schemes in the case of employer insolvency.

This amendment changes the purpose of the PPF as a compensation fund and that safety net in case of employer insolvency. Schemes go into the PPF either because an alternative sponsor cannot be found to take on the scheme’s liabilities or because the scheme is unable to secure benefits that correspond to at least PPF compensation levels. We do not expect alternative sponsors will be found to pay a premium for schemes that have transferred into the PPF. Additionally, it would place a different role on the board of the PPF to undertake a member-by-member assessment of whether members would get better benefits through a transfer. We do not underestimate the difficulty of this, given the decades since many schemes, such as the AEAT, entered the PPF. Changing the PPF’s role and how it operates as set out would need to be much more broadly considered, alongside impacts on the PPF and potentially unintended consequences.

[Baroness Altmann (Non-Afl)]

Section 169(2)(d) in the Pensions Act 2004 seems to make provision for this to happen. Therefore, what is the purpose of that clause? I am trying to build on that to specify circumstances in which it could happen. Of course, when a scheme is in the assessment period, it can be extracted. I am trying to say that if it has gone in and can improve the funding of the PPF by paying a premium and give members more than they would have in the PPF, why would there be an objection?

[Baroness Sherlock (Lab)]

The challenge of this is that of course schemes can come out in the assessment period. That is the point of the assessment period: to work out whether there is a sponsor or enough funds, which could, with appropriate support, be able to deliver greater-than-PPF benefits, in which case the scheme may go out again. It goes into the PPF only if that cannot be the case. Once it has gone in, the scheme does not exist anymore. There are no scheme assets because, at that point, the members are not scheme members but members of a compensation scheme. It cannot be the case that, years later, someone should come along and say, “We now want to try to move a group of former members of a particular scheme back out of the PPF”. That simply does not work.

The noble Baroness asked something else. I apologise for being slightly confused earlier on: I thought this was going to be part of the previous group, so I am slightly scrabbling around trying to put my speaking notes in the right place. The noble Baroness is trying to draw a comparison between AWE and this. Although they were both DB pension schemes in the nuclear industry, the two situations are entirely different. AEAT was created in 1989 as the commercial arm of the UKAEA. It became a private company, with no further government involvement in ownership or management.

By contrast, AWE, which is responsible for manufacturing, maintaining and developing the UK’s nuclear warheads, has since the 1950s either been government owned or the Government have held a special share in the company. It became fully owned by HMG again in 2021, when it became an NDPB. As the Government own and fund AWE, they are also responsible for funding its pension scheme responsibilities. That is why the AWE has a Crown guarantee, granted in 2022, shortly after it became a public body of the MoD, having previously been government owned. I hope that explains why the two are differently treated.

[Baroness Altmann (Non-Afl)]

I respectfully ask the Minister to consider the possibility, which is arising, of someone who can come along after the assessment period and pay more than the PPF can provide. As I say, that could help the PPF’s funding. It should not in any way impact on the levy, and it is an option to permit that to happen. So my amendment, building on what is already in the Pensions Act 2004 but which has not yet been used, given that schemes are in surplus, would allow them to do that.

The other thing I will say is that everyone in the closed section of the AEAT with accruals before 1997 was in the public sector. They were members of a public sector scheme, and they were advised by the Government Actuary’s Department that if they transferred they would not need to worry about the security of their pension, but that turned out not to be the case. I therefore hope the Minister can see the parallels. I know she is in a difficult position on this, but I thank her for her consideration.

[Baroness Sherlock (Lab)]

I am not in a difficult position. The Government’s position is clear: these are not comparable schemes. One has a Crown guarantee, for the reasons that I have explained, while the other does not because, for a significant portion of its history, it was a private company. It was privatised, and it subsequently went into administration. Those are not comparable situations. While I have sympathy for the position of individual scheme members, that does not make the two comparable or the Government’s responsibility comparable. I am certainly not aware that someone is out there waiting to sponsor this, although the noble Baroness may be. She is nodding to me, and if she wants to share with the Committee that she has a sponsor ready to do that, I would be glad to hear it, but the idea that this would routinely be a pattern where, for lots of long-dead pension schemes, sponsors are waiting to draw them out just would not be practical for the PPF.

I am also advised that the subsection 2(d) that the noble Baroness mentioned is not in force. That does not make a difference to her argument, but it may make a difference to the nature of this.

I shall try to return now to the issue that we were talking about earlier on, the AWE scheme. On hybridity, I say to the noble Baroness, Lady Neville-Rolfe, that my understanding is that hybrid bills affect the general public but also have a significant impact on the private interests of specified groups. In this case, there is no impact on the general public, only on AWE members. That follows the precedent in Royal Mail and Bradford and Bingley/Northern Rock legislation. This also refers to schemes that were or are to be defunded and replaced with public schemes. I hope that explains why this is not hybrid. I cannot comment on why the clerks did not accept her amendment because I did not quite catch what it was that she was comparing it with.

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[Lord Davies of Brixton (Lab)]

My Lords, I am going to try to put this issue into context. This is the third leg of our discussion, which centres on what we do now in relation to benefits that accrued for pensionable service prior to 1997.

I am going to take the Committee into a little history. The 1997 date was set by the Pensions Act 1995. I was there; although I had long left the TUC, because the TUC’s normal pensions officer had taken leave of absence for a few months, I was, in effect, acting as the TUC’s pensions officer at the time. On the background, in terms of what people understood about pension increases at that time, I will go all the way back to 1971, when the Pensions (Increase) Act was passed. In 1971, it was obviously under a Conservative Government. They linked public service pensions to inflation—initially RPI then subsequently, from 2011, CPI. That was all well and good. It set the standard, quite properly, for the Government of good pension provision, including increases. I make no apology for that. I am sure that we will return to this issue when we have the debate at our next meeting on public service pensions. The Conservative Government set that standard.

Then, in 1981—again, under a Conservative Government —Margaret Thatcher, the Prime Minister, decided, egged on by Aims of Industry, that there should be a review of pensions and pension increases. She took a personal interest—it is all there in the Thatcher archives—and established the Scott inquiry. Chaired by Sir Bernard Scott, a prominent businessperson at the time, it was a five-person inquiry that undertook a detailed study of pension increases, starting with public service pensions. We do not hear much about this inquiry now—there is another more famous Scott inquiry—because it came up with the wrong answer. Despite the committee being hand-picked by the Prime Minister, it came up with the answer she did not want. It said that index-linking was justified—it is worth saying here that, when it says “index-linking”, it is talking about the limited price index, or LPI, so not full indexation in all circumstances but up to a limit—and that there was no case for its removal from public service schemes.

The committee decided that public service pensions were not overly generous overall. It pointed out that the main driver of costs for public service pensions was not index-linking but the final salary benefit structure. Again, as an aside, it is worth noting that, from 2011 onwards, public service schemes moved away from that; they are now all average salary schemes. The committee advocated for parity of pension increases with state pension increases. So this committee, which was set up to tell the world how bad index-linking was, said that everyone should have index-linking. That was in 1981.

There is another stage. Originally, when schemes contracted out, they promised to provide GMPs. Initially, the GMPs were not index-linked but had a flat rate, and the state scheme was left to provide the indexing on the fixed flat-rate private sector schemes. However, by 1986, it was decided that the private sector schemes could provide LPI, initially at 3%. The scheme had to provide GMP, but it provided inflation linking up to 3%, and inflation over that would still come from the state scheme. This is where the contracting out becomes incredibly complicated, of course. That change to the GMP was when a Conservative Government introduced an additional element of index-linking in occupational schemes.

Then we had the Maxwell scandal, the subsequent Goode report and the Pensions Act 1995. There is a theme here. It was a Conservative Government; William Hague was the Secretary of State. From 1997, they introduced LPI index-linking, initially up to 5% and subsequently reduced to 2.5% in 2005—unfortunately, that was a Labour Government, but there you go. So there is this whole consistent move towards limited price indexation in occupational schemes. It became the accepted approach to providing occupational schemes. A scheme that did not provide some element of indexation in retirement was seen as an inferior scheme.

I was there, as I say, so what was my experience? Many schemes, particularly larger schemes, had LPI in the rules pre 1997, following Scott in the early 1980s. Schemes have gradually introduced it more and more; of course, index-linked bonds were introduced specifically as a follow-on from the Scott report. So many schemes, particularly large schemes, had LPI in the rules.

Other schemes said, “We’re going to provide indexation but we’ll do it under discretionary powers”. However, they still expected to provide increases and funded for them. It is my view, having been there, that, pre 1997, the number of schemes making no allowances for LPI increases was vanishingly small. For some, it was in the rules; for others, it was in the funding basis. Practically every member had a reasonable expectation of LPI in retirement in respect of the benefits that they accrued pre 1997. The statutory requirement was introduced to cover all schemes, as recommended by the Goode report; that was absolutely right.

So the suggestion that people are unreasonable in expecting their pre-1997 benefits to be increased is entirely wrong. It was entirely reasonable for them, and that is what people believed at the time, although they may not have a legal entitlement. This does not affect just the PPF or the Financial Assistance Scheme, where we are told that, if the scheme did not have it in the rules, it will not get these increases. It particularly affects active pension schemes—not necessarily those with new entrants, but those with pensioners to whom the scheme is paying money.

Many of the members will have benefits accrued before 1997, and those members have a reasonable expectation of increases. That is why I move Amendment 203 as a basis for discussion at this stage. In the light of what we hear, I may come back to the issue on Report. The law can now move to requiring increases on pensions accrued pre-1997, whatever it said in the rules, because it is a question of not legal but political justification. Politically, people can reasonably expect the Government to provide them with justice, and there is a reasonable moral expectation that they should now get limited price indexation on their benefits accrued prior to 1997.

The issue here is the position in which so many members find themselves. Their trustees—who were perhaps more engaged, years ago, with the operation of the scheme in those days—gave them a reasonable expectation of the benefits. I wrote to many schemes around that time, asking them what their practice was, having got an increase in the rules. Many of them wrote back to me and said, “Yes, we expect to increase these pensions and we are funding the scheme on that basis”.

Trying now, 30 years later, to distinguish between schemes that provided for these increases in the rules and in the funding basis is politically and morally wrong. These people have a reasonable expectation, and we have this opportunity to see that they are treated correctly. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I have every sympathy with the noble Lord’s amendment, and I would love the Government to find themselves able to accept it. I would certainly agree on the moral case and on the historical justification for members having reasonable expectations that their pensions would not suddenly be whittled away to a fraction of what they would previously have had. The Goode report recommended unlimited inflation protection, but it was limited when it came in and it was only from 1997 onwards rather than retrospectively. There are echoes there of what we have just heard about the Pension Protection Fund.

I see that the noble Lord, Lord Brennan, is here; he was instrumental in campaigning for the Allied Steel and Wire members and worked so hard to help them, as the noble Lord, Lord Davies, also did. The noble Lord, Lord Wigley, is no longer here, but this would certainly apply to the Allied Steel and Wire members, and I urge the Government to look at the amendments. I fear that there may be little appetite, given that our previously much more modest suggestions were rejected and bearing in mind that not all schemes are in surplus—there may be an issue. But, if the Government were so minded, there is certainly a good case for considering the amendment that the noble Lord, Lord Davies, so ably moved.

[Viscount Younger of Leckie (Con)]

My Lords, I will speak to Amendment 203 in the name of the noble Lord, Lord Davies of Brixton, and I am grateful to him for his tour d’horizon on the history behind this issue with the uprating, going back through several parties and Parliaments. Like the noble Baroness, Lady Altmann, I fully understand why members find this proposal attractive. The idea that pensions should keep pace with inflation feels intuitively fair, of course, but we think that mandating inflation increases for all pre-1997 service in live defined benefit schemes would be a step too far.

This amendment would dictate in statute how trustees and employers must use scheme resources and any surplus. We believe that this is overly prescriptive and risks being actively anti-business. Many employers are already using DB surpluses constructively, and that includes improving DC contributions for younger workers, supporting intergenerational fairness, and strengthening scheme security through insurance-backed arrangements and special purpose vehicles. We think that these are sensible negotiated outcomes, reflecting the needs of both members and sponsors.

It is also important to remember that employers have carried DB risk for decades. When funding assumptions proved wrong, when markets fell or when longevity rose faster than expected, it was employers who stepped in, often for many years, through additional contributions and balance sheet strain—that might be an understatement. I choose to use a casino analogy, not to make light of a serious subject but to illustrate the basic logic of risk sharing. Here goes.

In a defined benefit scheme, the employer and members effectively walk into a casino together. Trustees place bets on behalf of the scheme on how much risk to take in the investment strategy, what funding assumptions to use, how quickly to de-risk, how to price longevity and inflation exposure. Members benefit if those bets perform well because the scheme is safer and more likely to deliver the promised pension in full. But, crucially, if those bets go wrong—that is, if markets fall, inflation spikes, people live longer than expected or the assumptions prove too optimistic—the bill lands not on members but on the employer. The sponsoring employer is legally on the hook to repair the damage, often through years of additional contributions, cash calls at the worst possible moment and significant strain on the balance sheet. That is what the employer covenant means in practice: it is the backstop when the world does not behave as forecast, which, as we know, it often does not.

So, if we accept that the employer is the party that must cover the losses when the scheme is underwater, surely it cannot be right to argue that, when the scheme comes in above water—when investment returns are strong, funding improves and a surplus emerges—the employer must be barred in principle from any share of that upside. That is not risk sharing; it is risk asymmetry. Heads, the members win; tails, the employer loses. In any rational system, if one party is compelled to underwrite the downside, that party must be permitted—subject, of course, to trustee oversight and member protection—to share in the upside. If we legislate for a system where the sponsor carries all the risk but is denied any benefit when outcomes are good, surely we distort incentives. We make sponsorship less attractive and encourage employers to close schemes faster, de-risk more aggressively or avoid offering good provision in the first place.

This is a crucial point. The fair outcome is not that employers take everything or that members do. It is that surplus is discussed and allocated jointly by trustees and employers, balancing member security, scheme sustainability and the long-term health of the sponsoring employer. That is partnership. Legislation should support that balance but not override it; that is a crucial point.

Mandating automatic inflation uplift would also have wider consequences: higher employer costs; increased insolvency risk, ultimately borne by the PPF; knock-on effects on wages, investment and employment; and, potentially, higher PPF levies. For PPF schemes, uplift is manageable because the employer covenant has gone and Parliament controls the compensation framework. Imposing similar requirements on live schemes, however, risks destabilising otherwise healthy employers. In short, uplift should be an option, not a statutory obligation. As I said earlier, decisions should rest with trustees and employers together and not be compelled by legislation.

That said, focusing on choice does not mean ignoring power imbalances, because in some schemes genuine deadlock leads trustees to sit on surplus and de-risk further. That may be understandable, but I think it is fair to say it is inefficient. Government should be looking at how to enable better use of surplus by agreement, not mandating outcomes. Much more needs to be done on breaking deadlocks, but we believe that Amendment 203 is not the right way to do it.

[Baroness Altmann (Non-Afl)]

May I just correct the record? I believe that the Goode committee may indeed have recommended limited price inflation up to 5%, and I apologise to the Committee.

[Baroness Sherlock (Lab)]

I thank my noble friend Lord Davies for introducing his amendment and for the history lesson. It is living history, but he always has the edge on me because he goes back to 1975, and at that point I was more interested in boys and make-up, so I simply cannot compete, I confess, on that front.

The reality is that this Government have to start in 2026 and where we are now, so we have to address what the right thing to do now is for the DB pension universe and for the schemes in general. I can totally understand why my noble friend has introduced this amendment. Members of some schemes are concerned about the impact of inflation on their retirement incomes, and I am sympathetic. We have been around this in previous groups. This amendment would remove references to 6 April 1997 as the start date for the legal requirement on schemes to pay annual increases on pensions in payment. Obviously, as my noble friend indicated, legislation requires increases on DB pensions in payment to be done only from 6 April 1997. That has been a pretty long-standing framework which reflects the balance that Parliament judged appropriate at the time between member protection and affordability for schemes and employers. These changes are normally not backdated; they are normally brought in prospectively.

Most schemes already provide indexation on pre-1997 pensions, either because it is required under the scheme rules or because they choose to award discretionary increases. The Pensions Regulator has done some analysis and is doing more work on this. The latest analysis indicates that practices differ, but many schemes have a track record of awarding such increases. However, imposing a legal requirement on schemes now to pay indexation on pre-1997 benefits would create costs that schemes and employers may simply not have planned for. These costs may well not have been factored into the original funding assumptions or contribution rates. For some schemes and employers, these additional unplanned costs could be unaffordable and could put the scheme’s long-term security at risk.

Many employers are working towards buyout to secure members’ benefits permanently. Decisions on discretionary increases must be considered carefully between trustees and employers against their endgame objective. The reality is that the rules for DB pension schemes inevitably involve striking a balance between the level and security of members’ benefits and affordability for employers. But minimum requirements have to be appropriate for all DB schemes and their sponsoring employers. A strong, solvent employer is essential for a scheme’s long-term financial stability, and that gives members the best protection that they will receive their promised benefits for life, as the employer is ultimately responsible for funding the scheme. Any change to that statutory minimum indexation has to work across the full range of DB schemes. This amendment would increase liabilities for all schemes, regardless of their funding position or governance arrangements. While some schemes and employers may be able to afford increasing benefits in this way, others will not.

The way DB schemes are managed and funded since the 1995 Act was introduced has changed, but the basic principle remains that we cannot increase scheme costs on previously accrued rights beyond what some schemes might be able to bear or that many employers will be willing to fund, and that remains as true now as it was then. Our view is that schemes’ trustees and the sponsoring employer have a far better understanding than the Government of their scheme’s financial position, their funding requirements, their long-term plans and therefore what they can and cannot afford. They are also best placed to consider the effect of inflation on their members benefits when making decisions about indexation. The regulator has already been clear that trustees should consider the scheme’s history of awarding discretionary increases when making decisions about indexation payments.

We discussed earlier in Committee the Government’s reforms on surplus extraction. They will allow more trustees of well-funded DB schemes to share surplus with employers to deliver better outcomes for members. As part of any agreement to release surplus funds to the employer, trustees will be better placed to negotiate additional benefits for members, which could include discretionary indexation. Although I understand the case my noble friend is making—I regret that I cannot make him and the noble Baroness, Lady Altmann, as happy as they wish—I hope that, for all the reasons I have outlined, he feels able to withdraw his amendment.

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What I am saying is that these proposals are in line with the move to try to make pensions, and the funding of pensions, more rewarding, and then there are consequences for how the PPF may need to react. This is introducing an idea, and obviously we can go further into it on Report. It may need some tweaking, but I certainly see a case to allow a lot more flexibility, even if we may put ranges on it, for example. There is no indication in what I am saying about how it should be constructed, but I think that, with the maturity that the PPF now has, it is the right time to discuss and to enable provisions for change to be made. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I have added my name to these amendments. I very much support the aims of the noble Baroness, Lady Bowles, to ensure there is proper flexibility in the levy paid by companies to the PPF. The PPF can then use its discretion to decide which companies should pay more than others and which companies are more secure than others in terms of their pension schemes. The current requirement is based on circumstances that have fundamentally changed over the past 20 years or so, since the whole system was first thought of.

The PPF is one of our incredible success stories in terms of protecting people’s pensions by successfully investing money that it has taken in. It has worked far better than anyone would have anticipated at the time, and we need to pay tribute to those who have been running the PPF; they have done an extraordinarily good job in the face of sometimes very difficult circumstances. I hope that the Government will think favourably about the possibility of allowing the PPF this kind of flexibility, given that the situation with pension schemes, surpluses and funding levels has changed so fundamentally.

[Baroness Stedman-Scott (Con)]

My Lords, the amendments in this group in the name of the noble Baroness, Lady Bowles, are thoughtful and proportionate. They raise genuinely important questions about how we can future-proof the operation of the Pension Protection Fund.

Clause 113 amends the provisions requiring the PPF board to collect a levy that enables the board to decide whether a levy should be collected at all. It removes the restriction that prevents the board reducing the levy to zero or a low amount and then raising it again within a reasonable timeframe. We welcome this change. It was discussed when the statutory instrument passed through the House, at which point we asked a number of questions and engaged constructively with the Government.

The amendments tabled by the noble Baroness would go further; once again, the arguments she advances are compelling. Amendment 203A in particular seems to offer a sensible way to shape behaviour without micromanaging it—a lesson on which the Government may wish to reflect more broadly, especially in relation to the mandation policy. If schemes know that the levy will always be raised in one rigid way, behaviour adapts, and not always in a good way. In contrast, with greater flexibility, employers retain incentives to keep schemes well funded, trustees are rewarded for reducing risk and the levy system does not quietly encourage reckless behaviour on the assumption that everyone pays anyway.

This amendment matters because it would ensure that, if the PPF needed to raise additional funds, it could do so in the least damaging and fairest way possible at the relevant time. I fully appreciate that the PPF is a complex area but, as the market has changed and is changing, and as the pensions landscape continues to evolve, the PPF must be involved in that journey. These are precisely the kinds of questions that should be examined now, not after rigidity has caused unintended harm.

I turn briefly to Amendment 203C. We are open to finding ways to prevent the levy framework becoming overly rigid, which is precisely why we supported the statutory instrument when it came before the House. Instead of hardwiring an 80% risk-based levy requirement into law, this amendment would place trust in the Pension Protection Fund to raise money in the fairest and least destabilising way, given the conditions of the year. Flexibility may well be the way forward. I have a simple question for the Minister: have the Government considered these proposals? If the answer is yes, why have they chosen not to proceed? If it is no, will they commit to considering these proposals between now and Report? I believe that that would be a constructive and proportionate next step.

--- Later in debate ---

[Lord Pitt-Watson (Lab)]

My Lords, I rise nervously since it has been only one week since I made my maiden speech. I should declare an interest, as I have worked in the field of responsible investment for the past 25 years; I am not paid for any action there but, on occasion, my old employer allows me to use an office in the City when I have a meeting there.

I want to make two observations. One is about this Committee, which I have been sitting in on over the past few days, and one is more about this debate.

My observation on the Committee is that I am so impressed by the standard of the questioning. I am also extraordinarily impressed by the magisterial answers that can be given in pulling together what is a really complicated pensions Bill, much of which I admit not to understand. I have noted that, in our discussions and debates, there is often a great unity of purpose in terms of where we want to get to, but also some questions around how we might want to get there.

With that in mind, I want to address the issues that we are discussing today. I think that where I want to get to is very similar to the places the proposers of these amendments want to get to, but I might caution them a little to think about the ecosystem for which we are writing rules. If you look at a big UK pension fund, its equity portfolio is probably index-tracked, so it is buying entire markets rather than individual companies. It probably holds stakes in 5,000 different companies, or something like that, so we need to think practically about how we are influencing it.

We also have a situation—I find this extraordinary; I know that both the Government and the Committee are concerned about this—where an average British pension fund might have more equity investments in Nvidia and Apple than in the entire UK stock market because of the way in which assets are allocated. The UK pensions system is, therefore, a very small holder in a very large number of companies. I profoundly agree that we need to uphold international law on human rights, but, if we are to do that, do we not need to think about how we can get everyone to work together on that, rather than just a small proportion that might ultimately divest?

I note that Principles for Responsible Investment, which has $130 trillion of assets under management, has promised to be active owners and to incorporate social and environmental issues into its investment and ownership practices. Might there be some way in which we can hold those promises to account? Also, when thinking about how we can address human rights issues such as modern slavery—we have talked to companies about this—the campaigners often tell us, “Don’t have the companies ticking boxes saying that they know nothing about modern slavery. It is everywhere, and we need to be fighting it everywhere. Let us be open about how we do this”.

One initiative that I support, both in an advisory role and financially, is the Business and Human Rights Resource Centre, a network that investigates 1,500 human rights abuses by companies all around the world. It goes back to the companies and says, “You’ve got to fix this”. I have been particularly keen that, if the company does not fix it, the network can then see their shareholders and make sure, at the next shareholder meeting, that those questions are being raised with the companies. I wonder whether that is something we could leverage.

Recognising how difficult this is, I led the finance initiative to persuade British companies to divest from Myanmar 15 years ago, just before Aung San Suu Kyi took over. Of course, things have gone backwards since then. I was at a party before Christmas where someone remonstrated with me about what a terrible decision it was for British companies to withdraw from Myanmar. This is quite complicated stuff. How do we build on what is already there?

I love the passionate support for new asset classes, because it is so important that we move them forward. What we want to do is to get money flowing to social causes. I am not quite sure that there is always one solution. I was very involved in the development of the green bond market, which reached a $1 trillion issuance last year—that is pretty good. We also have to think about the traditional ways we can get this. Housing associations borrow on normal markets, so how do we get more of that? We have Bridges and the LGPS, which the noble Baroness talked about. I wonder whether we should always want things to be pension specific—although I do know that this is a pensions Bill, so perhaps that is part of it.

Then there is the question of knowing the social impact. We need to be careful about what social impact is. I am struck that, if you were to set up a pension system, a lending system or even a saving system in the developing world, you would be praised for the massive social impact you would make. Similarly, Henry Duncan’s trustee savings bank—he was Scottish, like me, as were Wallace and Webster, who set up the first pension fund—had a huge social impact. As we think about the social impact of the pensions and finance industry, I note that both in terms of its liability—what it is giving the public for their savings—and the assets it is holding on their behalf, the industry is thinking about both sides of that social impact.

Going back what I said earlier, I hear quite a lot of consensus about where we want to get to. Whatever happens to these particular clauses, I wonder whether we could work together on this issue—it is a very big one—in the future in some way. Britain is an absolute leader in responsible investment. If we can listen to beneficiaries, talk to sponsors and gather the industry—and if the Government can help set the framework—we can do something that would be really worth while.

[Baroness Altmann (Non-Afl)]

I will speak very briefly to support the amendment tabled by the noble Baroness, Lady Stedman-Scott, and the noble Viscount, Lord Younger. I know how passionate the noble Baroness is about the issue of social impact bonds, so it seems to me that this is a very modest and well-constructed amendment that could have significantly positive impacts on growth and local amenities. It would also specifically say, after Clause 117:

“Nothing in this section … requires trustees to invest in social bonds or any other asset class”.


So it does not in any way require this to happen, but it seeks to facilitate a system set up for pension funds to invest in this way in assets that, potentially, would have a significant social benefit, of which the noble Baroness spoke so passionately, having seen the positive results.

--- Later in debate ---

[Lord Hendy (Lab)]

I am sorry to interrupt the noble Baroness, but I emphasise that this amendment is to propose regulations that will be drafted by the Secretary of State. One would expect the Secretary of State to determine whatever issues there are about international law. By the way, international law itself is quite clear. It is about whether the factual situation on the ground meets the particular requirements of international law, but I think that could all be dealt with in regulation.

[Baroness Altmann (Non-Afl)]

I understand the point that the noble Lord is making. I am just not convinced that one would want to put this type of responsibility on the Government. Of course, judgments in international law change from time to time, and trustees are investing for the very long term. I recall the example of Myanmar given by the noble Lord, Lord Pitt-Watson. There are difficult issues that I understand the Government might regulate for. How pension trustees then build that into their asset allocation is another layer of complexity that I have concerns about, but I certainly have every sympathy with the intentions of the noble Lord, Lord Hendy, and the noble Baroness, Lady Janke. It is a difficult one. I just caution that getting to that level of prescription could be the thin end of the wedge for pension trustees, who already have so many responsibilities upon their shoulders.

[Baroness Bowles of Berkhamsted (LD)]

I welcome the noble Lord, Lord Pitt-Watson, to the Committee. His comments have inspired me to make a very small intervention. It is true that there is a lot of index investment, and inevitably that will capture things inadvertently, but there are now many more indices that will be socially responsible or environmentally responsible, and trustees can choose to use them.

If pension trustees collectively and pension funds made a little more noise and made more approaches to the index providers, we may well get indices that are more pushy in what they do for social and environmental protection. Ultimately, most of the time they are paid to invent an index or they are doing it for their own platforms, but I see an open door there to apply pressure.

--- Later in debate ---

[Baroness Neville-Rolfe (Con)]

My Lords, I support my noble friend Lord Younger of Leckie in proposing a review of pension awareness and saving among young people.

When I had the honour to review the state pension age for the DWP in 2021-22, I was struck by two things that strengthened the case for better policy in this area. First, I found it much more difficult to get young people or their representatives, or indeed middle career workers, to engage in my review. Those who did were keen to keep pension contributions down and they did not believe the state pension would still be universal by the time they reached the retirement age of, say, 70. They were worried about buying a flat, as my noble friend has said, looking after their children and paying back their student loans.

Secondly, the level of financial education was dire. Schools were focusing well on human rights, the environment and ESG, which was discussed under the previous amendment, but not on pensions or financial management. They were not teaching the importance of early saving, the magical impact of compound interest, the value of a pension matched by the employer and the risk of new sources of profit like cryptocurrencies. Much more such education is needed in our schools but the Department of Education was resistant, partly because teachers are also often a little short on financial education. This is an important area and I am sure the Pensions Commission will look at it, but my noble friend is right to highlight what a big job we have to do.

[Baroness Altmann (Non-Afl)]

My Lords, I add my words of support to the concept being promoted by my noble friend Lord Younger. I hope the Government will look into this, as it might well be a good topic to task regulators with in making sure that either they or pension schemes themselves are helping people to understand pension schemes better, how they work and the free money that goes along with a pension contribution in terms of your own money. There is, as I say, extra free money added by, usually, your employer and other taxpayers. I do not think young people always understand just how beneficial saving in a pension can be relative to, let us say, saving in a bank account or an ISA, or indeed the value of investing. It would be in the interests of the regulators and, indeed, the providers to help people to understand that. The Government’s role in guiding that and setting up this kind of review could be very valuable.

[Baroness Sherlock (Lab)]

My Lords, I thank the noble Viscount, Lord Younger, for introducing his amendment and all noble Lords who have spoken.

As we have heard, the amendment would introduce a statutory requirement for the Secretary of State to conduct a review of pension awareness and saving among young people. I agree with the Committee about the incredible importance of this issue, and I understand why the noble Viscount has tabled the amendment, but I hope to persuade him that there is another way forward.

The starting point, inevitably, is that last year the Government revived the Pensions Commission. The original commission did an astonishing job; its legacy under the previous Labour Government in effect lead to the creation of workplace pension saving via automatic enrolment. Since then, with support from both parties, automatic enrolment has transformed participation in workplace pension saving. It has been a particular success for younger people. Our participation for eligible employees aged 22 to 25 has gone up from 28% in 2012 to 85% in 2024.

Pension Schemes Bill

Baroness Altmann Excerpts

Committee stage
Tuesday 3rd February 2026 Grand Committee

[Lord Davies of Brixton (Lab)]

I possibly touched on this issue in the wrong group, but as the noble Baroness, Lady Kramer, has indicated, I raised, in essence, the same points in the previous debate.

I am in favour of mandation, but what worries me is that the Government do not seem to understand—and have never acknowledged—the consequences, which have been set out so clearly by the noble Baroness, Lady Kramer, and the noble Lord, Lord Vaux. There are consequences if the Government tell people how to organise their retirement income and if, having told them how to proceed to achieve a good income, it subsequently turns out that the Government are wrong. As I said last week, they will not necessarily be legal consequences, but political consequences and moral consequences.

I draw attention to the Financial Assistance Scheme, which we are going to be debating later this week. It was established because the Government had to acknowledge their failure to introduce the appropriate law and protect people, and they lost income. That is an exact precedent for where we are now. That Government had a responsibility to protect those people and failed to do so. After a vigorous campaign by those who had been affected, and the threat of losing a case at the European court, which was possibly more influential on the Government, they had to act. It is not wild speculation that the Government will end up having to meet these moral and political consequences; it has already happened. The Government have to face up to what they are proposing here.

[Baroness Altmann (Non-Afl)]

My Lords, I support this amendment in principle. I share the concerns just expressed by the noble Lord, Lord Davies, about the risk of mandating a substantial proportion of any pension fund to be invested in what is, in effect, the highest-risk end of the equity spectrum, which is meant in other circumstances—if you ask the Pensions Regulator and so on—to be the risky bit of investment.

The Government may need to think again about the consequences of potentially being so narrow—of course, in the Bill, we do not even have the exact definition of what the assets are going to be in terms of these unlisted opportunities—because the opportunity set for risky investments that can actually benefit the economy is a lot wider than seems to be indicated in the Bill. Surely the more diversified the portfolios, the better risk-adjusted returns members can expect. I hope that the Government will give the Committee a more precise understanding of their expectations for the types of assets and for the consequences of being automatically enrolled in a scheme that invests in private equity assets or other unlisted assets that end up failing completely—as has happened so frequently with that type of investment in the past.

[Lord Fuller (Con)]

My Lords, I will not repeat the long list of government missteps on a global, international stage from those politicians who have interfered with people’s retirements. Safe to say, it represents moral hazard.

There is a mismatch between the long-term investment needs of people who are saving for retirement half a generation ahead—in particular, the youngest members of our workforce—and the short-term political wants of those who might direct. Politics is transient. MPs come and go, but the hangover from bad decisions lasts a long time. The 1997 changes to dividend taxes have cast a long shadow that has deprived millions of a secure retirement. We should have learned that lesson but, no, we have not. Mandation risks repeating that mistake all over again and benighting a new generation of youngsters who are 30 or 40 years away from retirement. There is already generational unfairness in the system. Mandation will perpetuate it again. It should have no place in the Bill, yet here we are discussing it.

I align myself fully with the proposers of these amendments and hope that, even at this late stage, between Committee and Report, the Government will look at this matter once more. Mandation should not be part of the Bill because of that simple moral hazard. MPs and the Treasury love to tell people what to do, but they will not be around to pick up the pieces when, or if, it all goes wrong.

Pension Schemes Bill

Baroness Altmann Excerpts

Committee stage
Monday 26th January 2026 Grand Committee

[Baroness Noakes (Con)]

My Lords, I will speak to my Amendments 91 and 95. I thank my noble friend Lady Neville-Rolfe for adding her name to them. Having had a little detour into asset mandation in the last group, we now return to scale. My Amendments 91 and 95 relate to master trusts and group personal pension plans, respectively, returning to the theme of size not being everything. They are intended to exempt from the scale requirements those schemes that deliver investment performance which exceeds that achieved by the average of all master trusts or all group personal pension plans.

We debated the general theme of size not being everything on the last day of Committee. I firmly believe that we should not let an obsession with size squeeze good performers out of the market. The Minister’s arguments on that day, despite protestations to the contrary, show that the Government have an obsession with size that overrides their professed desire for better outcomes for savers. If they really care about outcomes for savers, they should not be fixated on structural issues such as the size of assets under management, because good investment returns are not the exclusive preserve of schemes that reach the magic £25 billion of assets. The evidence for the Government’s policy cited by the Minister last week merely indicates that there is a correlation between size and returns achieved. That evidence, however, categorically does not demonstrate that good returns are obtained only by those which pass a size threshold.

At the heart of this debate is the problem that the Government are trying to use this Bill to force pension schemes to divert investment resources into things that the Government think will improve the UK economy, while at the same time claiming the objective of good outcomes for savers. I remind the Minister of Tinbergen’s rule: if policymakers wish to have multiple policy targets, they must have an equal number of policy instruments under their control. One instrument—mandating the size of pension provider—will not achieve the separate targets of improving savers’ outcomes and increasing UK productive investment without risking policy effectiveness and reduced transparency and accountability. By ignoring Tinbergen’s rule, the Government are actively inviting policy failure in this area.

I also strongly support Amendment 98 in the names of my noble friends Lord Younger and Lady Stedman-Scott. Innovation will not thrive in the pension sector if it has to pass arbitrary size tests. We should do everything that we can in this Bill to promote innovation. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I, too, have a number of amendments in this group and I will address my remarks mainly to them. Amendments 99 and 106 recommend removing the specific figure of £25 billion from the Bill and replacing it with a figure to be determined by the Government nearer the time, I hope, after detailed consultation.

On the last day in Committee, when we debated Amendment 88 on small pots, in the name of the noble Baroness, Lady Noakes, which proposed a monetary limit of £10,000, the Minister rejected the amendment on the grounds that

“the Government are not persuaded that it is sensible to hardwire the cap in primary legislation”.—[Official Report, 22/1/26; col. GC 188.]

Quite right. The same applies here: my amendment follows exactly that principle. I am concerned about the risks involved in tying primary legislation to a fixed monetary sum.

First, a change in market conditions could render it inappropriate. Secondly, such a large sum risks stymieing the development of newer companies and gives an exceptional competitive advantage to those providers already of the required scale. There is no evidence—I have been searching—to suggest that big is always best and there is certainly no academic proof that £25 billion, £10 billion or any other number is the right dividing line between successful funds and failing funds.

Newer entrants with an interesting approach to member service, digital engagement or innovative investment may well take time to break into the market, but just because they have not reached what the Bill determines is the magic number should not mean that they are forced to close, which is what the Bill would do, in effect.

The Minister said that consolidation and scale will mean

“better outcomes for members … lower investment fees, increased returns and access to diversified investments, as well as better governance and expertise in running schemes”.—[Official Report, 22/1/26; col. GC 202.]

That may well be the case for many, but deliberately disadvantaging innovation and putting up barriers that damage recent or newer entrants, regardless of their merits, runs counter to those intended outcomes over the longer term. Using collective vehicles, for example, run by already established experts such as closed-ended investment companies, can replace the need for in-house expertise at each of the big pension funds. Indeed, that option is already available but is being discouraged by the Bill.

As the noble Baroness, Lady Noakes, said, a correlation is not the same as a causative impact. Putting £25 billion into the Bill creates a big issue with some of the newer companies that will fall into the vacuum between the new entrant pathway, which does not start until a scheme is established after 2030, and the transitional pathway, which requires this fixed £10 billion—I could have tabled amendments on that, but £25 billion is the same principle—if they have not reached that level.

What is worse—I tried to indicate this last week—is that, although I know that the Government want to inject certainty by including these numerical figures, unfortunately they are also blocking the progress and potentially forcing the closure of a number of schemes that have digital-first methodologies right now but have not been established long enough to reach the required scale and to which the market to raise growth capital is currently shut. Who would lend money to a newer company that may or may not reach the scale required by the particular date?

The Government need to think again about the merits of using a fixed number, as the Minister mentioned last week. I would be happy to meet officials or Ministers to go through the rationale that has had this damaging effect in the market. I hope that we will not give a hostage to fortune by specifying a particular number in the Bill that may or may not prove to be right, wrong or damaging. I hope that the Minister will help the Committee to understand whether the Government might consider this principle.

[Baroness Neville-Rolfe (Con)]

My Lords, I support Amendments 91 and 95 in the name of my noble friend Lady Noakes, to which I have added my name. I apologise for not being able to contribute to the Committee’s discussions on Thursday because of competing business on the Floor of the House. I have read Hansard and I should record that I share the reservations expressed about mandation, a subject on which I have received many well-argued requests and emails. I commend the arguments that have been well put by my noble friend Lord Younger of Leckie on the amendment from the noble Baroness, Lady Bowles. I particularly dislike powers delayed into the future. If the Government decide that they need to legislate later, they can bring in another Bill that the House can scrutinise in the light of contemporary evidence.

I turn to the amendments in this group, so well argued by my noble friend Lady Noakes. I am uneasy, as others are, about the overemphasis on creating size and scale in the Bill: £25 billion is a big fund and, as my noble friend Lady Altmann said, it does not seem to be well evidenced. It is a Labour trend that needs to be treated with some scepticism. We see it in local government reorganisation, in rail nationalisation and now in the proposals for the police. I know from my business experience, which noble Lords know I always come from, that mergers of any kind always have substantial costs and that you need smaller, pushy innovators to keep sectors competitive. This might be contentious, but Aldi was good for Tesco because it kept us on our toes—and even better for the consumer, the equivalent of the saver in this case. The point is that reorganisations of any kind always have costs and only sometimes have benefits.

We have seen the growth in recent years of money purchase funds that are almost entirely digital, and they have brought beneficial competition to the market. We risk eliminating the next generation of innovation, real value creation and indeed British unicorn funds, generated by competition, if we leave the Bill as it is.

We must not allow good performers to be snuffed out by the movement to bigger schemes. That is why we are asking the Minister to look at excluding master trusts and group pension plans that deliver good investment performance from the scale and size requirements. Performance is, after all, what matters to those saving for a pension. Size, scale and growth are not everything, popular though they tend to be with the fund managers who benefit. Returns matter more, but the Bill at present rather underplays them in favour of scale. My noble friend Lady Noakes’s amendments are just what is needed, and I look forward to hearing how the Minister is going to solve the problem that she has identified.

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[Baroness Sherlock (Lab)]

My Lords, I made these arguments at some length on Thursday. I have made them again now. The noble Lord disagrees with them; I can tell from his tone. He can read Hansard and pick up the relevant bits with me if he would like to.

Let me come back to the amendments. I will start with Amendments 91 and 95 from the noble Baroness, Lady Noakes. I thank her for introducing them with her customary clarity and brevity. These would create an exemption from the scale of requirements for master trusts and GPPs that can demonstrate investment performance exceeding the average of schemes that meet the scale conditions. I recognise the intent to reward strong performance, but obviously I am concerned the proposal would undermine the Government’s objective, which is a market of fewer, larger, better-run schemes, where economies of scale deliver sustained benefits to savers.

I should clarify the point about objectives. The Government’s primary objective is saver outcomes. I want to be clear about that. While I am here, I say to the noble Lord, Lord Palmer, that this is not about administrative simplicity but about member outcomes. At the centre of our policy is the drive for better membership outcomes. That does not mean a simple scheme, but one that has strong governance and is well run, including strong administration, because scale supports the scheme to have the resources and the expertise to do this.

To respond to the noble Baroness, Lady Noakes, in considering scale in the pensions landscape today, we have all shapes and sizes of schemes, in which value for members is important. We know that performance can be delivered across different sizes of scheme, but scale changes the landscape. Schemes that have scale will have the tools to deliver on value and performance in a way that a small scheme will not be able to in this future landscape. That is because scale enables greater expertise, efficiencies and buying power than a small scheme. That is the landscape we need to deliver for members because we want better outcomes for them. In considering the issue, it is therefore important to focus on the future landscape, the market at scale, and not the current landscape. In our view, there is not sufficient evidence that other approaches can deliver the same benefits for members and the economy.

On the specifics of the noble Baroness’s amendment, there are also some concerns around the impact; it could create an unstable landscape if we were to focus on the performance at any point in time. Of course, the intention for any exemption is that it is a permanent feature of the scheme and is not subject to regular assessment. As we all know, past investment performance is not a guarantee of future success. If we went down this road, there would be times when exempted sub-scale schemes found that they were no longer delivering investment performance that exceeds the average of those at scale. That is not stable for members or employers, and does not support their interests.

Amendment 98 proposes an innovation-based exemption from the scale requirement for master trust schemes offering specialist or innovative services. I agree with the noble Baroness, Lady Stedman-Scott, that innovation really matters; that is precisely why the Bill provides for a new entrant pathway so that novel propositions can enter the market and scale responsibly. But creating a parallel innovation pathway as an alternative to scale would dilute the fundamental objective of consolidation and risk maintaining a long tail of small schemes, with fragmented governance and limited access to productive investment.

I should say a few words on competition. Actually, I might come back to that.

Amendments 99 and 106 from the noble Baroness, Lady Altmann, would remove the £25 billion threshold from the Bill. We believe the threshold is a central pillar of the policy architecture. It has been set following consultation with industry and government analysis of the emerging evidence, to which I referred earlier, on the point at which the benefits of scale are realised. We believe that this is a key policy decision that should be in the Bill. We also believe, as the noble Baroness indicated, that it is very important that there is certainty for industry on this threshold at the earliest possible point. Putting the £25 billion on the face of the Bill assures industry that it cannot be changed without full parliamentary engagement.

I know the noble Baroness wants me to reassure her that this matter is open for further discussion. I regret that I will have to disappoint her. The Government are committed to this and have put it in the Bill for the reasons I just explained.

[Baroness Altmann (Non-Afl)]

If the intention is to maintain these specific limits in the Bill, I hope that consideration will be given to an existing new entrant pathway—rather than only a new entrant pathway from 2030 onwards—and some kind of innovation pathway, as suggested by my noble friends Lord Younger and Lady Stedman-Scott, so that schemes that either are already in existence or will come through over the next few years, if they are able to do so, will not be forced out of business or prevented even beginning.

[Baroness Sherlock (Lab)]

The noble Baroness makes an important point about innovation. We recognise the importance of a proportionate approach to scale, which is why we created the transition pathway. I know that the noble Baroness thinks the number or scale is not right, but that is the purpose of the transition pathway: to give schemes that can reach scale within a reasonable time the chance to do so.

On innovation, although we want to see a market of fewer, larger pension schemes, the policy still encourages competition through allowing innovative schemes, such as CDCs, to develop and by enabling brand new innovative schemes to enter the market via the new entrant pathway. I know the noble Baroness is not satisfied with that, but that is our answer to her question: the new entrant pathway.

Amendment 102 from the noble Baroness, Lady Stedman-Scott, would delete the regulation-making power on what values can be counted towards the scale threshold in order to probe how assets will be calculated. The market contains varied and complex arrangements. It is both prudent and necessary that affirmative regulations, consulted on with industry, set out the assets that may be included or adjusted when calculating the total value in the MSDA, with a focus on assets where members have not made an active choice.

Let me be clear on that point: the choices that will be made here are the ones that will create the big fat wallet, if you like, which will in turn drive the benefits of scale. The intent is that the regulations will focus on the default arrangement that the vast majority of members will be in. We want to see members of the same age who join the scheme at the same time get the same outcome, but the regulation-making power enables practical realities of how the market operates now—especially at the margins. We know that there is a variety in practice in the market, so engagement and consultation are crucial.

Amendment 104 from the noble Baroness, Lady Stedman-Scott, would remove the regulation-making power to define “common investment strategy” and to set evidentiary requirements for the scale condition. I understand that the aim here is both to probe this power and to require the Government to define “common investment strategy” prior to Royal Assent. A common investment strategy will help to deliver a single approach to maximise the buying power of a scheme in terms of fees and the diversification of its investments. We think that is crucial because allowing, for example, multiple potentially divergent strategies within the MSDA would maintain fragmentation and drive away from the consolidation that we want members to benefit from.

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Moved by

[Baroness Altmann]

97: Clause 40, page 40, line 37, after “arrangement” insert “or the total asset value of all member-specific classes of default arrangements offered to members by the Master Trust”
Member’s explanatory statement
This probing amendment seeks to ensure that this legislation does not exclude Master Trusts or other pension funds from offering members the chance to invest in default pension arrangements which are more suited to their own circumstances, including age, retirement intentions, health conditions, plans for future retirement income options etc.

[Baroness Altmann (Non-Afl)]

My Lords, I will speak to all the amendments in this group, which are basically on exactly the same topic. I hope that the Minister understands the spirit in which they are all intended. I also hope that the Committee will be minded to support them. In a way, they follow from my Amendment 108 in the previous group, which sought to get away from the idea that one size fits all in pensions and that a common investment strategy is a recipe for success for either a group of members or all members.

My concern is that the approach to auto-enrolment pensions hitherto was to assume that there is a standard fund that is suitable for all classes of members, which can then be safely invested in by everybody. Of course, it is easiest for providers to have a common investment strategy or a common investment approach in the default fund, but enforced uniformity does not mean that all groups of members are served well.

These amendments seek to anticipate the possibility that some of the large pension providers, either existing ones or, I hope, new ones, will follow an approach in which they have a number of default funds that can be suited to different classes of member on the basis of three or four basic questions that might be relevant to their circumstances. I hope that we get to a position—I know some of the new providers intend to do this—where the pension provider does not look just at your chronological age, for example, and make an assumption about what investments suit you, but asks you whether you intend to stop working at a particular date, whether you have other pension funds and what your state of health is. Just those three basic questions can be critical to the success of an investment strategy for that group of members, but they are all lumped together at the moment.

In addition, it would be helpful to use the Bill not to close down the option of a scheme offering a number of default funds. At the moment, the danger is that everybody thinks that we have to get to £25 billion, even if it is by a range of different approaches. I know that there is an option potentially to aggregate assets, but my amendments seek to ensure that, if the £25 billion number stays in the Bill—the noble Baroness unfortunately seems intent on that being so—the Bill directly allows for a number of default funds to be added up.

I say that because we have seen in recent years the “lifestyling” approach, for example, in which all members are put into one default fund with a lifestyle approach, or a target date fund approach. This has let members down significantly. Although it is not widely reported, I am sure that many other noble Lords have had emails or letters from people coming up to retirement in 2022, who had a pension fund statement that told them they were in a safe fund and the size of the pension they could expect to receive in a few months’ time. By the time they came to, let us say, later in 2022, however, their so-called safe fund had lost up to 30% of its value. Suddenly, they were unable to stop work because they had been put in an approach that was not suitable in the end or did not do exactly what it said on the tin in its results.

If the current approach is that, just because you are 50 or 55, no other questions are asked and you are in a big default fund that says you will be stopping work within the next five to 10 years, and therefore you should not be invested in high-risk assets, which is another name for higher expected return assets, but should be moved into low-risk assets, which is another name for low expected return assets, you are not necessarily being provided with a suitable option. One size fits all does not work if, for example, the member is 55 or even 60, has no intention of stopping work in the foreseeable future, perhaps has a guaranteed defined benefit pension somewhere else that they can rely on, or, at the other end of the scale, is in very poor health and may have to stop work soon, so should be in a different pool. I hope that the Minister will understand that the intention is to anticipate innovation in that regard. I feel that, at the moment, pension companies are not even asking members what their intentions or circumstances are, or even the basic three or four questions.

I declare an interest as an adviser to Cushon, which is looking to introduce an approach of that nature. Other innovative companies also intend to improve member engagement by reaching out to members and trying to put them in segregated pools, rather than just one big pool. The Bill, using just one default fund, or a standard fund, as I prefer to call it, will preclude that kind of development, which could be in members’ interests, could have avoided the catastrophes that we saw with the current one-size-fits-all approach and could encourage providers to explain more clearly what exactly is happening to the members’ money in the investment pools that they are in, which currently does not take place—low risk is not explained, nor is high risk. Therefore, I hope that this principle can be put in the Bill. It is a very minor change, to talk about more than one default fund for a provider, rather than saying “the” default fund. I beg to move.

[Lord Fuller (Con)]

My Lords, I will speak only briefly, because the noble Baroness, Lady Altmann, has put her finger on it. There is a choice here—the choice of the members. If we believe that the members have a say in their own retirement, having saved for it, so that they are stakeholders in that respect, they have a choice, or they are forced into groupthink. It is masterfully explained. The nonsense that gilts are low risk is a fantasy. We heard how the move into gilts resulted because the markets moved into a 22% loss in the underlying asset value.

But the groupthink in the pensions industry is that you have to go to gilts as you approach retirement. As you approach retirement nowadays, you have 30 years to go—30 years of growth. Yes, I do not deny that you need something in gilts and bonds, but there is still a long way to go. Especially in an inflationary period, as we have been through, cash, cash-like and bond/gilt-like investments will not be enough.

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[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Baroness, Lady Altmann, for the clarity of the exposition of her amendments, and I thank all noble Lords who have spoken. I will try to explain what the Government are trying to do here and then pick up the specific points that the noble Baroness raised.

To maintain the policy on scale and secure its benefits for pension scheme members, there will need to be centralised decision-making over a large pool of assets. The Bill sets out that this will be delivered by the main scale default arrangement, which is subject to a common investment strategy. I recognise that the noble Baroness has raised concerns about the common investment strategy being able to accommodate different factors, but I will tell the Committee why it is there. A key purpose of the policy is to minimise fragmentation in schemes and to have a single default arrangement at the centre of schemes’ proposition. Fragmentation is an issue, not because it is a piece of government dogmatism but because it is in the interests of members that those who run their schemes have a big wallet at the centre to give the scheme the buying power and expertise they need, because that enables them to deliver on the benefits of scale.

When we consulted, the responses told us that there were schemes with hundreds of default arrangements that have been created over a long period of time and that this is a problem. Members in these arrangements get lower returns and pay higher charges, which some consultation responses also told us. It is important that we deal with that fragmentation and that we improve member outcomes.

However, the Government also recognise that there are circumstances where a different default arrangement is needed to serve specific member needs only—for example, for religious or ethical regions. These will be possible through Chapter 4 but they will not count towards the main scale default arrangement. If the scale measure encompassed multiple default arrangements or combined assets, as these amendments would allow, it would not drive the desired changes or support member outcomes derived from the benefits of scale. Following consultation, there was clear consensus that scale should be set at the arrangement level as that is where key decisions about investments are made. Simply put, centralised scale is the best way to realise benefits across the market for savers.

The pensions industry has told us there are too many default arrangements in some schemes, and that fragmentation—

[Baroness Altmann (Non-Afl)]

My Lords—

[Baroness Sherlock (Lab)]

I am going to answer the point and then come back, if that is okay. Just give me another two minutes.

That fragmentation does not benefit savers but can lead to increased charges and lack of access to newer, higher-performing investments. The Government are committed to addressing this fragmentation, which exists predominantly in DC workplace contract-based schemes.

To prevent further market fragmentation, Clause 42 allows for regulations to be made to restrict the creation of new non-scale default arrangements. To be clear, this is not a ban nor a cap on new default arrangements. There will be circumstances where they will be in saver interests and meet the needs of a cohort of members. As the noble Baroness says, this is not a one-size-fits-all approach.

On the point about choice, auto-enrolment has moved many members to save for the first time. The vast majority enter the default fund and do not engage in their schemes. Those who do can choose their own funds, and these measures do not interfere with that, but they are a minority, and these measures aim to support the millions who do not engage.

The noble Baroness is right that one size of default arrangement does not fit all, but the Bill requires a review to consider the existing fragmentation and why multiple default arrangements exist. That will inform us of which default arrangements should continue and the characteristics they possess that deliver better member outcomes or meet a specific need.

[Baroness Altmann (Non-Afl)]

The Minister has raised many points that I would like to ask further about, if that is okay. The fragmentation applies to legacy schemes: the contract-based schemes, as she says. These are the old personal pension-type arrangements—SIPPs, GPPs and so on—which were developed a long time ago. Typically, the more modern schemes have just one default, with one investment approach that is meant to suit all members. It is that approach that I hope and expect to be refined as we move forward so that there can be different types of default fund for different types of member. I do not anticipate that they will be people choosing their own. It will be on the basis of information that the provider seeks from its members, using that to send them down a slightly more appropriate investment route for their money. That does not stop the providers having large pools of money that they allocate members to, but it would not be in just the one central fund, as I say. Of course that is easier for the provider, but I think the providers owe members a different duty, which is to try to tailor a little more for those who do not choose, based on wider circumstances than just their chronological age, what is best for their investment and pension outcomes.

[Baroness Sherlock (Lab)]

I have heard the noble Baroness’s explanation and understand the point she is making. The point about choice was not actually directed at her; it was directed at a colleague who mentioned choice and I was trying to explain that this is not about choice. I accept the point the noble Baroness is making that this is for those who do not engage.

If having a single default fund were simpler for the pension schemes, and that is what drove this, we would not have the number of defaults we have at the moment. We have huge numbers of defaults. I accept that many of those are the product of history, but the key is that we have to consolidate. To be clear, as I have said, we are not banning or capping the new default arrangements, but we want to ensure that any new arrangements meet the needs of members, so any new non-scale default arrangements will have to obtain regulatory approval before they can accept moneys into them. We have said that we are going to consult and we need evidence to look at whether anything else should be included, and that will come up when we consult.

I understand the point that the noble Baroness is making and I am happy to reflect on it, but we need consolidation and we need to consult to make sure that we have allowed for the right things. With that reassurance, I hope she feels able to withdraw her amendment.

[Baroness Altmann (Non-Afl)]

I thank the Minister for her constructive engagement on these issues. There is something slightly missing here because, if one consults before this approach enters the market, one will not know that that might be the appropriate approach. Indeed, the providers that one would consult will not necessarily recommend more than one approach, because that does not necessarily suit their business interests, and members will not know what it is because by definition they are not particularly engaged.

I am trying to address this issue and I very much appreciate that the Minister is engaging constructively and has listened carefully. Perhaps we can continue this at some point. This would be a very small change to the Bill; it would not stop the unsuitable dispersion of numerous different legacy funds from being consolidated, but it would potentially stop these new approaches entering the market. That is the concern. I beg leave to withdraw my amendment.

Amendment 97 withdrawn.

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[Baroness Altmann (Non-Afl)]

My Lords, I support every word that the noble Baroness, Lady Bowles, has said. I hope the Minister understands that this series of amendments is designed, once again, to help the Government.

The policy of excluding the very asset classes that the Government want to promote and want pension funds to invest in, just because they are held in a particular form, seems irrational. The process used to introduce it, as the noble Baroness, Lady Bowles, outlined, was materially flawed. There was a lack of consultation and the policy is directly contrary to some previous ministerial Statements and to the stated policy intention. I cannot see how any reasonable person could argue that excluding these companies is a legitimate means of achieving the stated policy objective. The decision goes against common sense and defies economic logic. It opens pension scheme members up to less choice, higher long-term costs and, potentially, new risks such as gating or frozen investments.

Amendments 122 and 123 are designed specifically to ensure that, if a closed-ended investment company holds the assets in which the Government want pension funds to invest as a result of the Mansion House Accord, they can do so. Amendment 123 includes these as qualifying assets under the Bill and Amendment 122 talks about ensuring that, if securities are

“listed under Chapter 11 of the UK Listing Rules or the Specialist Fund Segment that provide exposure to the qualifying assets”,

they too can be included.

These amendments would not change the intentions of the Bill or the Government’s policy; they would reinforce them. If schemes cannot invest in listed securities, we will exclude the closed-ended funds that hold such assets, for no obvious reason other than, perhaps, the fact that the pension funds or asset managers that are launching the long-term asset funds will obviously prefer to have their own captive vehicle under their direct control, rather than those quoted freely on the market.

I would argue that, by excluding investment trusts and REITs as qualifying assets, we will fetter trustees’ discretion as to what assets they can invest in and how they can do so. I do not believe that the Government want to do this. I think this is an unintended consequence of wanting not to allow schemes just to say, “Well, I invest in Sainsbury’s and it has a lot of property in the UK, so that’s fine”. But this is a very different argument. I hope that the time spent by this Committee on these funds will prove worth while and that this dangerous, damaging exclusion can be removed from the Bill.

If the Government want—as they say they do—pension schemes to invest in UK property, the amendments on this topic would allow them to choose to hold shares in Tritax Big Box, for example, which is a listed closed-ended fund. It is a collective investment REIT, not a trading company, and UK regulators, the stock market and tax regulation recognise its functions as a fund. It is just like a long-term asset fund, but it is closed-ended instead of open-ended. Under the Bill, pension funds would not be able to invest in it, even though it holds precisely the type of private assets targeted by this section of the Bill.

The amendments would maximise schemes’ choice of investable assets within the target sectors. This would widen competition, which should bring downward pressure on asset management costs; it would reduce the risks of inflating asset prices, by channelling demand into fewer investment pathways; and it would enhance potential risk-adjusted returns. There is simply no reason why master trusts and other pension schemes should object to being given additional freedom to make investments to meet the requirements of these reserve powers. Why are we discriminating against a particularly successful British financial sector offering a proven route to holding the assets in which the Government want pension funds to invest? I have not seen any argument to say that, if we include these amendments, pension funds would have to invest in these companies, but they could use them if it suited their needs.

I look forward to the Minister’s answer. I know and accept that she is in a difficult position, but I have not heard a coherent answer as to why we are going down the route that we are. Tritax Big Box is just one example. It owns and develops assets worth £8 billion and controls the UK’s largest logistics-focused land platform, including data centres, which the Government designated as critical national infrastructure in 2024. Tritax Big Box announced that its data centre development strategy will be partnering with EDF Energy, which manages the UK’s nuclear power, to develop such infrastructure. It is remarkable that such a homegrown success story should be excluded from the opportunities available to pension schemes.

This sector has reinvented itself over the past few decades, from being a holder of diversified quoted equities to managing real illiquid assets. It is generally recognised that it is an ideal structure for holding illiquid assets—it has renewable assets, wind farms, solar farms and National Health Service GP surgeries. All these elements of the economy need significant investment and pension funds could be using their assets to support them. Surely that should be part of the Government’s intention for the Bill. I hope that this possible error in the Bill can be recognised and corrected so that we can move forward without further discussion on this topic.

[Lord Davies of Brixton (Lab)]

The noble Baroness, Lady Altmann, called on the support of reasonable people. I think of myself as a reasonable person, and I support her. I find the Government’s position on this totally inexplicable. I say in all honesty to my noble friend the Minister that the reasons given so far for these provisions do not in any way explain their position. It is inexplicable.

In my view, it is possible to make an argument that closed-end funds of this sort are more suitable than some other sorts of investments for pension investment because of the possibility of there being additional liquidity. That makes it even more inexplicable. A further problem is that pension funds could invest in an investment company that is not a closed-end fund but holds these investments. However, if it decided to float on the stock exchange, it could not do so because it would lose all the pension fund investments. So there is not logic at all to the Government’s position. There may be some logic, but we have yet to hear it.

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[Baroness Noakes (Con)]

My Lords, I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, for her forensic analysis of both the Mansion House Accord and the ways in which there is a significant mismatch between what is in that accord and what is in this Bill. I confess that I was not aware of the extent of that, so that analysis is really important; I look forward to hearing what the Minister has to say.

I would like to comment on whether investments in listed securities should be excluded; here, I will part company with many of my colleagues on this side of the Committee. I understand why they are excluded. It is because buying and selling shares in listed companies is just buying and selling a financial asset. The buying and selling of shares in UK-listed assets does nothing to put money into the UK economy.

However, the way in which this measure is drafted probably goes too far, because it is possible that companies could raise new capital—for the purpose of investing in some of the things where the Government wish to encourage new investors—and that those vehicles could be listed. The way in which the Government have approached this is possibly too extensive, but I certainly do not think that the simple buying and selling of financial assets aligns with getting productive investment into the economy. As the noble Baroness, Lady Altmann, knows, I do not think that is a valid objective for this Bill—certainly not one that should override the need to get good returns for savers.

[Baroness Altmann (Non-Afl)]

I apologise, but I think that the noble Baroness’s characterisation of the impact of buying and selling, as she said, on listed companies—whether that puts money into the economy, to use her words—does not necessarily apply in the way she believes, particularly with closed-ended investment companies.

One of the problems with which they have had to deal, because of the regulatory constraints that we have been trying to help the Government address over the past two or three years, is that if people are selling these closed-ended investment companies but no one is buying them, they sink to a discount to their net asset value. At that point, they cannot invest in new opportunities; they cannot IPO or raise new capital. That has had a dramatic impact on the economy because these closed-ended companies, which were investing significantly in infrastructure across the country, have been unable to raise new money to invest in new opportunities.

[Lord in Waiting/Government Whip (Lord Katz) (Lab)]

If this is an intervention, it is quite a long one. I ask that interventions be kept brief; they should just be questions, really.

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[Baroness Sherlock (Lab)]

That was fun. I will have a go at explaining the Government’s narrative on this, which is an alternative to the narrative that has been established so far. I will then try to go through and answer as many of the questions as I can.

Let me start by stating the obvious. The amendments relate largely to the part of Clause 40 that determines which types of investment are deemed as qualifying assets for the purpose of meeting any asset allocation requirements were we to use the power. I stated in my opening reply to the noble Viscount, Lord Younger, that he said “when” mandation comes in, but it is very much “if”; we do not anticipate using this power but, if it were used, we would need to be clear about what happens next.

The most relevant provisions are found in new Section 28C(5). This broadly limits qualifying assets to private assets. The subsection provides by way of example that qualifying assets may include private equity, private debt, venture capital or interests in land—that is, property investments. It also clarifies that qualifying assets may include investments and shares quoted on SME growth markets, such as AIM and Aquis.

In contrast, according to this subsection, qualifying assets may not generally include listed securities, defined as securities listed on a recognised investment exchange. That approach reflects the aim of the power to work as a limited backstop to the commitments that the DC pensions industry has made, which relate to private assets only.

That brings me to the subjects of the amendments from the noble Baronesses, Lady Bowles and Lady Altmann. I start by reminding the Committee of the rationale for this approach, because it stems from the Mansion House Accord. The accord was developed to address a clear structural issue in our pensions market. DC schemes, particularly in their default funds, are heavily concentrated in listed, liquid assets and have very low allocations to private markets. That is in contrast to a number of other leading pension systems internationally, which allocate materially more to unlisted private equity, infrastructure, venture capital and similar assets.

The reason the Government are so supportive of the accord is that it will help to correct that imbalance and bring the UK into line with international practice. A modest but meaningful allocation to private markets can, within a diversified portfolio, improve long-term outcomes for savers and support productive investment in the real economy, including here in the UK.

The reserve power in Clause 40 is designed as a narrow backstop to those voluntary commitments. For that reason, any definition of “qualifying assets” must be clear, tightly focused on the assets we actually want to target and operationally workable for schemes, regulators and government. That is the context on the question of listed investment trusts and other listed investment companies.

I recognise the important role that investment trusts play in UK capital markets and in financing the real economy. Pension schemes—as the noble Baroness, Lady Noakes, pointed out—are, and will remain, free to invest in wherever trustees consider that to be in members’ best interests.

However, the clear intention of this policy has been to focus on unlisted private assets. This is reflected in industry documentation underpinning the accord, which defines private markets as unlisted asset classes, including equities, property, infrastructure and debt, and refers to investments held directly or through unlisted funds. That definition was reached following a number of iterative discussions led by industry, as part of which the Government supported the definition being drawn in this way.

Bringing listed investment funds within the qualifying asset definition would be out of step with the deliberate approach of the accord and its focus on addressing the specific imbalance regarding allocation to private assets. It would also raise implementation challenges, requiring distinctions to be made between the different types of listed companies that make or hold private investments or assets. It would introduce uncertainty about what we expect from DC providers. We might justly be accused of moving the goalposts, having already welcomed the accord, with its current scope, in no uncertain terms.

But the line has to be drawn somewhere. This is not a judgment on the intrinsic qualities or importance of listed investment vehicles, nor does it limit schemes’ ability to invest in them. It is simply about structuring a narrow, targeted power so that it does what it is intended to do: underpin a voluntary agreement aimed at increasing exposure to unlisted private markets in as simple a way as possible and without cutting across schemes’ broader investment freedoms.

The legislation draws a general distinction between listed securities and private assets; it does not single out investment trusts. Any listed security, whether a gilt, main market equity or listed investment company, is treated in the same way for the purposes of this narrow definition.

Crucially, this concerns only a small proportion of portfolios. Under the accord, the remaining 90% of default fund assets can continue to be invested in any listed instrument, including investment trusts, where trustees and scheme managers judge that that would benefit their members.

I am just coming to the answers, but please ask some more questions.

[Baroness Altmann (Non-Afl)]

I am very grateful to the noble Baroness for giving way. In a situation where trustees do not wish to put more than the prescribed amount in the qualifying assets, and they want to hold those through a listed closed-ended company because they are concerned about the structure of an open-ended fund and do not have the ability to invest directly, why would the Government want to fetter their choice in that way? I thank the Association of Investment Companies, which has helped me to understand some of the things that these companies do.

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Moved by

[Baroness Altmann]

112: Clause 40, page 45, line 38, after “percentage” insert “to a maximum of 10%”
Member’s explanatory statement
This amendment and others to Clause 40 in the name of Baroness Coffey seek to cap the prescribed/mandated asset allocation to 10% and limits the time for this power till the end of 2032.

[Baroness Altmann (Non-Afl)]

On behalf of the noble Baroness, Lady Coffey, who is unable to be here today, I am happy to move her Amendment 112 and speak to the others in this group. My remarks on Amendment 112 also apply to the noble Baroness’s Amendment 117 and Amendment 114 tabled by the noble Baroness, Lady McIntosh.

The aim of this amendment is merely to ensure that, in new Section 28C, which says that master trusts or GPPs will require regulatory approval of their asset allocation—and that that will require that at least the prescribed percentage by value of the assets held in the default funds of the scheme are qualifying assets—the maximum value should be no greater than the Government’s expressed aim of 10%. As far as Amendment 114 is concerned, the UK element of that should not be more than 5%. The aim is to avoid policy creep. If there is mandation and it prescribes a percentage in particular assets, this should not then be used as the basis for perhaps increasing the element of mandation, given that there is no figure in this instance in the Bill.

My Amendment 113 is on a slightly different aspect. In the case of regulatory approval being required for asset allocation and a prescribed amount of qualifying assets being required, I would like to add the possibility—this is a “may” not a “must”—of the minimum amount in prescribed assets being part of the flow rather than the stock. My concern—it has been mentioned on other groups, and I am sure we will come back to it—is that, by prescribing a percentage of assets in a very illiquid range of assets as the proportion of the already-existing stock of funds in a default fund, there is a danger that all the new contribution flows will need to be directed to that particular type of asset to end up with an overall percentage of the whole fund in the required prescribed assets. My suggestion is that the Government might want to have the option of just mandating—if they do so, which they may or may not—a proportion of the new contributions, which will perhaps be less disruptive to the market in the underlying assets.

I support all of the amendments in this group. I am also supportive of the idea that the noble Viscount, Lord Younger, and the noble Baroness, Lady Stedman-Scott, are recommending and which the noble Lords, Lord Vaux and Lord Palmer, are suggesting, of moving away from the idea of mandating just private equity—or, indeed, just private equity and private debt—and having a wider range of options for meeting the Government’s intention, which I support, of bolstering pension fund support for new companies and growth assets in the UK that can help support and boost both the long-term growth of this country and the returns of the UK’s pension funds over the long term. I beg to move.

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[Baroness Altmann (Non-Afl)]

I thank the Minister and all noble Lords who have spoken in this debate. We have had a good rehearsal of the views and concerns about mandation and the need for a specific limit. I understand that the Minister is not keen on having a specific limit, but I hope that we can meet ahead of Report to go through some of these issues, which are keenly felt by many noble Lords in Committee.

The same is true of the concern about private equity or private debt and the dangers of being invested in them. It strikes me as rather strange that the Government think that the risk-return opportunities in private equity are suitable for mandation but that that would not extend to quoted listed investment companies, which have long proven their track record without the disasters that we have often seen with private equity. With that, I beg leave to withdraw the amendment.

Amendment 112 withdrawn.

Pension Schemes Bill

Baroness Altmann Excerpts

Committee stage
Thursday 22nd January 2026 Grand Committee

[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.

[Baroness Altmann (Non-Afl)]

My Lords, I strongly support Amendment 46A from the noble Baroness, Lady Bowles, to which I have added my name and which she so eloquently explained. I will speak to my own Amendment 47, which she referred to and which looks at the value-for-money ratings from the point of view of members. For me, that is an extremely important element that is often overlooked when concentrating on the investment side alone—not that that is not important.

I draw the Committee’s attention to some of the specifications that I have made in my Amendment 47, which I think are crucial to understand when one is choosing a pension scheme for one’s workforce. The quality of service for members can be extremely important and can indeed drive adequacy in ways that are not recognised by the investment side. The investment side is of course important, but if quality of service and the education, guidance and support provided to members are working well, that can be a driver to encourage members to increase their contributions. Ultimately, that can be at least on a par in importance with investment performance over time. If members gradually build up their contribution levels to, say, twice what they were before by adding 1% a year every time they get a bonus, that combined with the investment performance can be an extremely powerful driver for value for money over the long run, which is of course where we are meant to be examining and assessing the schemes.

On communications with members, I have specifically included in that what I call “jargon-light” communications, because I have not yet seen a communication with members about pensions that does not include baffling or off-putting terms, including—I will come to this later—the very term “default funds”. We all know what this refers to, but if you are talking to a young worker or someone in later life who is not on a high salary and does not know a lot about pensions and you tell them that what they are supposed to do with their money is to put it into a default fund, that may not sound terribly attractive to them. The last thing that most people want to do with their money is default.

The Minister is looking somewhat askance at my remarks, but this is just one example. I apologise—perhaps she is just looking at something in her notes. Certainly, those are the kind of looks that one sometimes gets from the pensions industry, which does not tend to understand that the ordinary person has never heard of a default fund and it does not sound particularly attractive. If we can include, in communications, words in plain English that may sound more enticing than the usual pension jargon, I think it could be helpful. I would argue that that is potentially a measure of the value offered in a workplace scheme, which is what the ratings are going to be looking at. I hope that the Committee will understand the aims of my specifications in Amendment 47 and, perhaps as we go through, Members of the Committee may suggest other elements.

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Moved by

[Baroness Altmann]

58: Clause 15, page 16, line 29, leave out “fully delivering” and insert “good value”
Member's explanatory statement
This amendment seeks to simplify the language in Value for Money assessments, to make them more intuitively understood by members, especially as 'fully delivering' may give an expectation that all required metrics are being fully met.

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[Baroness Altmann (Non-Afl)]

My Lords, I will speak to my Amendment 58. My remarks will apply to all the other amendments in this group, apart from Amendments 64 and 65, to which I will speak shortly, and Amendment 69 in the name of the noble Viscount, Lord Younger, which I also support.

My views on this group of amendments follow on from the comments I made earlier about jargon and trying to make pensions more member-friendly—more intelligible to the ordinary person. I believe that this is an extremely important area, having met so many members who simply do not understand what they are being told. The remarks from the noble Baroness, Lady Bowles, encapsulate some of that: if we cannot understand what we are being told in the communications, neither can members.

It was interesting to see that the original consultation suggestions of red, amber and green, which people would have at least a good chance of understanding, have instead been put into the Bill as “fully delivering”, “intermediate” and “not delivering”. Delivering what? We are talking about value; this is not Ocado or Amazon. The noble Baroness, Lady Warwick, in her remarks on the first group used the terms “good value” and “poor value” as if they were in the Bill—but they are not. My proposals in these amendments—to change the term “fully delivering” to “good value”, and “not delivering” to “poor value”—simply respond to what most people would expect this clause to tell them. I hope that the Minister understands that. Obviously, this is a probing amendment, so she may prefer other ways to express what we are trying to achieve here, but I hope that the intention behind these amendments will, in some way, feed into both the Bill and how the value-for-money framework will be considered when we develop it. It is a very sketchy framework at the moment.

I take the point about the consultation, but I have a related question. The critical players in moving away from the idea of cost to value, when assessing the merits of any particular scheme being used for the workforce in auto-enrolment, will be the employee benefit consultants. They advise the employers that they currently simply use cost as their major recommendation metric. They are not, in any way, properly scrutinised or regulated. Having done all this work to develop a value-for-money framework, will any attention be given to ensure that the people advising the employers on whether a scheme should be used will properly use the value-for-money framework that we will devise?

Amendments 64 and 65, which are also probing amendments, specifically address the “intermediate” rating, which is designed to have many levels or gradations. However, it seems that all of them could lead to scheme closure. They will all certainly lead to significant costs for a scheme rated “intermediate” due to the extensive reports and explanations that need to be given. My amendments simply seek to avoid significant extra costs, or the risk of scheme disclosure, for schemes that receive an “intermediate” rating on a shorter-term basis. It seems that it is almost possible that a “not delivering” rating will have a similar outcome to an “intermediate” rating because of how the Bill is phrased.

My suggestion is—and it is, as I said, probing and open for discussion and change—that you have to have an intermediate rating every year for, say, four years before the extensive requirements of this section kick in, so that in cases of up to five years you would need to notify the employer if you have changed from a good value to intermediate and the scheme would need to explain why this rating has been given and what plans it has for improvements. That would not be an extensive report, but it would obviously be helpful and would focus the minds of the scheme without the draconian implications that seem implied by the consequences of the intermediate rating as specified in the Bill. That brings me briefly to my support for Amendment 69, tabled by the noble Viscount, Lord Younger, and the noble Baroness, Lady Stedman-Scott, which probes what the penalties are, how they have been assessed and whether they are appropriate. I beg to move Amendment 58.

[Baroness Coffey (Con)]

My Lords, this is an interesting group of amendments. My noble friend has explained the importance of clarity in who decides whether something is fully delivering. I want to ask about the different assessments being made at this point. We are now, effectively, on Clause 15 onwards. We have the ratings coming through. My noble friends on the Front Bench will explain why they do not agree with certain elements. There is merit, however, in trying to work out whether something is taking a nosedive and whether it is it fixable, but we need to be more specific about a reasonable period, and then a prescribed number of VFM periods needs to be put in the Bill, which it is not at the moment.

Thinking through what has been suggested, I am trying to understand how this will work. Clause 13, which we have discussed briefly, has a certain amount of potential calculations. We then have the trustees doing their own assessment, and then we jump forward to Clause 18 and the Pensions Regulator may check. This is all feeling quite random. Normally when we do ratings, the CQC or Ofsted make that judgment, so I am trying to understand how this will work in practice. Are the guidelines going to be fixed—for example, the average or the benchmark across all pension schemes is this, or the FTSE 100 index has changed this much, or the costs are this percentage? It would be helpful to start to get a proper pitch. I appreciate that the consultation may have gone out, but there must be thinking in the Government’s mind, not just the regulator’s, on what “good” looks like. There are risks, as identified by my noble friends, that we may be overburdening to the point that the minutiae become an industry in their own right. I am surprised to see the penalties put in primary legislation, which is unusual nowadays, although I agree that we need a better sense of how that compliance element, as set out in Clause 18, will work alongside the other amendments. My noble friend is right to say that we need to keep this straightforward and simple for people to be able to understand.

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[Baroness Sherlock (Lab)]

My Lords, I again thank the noble Baronesses, Lady Altmann and Lady Stedman-Scott, and all noble Lords who have spoken. Let me start with the amendments from the noble Baroness, Lady Altmann. I completely appreciate her desire to make the VFM framework easier for everybody to understand. I recognise there is a need for clarity here and a role for regulators to support member engagement with something as complex as this, but our concern with her proposals is that they would reduce precision and could unintentionally weaken regulatory accountability and undermine comparability across schemes, and those are three pillars on which the VFM framework depends. There is a genuine challenge here, which is to balance technical accuracy with clarity for members. Obviously, the latter will help to overcome the kind of behavioural inertia that we all see and so will ensure that VFM assessments result in meaningful action, not just awareness.

That is distinct from the regulatory precision required for the VFM system, which is why these terms are in the Bill. That current wording of “fully delivering” and “not delivering” is not accidental: it is designed to reflect objective compliance with all the mandated metrics: costs and charges, investment performance, governance and member outcomes. The terms provide clarity for trustees and regulators about whether a scheme meets the required standards. Replacing them with “good value” and “poor value”, even if it sounds attractive on the surface, would introduce subjectivity. Good value is not a regulatory test. It risks creating ambiguity about what triggers action when a scheme falls short.

Members deserve clarity and I absolutely agree that language should be understandable. However, the right place for explaining concepts to members is in disclosures and guidance, not primary legislation. We intend to work with the Pensions Regulator, the FCA and industry to ensure that member-facing communications such as rating notifications to employers and the regulator-supporting guidance, which will be aligned with the implementation of VFM, explain these outcomes in plain English that is suitable for its intended audience. I take the challenge from the noble Baronesses, Lady Altmann and Lady Bowles, about how to make sure that happens. That is something I am really happy to reflect on quite carefully. However, changing the statutory terms dilutes precision, creates inconsistency and risks uncertainty. Our approach preserves enforceable standards while committing to clear, accessible explanations for members.

Amendments 64 and 65 from the noble Baroness, Lady Altmann, would limit the powers the Government have to specify the consequences for pension schemes that have had an intermediate VFM rating for fewer than five years in a row. Let me pause before I answer that to come back to the noble Baroness, Lady Coffey, who always asks clear questions. One of her questions was “How is this going to work, anyway?” Let me give a very quick rundown, subject to time. The consultation sets out updated proposals—they were updated in response to the previous consultation—and draft FCA rules, showing how the VFM framework will work. The paper sets out the proposed metrics for performance, costs, charges and service quality. It outlines how the assessment process will work. It gives more details around the ratings structure and the consequences associated with each rating. Basically, trustees of in-scope DC workplace pension schemes and arrangements will have to publish standardised performance metrics and follow a consistent and comparative assessment of value to assign an overall VFM rating. The regulator will ensure compliance with those obligations and will have the ability to enforce transfer of savers—I will come back to that in a moment—from consistently poorly performing arrangements.

I said that the consultation had changed. There were five key changes from the previous consultation. The most relevant one here proposes, in response to feedback, the adoption of a four-point rating system: red, amber, light green and dark green. There was strong pressure to have more granularity, so that it was not quite as stark. I make it clear that it is only amber that could lead to possible enforced transfer. I hope that is helpful.

A good question is “How will members know what ‘fully delivering’ means?” Obviously, we are not proposing to use the Bill’s terminology when communicating ratings to members. Instead, the schemes will use the four-point RAGG rating. Red corresponds to not delivering, amber and light green to intermediate performance and dark green to fully delivering. It is proposed that this more accessible and granular terminology will be used in the assessment reports published by all schemes at the end of 2028, and the reports will be made publicly available. Guidance will also include plain English explanations and a summary of metrics so that members understand what the outcome means for them.

[Baroness Altmann (Non-Afl)]

In what the Minister has just described, I do not quite understand how dark green and light green fit with “fully delivering”. Only dark green would be fully delivering, so why is light green not in the intermediate category? To me, this is quite confusing. I understand what the Minister is saying, but I urge her to work with whoever is devising this to iron out this kind of confusion at this stage, rather than running with it, as seems to be the intention here.

[Baroness Sherlock (Lab)]

We are still consulting on this. We consulted on the initial proposal and the response came back that more granularity was needed. We have to accept that clarity pulls in one direction and precision and granularity pull in the other, so the job of the Government is to support the regulator in making sure that we end up with a framework that does its primary job, which is not just to work out where a scheme is now but what the right consequences are for that scheme and then to make sure that is communicated to those who need to know in ways that are appropriate. On the one hand, the noble Baroness wants clear, strict categories, and on the other she wants to have different consequences for schemes depending on their circumstances. We think it is important to be able to judge appropriately and come up with a scheme. I would be happy to write to point out all the areas and explain more about how this works, but the point is that this needs to be understood by those who will do the assessments and the communication of the results of that has to be in the right language for those who need to understand them. As the noble Baroness knows as well as I do, it is the nature of pensions that the challenge is that marketing simple language does not map neatly onto precise legal language. I hope that at least explains what we are trying to do on that.

[Baroness Altmann (Non-Afl)]

My worry is we have a term “fully delivering” in this legislation. It does not seem to me that very many schemes are likely to be fully delivering, even in a light green capacity. Therefore, I think we are already sowing the seeds of confusion if we go along this route. That is all.

[Baroness Sherlock (Lab)]

I am going to explain a little bit about the consequences because the thing that matters most is the consequences. Amber schemes may be required to close to new employers. Red schemes must close to new employers. I am just getting that down for the record, which suggests that I probably did not say that a moment ago. Just to be really clear, amber schemes may close to new employers; red schemes must close to new employers. Much nodding, I hope, from behind me. Great sighs of relief all round. Excellent.

Let me come on to the consequences of this. On Amendments 64 and 65 from the noble Baroness, Lady Altmann, we think that making reporting less comprehensive, even for schemes with intermediate ratings, could reduce the early warning signals on which regulators will rely to protect savers. I fully understand her desire to make this reporting proportionate. The current framework is designed to strike a balance. Powers are designed to enable the Government to ensure that trustees keep sponsor employers informed and that any issues are addressed promptly via the improvement plan without putting unnecessary burden on schemes. The noble Baroness may want to note this bit. The Secretary of State has discretion under Clause 16 on the consequences of an intermediate rating and could require different consequences to flow from different levels of intermediate rating. It is not the intention that a requirement to close the scheme to new employers would necessarily flow from all intermediate ratings. I think that is what she is shooting at, so I hope that helps to reassure her. That enables some flexibility around the consequences for pension schemes that have, for example, received an intermediate rating for fewer than five years, which is the space that she was shooting into just now.

Changing the powers as suggested risks missing the signs that a scheme may be heading into trouble. Early sight of any negative impact on a scheme’s performance and value really matters. I am sure that the Committee agrees that it is better to catch problems sooner rather than later and to put in a plan to remedy things, ensuring that schemes provide value and avoiding harm to members and greater costs in the long run.

The amendment suggests that schemes should face full reporting only if performance issues continue for five years or more, but five years is a long time for problems to go unchecked. I think members deserve better protection than that. We certainly would not want to see situations where savers are left in a poorly rated scheme for many years. That is why we propose to give schemes in the intermediate rating a period of up to two VFM assessment cycles to make the improvements needed to provide value to their savers.

I know that Amendments 60, 61 and 69 from the noble Baroness, Lady Stedman-Scott, are probing amendments that want to challenge and clarify the terms “reasonable period” and “relevant period”. The relevant period is the VFM period, or rather the annual reporting timescale for data collection assessment against VFM metrics, which we expect to run from January to December of the preceding calendar year. We expect to set that out in regulations following consultation. The reasonable period is a period during which the regulator would normally expect the scheme to deliver value for money. Due to the level of detail this will involve, this will all be outlined in regulations. We will, of course, formally consult on draft regulations, and I am more than happy to make sure that we engage with interested noble Lords during the consultation to provide an opportunity to feed thoughts into that. The finer proposals behind the VFM ratings, such as the conditions under which each rating will apply and when they should be used, are outlined in the joint consultation which is currently open and will be provided in full in regulations.

Turning to Clause 18, Amendment 69 seeks to understand the rationale for the maximum penalty levels for non-compliance set out in subsection (5). As pension schemes grow in size, it is vital that the fines we impose on schemes carry real financial weight. This ensures that compliance and enforcement remain effective, safeguard members’ interests and, of course, maintain confidence in the system. These figures represent a significant deterrent against non-compliance while not being overly excessive in the current market landscape. We have worked closely with regulatory bodies and taken care to ensure the penalties align with other powers taken in Part 2 of this Bill. We believe the figures are proportionate to both the current and future scale of schemes.

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[Baroness Sherlock (Lab)]

I am absolutely not going to answer that. If there is answer which is known to me, then I will be happy to share it with her, but it certainly not known to me.

[Baroness Altmann (Non-Afl)]

My Lords, I thank all noble Lords who have spoken and the Minister for her responses and patience with the comments made, especially by me. I have ongoing reservations but will obviously look carefully at the consultation. I would be grateful if we might have a further discussion before Report, because this is a crucial area, for employers and members. Perhaps we can bring this back in some form to iron out this huge intermediate range that could have a wide variety of implications that might be quite costly—I know how much these reports cost when you try and commission them—to schemes that may be having a bad performance patch for a year or two, but for understandable reasons. I thank the Minister and I beg leave to withdraw the amendment.

Amendment 58 withdrawn.

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[Lord Palmer of Childs Hill (LD)]

My Lords, this is an appropriate time to stand, because Amendment 83 is signed by the noble Lord, Lord Vaux, and by me. In the absence of the noble Lord, Lord Vaux, today, and having discussed the matter with him, I speak on my behalf and his to Amendment 83. As has been stated, it is intended to deal with the risk that consolidating small pots might worsen the problem of lost or forgotten pensions.

We are all aware of the problem of people losing track of small pension pots: a problem that has increased in recent years as people tend to move between jobs more frequently, and may therefore end up with several small pensions, perhaps from many years ago. Chapter 2 of the Bill allows the Government to make regulations to consolidate small, dormant pension pots. I, and indeed the noble Lord, Lord Vaux, and the noble Baroness, Lady Coffey, support this as we believe that providing additional scale to small, dormant pots should enable greater efficiencies and a reduction in costs.

However, a possible unintended consequence could be to make it more difficult for a person to trace a forgotten pot if it is moved to a consolidator without their knowledge: for example, if any notice is sent to an old address. The introduction of a pension dashboard, as enabled by the Pension Schemes Act 2021, was intended to make it easier for people to identify pensions that they have lost track of or even forgotten. This has been somewhat delayed, but progress does, at last, seem to be happening. The connection deadline is October 2026, so hopefully people may start to be able to access the dashboard in the not-too-distant future.

In order to avoid making the problem of lost pensions worse, Amendment 83, in the name of the noble Lord, Lord Vaux, and myself, simply says that the regulations that would mandate the consolidation of a dormant, small pot could not be made until the dashboard had been available for at least three months. The three months is designed to give a bit of time to ensure that it is actually working and that any teething issues have been resolved. I think it prudent to ensure that we do not cause unintended consequences from what is otherwise a good policy, I hope the Minister will be sympathetic to the intention of the course outlined in Amendment 83.

[Baroness Altmann (Non-Afl)]

My Lords, I support the amendments in this group, particularly Amendment 83, which has received wide support. I think it is really important, as is the idea of lengthening the 12-month period for so-called dormant pots, and Amendment 81 from the noble Baroness, Lady Bowles, where, for example, a woman may take time off to care for children or other loved ones and intends to return, but her pension will have been moved before she gets back. Those are distinct possibilities under this scheme. We are talking about moving somebody’s savings—or investments; I am doing it myself—from one place to another, just because they have not done anything with their pension for a while. The pension fund is not meant to have anything done with it when you are younger; it is meant to just sit there and stay there.

Of course, the big problem that needs to be solved here is the costs to providers of administering all these very small pots. But the aim of the dashboard itself is meant to be to help people move their pots from one place to another. It seems to me that this particular section of the legislation is trying to deal with something that is meant to be dealt with by a different policy area. The consolidators, of course, will be attractive to providers to establish, and the money saving from not administering these small pots will also be attractive to the providers. But have the Government given any consideration to the idea of making, for example, NEST the consolidator? That is a Government-sponsored scheme. It has obviously had to have reasonable charges. Any transfers do not incur an upfront fee. That would run less of a risk of having consolidators that end up perhaps not performing well.

[Baroness Coffey (Con)]

I understand what the noble Baroness is saying about NEST. It is a brilliant organisation. But my recollection is that it does charge 2% on the transfer of assets into it. That is not something we should be particularly encouraging.

[Baroness Altmann (Non-Afl)]

No. I was just saying, if you transfer assets in, that 2% charge does not apply and will not apply. Otherwise, obviously, it would be uneconomic. But I understand that the idea of NEST is that the transfer in of a pension from another provider does not incur the upfront charge of, I think, 1.8%. So that would not be an issue. It is just a 0.3% flat fee. I hope the Minister will be able to respond on that element. There is a residual risk to government in moving somebody’s long-term assets from one provider to another if the other provider eventually proves not to deliver good value.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords who have spoken on this. I will start by addressing the proposed amendments to Clause 22. I will say at the start that we regard this clause as being a vital measure to tackle the structural inefficiency caused by the ever-greater proliferation of small, dormant pension pots in the auto-enrolment market. It empowers the Secretary of State to make regulations to consolidate these pots into authorised consolidator schemes, improving outcomes for pension savers and reducing unnecessary costs to providers.

Amendments 79 and 80, from the noble Viscount, Lord Younger, seek to extend the dormancy period for a pot to be considered eligible for automatic consolidation from 12 months to 18 months. We concluded that the 12-month period strikes the right balance between legislative clarity and administrative practicality. The timeframe was consulted on extensively with industry in 2023, under the previous Government. I suspect the noble Viscount was the Minister, so he may recall this well. Twelve months represents a supported middle ground: long enough to ensure that pots are genuinely dormant but not so long as to delay consolidation unnecessarily. Extending the period to 18 months would create inefficiencies and higher costs for both savers and providers, and slow progress towards consolidation.

Amendment 80 proposes removing subsection (3)(b) from Clause 22 as a means of probing the circumstances in which a pot should not be treated as dormant. This was picked up, slightly glancingly, by the noble Baroness, Lady Coffey, as well. I make it clear that the scope of the policy is deliberately aimed at unengaged savers in default funds, where fragmentation poses the greatest risk to value for money and retirement outcomes. It is not designed to consolidate pots from those who are engaged and have made active decisions about their pension.

The exceptions provision is designed for cases where investment choices have been made that are driven by factors other than active financial management, such as religious belief. For example, following the consultation in 2023, sharia-compliant funds emerged as a suitable case for this. The aim was to ensure that savers in those funds remain eligible for consolidation and the benefits it brings, because, even though they have made a choice to be in a sharia-compliant fund, Clause 22 would allow schemes to differentiate that choice from other forms of pension engagement which might indicate that the member would not want their pot to be moved. I make it clear that anyone brought into scope under these exceptions will retain the option to opt out, so member autonomy is preserved, and consolidated schemes would need to offer a sharia-compliant option for consolidation to ensure that members’ wishes continued to be recognised and respected.

Although the power allows for wider exceptions in future, proportionality is key. For example, it would not be appropriate to consolidate members in ethical funds into a default fund; nor is it feasible for consolidators to cater to every ethical fund in the market. However, this flexibility would ensure that the framework could evolve if another religious or other fund reached sufficient scale. It balances the inclusion of disengaged savers with the need to limit complexity, cost and operational burden for authorised consolidator schemes; that is crucial to ensure that the automatic consolidation model remains viable.

Again, to be clear, this is not about bringing into scope people who do not want to be consolidated; it is about ensuring that those who are likely disengaged on pension saving are not automatically excluded from consolidation and its benefits simply because of their religious beliefs. For clarity, I note that, similarly, this clause does not allow or compel a pension scheme to move someone who has not selected a sharia-compliant fund into a sharia-compliant fund.

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With all of those questions and points, I look forward to both the debate and the Minister’s response. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, the noble Viscount, Lord Younger, and the noble Baroness, Lady Stedman-Scott, have done the Committee a great service. I wish to flag up that these amendments are really important for us to consider before we come back on Report.

The noble Viscount’s comments on Clause 31 potentially being dangerous are right on the mark. Many of the wide powers suggested here should say “must” rather than “may”, but they say only “may”. We are talking about moving somebody’s money, potentially without their knowledge; yes, we will have to write to them, but we know very well that many schemes have dormant pots because either they have lost track of the members or the members have lost track of the scheme. There is a danger here in public policy terms.

In connection with this policy area, the Minister mentioned at the beginning of the debate that there are risks to members and providers. I understand the risks to providers of having small pots, as well as the costs of administering them being higher than the fees they receive from managing them, but what is the risk to the member of having their money stay where it is until they come along and ask for it to be moved? There are risks in leaving as well as in staying if they are moved into a scheme that is less suitable for them, performs less well or has a different charging structure.

What if the member is away for a couple of years on a secondment, for example? What kind of protections will there be? Pensions are typically designed to be left alone. Having default funds, making regular contributions and not being able to take any of your money back until you are 55, for example, are part of the whole structure—indeed, the intention—of private pensions. Is there any intention to ensure, for example, that the member and the dashboard have been operational? I know the Minister said—we talked about this in the previous group—that there might be conflicts between the intention of the small pots legislation and the timing of the requirements relative to the timing of the dashboard, but if a member is moved and it is discovered that they are suffering a loss as a result of the move because their scheme was better or because they have come back to that scheme after a temporary absence, is there any consideration of who might be responsible for any compensation due for money that was moved when the member might well have known nothing about it?

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[Baroness Noakes (Con)]

My Lords, Amendments 134, 137 and 138 in this group are in my name. I thank my noble friend Lady Neville-Rolfe for adding her name to Amendment 137; unfortunately, she needs to be in the Chamber imminently so was unable to stay in the Committee.

I support the other amendments in this group. I am very sorry that the noble Lord, Lord Davies of Brixton, is not in his place; I hope he has not been silenced by his Front Bench. On our first day in Committee, I found myself in near agreement with the noble Lord—that is quite unusual for me—when he said that he was not totally convinced by the Government’s line that big is necessarily beautiful. He said that he was open to that debate, but my position is less nuanced: I am absolutely certain that big is not always beautiful. There are plenty of examples of big being beautiful. The US tech industry is probably a good example of that, at least from a shareholder perspective. On the other hand, there are many examples of where being big is not good. Big can be bureaucratic and low-performing. It can be hampered by groupthink, unresponsive to customer needs and hostile to innovation and competition; we can all name organisations in that category, I am sure.

I buy, as a general proposition, that an investment management scale has many attractions, including efficiency of overhead costs and the ability to diversify into a wider range of asset classes in order to achieve superior investment returns, but I have absolutely no idea whether £25 billion is the right threshold for forcing people into certain kinds of investment. I am absolutely certain that we should not dogmatically force all organisations towards that asset threshold in order to leave the door wide open for new entrants and players who can demonstrate good returns for savers and innovation.

My Amendment 137 would widen the qualification for the new entrant pathway relief so that it can include schemes that will produce above-average performance. If smaller, more agile providers can provide equal or better returns than the big boys, why should they be excluded? If a provider has a winning formula, why must it also demonstrate that it will achieve scale? What benefit is there for pension savers in restricting the market in this way? Noble Lords should also ask themselves why the big providers in the market, in their emails to us, have generally not challenged the scale proposals. The answer is very simple: this Bill acts as a barrier to entry, and large players love barriers to entry. We must not let them get away with it.

Amendment 134 probes why subsection (2)(a) of new Section 28F, which is to be inserted into the Pensions Act 2008 by Clause 40, restricts new entrant pathway relief for schemes that do not have any members. The main scale requirement is to have assets of £25 billion under management by 2030. The transitional pathway is for existing smaller players, provided they have assets of £10 billion under management by 2030 and have a credible plan for meeting £25 billion by 2035. The new entrant pathway relief is available only to completely new schemes—that is, those with new members—and only if they have strong potential to reach £25 billion. This leaves a gap in which new players that have been set up very recently, or will emerge between now and when this bit of the Bill comes into force, will not qualify for new entrant pathway relief and may also not qualify for transitional pathway relief. They may well have strong potential to pass the new entrant test—that is, if they were allowed to because they had no members—but they would not satisfy the regulator that they have a credible plan for transitional pathway eligibility.

Growing a business is not a linear matter. At various points, additional capital will generally be needed, but the Bill will make it difficult to raise funds because of the significant uncertainty about whether a pension provider would satisfy the transitional pathway test; and failing that test would mean that the business could not carry on and would thus be very risky for investors or lenders. Do the Government really intend to drive out of the market new providers that have only recently started or will start between now and the operation of the scale provisions? I am completely mystified by this.

My Amendment 134 deals with the substance of Amendment 136 in the name of the noble Baroness, Lady Altmann, which she has degrouped into a separate group and which will not come up until later. I think they deal with the same issue, but I will wait to see what she has to say on her amendment in due course.

Finally, my Amendment 138 seeks to delete subsection (4) of new Section 28F in order to probe why the Government need a regulation-making power to define “strong potential to grow” and “innovative product design”. The Government are probably the last place I would go to find out about growth or innovation. The regulators that will implement the new entrant pathway are, or ought to be, closer to their markets and therefore will understand in practice how to interpret the terms for the providers they regulate. Why can the Government not simply leave it to them? What value can the Government possibly add to understanding how these terms should be implemented in practice? I look forward to the Minister trying to convince me that the Government know about growth and innovation.

[Baroness Altmann (Non-Afl)]

My Lords, as the noble Baroness, Lady Noakes, said, my Amendment 136 is in a later group and was degrouped deliberately to explore the issues that she has just raised. If the Committee is comfortable for me to deal with Amendment 136 here today, I do not mind doing so, but that would potentially cause a problem for the Ministers or other Members of the Committee. May I do so? Alternatively, I could speak to it later; whatever the Committee decides is fine with me.

[Noble Lords]

The noble Baroness should speak now.

[Baroness Sherlock (Lab)]

The noble Baroness may do whichever she prefers.

[Baroness Altmann (Non-Afl)]

Okay. I have not fully prepared for it, but I am happy to do that; it will save us time later on.

The concerns expressed in Amendment 136 and the amendments that the noble Viscount, Lord Younger, mentioned—some of which I added my name to—revolve around schemes that are already established. There is uncertainty about whether the schemes that are currently below the level will be permitted as new entrants or be able to access new business.

I am already being told that advisers are opting to advise employers only to join schemes that are already almost at or above the current £25 billion default fund threshold, which is creating market disruption and preventing schemes currently below the scale threshold from growing, as they cannot access the amount of new business they would otherwise have anticipated. Therefore, the risk is that these schemes will close prematurely but could offer good value to members who would otherwise be able to benefit from a scheme that is potentially on track to enter the transition pathway but will not quite be there.

I will offer the Committee an example. One of the recent new entrants, Penfold, which was established in 2022, will not have the time that other new entrants, established a few years before it, will have—such as Smart Pension, which may well be on track to reach the goal by 2030. Penfold faces a cliff edge because it launched only in 2022, has already surpassed the £1 billion asset-under-management mark and could well quadruple business over the coming few years, which would be an extremely positive achievement, but it will not qualify it not to have to close.

There are other new potential entrants that were planning to enter the market in the next three or four years, but they cannot now do so unless they are able to enter the pathway. That is why Amendment 136 suggests that schemes that have been established for, let us say, less than 10 years—again, that is a probing figure—would be able to enter either the transition or new entrant pathway if there is a demonstrable case that they will be able to grow. However, I am completely aligned with the noble Baroness, Lady Noakes, that big is not necessarily best and that there are risks of an oligopoly developing in this connection, which I hope the Government would not have intended. I am convinced that that would not necessarily be in the interests of the market, innovation or pension savers more generally.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords for introducing their amendments. As this is the first time we are going to debate scale, let me first set out why we think scale matters. I hope to persuade the noble Baroness, Lady Noakes, with my arguments, but she is shaking her head at me already, so my optimism levels are quite low given that I am on sentence two—I do not think I am in with much of a chance.

Scale is central to the Bill. It adds momentum to existing consolidation activity in the workplace pensions sector and will enable better outcomes for members, as well as supporting delivery of other Bill measures. These scale measures will help to deliver lower investment fees, increased returns and access to diversified investments, as well as better governance and expertise in running schemes. All these things will help to deliver better outcomes for the millions of members who are saving into master trusts and group personal pension plans.

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[Baroness Sherlock (Lab)]

I feel that we will have to agree to disagree on this point. The Government are not obsessed with scale; the Government believe that the evidence points to scale producing benefits for savers. We find the evidence on that compelling. I understand the noble Baroness’s argument, but the benefits of scale are clear. They will enable access to investment capability and produce the opportunity to improve overall saver outcomes for the longer term.

I cannot remember whether it was this amendment or another one that suggested that a scheme that did well on value for money should be able to avoid the scale requirements; the noble Baroness, Lady Altmann, is nodding to me that it was her amendment. The obvious problem with that is that schemes’ VFM ratings are subject to annual assessment and, therefore, to change. It is therefore not practical to exempt schemes from scale on the benefit of that rating alone.

We are absolutely committed to the belief that scale matters. It is not just that we think big is beautiful—“big is beautiful” has always been a phrase for which I have affection—but I accept that it is not just about scale. It is not so for us, either. We need the other parts of the Bill and the Government’s project as well. We need value for money; we need to make sure that schemes have good investment capability and good governance; and we need to make sure that all parts of the Bill work together. This vision has been set out; it emerged after the pension investment review. The Government have set it out very clearly, and we believe that it is good.

[Baroness Altmann (Non-Afl)]

The remarks that the Minister is making are of concern to me—and, I think, to other Members of the Committee—because they are just what the big providers would say. They have the power. I have seen this in the pensions landscape for years: the big players have this incredible advantage and lobbying power and the power to get their way on legislation somehow. That is not always bad for members; I am not saying there is something terribly wrong with the big providers. What I am saying, though—this is an important point—is that there is a real need for innovation, new thinking and new ideas in this space. Huge sums of money are under discussion here. If we are bowing to the existing incumbents and not making provision even for those small businesses that are currently established but will not necessarily reach that scale in time, I am not convinced that we are improving the market overall. I would be grateful for a thought on that, or for the Minister writing to me.

[Baroness Sherlock (Lab)]

I am going to push back on the premise of the noble Baroness’s comments. I understand that she feels very strongly about this, but the Government are not doing this to benefit large pension schemes. The Government are doing this to benefit savers. The Government established an independent pension investment review, looked carefully at the evidence and reached the view that the best thing for savers is, via these measures, to encourage and increase the consolidation that is already happening in the marketplace. It is our view that that, combined with the other measures in the Bill, will drive a better market for savers and better returns for savers in the long term. That is why we are doing it—not because we want to support any particular players in the market; that is not what we are about.

The noble Baroness mentioned her Amendment 136; I want to respond to that as well as to the noble Baroness, Lady Noakes. There is an issue around whether schemes already in the market have enough time to make scale. From when the Bill was introduced in 2025, schemes have up to 10 years, if we include the transition pathway, to reach scale. We project that schemes with less than £10 billion in assets under management today could still reach the threshold based simply on historical growth rates. For example, a £5 billion fund today, growing at 20% a year, broadly in line with recent growth in the DC market, could reach £25 billion within 10 years—and that does not take account of the impact of consolidation activity, which we expect to see within the single employer market as a result of reforms brought forward in the Bill, such as VFM, which we expect to lead to poorly performing schemes exiting the market.

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[Baroness Altmann (Non-Afl)]

Is there a reason why the Government will not even consider allowing some transitional entry for schemes that are already established, such as the one I mentioned, which may or may not reach that number? This is not a magic number—£10 billion or £25 billion are not magic numbers—but these are businesses that are already established. It will put people off entering the market if suddenly, with no warning, a company that started in 2022 is under pressure. Let us say that there are bad markets or that it takes longer; as I was saying, at the moment, employers are not going to give these companies new business. If the Government could look at some minimum period of establishment that could get new entrants into the 2010 transition, that would be good.

[Baroness Sherlock (Lab)]

The important thing here is clarity. The noble Baroness mentioned a single scheme. I am not going to comment on individual schemes, for reasons she will appreciate—she would not expect me to do so, I know—but we have to set some clear boundaries. The boundary has to be somewhere. As I said, we have actually gone for the bottom end of what was consulted on. We have created a transition pathway precisely to give schemes the opportunity to grow; they need to be able to persuade us that they have a credible path to do that.

In the case that the noble Baroness mentioned, if there were some particular market conditions that caused problems across a sector, she will be aware that in the Bill there is something called a protected period. There are powers in Sections 20 and 26 of the Pensions Act 2008 that give regulators the ability to delay temporarily the impact of the scale measures. That is to ensure that the consequence of a scheme failing to meet the scale requirement—having to cease accepting any further contributions—is planned and managed. There is a range of reasons why that might happen. It might be about an individual scheme that has been approved as having scale but has failed to meet the threshold or it might be a market crash that affects all schemes. There is flexibility there for the Government.

However, the principle is that we have to set some boundaries around that. The Government have reviewed the evidence carefully, and we have concluded that the point that we have chosen is appropriate. We have created a transition pathway in order to do that, and we have created new entrant pathways in order to accommodate those situations. We believe that that will protect members’ interests.

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[Lord Vaux of Harrowden (CB)]

My Lords, before I start, I apologise to the Grand Committee for failing to be here to speak a previous amendment. It was unavoidable, unfortunately. I am very grateful to the noble Lord, Lord Palmer, for stepping into the breach. I have had an exciting afternoon moving from R&R to pension schemes. I apologise that I am afraid I am going to be in the same position next week, so it will not be me speaking to my Amendment 119. Anyway, there we go.

I speak in support of Amendments 111, 161 and 162, tabled by the noble Lord, Lord Sharkey, to which I have added my name. To be honest, I support all the amendments in this group that seek to remove the asset allocation mandation powers, which is probably the most controversial part of the Bill. The trustees or managers of pension schemes have an obligation to act in the best interests of scheme members. That is their fiduciary duty. It is not their job to carry out government policy and they should not be forced to act in a way that they may believe is not in the best interests of scheme members. That is the clear implication of mandation. If the assets that the Government wish to mandate are so suitable or attractive for the relevant scheme, the trustees would presumably already be investing in them. If mandation is required to force trustees to invest in such assets, it implies that they have decided that they are not suitable assets for the scheme. That drives a coach and horses through the whole fiduciary principle. As we will come to in a later group, personally I would feel very uncomfortable about taking up a trustee role in such circumstances.

It begs a range of questions. Who will be liable if the mandated assets perform poorly? The Bill is silent on this. Why should scheme members take a hit because of government policy? Are the trustees liable for any below-par performance? Why do the Government feel they know better than professional managers and trustees? I do not see any evidence at all that the Government are a better manager of investments. Who will decide on the asset allocation, and based on what criteria? There is nothing in Bill that sets out the purpose or criteria for the asset allocation: just some examples, including private equity, which the noble Lord, Lord Sharkey, mentioned, which will be looked at in a different group. All the Bill says specifically is that the allocation may not include securities listed on a recognised exchange. How will the impact be measured and reported? The Bill does require the Secretary of State to publish a report setting out the expected impacts on scheme members and UK economic growth, but there are no reporting requirements on the actual outcomes.

Surely it would be better to try to understand why pension schemes are not currently investing in these so-called productive assets. What are the barriers to them doing so? That is not a rhetorical question; I would very much like to hear why the Minister thinks this has not been happening. What is, or has been, stopping the pension schemes investing in those assets they believe are so desirable? Surely, the better answer must be to try to remove those barriers, to make the assets more investable, rather than mandating, perhaps by refining regulation or adjusting tax—Gordon Brown’s dividend tax raid has, I am sure, quite a lot to do with this—or taking whatever other actions may be required to remove or reduce the identified barriers. Mandation is, frankly, the lazy option. We should identify and deal with the root causes if we want a sustainable solution.

The Government say they do not intend to use the mandation powers and, in some ways, that is worse than using them. The powers are there as a stick in the background, to force trustees to invest as they want, but without giving the trustees any of the protections that might exist if they could at least show they were acting as required by law. In any case, as a matter of principle, Governments should never take powers that they have no intention of using. This mandation power drives a coach and horses through the fundamental fiduciary duties of trustees. The Government say they do not intend to use it; it should be removed.

[Baroness Altmann (Non-Afl)]

My Lords, I support all the amendments in this group. I echo the words of noble colleagues in the Committee about the dangers of the Government mandating any particular asset allocation, especially the concerns about mandating what is the highest risk and the highest cost end of the equity spectrum at a time when we are aware that pension schemes have probably been too risk-averse and are trying to row back from that.

What is interesting, in the context of the remarks made by the noble Lord, Lord Vaux, is that I was instrumental in setting up the Myners review in 1999, which reported in 2001, under the then Labour Administration. As Chancellor, Gordon Brown’s particular concern was about why pension funds do not invest much in private equity or venture capital. That was the remit of the review. The conclusions it reached were that we needed to remove the investment barriers, to change legislation, to encourage more asset diversification, to have more transparency and to address the short-term thinking driven by actuarial standards—at the time, it was the minimum funding requirement, which was far weaker than the regime established under the Pensions Regulator in 2004.

So this is not a new issue, but there was no consideration at that time of forcing pension schemes to invest in just this one asset class. The barriers still exist. In an environment where pension schemes have been encouraged, for many years, to think that the right way forward is to invest by reducing or controlling risk and to look for low cost, it is clear that the private equity situation would not fit with those categories. Therefore, I urge the Government to think again about mandating this one area of the investment market, when there are so many other areas that a diversified portfolio could benefit from, leaving the field open for the trustees to decide which area is best for their scheme.

I am particularly concerned that, as has been said in relation to previous groups, private equity and venture capital have had a really good run. We may be driving pension schemes to buy this particular asset class at a time when we know that private equity funds are trying to set up continuation vehicles—or continuation of continuation vehicles—because they cannot sell the underlying investments at reasonable or profitable prices and are desperately looking for pools of assets to support those investments, made some time ago, which would not necessarily be of benefit to members in the long run.

[Baroness Noakes (Con)]

My Lords, I support all the amendments in this group. When I came to draft my own amendments, I discovered that this area of mandation was a rather crowded marketplace, so I decided not to enter it. I will not speak at length on the subject, but I endorse everything that has been said so far and wish to commit my almost undying belief that mandation must not remain in the Bill.

Pension Schemes Bill

Baroness Altmann Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

Moved by

[Baroness Altmann]

26: Clause 9, page 10, line 39, at end insert—
“(7A) Regulations may provide that payment of surplus to the employer may only be made to the employer on the condition that—(a) enhancement to member benefits particularly relating to provision of pre-1997 inflation increases, or (b) one-off payment to reflect lack thereofis simultaneously provided by the employer.”Member’s explanatory statement
This amendment would allow regulations to require employers to enhance member benefits (including provision of pre-1997 inflation protection or offer a one-off payment) if they want to extract surplus payments from the scheme.

[Baroness Altmann (Non-Afl)]

My Lords, in moving Amendment 26, I shall speak to my similar Amendment 39, to both of which I am grateful for the noble Baroness, Lady Bowles, adding her name. To follow on from the words of the noble Lord, Lord Davies, I am introducing these amendments as a marker, because I genuinely believe that it is important, if we are talking about distributing assets—I agree with the noble Lord on that terminology—to employers, that members should participate in the benefits that the excess funding has delivered.

My particular concern revolves around protecting members’ pensions against rises in the cost of living over many years. To go back to the Goode committee report of 1993, which followed the Maxwell scandal, that was the first talk of protecting private pensions in a similar way to state pensions, which would automatically be expected to have some kind of protection against either rising living standards or the rising cost of living. The protections put in place for pension schemes, however, were watered down to some degree and not introduced until 1997, so there are many people now retired who have a significant chunk of their private pension without any inflation protection at all. As inflation has become a much greater concern in recent years particularly, I hope we will be able to agree that attention should be paid to looking after what will be the most elderly of the pensioner population—those with pension accruals since before 1997. If there is to be an enhancement of member benefits, I would argue that the first consideration should be helping to rectify and remediate the shortfalls that many of these people face when trying to afford to live in 21st-century Britain.

I have included in the amendment the option of a one-off payment instead of enhancing the actual pension. In Amendment 26, it is a “may” rather than a “must”. The aim would be to make sure that some money is received by the member who has lost out, while bearing in mind that immediately lifting the pension from the pre-1997 accrual—which could be half or more of the person’s pension—up to a new level and then requiring the employer scheme to continue enhancing from that position, could add a significant extra strain on the scheme in the future if funding deteriorates.

However, we know that currently, in a scheme considering distributing surpluses, there is much more than is required on the current expectations, and for the likely nearer-term future, to meet the liabilities that will arise in, say, the next five to 10 years. Thereafter, one does not know; many of the members affected will not, sadly, be with us in that timeframe. But if actuaries are concerned about a permanent rise in the base level of pensions that must be paid by the scheme and then ongoingly increased over the very long term, payment of a one-off surplus amount to reflect the lack of inflation linking that the member has suffered over past years would, in my view, be easier to absorb but would also significantly enhance the well-being of the members themselves.

These amendments do similar things, although one is more definite than the other. I hope the Government and Minister can confirm that there is sympathy with this idea. Obviously, in a wider context, we will talk about enhancing members’ benefits more generally—I will come back to that on the next group—but, on that basis of the need for inflation protection in particular, I beg to move.

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I am not suggesting something specific for them in the Bill. My noble friend Lady Noakes in her Amendment 42 has, as always, a classically pure position, which is that it is not for any of us to tell anyone how their money should be spent. But I would be grateful if the Minister, in her winding up, could clarify the position of these people and, if there is to be any consideration of their interests, where that should fall. They are not members of the scheme, so I assume that it would not be a role of the trustees to think of the interests of people who are not members of the scheme; they are also employees of the same company.

[Baroness Altmann (Non-Afl)]

May I ask my noble friend a couple of questions? I totally accept the rationale for the change happening only post-1997, but does he accept that because we now have surpluses and there is this gap, a one-off payment would be a potential way of recognising the problem faced by the pensioners without changing the long-term funding position of the scheme?

[Lord Willetts (Con)]

I am not against such payments. As I say, I think this is highly discretionary—there would be a negotiation. I absolutely understand that argument, and we have all received letters from the people suffering financial distress in some circumstances because of not having pre-1997 inflation protection. But I just want to bring in another consideration and try to find out where it would fit in when the employers or the trustees are reaching a decision.

The Government have a policy, or rather we now have on a cross-party basis, a successful policy of auto-enrolment. The levels of pension contribution to the next generation, who are not in these schemes, are way lower than the pension contributions that have generated these large surpluses. It would be great if we could see increasing contributions. Where might a decision fall if an employer says, “We have now turned our scheme into surplus because of the work of the company, and one thing we could do with the money is to put some enhanced contribution into the auto-enrolment pensions of the next range of employees, whose pension rights at the moment will be far lower than those of the people covered in this debate”?

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[Baroness Sherlock (Lab)]

Absolutely. There may be—I am not saying that there are—risks that need to be explored around the use of sole corporate trustees. The consultation will look at that, and at generally improving the quality and standards of administration to improve service quality and so on. That runs until 6 March. My noble friend may wish to contribute to it; I commend it to him.

On safeguards, trustees will need to notify the regulator when they exercise the power to pay surplus. As part of that notification, we anticipate the provision to be made in regulations for trustees to explain how, if at all, members have benefited because that will help the regulator monitor how the new powers are being used.

In response to the noble Viscount, Lord Thurso, the Pensions Regulator has already set out that trustees should consider the situation of those members who would benefit from a discretionary increase and whether the scheme has a history of making such increases. Following this legislation—and as I may have said in the previous group—TPR will publish further guidance for trustees and advisers, noting factors to consider when releasing surplus and ways in which trustees can ensure members and employers can benefit.

On that broader point, we feel that it must be a negotiation, because increasing indexation would increase employer liabilities, so it is right that it ends up being a negotiation. All the safeguards are already there. My noble friend Lord Davies asked what advice trustees should take. We expect trustees to take appropriate professional advice when evaluating a potential surplus release and making a payment. As well as actuarial advice, this should also include legal advice and covenant advice to enable trustees to discharge their duties properly. Let us not forget that a strong covenant is the best guarantee a scheme has; not undermining the covenant, or the employer that stands behind it, is crucial to this.

Amendment 44 would require the Secretary of State to publish a report on whether trustees’ duties should be changed to enable trustees to pay discretionary increases on pre-1997 accrued rights. It is not clear to us why this would be needed as the scope of trustee fiduciary duties do not prevent trustees paying discretionary increases, where scheme rules allow them to do so. We expect trustees to consult their professional advisers, including lawyers, on their duties if they are not sure.

Amendment 41 from the noble Lord, Lord Palmer, highlights the importance of ensuring that members have access to good quality pensions advice. Although we understand the intention, we remain clear that we will not be mandating the use of surplus released from schemes. My noble friend Lord Davies made the good point that, in some ways, the greatest need for support is on the DC side rather than the DB side. DB scheme members expect to receive a lifelong retirement income, which trustees must regularly and clearly communicate to members. This is typically based on salary and length of service, offering strong financial security. For DB, the benefits they will receive on retirement are generally known.

The Government recognise the importance of robust guidance, however, and we already ensure that everyone has access to free, impartial pensions guidance through the Money and Pensions Service, helping people to make informed financial decisions at the right time. The MoneyHelper service offers broad and flexible pensions guidance that supports people throughout their financial journey.

A couple of other questions were asked, including what employers will use the surplus for. The Pensions Regulator published a survey last year, Defined benefit trust-based pension schemes research. In a sample of interviews, it found around 8% of schemes with a funding surplus reported having released a surplus in the last year. That equates to nine schemes. Of those nine, seven schemes used the surplus to enhance member benefits. One used it to provide a contribution holiday for future DB accrual and one to make a payment to a DC section established in the same trust. None of the nine schemes stated that the surplus was released to the employer.

In answer to the noble Lord, Lord Willetts, and my noble friend Lord Davies, it was always the case that it depends on the scheme rules. I want to make sure I get this right. I had a note somewhere about it, but I am having to wing it now so I will inevitably end up writing and correcting it. If there is a DB and a DC section in the same trust, it could be possible, depending on the scheme rules, for trustees to make a decision to release funds from one to the other. But trustees may not be able to agree to that; it would obviously depend on the circumstances. However, as I understand it, there is nothing to stop an employer releasing funds—surplus released from a DB scheme back to an employer. The employer could then choose to put that money in, for example, a DC scheme. I understand the tax treatment would be such that the tax payable on one can be offset as a business expense on the other, making it a tax neutral proposal. In any case, as noble Lords may have noted, the tax treatment of surplus rate has dropped from 35% to 25%. A decision has been made to make that drop down. If by winging it I have got that wrong, I will clarify that when I write the inevitable letter of correction.

My noble friend Lord Davies asked about tax treatment. I will read this out, as it is from the Treasury, and I will be killed if I get it wrong. Amendments to tax law are required to ensure these payments—one-off payments—qualify as authorised member payments and are taxed as intended. The necessary changes to tax legislation will have effect from 6 April 2027. Changes to tax legislation are implemented through finance Bills and statutory instruments made under finance Acts. There will be consequential changes to pensions legislation where necessary, which will be dealt with through regulations. I hope that satisfies my noble friend. If it does not, I will write to him at a later point.

I hope I have covered all the questions. I am really grateful for that contribution; it is one of the ways in which this Committee illuminates these matters. But I hope, having heard that, the noble Baroness feels able to withdraw her amendment.

[Baroness Altmann (Non-Afl)]

I thank the Minister for her explanation. Although it is rather disappointing, I understand where she is coming from. I also thank all noble Lords who have participated in this group. There is a general feeling across the party divides—but obviously not unanimity—that lack of inflation protection is an issue. How or whether it is dealt with is the big question. I hope that maybe we can all meet and discuss this and how it could best be brought back on Report, if it is going to be brought back. With that, I beg leave to withdraw the amendment.

Amendment 26 withdrawn.

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Moved by

[Baroness Altmann]

33: Clause 10, page 11, line 22, at end insert—
“(ca) requiring the relevant actuary to confirm that work to comply with Technical Actuarial Standards issued by Financial Reporting Council on risk transfer processes has been completed,”Member’s explanatory statement
This amendment will ensure that prior to a surplus payment being made the trustees and sponsor have considered the impact on bulk transfer and run-on strategies currently required under TAS300V2.1 P5 other financial considerations for the scheme and the sponsor.

[Baroness Altmann (Non-Afl)]

My Lords, I hope that noble Lords will understand as I go through my remarks that I believe my Amendments 33 and 33A are incredibly important to the future of defined benefit schemes and the aims of the Bill.

Clause 10, which is about the restrictions of power to pay surplus, specifies in new subsection (2B)(c) a requirement for

“the relevant actuary to give a certificate”.

My Amendments 33 and 33A seek to add a strengthening of the trustee considerations of alternatives, rather than just having a certificate from the actuary. Amendment 33 would state that the actuary must confirm that the required technical actuarial standards work has been completed. Amendment 33A is about the trustees, who must ensure that they receive the report on the relative merits and consider alternative options such as buyout, superfunds or even a change of sponsor—I will come to that in a moment—before making payment of surplus.

Why are these amendments required? There are standards in place, but I have been careful not to specify a number for the standard. I am talking about today’s technical actuarial standard, TAS 300, but of course these standards change—there is already version 1 and version 2—so the amendments aim to see that the standards are applied, taken notice of and fed into the consideration before any irreversible changes are made to the scheme.

The trustees obviously have a fiduciary duty to consider members’ best long-term interests, but it seems that they do not already receive the depth of analysis required in many cases. The calculations done for the TAS 300 are not consistent; they are not applied consistently, according to the information that I have received from those in the market. There is no standard calculation methodology, but the DWP regulations that were changed recently require trustees to set funding and investment strategies. In my view, TAS 300, as it stands, should be part of that.

Before any surplus is paid out, or a decision to buy annuities, enter a superfund or change sponsor is made, a proper risk assessment should be carried out looking carefully at the downside risks of any potential move versus the upside potential. The actuarial calculations to quantify these, which are specified in the Financial Reporting Council’s technical standards, do not necessarily become applied, and there are regulatory gaps. The technical standards require actuaries to provide TAS 300 comparative advice, but it is not clear how, when or whether the trustees must consider them.

Consistent application of the assessment, in my view, could be significant in changing the standard mindsets about the best choice for the future of DB schemes. But, even today, there is no consistency, no agreed pro forma, no standard template and no detailed implementation guidance, even, from the Financial Reporting Council or other bodies. It has long been recognised that there is a lack of co-ordination and scrutiny of technical actuarial standards. The Kingman report in 2018, the Morris report and the Penrose report, dating back to 2000, all proposed urgent improvements but not much has changed.

There are seven regulators reporting to three government departments. The Pensions Regulator and the PPF report to the DWP; the FRC and the CMA to the Department for Business and Trade; the PRA and the FCA to the Treasury; and the Institute and Faculty of Actuaries is self-regulating. These regulators need to work together to address this massive pool of assets and national wealth. My amendments are an attempt to help this integration and move it along.

Currently, there is over £1 trillion-worth of assets in these schemes. Since 2018, £350 billion of the value in defined benefit schemes has been transferred to insurance companies, many of which are now offshore. The scrutiny and regulatory control over those massive amounts of money is being diluted, and that has not been recognised. It is still considered that the gold standard for the future of defined benefit schemes is annuities, whether a buy-in or a buy-out; that is meant to be the no-risk option. That is not necessarily the case any more. The Bank of England itself has stated that there are risks in terms of the offshore insurers.

This TAS 300 exercise could become part of a crucial element in deciding what the future of these schemes will be. Currently, the transfer of assets to insurance companies, which is so frequently being carried out—we are told that there may be another £500 billion in their sights from DB schemes in coming years—is handing the surplus assets of these schemes to the insurance companies. I argue that proper use of the TAS 300 exercise could help the surplus be used for national investments, for improving member benefits and for improving the resources of corporate UK.

It is estimated that the scheme assets which are currently being transferred to insurers are invested in such a low-risk manner that their aim—this is the Pensions Regulator’s recommended strategy for low dependency to attain a return of gilts plus a half or so—as soon as the insurer takes these assets in, is to re-risk, invest in other assets, and sell the gilt and aim for a return of gilts plus, say, one and a half. Every £100 billion of assets transferred to an insurance company is the equivalent of about £200 million of scheme assets that are not going to members or employers but are transferring offshore.

Stagecoach, which uses this TAS 300 exercise, actually managed to justify changing the sponsoring employer, while enhancing member benefits and paying extra out in surplus. That could be the way of the future if we get away from the current obsession, which states that the no-risk option is annuities and everything else is risky. This is a huge amount of money. These schemes have changed fundamentally. The outlook has changed fundamentally: we are no longer worried about deficits and employer covenants. We should be talking about using this national pool of wealth to boost Britain.

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[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Baroness, Lady Altmann, for setting out her amendments. I am also grateful to all noble Lords who have spoken. I must admit that I have learned more about actuaries in the past week than I ever knew hitherto, but it is a blessing.

Three different issues have come up. I would like to try to go through them before I come back to what I have to say on this group. In essence, the noble Baroness, Lady Altmann, has us looking at, first, actuaries: what is their role, what are the standards and how do they do the job? Secondly, what are the right endgame choices—that is, what is out there at the moment? Finally, what should be in the surplus extraction regime? We have ended up with all three issues, although the amendments only really deal with the last of those; they deal with the others by implication. Let me say a few words on each of them, then say why I do not think that they are the right way forward.

We have just finished hearing from the noble Lord, Lord Fuller. Obviously, we are talking about the position now. DB schemes are maturing and, as such, are now prioritising payments to members. Given this context, they are naturally more risk-averse, as they are now seeking funding to match their liabilities. Since the increases in interest rates over the past five years, scheme funding positions have—the noble Lord knows this all too well—improved significantly in line with their corresponding reductions and liabilities.

However, when setting an investment strategy, trustees must consider among other things the suitability of different asset classes to meet future liabilities, the risks involved in different types of investment and the possible returns that may be achieved. The 2024 funding code is scheme-specific and flexible. Even at significant maturity, schemes can still invest in a significant proportion of return-seeking assets, provided that the risk can be supported.

On actuaries, actuarial work is clearly an important part of the process. It helps set out the picture, as well as highlighting the risks, the assumptions and the available options, but it does not determine the outcome. My noble friend Lord Davies is absolutely right on this point. Decisions on how a scheme uses the funds are, and will remain, matters of trustee judgment. The role of the actuary is to support the judgment, not replace it. Trustees are the decision-makers, and they remain accountable for the choices that they make on behalf of their members.

Of course, in providing any certification, actuaries will continue to comply with the TAS standards set by the Financial Reporting Council. I am not going to get into the weeds of exactly how the standards work but, on the broader points made by the noble Baroness, Lady Altmann, we agree that the requirements and the regulations must work together. As my noble friend said, after the funding regime code was laid, the FRC consulted on revisions to TAS 300 covering developments; it has now published the revised TAS. These are complex decisions. Regulators need to work together. We will come back to this issue later on in the Bill, following an amendment from the noble Baroness, Lady Coffey.

In terms of the endgame choices, the independent Pensions Regulator has responsibility for making sure that employers and those running pension schemes comply with their legal duties. Obviously, the Government are aware of the recent transaction that resulted in Aberdeen Asset Management taking over responsibility for the Stagecoach scheme; we are monitoring market developments closely. Although we support innovation, we also need to ensure that members are protected. Following the introduction of TPR’s interim superfund regime and the measures in this Pension Schemes Bill, we understand that new and innovative endgame solutions are looking to enter the DB market and offer employers new ways to manage their DB liabilities. I assure the noble Baroness that we continue to keep the regulatory framework under review to ensure that member benefits are appropriately safeguarded.

Then, the question is: what is the right thing to be in the surplus extraction regime? I know that the noble Baroness, Lady Altmann, is concerned that, following these additional flexibilities to trustees around surplus release, trustees continue to consider surplus release in the context of the wider suite of options available to their scheme, including buyout, transfer to a superfund or other options beyond those. Following these changes, trustees will remain subject to their duty to act in the interests of beneficiaries. As such, we are confident that trustees will continue both to think carefully about the most appropriate endgame solution for their scheme and to act accordingly. For many, that will be buyout or transferring to a superfund, rather than running on.

Let me turn to what would happen with these amendments specifically. Amendment 33 would link the operation of the surplus framework to existing standards on risk transfer conditions in TAS. In essence, it seeks to ensure the scheme trustees have considered a potential buyout or other risk transfer solution before surplus can be released. Amendment 33A has a similar purpose; again, it aims for trustees, before they can release surplus, receiving a report from the scheme actuary assessing endgame options and confirming compliance with TAS.

Although I appreciate the noble Baroness’s intention to ensure that trustees select the right endgame for their scheme, these amendments are not needed because trustees are already required, under the funding and investment regulations, to set a long-term strategy for their scheme and review it at least every three years; that strategy might include a risk transfer arrangement. Furthermore, although I know the noble Baroness has tried to minimise this, hardwiring any current provisional standards into the statutory framework could have unintended consequences, including reducing flexibility for trustees and requiring further legislative or regulatory changes to maintain alignment as these standards evolve over time.

We are back to the fact that, in the end, trustees remain in the driving seat with regard to surplus release. As a matter of course, TPR would expect trustees to take professional advice from their actuarial and legal advisers; to assess the sponsor covenant impact when considering surplus release; and to take into account relevant factors and disregard irrelevant factors, in line with their duties. We are working with the Pensions Regulator regarding how schemes are supported in the consideration of surplus-sharing decisions. The new guidance already considers schemes as part of good governance to develop a policy on surplus. TPR will issue further guidance on surplus sharing following the coming into force of the regulations flowing from the Bill, which will describe how trustees may approach surplus release and can be readily updated as required. Alongside the Pensions Regulator, we will work with the FRC to ensure that TAS stays aligned.

I am grateful for the noble Baroness’s contribution and the wider debate, but I hope that she will feel able to withdraw her amendment.

[Baroness Altmann (Non-Afl)]

I thank the Minister and everybody else who has spoken. I have enormous respect for the noble Lord, Lord Davies, and take what he says seriously. I am most grateful for the support of the noble Lord, Lord Fuller.

I make no apology for the technical nature of these amendments, but I apologise that they had to be shoehorned in; this is such an important issue, though. This environment of higher inflation risk, excessive prudence and hoarding of surpluses is damaging pension adequacy. The de-risking overshoot has sucked innovation, energy and impetus out of the pension system and the economy. Indeed, the chair of the trustees of Stagecoach described to me that he faced what he termed co-ordinated and insidious behind-the-scenes lobbying against the trustees’ aim to try to obtain better pensions for their members; he also said that the lobbying was in favour of annuitisation as the best option for the scheme.

There is no lobbying for either improving member benefits or giving a lot more money back to employers at the moment. If we were able to get an amendment such as this one into the Bill, so that everybody must consider the range of available options plus innovative strategies, I would hope that the outcome of the Bill would be much better, more productive use—which is the aim of the Government: the Minister, Torsten Bell, has rightly talked about using surpluses in a productive manner.

The FSCS backs annuities. It has no government guarantee. I hope that, on Report, we may come back to the spurious safety of the current recommended future for this enormous amount of assets and find ways in which the Bill might be able to accommodate the need for a mindset change in this connection. For the moment, I beg leave to withdraw the amendment.

Amendment 33 withdrawn.

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[Lord Palmer of Childs Hill (LD)]

This amendment raises a very important point. The question, though, is when the surpluses could be paid out. If the company seems to be in a robust way, there is no reason why the pension fund should be overprotected. While everything in the garden is lovely, there is no reason to give them a 10-year position when things may have deteriorated in subsequent years. So, I agree in principle with the amendment of the noble Lord, Lord Sikka, but 10 years is far too long, because in those 10 years, all sorts of things can happen. If it was five years or fewer, it would be very good, but while everything in the garden—in the company—is lovely, the pension fund should not be overprotected for the extent of 10 years.

[Baroness Altmann (Non-Afl)]

My Lords, I have enormous sympathy with the thoughts behind the amendment of the noble Lord, Lord Sikka. However, I share the concerns expressed by the noble Baroness, Lady Noakes, in that it is not clear how that would work, because this would then need to be a contingent payment or some kind of conditional payment which can be recouped, and that would impact creditors or debt holders of the company as well. Does the noble Lord feel that if, as a consequence of the surplus payment, members also got enhanced benefits, that would in some ways compensate for the future eventuality of what he is concerned about?

Finally, in the days before we had a Pension Protection Fund, I was very much in favour of increasing the status of the unsecured creditor position of a pension scheme. But in the current environment, where there is a Pension Protection Fund, and where the Bill will be improving the protections provided by it, it is much less important to increase the status on insolvency of the pension scheme itself than it would have been in past times. I certainly agree with the noble Lord, Lord Palmer, that if there were to be any such provision, it should be a lot less than 10 years.

[Baroness Stedman-Scott (Con)]

My Lords, I am grateful to the noble Lord, Lord Sikka, for tabling this amendment, which is clearly motivated by a desire to protect scheme members and guard against the risk that pension surpluses are extracted prematurely, only for employers to fail some years later. I suspect that there is broad sympathy with this objective across the Committee. However, I have a number of questions about how this proposal would operate in practice and whether it strikes the right balance between member protection, regulatory oversight and the wider framework of insolvency law. My noble friend Lady Noakes, the noble Lord, Lord Palmer of Childs Hill, and the noble Baroness, Lady Altmann, have all raised points connected to this amendment. I hope I am not duplicating their questions, but I will ask mine.

First, can the noble Lord say more about how this amendment would interact with the existing hierarchy of creditors under the Insolvency Act 1986? As drafted, it appears to require pension schemes to be paid ahead of all other creditors, including secured creditors and those with statutory preferential status? Does the noble Lord envisage this as a complete reordering of creditor priorities in these cases? If so, what thought has he given to the potential consequences for lending decisions, access to capital or the cost of borrowing for employers that sponsor defined benefit schemes?

Secondly, I would be grateful for further clarity on the choice of a 10-year clawback period, which other noble Lords have raised. As has been said, 10 years is a very long time in corporate and economic terms, and insolvency occurring at that point may bear little or no causal connection to a surplus payment made many years earlier, perhaps in very different market conditions. What is the rationale for that specific timeframe, and how does the noble Lord respond to concerns that this could introduce long-tail uncertainty for employers and their directors when making decisions in good faith?

Thirdly, how does the amendment sit alongside the existing powers of the Pensions Regulator? At present, trustees must be satisfied that member benefits are secure before any surplus is paid, and the regulator already has moral hazard powers to intervene where it believes scheme funding or employer behaviour to be inappropriate. Does the noble Lord consider those tools insufficient and, if so, can he point to evidence of systemic failure that would justify addressing this issue through restructuring insolvency priorities rather than through pension regulations?

I am also interested in the practical operation of this provision. Proposed new subsection (2) would allow amendments to both the Insolvency Act 1986 and the Enterprise Act 2002 to achieve the intended outcome. That is a very broad power, even acknowledging the use of the affirmative procedure. Has any thought been given to how this would operate in complex insolvencies; for example, where surplus has been paid to a parent company, where assets are held across a corporate group or where insolvency proceedings involve cross-border elements?

Finally, although I understand the protective instinct behind this amendment, I wonder whether there is a risk of unintended consequences. Might the creation of a potential super-priority for pension schemes discourage legitimate surplus extraction, even where schemes are demonstrably well funded, trustees are content and regulatory requirements have been met? If that were to occur, could it inadvertently weaken employer covenant strength over time rather than strengthen it?

None of these questions is intended to diminish the importance of member protection or suggest that concerns about surplus extraction are misplaced. Rather, they are offered in the spirit of probing whether this amendment is the most proportionate and effective way of addressing those concerns, or whether there may be alternative approaches, perhaps within the existing regulatory framework, that could achieve similar objectives with fewer systemic risks. I look forward to hearing the noble Lord’s response and the Minister’s comments.

Pension Schemes Bill

Baroness Altmann Excerpts

Committee stage
Monday 12th January 2026 Grand Committee

[Baroness Altmann (Non-Afl)]

My Lords, I will be brief. I declare my interests as a board adviser to a pension scheme and a non-executive director of a pension administration and consultancy firm.

I support this amendment because, with such wide Henry VIII powers, it is really important to have some framework to hang our discussions and thoughts on or for future people looking at the Bill to understand its intentions. I was tempted to try to amend this amendment to change the word “savers”, which pervades the discussion about the Bill and lots of the background reading about it. Anyone who thinks that someone who is invested for the long term in a pension is a saver has misunderstood what saving is about. It should be “investors”, “members” or “customers” rather than “savers”. That is an important distinction when talking about providing for the long-term future of retirees in this country via a savings or investment mechanism which uses money that is put in to build up funds for the long term.

I would also have added to this list something that I think is really important. I hope, perhaps against hope, that we might be able to improve the excellent measures in the Bill by improving the compensation and payments for pre-1997 accrual by the Pension Protection Fund and the Financial Assistance Scheme, in particular for members who have been denied inflation protection. We ought—within this Bill, I hope—be able to give them extra for the future.

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[Lord Fuller (Con)]

I am coming to a conclusion. I spent 20 years at the coalface with some of the brightest and smartest professionals from around the world. If we persist with subsections (2) to (8), we will be further in hock to a Treasury that has demonstrated that it does not understand the interplay between revenue and capital, or the underlying principles of a capitalist economy. If it ain’t broke, don’t fix it. Now is not the time to meddle in the LGPS.

[Baroness Altmann (Non-Afl)]

My Lords, I will be brief. I have added my name to Amendments 2, 5 and 6. I support the thrust of these amendments. I agree wholeheartedly with the noble Lord, Lord Davies, that the local government pension schemes have been successful. One reason is that they have been able to take higher risks—in other words, earn higher returns—than many of the traditional private sector pension schemes, which were so constrained and had the problem of LDI.

I have concerns about the cost to taxpayers because the Bill effectively suggests that, by reducing the number of asset pools for local government pension schemes from eight to six, somehow the returns will magically improve and the Government will be able to direct local authority pension schemes into the right place. As we have heard from so many noble Lords, it does not appear to me that the Government are best placed to direct where people invest.

With £402 billion in these schemes at March 2025, with about a quarter of council tax being spent on contributions into them and with so many areas of the economy needing investment, it is right that we expect local authority schemes to be able to support the local—and, potentially, the national—economy. The Government might well be tempted to turn this £400 billion into a sovereign wealth fund, given that taxpayers at the national scale underwrite local authority pension schemes—they do not belong to the PPF; they do not pay a PPF level. If a council goes bust, taxpayers bail it out and the pensions are still paid. I argue that, unless the Government want to do that—

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[Baroness Altmann (Non-Afl)]

My Lords, I had basically finished—I just wanted to say that, if we are not going to turn the £400 billion or so into a sovereign wealth fund, it would be preferable if the Government did not try to direct the investments.

[Lord Palmer of Childs Hill (LD)]

I simply ask the Minister to explain how local accountability will be preserved, how fiduciary duties will be protected in practice and why so much of this is not in the Bill.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will speak to my Amendment 12 in this group. I hate to disappoint the noble Lord, Lord Davies, but he will have to wait a while before we get to Amendment 10.

As I mentioned earlier, a few years ago I had engagement with local authority pension funds concerning investment opportunities that could be tailored to their own areas. I discovered that they did not want it only in their own areas. They wanted to look at wider areas that included nearby local authorities, in some instances, as well as those further away where the economic responses to recession had fared better. There were some that wished that they had not just invested in some shopping centres in their own area but also in some in London and the south-east that had not lost so much money. That is not what I was trying to involve them in at the time, but these were the examples that came to me.

Those that were in more rural areas wanted some action from the cities. They viewed local investment through a broader lens of meaning things that help localities generally. They wanted to invest in local-sized infrastructure, but not necessarily only in their own areas—especially where some of these things could serve their areas from the outside. There is an example of waste management in Milton Keynes that goes beyond its area. Another example is that of a local waste management facility that recycles all the waste from kitchens. Normally, because there is quite a lot of toxic stuff in it, that waste will go to landfill, but this facility deals with all the nasties and converts it into energy. That facility is not just of interest to the local authority area in which it sits but to other ones too.

There is no suggestion that I wish to compel this in any way; I just want to draw attention to the fact that my personal experience brought this, which I was quite surprised about at the time. There was a focus on saying, “Do good in your own area”, but there was also a desire for the diversity to do good in other areas as well. Maybe you need it under a separate heading, but I just thought I would table this amendment to draw attention to this point and to make sure that, when it comes to regulations, maybe it is in the mind of the Minister and others that there should be some wriggle room around what is defined as local.

[Baroness Altmann (Non-Afl)]

My Lords, I added my name to the amendment tabled by the noble Lord, Lord Davies, and I endorse his remarks. There is a clear need for social housing and I would be grateful if the Minister could explain to the Committee the impact of asset pooling and whether it perhaps interferes with funds from local authority pension schemes being invested in social housing.

There is a clear need across the country for improvements in the housing stock. Local areas can know what the need for build-to-rent might be or the need for social housing that is disability friendly or friendly for an ageing population. These areas are not necessarily the focus of some of the private sector housebuilders. Using this resource to improve the lives of local residents—perhaps it would improve the futures of pension scheme members themselves—as well as areas around the country, would be important and I would be grateful to hear the Minister’s views.

I also support Amendment 12, which was so well introduced by the noble Baroness, Lady Bowles. It is essential that the resources in both local and national pension schemes are invested to benefit local and national growth. The diversification benefits of investing in areas much wider than just the local area are clear in terms of using pension fund assets to boost long-term growth, which is an aim the Government rightly have.

I know the Government want to use pension fund assets to benefit Britain, and it seems that local authority pension schemes offer an ideal opportunity for that. If these asset pools can invest more broadly than just the local area, and local authority pension schemes are encouraged to have a diversification spread across the country, I hope that would be a significant improvement and a tangible benefit from the funding that goes into these schemes and from the strong position they have built.

[Lord Fuller (Con)]

My Lords, I want to focus in this group on the nature of local investment. Once again I find myself in broad agreement with the noble Lord, Lord Davies; I am not quite sure whether I should be concerned or he should be.

Clause 2 of the Bill places a duty on LGPS administering authorities to co-operate with strategic authorities, which are defined in the Bill, to

“identify and develop appropriate investment opportunities”

in relation to local investments.

The Bill defines what a local investment is and encourages co-operation, but does not define what constitutes appropriate investment opportunities, how co-operation is to be structured and what the core governance is. Of course, governance leads to covenant strength—in turn to coupon and thus to viability, so this is quite important—and the metrics for assessing local impact. We need further explanation of the duty to co-operate between LGPS authorities, not just within the pool but possibly elsewhere.

If you restrict investment opportunities just to a local area, as other noble Lords have said, it leads you to concentration risk, which is bad for two reasons. First, it is inherently more risky, but it also locks other investors out of the closed shop that then exists between the local pool and its home strategic authority. I have to ask the Minister, who I assume is going to respond here: why would the Government want to make it harder for a northern pension fund to invest in the south—or, probably the other way around, why would they make it difficult for a southern pool to be able to invest in a northern opportunity? As we heard in the previous group, there are provisions in the Bill that will prevent a scheme being involved in any more than one pool.

For “co-operation” I sometimes read “connivance”, and that can never be a good thing when you get a statutory and enforced failure of the separation of duties between those selling investment opportunities and those buying them. Thinking more widely, we know that there is a national infrastructure bank, which is to morph into the National Wealth Fund—I am possibly not the only noble Lord to have been invited to a reception it is holding in our House on 28 January. But the clue is in the name: it is the National Wealth Fund, not the local one. So, where might the order of priority be in the funding and financing here: national or local? When we think about local, we need to have a deep understanding, if we are to start making these investments, of greenfield versus brownfield, and I am concerned about the capacity and capability of funds to manage greenfield development, especially under pooling. That is another perverse consequence of getting too big.

This is where I align myself with the noble Lord, Lord Davies, because during the passage of the Planning and Infrastructure Act, I proposed amendments so that mayoral development corporations could have the financial instruments to go to bodies such as local pension funds and issue debt, so we could build affordable housing or new towns and so on. I divided the House, and noble Lords on the government side defeated us. So, now that the principle of development corporations for the purposes of new towns or affordable housing has been taken off the table, can the noble Lord say how they intend to legislate to enable these local investments with strategic authorities? By their votes they have shown that they are dead against that.

However, there is more, because I am very anxious about the definition of a “responsible investment”, which is in Clause 2(4). Clearly, nobody wants irresponsible investment, but what is responsible? Do we prohibit investments in alcohol, tobacco or sugar, or in supermarkets because they sell the sugar, tobacco and alcohol, or in arms, oil or bookmakers? I have seen it all before. Everybody has an opinion, and some beneficiary members sometimes think they own the scheme. There is much virtue signalling to be had, where long-term returns take a back seat, which results in fewer returns and less business ideas with solid, repeatable cash flows, and the poor member and the taxpayer ultimately suffer from the vanity.

I have seen with my own eyes the letter writing from these people who purport to tell pension committee members and trustees what they should invest in, but where does it end? It ends in the limits of the constellation of investment ideas, so that everybody else ends up chasing the same stocks in a value-destroying bubble, creating systemic risks when everyone does the same thing. It also ends up with the so-called ethical investment funds that disproportionately have gone into ESG investments, putting those ahead of returns, being the lemons in the market. Yet that is what the Bill encourages. There should be no role for ministerial direction in the type of investments. If we want a dynamic economy, you do not create it by wrapping the flow of capital in red tape.

If the Government wish to make infrastructure more investible, whether nationally or locally, they need to create investible opportunities. I know that toll roads are not popular and that a flood defence does not pay rent, but the Government would be better employed creating new asset classes where desirable investments can be matched with long-term returns, rather than herding them into the same old asset classes.

I realise that this is a probing amendment, but I accept that the Government should seek to promote the alignment between pension funds, affordable housing, new towns and other investment opportunities. However, by their actions, they put every obstacle in the way. Can the Minister say what steps will be taken, presumably when we get to Report, to breathe fresh life into the possibility, which was contemplated in the Planning and Infrastructure Act, whereby local bodies may issue local bonds for debt or whatever else, so that we can get the flow of capital to make this country richer, rather than just herding into the same old asset classes that we compete with everybody else for?

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Moved by

[Baroness Altmann]

8: Clause 2, page 4, line 24, at end insert—
“(d) specifying the percentage of new contributions which must be invested in United Kingdom growth assets.”Member's explanatory statement
This probing amendment would allow investment strategies to require a particular percentage of new contributions, which include added taxpayer reliefs, to be invested in UK assets which could improve the outlook for UK growth and provide a better retirement environment for members in future.

[Baroness Altmann (Non-Afl)]

My Lords, in moving Amendment 8, I will speak also to Amendment 13, in my name. The aim of this amendment is to focus on the flow of money going into these schemes, rather than just the investment of the stock of assets that are already held, which has been the focus so far and is generally the focus of everything else in the Bill. Both are important.

Take, for example, value for money for taxpayers and members. With so much money going in each year—the latest estimates are £10 billion a year of employer contributions alone, let alone the members who are local workers—there seem to be strong reasons why we should expect targets to be set. If we are setting targets for other types of areas of investment, and for the investment of new contributions, we should have a local or national focus, or both.

This is obviously a probing amendment. As I declared at Second Reading, I support all private pension schemes also having an incentive to invest a certain percentage—I have suggested 25%—in UK growth assets. I have described UK growth assets in Amendment 13 as including listed and unlisted equities, infrastructure and property, as we have been discussing, all designed to boost long-term UK growth. I hope that the Minister will be able to explain whether the Government have specific objections to this idea and, if so, why?

If the Government are intent on mandating specific asset pools to invest in certain ways, why would they be reluctant to set certain aims or requirements for the new contributions of what are, in effect, publicly underwritten pension schemes? If we are intent on having mandation, requiring asset pools to invest in certain ways and requiring these funds to invest in them, and if we are not, as we will come to later, looking at ways of permitting employers to either significantly reduce their contributions or have a contribution holiday, would it not be sensible for the Government to look at directing those contributions—which are being paid into a scheme that does not need the money, as far as the actuarial certifications are concerned—to invest to boost long-term growth? I beg to move Amendment 8.

[Lord Palmer of Childs Hill (LD)]

This is an important, basic matter. Directing investment by asset types raises difficulties. If pension funds or individuals knew which assets were going to go up, there would be no problem, but there is no guarantee of that, so, my question to the Minister is: are pension funds primarily long-term investors acting for members or instruments of policy delivery? The answer matters a lot for confidence in Local Government Pension Scheme governance. I am all for productive investment, but it can be a slippery slope if you get it wrong. I wonder whether the Minister can give us some guidance on that.

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The amendments would apply to the investment of new contributions only. It is therefore more meaningful to consider the allocation of the whole portfolio than to look at new contributions in isolation.

[Baroness Altmann (Non-Afl)]

I stress that the amendment is a “may” or “must”; the group does not require a “must”. This was intended to help the Government understand that there are merits in considering the flow and the stock. If there is new contribution flow of a particular size going into an area—this can be part of regulations; it is not required—that could well have a less damaging impact on the market than mandating or aiming. For example, Clause 2(4)(c) talks about “target ranges” for strategic asset allocation to growth assets and income assets. With a fund of this size, when talking about a target range for growth assets or any other assets, we might be moving the markets, because so much money would need to be shifted around. That is much less of an issue with the new contribution flow, but it could still achieve some of the objectives that the Government are seeking to attain.

[Lord Katz (Lab)]

I thank the noble Baroness for that intervention and clarification. I do not want to comment specifically on whether the scale of that investment would be market moving; I do not have the expertise to say that. I want to underline that, ultimately, we think it is for administering authorities and the pools to decide where these investments are made. That is right, because it is the way they fulfil their fiduciary duties. I am happy to look at her contribution again and, if I can add to that explanation, I will happily write to her.

The noble Lord, Lord Palmer of Childs Hill, asked whether pension funds are investments of policy delivery. As I stated earlier, the responsibility for setting investment strategy remains with the funds. The Government are not taking powers to direct asset pools to make or not make investments in specific projects. To be clear, it goes back to the fact that it is for those administering authorities and pools to make those decisions.

[Baroness Altmann (Non-Afl)]

I am so sorry, but this is a really important point. In Clause 2(4), paragraphs (a), (b) and (c)—in particular paragraph (c), to which my amendment seeks to add something—state that we are talking about

“strategic asset allocation or target ranges for growth and income”.

That absolutely sounds as though the Government could—it is “may”, not “must”, so it may not happen—leave the door open to directing investments in the way the Minister says the Government do not wish to do. I would be grateful for some clarification; I do not need it now, as I am happy either for the Minister to write or for us to meet to discuss it.

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[Lord Katz (Lab)]

I am not sure whether I can provide much more clarity than I have done so far, so I would be very happy to write to the noble Baroness to spell that out.

I realise that I have not given the levels of satisfaction and clarity that Members perhaps wanted but, as these are probing amendments, we contend that they would have a minimal impact. On that basis, I ask the noble Baroness to withdraw her amendment.

[Baroness Altmann (Non-Afl)]

I thank the Minister for his answers; I feel for him in his position. I am happy to withdraw the amendment; we can have further interaction at a later stage.

Amendment 8 withdrawn.

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I invite the Government to rethink before we reach new Section 28C, where the discrimination is explicitly elaborated on; if they do not do so, I will return to this matter in more detail. Others who are involved—those in the Mansion House Accord—may wish to reflect on what is being done in their names, as well as the competition implications. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I strongly support the amendment in the name of the noble Baroness, Lady Bowles, and all that she has said so far on the ramifications and the importance of this issue to the Bill—indeed, to the wider UK financial market landscape.

The Government require from the Mansion House Accord investment in unlisted assets, private equity, infrastructure and so on. The Minister stressed in writing that she can confirm that the aim is broadly limited to unlisted assets and consistent with the scope of the Mansion House Accord. If that is the aim of the reserve powers and an overriding objective of this Government, it makes the explicit exclusion later on of this particular asset type—the wrapper, as the noble Baroness, Lady Bowles, called it—even more mystifying.

I have amendments later to the relevant clauses that would specifically make the Bill include these closed-ended investment companies, rather than exclude them, which is more opaque.

As regards the LGPS, using closed-ended listed companies is an ideal way for these funds to invest in local infrastructure where the council and local residents can see the impact. It fits with the Government’s aim too. But by explicitly excluding closed-ended funds and because of the regulatory undermining of this type of fund, which makes up one-third of the FTSE 250 and is an important element of the asset management industry of the City of London and, in particular, of Edinburgh, we are starting to see—I am told that West Yorkshire is an example—that local authorities which have previously invested are disinvesting from these investments.

At the moment, there is a regulatory driver making these closed-ended investment companies appear more expensive than they are. Trying to favour open-ended structures over closed-ended structures, even when the closed-ended structure is the most suitable for holding long-term illiquid investments, makes no sense to me or to many in the industry. Why should investors have to be told that investing in a closed-ended company is costly to them when the costs are paid by the company? They are merely a shareholder. They are not directly charged. With an open-ended fund they are, but not with a closed-ended fund.

Will the Minister explain or write to me to explain—I recognise that there are complexities here that he may not wish or be able to deal with at the moment—why the Bill has excluded these types of investment, reassure the Committee that local authorities will not be directed to exclude these investments and explain why our Government seem to be moving in the opposite direction from other countries, which are apparently now considering launching closed-end investment companies to invest in these kinds of assets?

The FCA designed and authorised the long-term asset funds which the Government seem to favour. They are open-ended structures. One argument that illustrates perfectly the perversity of the Government’s position and the importance of this issue—I make no apology for labouring the point because it is so important to pension scheme investments—is that long-term asset funds will be allowed to hold up to 50% in listed assets. Although the Government want long-term asset funds specifically to promote and guide the investment of long-term pension funds into unlisted assets, their favoured structure—the long-term asset fund, or open-ended funds in general—will have to have listed assets to help manage their liquidity. Closed-ended funds are not constrained in the same way.