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.

--- Later in debate ---

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.

--- Later in debate ---

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.

Pension Schemes Bill

Baroness Altmann Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

[Baroness Altmann (Non-Afl)]

My Lords, it is a pleasure to follow the noble Lord, Lord Vaux, and to take part in this Bill, which is a historic measure proposed by the Government with noble intentions. I need to declare my interests as an adviser to NatWest Cushon and a non-executive director of Capita Pension Solutions. I too look forward to the maiden speech of the noble Baroness, Lady White, who has so much success and experience to offer the House. I thank the Pension Protection Fund, CityUK, Pensions UK, the Institute and Faculty of Actuaries, and the Pensions Action Group for their helpful briefings and information for this speech.

The Bill introduces reforms that aim to improve pension outcomes for members of defined benefit schemes, defined contribution schemes and local government schemes and to increase investment in UK productive assets via the route of consolidation into a few larger asset pools or by ensuring default arrangements for direct pension funds in a way that the Government will mandate. I certainly support the aim of increasing UK investments by UK pension funds and the aim of improving pension outcomes. I warmly welcome many of the Bill’s provisions, but I believe that some of the assumptions underlying these reforms could prove dangerously false and that there is a real risk that there will be a lack of innovation in future as smaller, newer providers drop out or do not even start, while the Government could and should be bolder in encouraging pension schemes to support UK growth than the measures in the Bill provide for.

Using both unlisted and listed investment seems to make far more sense than just requiring a specific exposure to private unlisted assets. I hate to disappoint the noble Lord, Lord Vaux, but I think we are on a similar page when it comes to the Government’s specific proposals. Many of our listed companies are selling at attractive ratings or discounts to their real asset value.

There are many aspects of the Bill that my remarks today could cover, but I will have to try to concentrate on a few and leave the rest for Committee. The aim of increasing UK pension fund support for UK growth is right and long overdue. However, much more could be done with the Bill. According to the Government’s workplace pensions road map, the UK has the second largest pension system in the world, and it is clearly the largest potential source of domestic long-term investment capital. Taxpayers provide £80 billion a year of reliefs to add to individual and employer contributions, but most of that money helps other countries, not ours. If taxpayers were presented with the question, “Would you like £80 billion of your money to build roads and fill potholes in other countries, rather than keeping it here in Britain?”, I am not convinced that they would answer in the positive.

UK pension funds have stopped supporting British companies, large and small. I believe that the future of British business can be successful and I believe in Britain, but it seems like our own pension funds do not. Even the parliamentary pension scheme has about 2.8% of its equity exposure in the UK. The Bill does not address that, as the Government are focusing on DC and local government schemes. One of the proposals that I would like to put to the Government is to see whether there are ways in which, instead of mandating specific areas that the Government want pension funds to invest in—which happen to be, in my view, some of the riskiest areas that they could support—the Government should require, let us say, at least 25% of all new contributions into pension schemes to be put into UK assets, listed or unlisted.

The UK listed markets have become exceptionally undervalued in a global context because our pension funds no longer support our markets. We used to have a reliable source of long-term domestic investment capital. If schemes want taxpayers to put huge sums into their pension funds each year, and if managers and providers wish to continue to receive such sums, is it so unreasonable to ask that they put, as I say, maybe just one-quarter of those contributions into the UK? That could include unlisted assets, listed assets or infrastructure—that would be up to trustees to decide—and if they wanted to put more than 75% overseas, they could go ahead, but should not expect taxpayers to give them money to do so. That seems to me to be not mandation but a proper incentivisation, using the incentive mechanism that we already have of tax relief, which does not have to support Britain at all.

We find ourselves in constrained fiscal circumstances. New Financial recently showed that each bit of the UK pension system has lower allocations to domestic equities as a percentage of assets, as a percentage of their equity allocation and relative to the size of the local market than other countries. What is wrong with Britain? I believe in Britain, and there are reasons to expect that pension schemes—after all, 25% of the pension is tax free—should do far more now to protect and boost our growth. This would not have to wait until 2030, either; it could happen immediately.

If I may, I want to cover the question of relying on consolidation as the answer to driving better returns, and what that might do to the marketplace. Defined contribution workplace schemes and the LGPS are supposed to somehow automatically generate better long-term returns by being bigger. Well, there is a case for that, and some studies would support it, but the figure of £25 billion that must be reached by default funds, and the £10 billion by 2030 that is required, are totally arbitrary. There is no rationale that says that is the right number, yet we are putting it in primary legislation. That is most unwise. What if there is a market crash between now and 2030, for example? What is magic about that number?

Can the Minister say what evidence there is that scale is a reliable future predictor of returns? What consideration have the Government given to the damage to new entrants by favouring these large-scale incumbent funds? The risk of schemes herding and all doing the same thing with such large pools of capital, especially in global passive funds, could distort markets. What consideration has been given to that? What level of confidence is attached to the predictions that the Government have made for improvements in outcomes?

I have heard from new entrants to the market, such as Penfold, which say they are now unable to get new business because they are growing fast but may not reach the £10 billion by 2030—and of course people cannot recommend that employers now invest in them. That company has innovative financial methodologies and is offering a new way of reaching out to pension scheme members, as are Cushon and Smart Pension, which may be further down the line in reaching the target. I have concerns that the Bill will stop new competition and new entrants coming in. An oligopoly is not normally the best way for a market to succeed.

I am particularly puzzled by the explicit exclusion of closed-ended listed companies within the Bill. Part 2 says that none of those investment trusts that have invested in precisely the types of investment that we need, and that the Government want to encourage to boost the UK economy, are excluded from the Bill. I do not understand why the Government would be doing this. I know that they want to encourage long-term asset funds, which are open-ended structures, but there are enormous reasons for and benefits from having closed-ended structures when holding such illiquid assets and long-term growth assets. These are proven companies that have produced very good returns in net asset value yet have shrunk to discounts, due partly to macro factors but also to regulatory overkill, which needs urgently to be reviewed.

Investment in just UK infrastructure and renewables by this investment company sector has exceeded £18 billion. Overall, in the kind of assets that the Government want to encourage—funding solar and wind projects, energy efficiency initiatives, social housing, biotech, property and private equity—these companies have put more than £60 billion to work. But they are now struggling to survive and having to buy back their shares, rather than invest in the kind of growth assets that they could otherwise be selling and managing for pension funds in this country.

I hope that the Minister will help us understand whether the Government are going to reverse this particular exclusion and recognise the benefits of this long-standing, world-leading investment sector. Unquestionably, it can be part of the answer in this scenario. I also urge the Government to clarify what fiduciary duty means. I know that there have been many calls for that to be put into statutory guidance, and I would support this.

Finally, as regards the Pension Protection Fund and the Financial Assistance Scheme, I welcome the flexibility that is being put in to allow the levy to be changed. I welcome the change in the terminal benefits. I welcome the acknowledgment of the injustice of the pre-1997 frozen payments, with the oldest people both in the Pension Protection Fund and particularly in the Financial Assistance Scheme, suffering most. I also welcome the flexibility that will mean that, where a scheme is unsure whether the previous rules would have granted increases on the pre-1997 benefits, it will be assumed that they will. The terminal illness increase, from six to 12 months, is again very welcome. But I would urge the Government to look carefully at how we can recognise the injustice to the pre-1997 members, such as Terry Monk, Alan Marnes, Richard Nicholl and John Benson, who gave years of their lives to achieve better outcomes in the Financial Assistance Scheme, and promote the PPF, which has been such a success. I have also heard from Carillion workers who were in the Civil Service pension scheme and have ended up in the PPF, losing their pre-1997 benefits. This injustice hurts, especially in light of the Government’s generosity to mineworkers and the British Coal Staff Superannuation Scheme, which has been given a 30% to 40% increase to pensions that is effectively publicly funded. I hope that the Government will think again about potentially one-off increases, or some other way of helping the pre-1997 members who lost their benefits.

Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2025

Baroness Altmann Excerpts

Wednesday 23rd April 2025 Grand Committee

[Baroness Altmann (Non-Afl)]

My Lords, first, I thank the noble Lord, Lord Davies of Brixton, for bringing this important matter to the attention of the Committee, notwithstanding the fact that the actual instrument that we are debating is not contentious. I thank the Minister and her officials for their engagement before this debate and for taking seriously some of the issues that we are expecting to hear about today. Of course, I also thank the Pension Protection Fund for its briefing note. I commend it on its excellent work and thank the staff for all that they have been doing to help those pensioners, or members of pension schemes, who are at a time of their lives when they are incredibly stressed—they will have seen their company go bust and feared what was going to happen to their future. At least we have in place a system which gives some comfort and underpin to the pension promises that they would otherwise be relying on, which could have disappeared were it not for the Pension Protection Fund and the way it has been managing its investments.

I share some of the concerns expressed by the noble Lord, Lord Davies. I point out that, although this is talking about the maximum levy that can be imposed, it has never been imposed in all the 20 years of the PPF’s existence. Yet, each year, the maximum levy keeps going up with average earnings; it was at 4% this year, after being some 8% the previous year, and it has to be reviewed every 12 months. That was born out of the origins of the Pension Protection Fund—and I know that, at the time, other noble Lords were with me in trying to help the Government of the day to understand what was happening to the current members of the Financial Assistance Scheme, which paved the way for the Pension Protection Fund, who have been paid out so well by the PPF.

Given the PPF’s robust financial position—partly as a result of the cap on benefits, as the noble Lord, Lord Davies, said, but also as a result of the investment management policies that it has put in place and maintained, which one must give them credit for—it would be really helpful, now that we have 20 years’ experience of the fund and seen the subsequent development of defined benefits scheme in this country, to consider the flexibility that we do not currently have in the levy-setting process. The Pensions Act 2004 could probably never envisage a situation, 20 years after its creation, where so many schemes had not called on the PPF, and so many employers had managed through all the different economic cycles to still fund their schemes and be heading toward buyout—which I will return to.

Section 177(5) of the Pensions Act 2004 says that the maximum year-on-year levy increase cannot exceed 25%, which has clearly meant that it is impossible to have a levy holiday. As these reserves have built up over time—thanks to the noble Lord, Lord Davies, I shall not refer to “surplus” because reserves is a much better word—the PPF and, I presume, the employers’ organisations, would have wished a significant reduction in the levy to be introduced, if not a zero levy. Yet that proved to be virtually impossible because of the fear that they could never put it up again. In practice, of course, a levy of zero could never be increased; you are stuck with it for the rest of time. I hope that the Minister will help us understand what considerations are being given to the flexibility that we have heard about, which the Government would, laudably, like to see, and whether a levy of zero is possible and whether the required law change might be in the scope of the Bill that we are all eagerly anticipating.

My second point, which again echoes the noble Lord, Lord Davies, is that I am seriously concerned by the lack of pre-1997 indexation. The Pension Protection Fund has an element of older members, many of whom had a significant accrual before 1997, and their own schemes may have had inflation linking. Not all did—it was not a legal requirement—but many schemes that I worked with from 2000 to 2004, before we had either the Financial Assistance Scheme or the Pension Protection Fund, had pre-1997 increases that were lost and will be lost for ever unless we change the legislation. I would be grateful for the Minister’s take on that.

I make a particular plea for the Financial Assistance Scheme to mirror, as it has done all along, any changes made to the Pension Protection Fund, because those are schemes that failed before the Pension Protection Fund started. By definition, a much greater percentage of its accruals will have been before 1997, so the issue is of even greater importance and will cause greater hardship for those members.

In addition—and the noble Lord, Lord Davies, mentioned this but did not really go into it—the Government’s desire to use pension assets for productive investment is one that I wholeheartedly share and would very much like to see progressed much further. But this is a classic example of assets that could be used for productive investment but that are not, partly because of the existence of the PPF and the regulator’s desire to protect against PPF entry, which has driven so many schemes to look to buy out. The extra restrictions on sponsors of defined benefit schemes have caused many employers to look to buy out, if they have not done so already. The expectation is that £300 billion of pension assets will be buying out over the next five years. Some 85% of all schemes are under £250 million; it is clear that there is money that could be used for productive investment.

I hope to get this on the record: before a buyout, the distribution of assets tends to be 70% in gilts and government bonds, and about 30% in corporate bonds. There is very little, if not any, in equity investment or productive investment. After buyout, that 70% in gilts and other sovereign-type debt falls to 10% or so, maybe 15% at the most, and corporates become 80% to 85%. There are clear and present dangers for the gilt market itself from this trend. Anything that we could do to halt the buyout, perhaps by encouraging consolidation or more of that money to go into productive investment, given our experience of the Pension Protection Fund so far, would be beneficial to both the Government’s aims for the economy and the wider pensions landscape. I hope that the Minister will be able to explain some of this thinking.

I wish to place on the parliamentary record my commendation of the work of both the Pensions Action Group and the “Stripped of our Pensions” campaign, which I worked on for many years with many good people to get to where we are now in terms of pension protection. I also laud in particular the work of the late Mr Peter Humphrey, who passed away just a few days ago and was one of the absolute leading stars of that campaign; he and his family lived and breathed pensions for so many other people. I hope that the Minister might join me in commending his work and that of so many others.

State Pension: Triple Lock

Baroness Altmann Excerpts

Tuesday 21st January 2025 Lords Chamber

[Baroness Sherlock (Lab)]

My Lords, I am certainly not going to answer for the leader of the Opposition. I will allow others who are rather better qualified than I am to do that. But I can assure her that the idea of means testing the triple lock, even if its meaning were clear, is not something we on these Benches embrace.

I can tell the noble Lord very clearly that we have a manifesto commitment that the triple lock will hold for the entirety of this Parliament. That is a huge commitment. The noble Lord mentioned winter fuel payments. Means testing those meant that a number of pensioners lost a sum of £200 or £300. By contrast, the amount of money we are investing in the state pension will mean that the annual rate will go up by up to £1,900 by the end of this Parliament.

The comments by my colleague, the Minister for Pensions, Torsten Bell, were made as a private individual when he was the head of a think tank. It is the job of heads of think tanks to think big ideas and to talk about them. However, I assure the House that Minister Bell, along with me, is fully committed to the triple lock and the Government’s commitment to it. I hope the nation’s pensioners will be delighted to hear that.

[Baroness Altmann (Non-Afl)]

Does the Minister agree that there is an inconsistency in the triple lock between younger pensioners, who tend to be better off and for whom the triple lock provides protection for their full new state pension, and the oldest pensioners, who tend to be poorer, or those on pension credit, who either have only the basic state pension triple lock protected, or, in the case of pension credit, no triple lock protection at all? Is there any plan for a review of how, generally speaking, the distribution of incomes among pensioners and the protection provided by the triple lock interact?

[Baroness Sherlock (Lab)]

The noble Baroness has raised a number of important and connected questions. Let me pick a couple of them out—as many as I can in the time. First, on the distinction between those on the old basic state pension and those on the new state pension, it is not a straight read across that people on one are getting more than people on the other. As she knows, it depends, of course, on what the national insurance contribution rates were and how many years they worked. How much contribution they made determines how much they will get. It is also a fact that many people on the basic state pension were contracted out and therefore will have occupational pensions and will have paid lower national insurance contributions as a result. Whichever of those state pensions people get, we will guarantee that it will go up by the triple lock, which is a massive investment, given the economic climate, and a huge investment in pensions.

On the broader question, the noble Baroness will know that in the second stage of the pensions review we will look at the whole question of the adequacy of pensions. We need to have in our country a system designed to be built, as she knows as a former Pensions Minister, on the foundation of the state pension but with an adequate second pension coming from occupational provision. On that, auto-enrolment, investment in the system, addressing gender pay gaps, and a whole range of questions are important. I will stop talking now as I have talked for far too long. The point is that we are investing in pensioners, we will get the pensions market working and we want this to work for everybody.

Pensioners: Winter Support

Baroness Altmann Excerpts

Tuesday 29th October 2024 Lords Chamber

[Baroness Sherlock (Lab)]

On bureaucracy, 80% of people now apply for pension credit online. You can apply online, on the phone or on paper, or you can get help from the DWP or a third-party organisation, but 80% apply online. That is by far the simplest and quickest way to do it, not least because you end up answering, at most, 48 questions and sometimes only 35, because lots of things you do not have to go through are taken out. That might seem like a lot, but it really is not—the experience people have is fairly straightforward. If you do not like doing it online, you can phone up and that is the equivalent, because the person on the other end just does it for you—you are on the phone and they are entering all the details. Some weeks, only 5% of people apply on paper.

On how long it takes to process it, as we are expecting an influx of applications, we have redeployed another 500 staff to work on processing. We know that there will be slightly longer times and are warning people who apply that it could take up to nine weeks, but I assure the House that if anyone applies in time, they will get the money. If that means that for a small number of people there will be a cashflow issue, I encourage them go to their local authority to apply to the household support fund to tide them over that gap.

[Baroness Altmann (Non-Afl)]

My Lords, I encourage the Minister to recognise that the winter fuel payments are being taken away from the very poorest pensioners. Those on pension credit are not the poorest; those who are entitled to it and will eventually receive it will also not be the poorest because they will get thousands of pounds extra, including winter fuel payments. Those slightly above that—it is estimated there could be 1 or 2 million—have no means of receiving the money that they will need this winter. There is no protection for them. The Minister talks about the reduction in fuel costs. Last winter and the one before, those pensioners received one-off cost of living payments. With a Budget tomorrow, it may not be too late to recognise that this is a mistake; it is going to cause serious harm to a number of pensioners and cost the Government and the NHS significant sums.

[Baroness Sherlock (Lab)]

My Lords, nobody went out thinking that this is where we would like to be, but the noble Baroness knows very well the economic situation that we inherited, and she will know exactly why it was necessary to save money in year. I remind the noble Baroness that, by definition, the poorest pensioners are getting the support they need provided they apply; we will make it as easy as possible for them to do that. For everybody else, the Government have committed to sticking to the triple lock for this Parliament. That means that somebody on the new state pension will find that, over this Parliament, the value of that state pension will rise by £1,700, and the value of even the basic state pension will rise by £1,300. That is where the huge extra support will come from for the pensioners that she is talking about.

Pensions Regulator Defined Benefit Funding Code of Practice 2024

Baroness Altmann Excerpts

Monday 21st October 2024 Grand Committee

[Baroness Drake (Lab)]

My Lords, I declare my interest as a DB pension scheme trustee as recorded in the register. I thank my noble friend Lord Davies for securing this debate. This is an important code, and it should not pass without comment.

As the Explanatory Memorandum and my noble friend observe, while aggregate DB funding levels have improved in recent years, financial markets and economic conditions are changeable and funding positions can quickly deteriorate. There is a dynamic in the pensions world related to economic circumstances, whether fiscal policies, investment returns, gilt yields or the impact of technologies on markets, to name but a few.

An intended purpose of the code is to allow TPR to be more proactive in identifying and mitigating emerging risks in a targeted way. There have been significant instances over the past 30 years of regulatory failure to identify or respond quickly to emerging risks in DB pension provision, some with dreadful consequences. What do the Government believe are the most compelling levers in this code that will materially improve mitigating such emerging risks?

The new code sets two key requirements: planning for the length of the scheme’s journey plan to get to full funding at an appropriate pace of de-risking and assessing current funding positions when carrying out valuations. As part of that planning, the code trustees must set a funding and investment strategy—that is, the journey to getting to the planned endgame for the scheme. The strategy must set out how the trustees will transition from the scheme’s current funding position to low employer dependency funding when the scheme is mature. In making that transition, how risk can be supported by the employer and the strength of the scheme has to be made clear.

During the consultation a lot of concern was expressed that the new code could weaken an important fiduciary power of trustees to make the investment allocation decisions by requiring trustees to invest in line with the investments set out in the funding and investment strategy that must be agreed with the sponsoring employers. In response to those concerns, although changes have been made to the code to clarify that decisions in relation to the scheme’s investment allocation are not constrained by the notional investment allocations in the funding and investment strategy, an inference remains that, in most instances, TPR expects trustees to align their investment strategy with the funding and investment strategy. Will the Minister confirm unequivocally that the code will not remove the power of existing trustees to decide on the scheme’s investment allocation? It is an important power in addressing moral hazard.

The code places a welcome greater emphasis on the strength of the sponsoring employer covenant, which is of fundamental importance but is often lost in debate, when considering funding and investment risk. The level of cash generated by a sponsoring employer and its future prospects will be key determinants of how much investment risk a scheme should take. The strength of an employer covenant can change very quickly following mergers, acquisitions, restructurings et cetera. Such changes may result in changes to the level of debt in a company, dividend policy, free cash flow, covenant and longevity. The code requires any funding deficits to be repaid as quickly as the sponsor can reasonably afford, but trustees will have to consider the impact on the employer’s sustainable growth. Trustees will need to assess such affordability annually; they will also have to provide evidence for their view of what is reasonably affordable and their opinion on the maximum supportable risk that a sponsor employer can bear.

These are potentially significant areas for disagreement between sponsoring employers and trustees, with one seeking to discharge a fiduciary duty to protect its members and another wanting maximum freedom from the liability of funding a pension scheme, but TPR has still to provide its covenant guidance on the main areas that trustees must consider when assessing the employer covenant. In that sense, there is a significant area of this code where an important point of detail is missing. Can the Minister advise when such covenant guidance will be issued?

The code emphasises a flexible and scheme-specific approach to regulation, taking into account the variety of DB schemes. It contains provisions for schemes that remain open to new members and may not be maturing, such as schemes that are now closed. Again, that is quite a controversial issue in the initial iteration and consultation on the development of this code. The considerations around investment strategy and the ability of trustees to choose how to invest now recognise the different characteristics of open schemes compared to closed schemes; the importance to open schemes of long-term planning; and a more flexible approach to assessing investment risk, which is supportable by the covenant and the scheme.

Finally, the Explanatory Memorandum—I shall pick up with brevity a point that my noble friend elaborated on in more detail—states:

“The approach to monitoring this legislation is that there is no requirement to carry out a statutory review of the draft Code”.


However, as we all know, the previous Government were—and, more so, the current Government are—focused on the issue of wider funded pension scheme consolidation and scheme investment strategies. Although I recognise that the Minister cannot comment on the outcome of such considerations or what may flow from the first pension review, if those outcomes had an impact on the provisions of the DB code, what would be the mechanism and consultation for revising the code as a consequence?

[Baroness Altmann (Non-Afl)]

My Lords, I congratulate the noble Lord, Lord Davies, on securing this important debate. I agree with the noble Baroness, Lady Drake: the code is an important document that certainly deserves the attention of this Committee. I apologise to the Minister because this debate may well end up lasting more than the half an hour that was apparently expected; I will try to be as succinct as I can.

The overall aim of the defined benefit code is to protect member benefits. The whole point of the code was that, in the past, there had been a kind of free-for-all where employers and trustees could invest and take as much investment risk as they wished. Given other circumstances in the market, hundreds of thousands of members either lost their benefits or were at significant risk of doing so. I welcome the fact that there is now a stronger regulator, the Pension Protection Fund and this kind of code, which is constantly being revised and updated.

However, I stress that I agree wholeheartedly with the comments of the noble Lord, Lord Davies, that this particular document, like previous documents, is rather too prescriptive, with excessive requirements placed on trustees, who may or may not need them. It seems to attribute spurious accuracy to an inherently uncertain outcome of events. The kind of box-ticking and groupthink approach that needs to be revised within 15 months of each new valuation will be costly to the schemes, and it is not clear what value will be added if the long-term strategy is unchanged or not likely to change.

Some of the issues we are grappling with, in this code and in the defined benefit universe as a whole, are dependent on and the result of the exceptional period of quantitative easing introduced in 2009. It was deliberately designed to drive down government bond yields and, concomitantly, to clearly put a much greater inflation risk on liabilities. That is indeed what happened. Initially, assets did not keep up with liabilities, but the fears of ongoing falls in gilt yields over that subsequent period, as quantitative easing, gilt printing and the driving down of long-term bond yields continued, have made anyone involved in the defined benefit space rather nervous of what are called “non-matching assets”.

We had a reversal of conventional thinking about defined benefit pension schemes. They were supposed to invest to take risk and welcome risk placed judiciously. This thinking became: do not take risk or try to beat the gilt market, because the gilt market may beat you and increase your deficit. So a whole groupthink built up around the idea that defined benefit pension schemes should have as much as possible in so-called matching assets, because you want to match your liabilities. The fact is that, if you want good funding, you need to outperform your liabilities—just matching them is not sufficient—but I am not sure that that is reflected very much in the code for schemes that are not in healthy surplus.

I welcome the Minister’s comments on the fact that we are talking about estimated liabilities based on expected future values, relative to current mark-to-market actual values for the assets, and on whether the risks of attributing that spurious accuracy to the long-term liabilities have been sufficiently considered. In this regard I declare my interests: I work with some defined benefit pension schemes, and have done so in the past, to advise on investment strategy.

It seems to me that part of the thinking going through this defined benefit code is that it is better for all schemes to fail conventionally than for too many schemes to try to do unconventional things that might succeed but incur greater risk. I feel we need more scheme-specific flexibility there, and we need to consider the impact of quantitative tightening and how that will be different for the pension liabilities associated with these schemes.

I welcome the differentiation mentioned by the noble Baroness, Lady Drake, and the noble Lord, Lord Davies, between open and closed schemes. I urge the Government to consider going further in allowing and enabling open schemes to take advantage of investment opportunities from a diversified array of risk assets, even in circumstances where there is, perhaps, some nervousness about the sustainability of the employer.

There is concern about the stability of the gilt market, but there is also an inherent conflict between that desire for stability and the need for outperformance of liabilities that these schemes could be delivering. If capitalism is not at an end—one might argue that it is—then investing in assets of higher risk than government bonds or the supposedly safer assets should, on aggregate and in the long run, deliver better returns. On top of that, we have a Government who rightly want to use more pension assets to boost the economy. There are assets such as infrastructure, small growth companies and equities as a whole, both domestically and internationally, that could deliver that objective, but they entail risk. That is where I hope the funding code may be further refined.

Social Fund Winter Fuel Payment Regulations 2024

Baroness Altmann Excerpts

Wednesday 11th September 2024 Lords Chamber

Moved by

[Baroness Altmann]

That an Humble Address be presented to His Majesty praying that the Social Fund Winter Fuel Payment Regulations 2024 (SI 2024/869), laid before the House on 22 August, be annulled because they would significantly reduce state support for pensioners without sufficient warning and without a proper impact assessment, and because they present a significant risk to the health and wellbeing of many pensioners on low incomes.

Relevant document: 2nd Report by the Secondary Legislation Scrutiny Committee (special attention drawn to the instrument)

[Baroness Altmann (Non-Afl)]

My Lords, I would like to say from the start that I believe the noble Baroness opposite is a very, very good woman and I hope that the House will forgive me in some way for bringing this before your Lordships. But I have spent my life trying to stand up for people who have no voice and trying to do what I believe is right. On this particular occasion, with a heavy heart, I believe I must do so.

Let me read some of the words of those people from whom we are taking away £200 or £300 this winter. These are the poorest pensioners. We will hear that the Government is protecting the poorest. It is simply not the case. I apologise, but that is the reality. “I do not qualify for pension credit. I live on my state pension and one small occupational pension that pays me the cost of a couple of bags of carrots and potatoes a month in an annuity. I receive just a little over the qualifying limit and fall into that group of pensioners who are in limbo. I am 75 years old and not in great health. I will be trying very hard not to turn my heating on this winter. I have only a few pounds a week for food, toiletries, insurance or any other repairs. Why is this being done? I always turn off the lights and am very careful, but I don’t know how I will get through the cold weather this year. I have arthritis and COPD and need to keep warm for my health.”

Another says, “I am 82 years of age and live alone. I am on £220 a week state pension and therefore £2.85 a week over the pension credit limit. Since the cost of living crisis, I have not been able to afford any central heating for the last two winters. I did not put on my gas central heating and I will not be putting it on again this year. My welcome winter fuel payment went towards my electricity bill, which increased due to the single room heater I used. I work on the ‘heat the person not the room’ principle. I fall into that group of pensioners who do not qualify for pension credit, and I am not sure how I can economise further”.

One more example says, “I am 91 years old and my husband and I struggled to keep our home warm enough last winter. The fuel bills rose so much, and even though our home is small we were spending so much on heating that we only had the heating on in the sitting room and our bedroom. He had Parkinson’s and I have had cancer, but we looked after each other. We spent our time in the one room downstairs and used lots of blankets, as well as often having three cardigans on. We went to bed early so we could turn off the heating, and would try to keep the heating off in the bedroom most of the time, but we would cuddle up together to keep warm. My husband passed away a few months ago and I don’t know how I will manage this winter. I don’t have enough money to warm the house more, and my small pension has put me over the limit for pension credit”.

This is the reality of the statutory instrument we are debating. I agree with the Government’s aim of removing a tax-free payment from millions of people who do not need it. Indeed, I have called for that to be done for a long time, or for it at the very least to be taxed: it could perhaps be rolled into a higher state pension but then become taxable.

I would support this measure if it was dated 2025 instead of 2024, giving time to put in place some mitigation and protection for these poorest pensioners. Those on pension credit are not the poorest as they get extra help—as the Minister herself has said, some get thousands of pounds extra. It is those who are just a few pounds a week above the limit or those who are eligible but do not claim or receive it who are the poorest. Nothing in these regulations will ensure they receive the money they expected, which has been withdrawn from them with no warning or time for them to economise in time for November, when it was due, or for the colder weather this winter.

I believe that the Government do not want to hurt these people. I do not expect that the needs and situation of these very poorest pensioners were really considered when this announcement was made. The aim, which I fully endorse, was to take the winter fuel payment away from the quarter of pensioners who have assets worth £1 million, and from those higher up the income scale, who clearly can manage without it. But that is not the impact that I am concerned about if we pass this measure today.

I am particularly concerned because of the wording in the statutory instrument document itself:

“A full impact assessment has not been produced for this instrument as no, or no significant, impact on the private, public or voluntary sector is foreseen”.


If that had been the expectation, since that publication the voices of Age UK, Independent Age, Silver Voices and the trade unions have all warned clearly that what the Government perhaps did not foresee is indeed foreseeable and potentially about to happen.

The Government’s Explanatory Memorandum says:

“No consultation was undertaken ... Whilst making the necessary Exchequer savings, it retains support for pensioner households on the lowest incomes”.


This is simply not correct, and I am trying to help the Government see that what I believe they do not wish to do, they may not need to do. I understand that there are pressures on the public finances, and I completely support the idea that a universal payment to those who do not need it, especially one that is tax-free, should not be made. Why not work out a system whereby they do not receive it, but the consequence of taking it away is not that we also have to take it away from perhaps 3 million of the poorest pensioners in the land?

The Secondary Legislation Scrutiny Committee has brought this issue to the attention of the House:

“We are unconvinced by the reasons given for the urgency attached to laying these regulations and are particularly concerned that this both precludes appropriate scrutiny and creates issues with the practicalities of bringing in the change at short notice”.


That is the problem I have, the short notice. It is not the aim of the policy that I query: there is no time to prepare, no time to increase pension credit—although that is a worthy aim, and I hope a few extra people will claim it. According to the Government’s own figures, more than 800,000 households are eligible but not claiming. The idea that they will receive the money this winter, having gone through the 243 questions on the application form, be approved and start receiving it, is simply fanciful. With the best will in the world—and I believe the Government have the best will to try to increase take-up—even if half the households were to receive it, the savings the Government say are so essential to make will be wiped out. This argument does not make sense. It is not logical to say that we have to take it away from the poorest because we want to take it away from the well-off.

Taking this money from people is, effectively, a 3.4% state pension cut this year. For anyone on the old basic state pension who is over 80, £300 is 3.4% of the money they received from the Government last year. This measure was introduced in 1997 and it has been an essential part of the state pension support package for pensioners ever since. No Government have said it will be removed; indeed, that was suggested and rejected time and again. I believe there could, and will, be a way of dealing with this. For example, to save money, you could tax it rather than axe it; or you could just say that anyone paying higher rate tax will have their tax coding adjusted and the money will be taken back from them. If you pay 40% or 45% tax, of course you do not need it.

--- Later in debate ---

[Baroness Stowell of Beeston (Con)]

My Lords, I commend my erstwhile noble friend the noble Baroness, Lady Altmann, on her powerful opening of this debate. I agree with the arguments she put forward, as well as those of my noble friend on the Front Bench. There is very little for me to add to what they have already said about this decision that the Government have made and for which they have no mandate. They have not even had the respect to set out a proposal in a Budget in a much more rounded way, as put forward by my noble friend Lady Altmann.

I want to make a bigger point. What a lot of people find quite hard to take at the moment is that, alongside this decision, the Prime Minister has the gall to say that his Government are acting in a way which will restore public trust. He seems not to understand that all of us in the political class over the last few years have lost public trust—himself included—because of our disregard and disrespect for what the electorate have been demanding from us. For this Government now to take decisions that affect people so directly without any notice—believing that such decisions can be justified because the Prime Minister and his Chancellor are convinced that they know best—damages public trust further.

Of course, the impact of this politically on the Labour Party is a matter for it, but I urge the Minister and the rest of her Government to accept the arguments put forward by my noble friend Lady Altmann today. I hope that she does not mind me calling her my noble friend; she will always be “my noble friend” to me.

[Baroness Altmann (Non-Afl)]

Absolutely. She will always be my noble friend.

[Baroness Stowell of Beeston (Con)]

I also urge the Prime Minister to drop his misplaced belief that he and his Government are somehow morally superior and are acting in a way which will restore public trust. On the basis of this decision, they are not.

--- Later in debate ---

[Baroness Altmann (Non-Afl)]

My Lords, I too welcome the noble Baroness to her position on the Front Bench. She brings huge expertise and value to that position. I hope that we can work together in the future on other pension-related issues—but on this issue, I have listened carefully to all noble Lords who have spoken and I have not heard any reasonable justification at all for the hurry to take this money away from the poorest pensioners this year. I have heard a marvellous case for changing it, and about the excellent work that is being planned to try to improve the take-up of pension credit and maybe to help people get the support fund, but none of these off-sets the loss for the possibly 3 million of the poorest pensioners—I repeat, the poorest pensioners, who are not the ones who are already on pension credit or might have a chance to receive it with the current take-up increase plan. This year they are at risk in their homes. This is the last chance to protect them and help them keep warm this winter.

For me this is about policy, not politics. I do not welcome any of the undertones or overtones that have tried to look at politics in this. There is none for me. My whole pensions policy life’s work has been about the idea that pensions are about not just money but people and giving them a better life in retirement. On that basis, I have not heard how the Government can possibly protect the poorest this winter.

We have heard about the triple lock. A triple lock increase of 4% on the basic state pension next April will give pensioners—many of whom, demographically, will not survive that long, regardless of the winter fuel payments—an extra £6.80 a week. They will not recoup a £300 loss until about February 2026. They need the money for their bills this winter. As I said, if the Government were to talk about this for next year, I would not be here—and believe me, I wish I was not here.

I know how hard it is to defy a Whip. I also know, though, as the noble Baroness, Lady O’Loan, said, that the conventions of this House are just that: conventions. We are the only mechanism left to protect the poorest pensioners and help them keep warmer this winter. With a very heavy heart, I believe that I must now test the opinion of the House.