Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Monday 26th January 2026 Grand Committee

Moved by

[Baroness Noakes]

91: Clause 40, page 38, line 34, at end insert—
“(c) able to demonstrate that they deliver investment performance which exceeds that achieved by the average of all Master Trusts which hold an approval under section 28A in respect of a main scale default arrangement.”Member’s explanatory statement
This amendment allows Master Trusts which deliver good investment performance to be excluded from the scale requirements.

[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.

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I understand that noble Lords do not like the idea of scale in all cases, but I hope I have reassured them about the nature of our approach and the sense of it, and I hope they will feel able not to press their amendments.

[Baroness Noakes (Con)]

My Lords, I thank all noble Lords who took part in this debate, which has demonstrated that there is unanimity on this side of the Committee on scale not being the most important thing—in direct contrast to the Government’s dogged attachment to scale.

We will probably return to innovation next week, so the Minister will not escape it, but I do not think the Government yet understand how innovation works and what it takes to scale a business: the timescales involved, the way you need to raise finance during the growth of a business, and the impact that what they have put in the Bill will have on those processes. We will need to explore that in much more detail. The noble Baroness, Lady Altmann, who wished to do so, is absolutely right, because I do not think the Government really understand what is involved in this area.

On “big is best”, which we on this side of the Committee certainly do not subscribe to, the Government said that the primary objective was savers’ outcomes, but a couple of minutes later the Minister said that the objective was consolidation. Is there a hierarchy of objectives in this Bill? It is not clear to me that there is. A few sentences away, she talked about the benefits that derive from scale, but the Government seem to have closed their mind to this: if you can get equivalent benefits without scale, why should you not?

That was immediately followed by the Minister saying that when you are in a £25 billion-plus fund, you put double the money into productive finance. There we are into the real objective of this Bill: to funnel savers’ money into productive investment. I refer the Minister to my comments on each policy objective needing a policy instrument and getting into terrible trouble when you try to get one policy instrument to meet more than one objective. I was reminded of this by one of her Back-Benchers, who kindly pointed out that clear rule, which is well evidenced. I will not disclose his identity, and he is not going to get up and say it, but I really think the Government should look again at how they are using the instruments in this Bill to achieve what are clearly multiple objectives, not disclosed in a hierarchy and not even acknowledged as being potentially in conflict. We will clearly not progress any further in Committee, but the Minister should be in no doubt that this will be a feature of our discussions on Report. I beg leave to withdraw.

Amendment 91 withdrawn.

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[Lord Fuller (Con)]

My Lords, the noble Lord, Lord Davies, found the Government’s position inexplicable such that these amendments have become necessary. I can understand that. The point is that the Government do not—they do not understand finance. Perhaps they should have had a few more prawn cocktails before the election; they might have got some learning inside them. This group demonstrates that there is ignorance in this Bill about investment, asset classes and asset allocations.

New Section 28C(5) treats private equity as if it is just one class, but it is not. That is why I welcome Amendment 121, specifically proposed new paragraphs (f) and (g), which would lay out the appropriateness of scale-up capital and quoted and unlisted companies.

There is no doubt that you can make a lot of money in private equity. High risk leads to high rewards; the big hitters can and do make money. The early backers of Revolut turned a million into a billion, as the FT reported last week. On that basis, everybody should be having a go. What could go wrong? We all know that, in many cases, companies get loaded with debt and dividends are extracted; we have ended up with serial bankruptcies in the casual dining sector, for example, and Claire’s has gone bust twice in the last four months. I am not exactly sure the Government should be mandating this sort of thing by statute.

Putting that to one side, I have some experience through my membership of the Norfolk Pension Fund in private equity investment. I have been a board member since 2007. There are some big firms in this space; HarbourVest might be a name familiar to noble Lords but others are available, as it says in the adverts.

To participate in this space, you typically enter a 10-year commitment for quite a lot of money as a fund. You provide the fund manager cash certainty. He can go ahead and acquire smaller firms within the fund. You do not pony the money up front necessarily; it just needs to be available when the fund manager calls you to chip in. By and large, the fund manager finds the firms and invests that money, typically over the first four years of the indicative 10-year period. They then grow and nurture those firms until they can be sold for a profit—unless they go bust in the meantime, which many do.

At some point, 10 to a dozen years later, after all the surviving companies have passed on and the fund closes, all the money is returned to the pension fund. It is a well-trodden path and a proper asset class. This is why proposed new paragraph (g) in Amendment 121 is so important. These opportunities should be available to pension funds, but the Bill as currently constructed excludes them. It is madness. This is not what we need as a nation.

We need to go further. We need to be able to step in and help those founder-owned companies, together with local business angels, their families and friends, to get to the stage where HarbourVest can have a nibble. We need to make the small nibbles into larger fish. It is the scale-up issue. The exam question here is to identify good founder-led businesses locally and grow them. I declare an interest; I have been a director of New Anglia Capital Ltd, which was public sector, 100% owned by councils in Norfolk and Suffolk for the purposes of investing in early stage companies, taking them from a glint in the eye to the stage at which private equity might get involved. My goodness, it is hard. We have invested in bright prospects in life sciences, engineering, medical technology and clean energy. It is high risk, and I am told it carries the opportunities to make big returns—not that we have found them yet. But at least it carries that opportunity. As a nation we need to turn those cygnets into swans and those small acorns into mighty oak trees. The Bill should aim to do that, but it does not.

The conflict is with the press release that accompanied the Mansion House announcement. The Government’s own presser boasted:

“More than 50 scale-up businesses have signed a joint letter to the Chancellor welcoming the reforms as a ‘significant milestone in ensuring British institutions back British businesses at the scale required to generate growth, employment and wealth’”.


I feel sorry for the people who signed up that letter, because they were suckered. The Bill does little to scale up businesses and it has taken the noble Baroness, Lady Altmann, to put proposed new paragraph (f) into the amendment so that the Government’s own press release can form part of the law.

Forcing everything to be large, as we have heard, makes it harder to get the boost for start-ups. Amendment 121 would remedy this. We need it not just for those start-up businesses: the founders, their families and friends and all those angels—important though they are. We need it for our provincial cities and market towns. These are the places with the gems that need to grow in pursuance of

“UK growth assets rather than wider overseas assets”,

as it says in the Member’s explanatory statement.

Without this amendment, Mansion House is a mirage. By this Bill the Government have done a confidence trick on those who believed there would be a flow of capital to these businesses. It is not too late to change course. I echo strongly the comments of the noble Baronesses, Lady Bowles and Lady Altmann, and note that we are in Committee. I think this Committee is doing valuable work, because it has set up the conversations we all need to have between now and Report. The Government can reflect on what they are trying to achieve and recognise that it will not be achieved by the Bill as currently constructed. We may then need to have a compromise that will actually do the thing we are here to do, which is to invest in Britain and have better, more secure futures for people who want to invest in pensions, not Lego sets or Star Wars characters.

[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.

[Baroness Noakes (Con)]

The noble Baroness knows that she and I disagree on this subject. I hold to my view that the buying and selling of shares is simply the exchanging of financial assets.

[Baroness Bowles of Berkhamsted (LD)]

May I intervene so that I do not have to take up time later? I cannot see the difference between the follow-on funding that you get with a listed investment company, if you have an IPO, and the subsequent follow-on funding rounds. With an LTAF, you have initial fundraising and subscriptions. With a listed investment company, you buy and sell on the market. With the open-ended LTAFs, you have redemptions, purchases and flow matching. If you are watching the money, those are equivalent processes.

[Baroness Noakes (Con)]

If the noble Baroness, Lady Bowles, had listened, she would know that I said I thought what the Government were doing had gone too far, because there were instances where there was a necessary flow between the raising of funds and that flowing into new investment.

A number of noble Lords on this side of the Room have been talking as though this Bill stops pension schemes investing in listed assets or investment companies. It certainly does not; it merely says that they do not qualify if asset mandation is introduced. We ought to be concentrating on whether this is a valid policy objective—the Minister knows that I do not subscribe to that—to get money out of pension funds and into the real economy. We then ought to concentrate on which flows achieve that; certainly not all flows of buying investment trusts or other listed vehicles will achieve that.

[Viscount Younger of Leckie (Con)]

My Lords, I rise to speak in strong support of a number of carefully drafted amendments tabled by the noble Baroness, Lady Bowles, and once again ably supported by the noble Baroness, Lady Altmann. I will also speak to my Amendment 127.

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[Baroness McIntosh of Pickering (Con)]

My Lords, I am grateful to my noble friend Lord Younger of Leckie for introducing this group and setting the scene so eloquently, and to my noble friend Lady Penn for speaking to her amendment. I shall speak to the amendments in my name and I thank the noble Baroness, Lady Altmann, for lending her support to Amendments 129, 153 and 156. They follow on neatly from the other amendments about which we have heard. The Bill requires the Government to publish a report before the introductory regulations are brought into force to bring in the reserve powers, but it covers only how the financial interests of savers will be affected and the effect of the regulations on economic growth.

The purpose of my Amendment 129 is to set out additional items to be covered in the report, to ensure that the Government properly and comprehensively assess the impacts of any future regulations, such as, for example, the functioning of workplace pensions markets and impacts on the market of assets to be mandated and other requirements. What I am proposing in Amendment 129 is to test whether the Government have done enough to justify using such a drastic power. I am also suggesting, taking up the point of my noble friend Lord Younger, that the first report should be in less than five years: the first report should be after two years, because a lot of damage could be done in the first two years and even more damage could be done if there is no report for five years.

Amendment 156 continues on this theme, looking at a different part of Clause 40 for these purposes. Amendment 153 says that there should be a review, as I have mentioned, which should take place within at least two years, in addition to a review within at least five years. While the review in the Bill allows for mandation to be in place for five years before the Secretary of State must review its impact, I believe that that is too long and that it could potentially allow for negative effects to set in under the regulations under the Bill for affected default schemes. Taken together, Amendments 153 and 156 bring forward the review of regulations to take place within two years after those regulations have been in force, as well as after another three years to stop any further damage being done. We set out here what those reviews should look at

“the functioning of the market for Master Trusts … what effects the measures have had on that market … what effects the measures have had on the markets for qualifying assets”,

and so on, as set out in these amendments.

I hope the Minister will look favourably on these amendments, particularly since there is a mood on this side to coalesce around a review within the first two years.

[Baroness Noakes (Con)]

My Lords, all the amendments in this group raise important issues. I hope that none of them will be necessary, because I hope that we will have got rid of the power from the Bill, so these will become irrelevant details. I have Amendment 130 in this group, which would modify the mandation power by removing new Section 28C(15). This subsection “overrides any provision” of a trustee or scheme rules that conflicts with the mandation power. Thus, if the scheme had been set up with investment parameters that, for example, ruled out investing in private equity, and the Government then specified private equity, the wishes of the employer expressed in the scheme’s governing documents would be completely overwritten. Since there is no requirement in the Bill, as I understand it, for the Government to specify more than one asset class, it is quite possible that the Government could specify a required asset class that conflicted with things that had been deliberately set up when the scheme was set up.

I can understand, of course, why the Government want to encourage pension schemes to consider investing in alternative asset classes. I do not think you will find much resistance to the concept of investing in alternative asset classes. But I simply cannot understand why the Government think they should have a power to force schemes to invest in a particular way, if a conscious decision has already been made not to invest in that asset class. The Government might not agree with that decision, but I hope we do not live in a world where the Government can simply ignore the clearly expressed wishes of those they govern. I hope that we still live in a free society. Subsection (15) seems to me to extend the powers of the state too far, and we ought not to go along with it.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I have several amendments in this group: Amendments 154, 157, 158 and 159, which I will not say much about because I am fishing in the same pond as everybody else. If there is this mandation, we are anxious to know how it works, and we think the review should come earlier—I have put in some of the things that I think it should look at. I will spend more time on my Amendment 131, which is about prior steps that would have to be taken before there was any exercise of the mandation and regulations were made. It is about the prior steps that must be taken before the Secretary of State can exercise the regulation-making power in new Section 28C—what I termed the devil’s clause once before, although we now know that it is the ABI clause.

It is probably worth pausing here to remind ourselves whom the ABI represent: it is the Association of British Insurers and it represents the insurance companies, which are the manufacturers of the LTAFs, as was indicated earlier. It had a meeting in which, as usual, it displayed the slide that says, “We’re not colluding and breaking competition law, but we’re just going to agree that we won’t be investing in the other vehicle that has protected net asset value, and we’ll do a Q&A that says that’s not happening”. Interestingly, the insurers present at that meeting seem to have either forgotten about it or are telling me that they did not agree to anything. However, I leave that hanging.

If the Government wish to enforce a power of this potential scope, which, as has been explained, is much wider than the example in the Bill—a power that could reshape asset allocation across the pension sector—it must be subject to proper safeguards. These prior steps are not obstacles but constructive checks that should support the Government’s own objectives.

Proposed new paragraph (a) would require the Secretary of State to

“review the effect of any voluntary agreements or coordinated commitments relating to asset allocation”.

We have had a lot of policy alignment, pledges and so forth, and we all want the voluntary method to succeed. But if the point comes that regulations are contemplated, it is essential to understand what the voluntary route has already achieved, where the evidence points and why it did not happen.

Proposed new paragraph (b) would require an assessment of

“the impact of any such agreements on asset allocation, pricing and valuations”.

If the Government are concerned about market functioning, they should be equally concerned about how co-ordinated commitments affect pricing signals and valuation discipline. This is simply good policy hygiene because it ultimately affects workers’ pensions.

Proposed new paragraph (c) would require a review of

“the likely effect on returns to pensions savers”.

We all hope for the double benefit: better long-term returns for savers and productive investment that supports the UK economy. But we must analyse whether that is happening in practice, and if not, why not, before moving to a regulatory footing.

Proposed new paragraph (d) would require the Secretary of State to “obtain clearance” from the Competition and Markets Authority, and that is entirely consistent with the CMA’s pro-competition remit and with the competitiveness and growth objectives embedded in FSMA. Any use of this power must reinforce the UK’s competition framework, not bypass it, and where co-ordinated commitments already exist in the market, the Government must be certain that any regulations they bring forward meet a clear public interest justification.

Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Thursday 22nd January 2026 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, my Amendment 81 is very small; I hardly need to say anything about it. It came from one of those occasions when you are going through the Bill and you write a little query which you then convert into an amendment. It concerns Clause 22(3)(b), which says that a pension pot can be moved into a consolidator if

“the individual has, subject to any prescribed exceptions, taken no step to confirm or alter the way in which the pension pot is invested”.

There are instances in which a person may want to stay attached to a pension fund they have in a workplace, particularly if they do not necessarily have a long relationship with an employer or have done some intermittent work and then gone off to have a family, because they may have an informal agreement to go back. How do you cater for that? I realise that it might just fall under “any prescribed exceptions”, which you write in a note to deal with, but that is the basis of the amendment. I am sure it will be very simple for the Minister to say, “Yes, that is covered”.

While I am on my feet, I support Amendment 83. I also support Amendment 88 from the noble Baroness, Lady Noakes, because it is worth having some guardrails for things that are doing very well.

[Baroness Noakes (Con)]

My Lords, my Amendment 88 proposes to limit the power in Clause 34 to increase the size of the pot classified as small so that it is limited to £10,000. I welcome the fact that the power to make regulations under Clause 34 has to be consulted on and that they will be subject to the affirmative procedure, but we know that Parliament has close to zero power to alter the content of regulations, so it is important that the guardrails around the power are sufficiently strong.

There is widespread acceptance in the industry that there should be consolidation of small pots of £1,000 or less. I understand that there are already around 13 million pots of that size, and that is predicted to rise to over 30 million in only a few years’ time, so this is clearly an important issue. There is a concern, however, that the Clause 34 power could be used beyond its core purpose, which is to ensure that multiple small pots do not accumulate within pension providers and that individuals do not lose track of their own pension pots. It is one thing to use the power for sensible tidying up, but it would be quite another if the power were used to drive further consolidation, for example, which would not necessarily be in the interests of either savers or pension providers.

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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.

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[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.

[Baroness Noakes (Con)]

Will the Minister say what the evidence base is for the assertions she just made?

[Baroness Sherlock (Lab)]

I was going to come on to that, but I am happy to do so now. Our evidence shows that across a range of domestic and international studies, a greater number of benefits can arise from scale of around £25 billion to £50 billion of assets under management, including investment expertise, improved governance and access to a wider range of assets. This is supported by industry analysis, with schemes of this size finding it easier to invest in productive finance. International evidence shows funds in the region of £25 billion invested nearly double the level of private market investment compared to a £1 billion fund. Obviously, we consulted on these matters and we selected the lower band, but there is further evidence that demonstrates the greater the scale, the greater the benefits to members. We did go for the lower end of that.

I turn to the amendments to Clause 40 from the noble Viscount, Lord Younger. This probing of how exemptions might operate, especially in relation to CDC schemes, is helpful. Our intent is clear: to consolidate multi employer workplace provision into fewer, larger, better run schemes. To support this, exemptions will be very limited and grounded in enduring design characteristics; for example, schemes serving protected characteristic groups or certain hybrid schemes that serve a connected employer group. I can confirm that CDC schemes are outside the scope of the scale measures. Parliament has invested considerable effort to establish this innovative market, and we will support its confident development while keeping requirements under review.

I turn to the broader point about why the exemptions are intended for use for schemes for specific characteristics; for example, those that solely serve a protected characteristic or those that serve a closed group of employers and has a DB section—hybrid schemes. I agree with the noble Lord that, if we were to have too many exemptions, it would simply mean the policy had less impact, but we need to have some flexibility and consultation.

Amendment 92 from the noble Baroness, Lady Bowles, proposes that master trusts delivering “exceptional” value under the VFM framework could be exempted from scale and asset allocation requirements. Exemptions listed in new Section 20(1B) relate to scheme design and are intended to be permanent. Introducing a performance based exemption tied to ratings would be inherently unstable for members and would risk blurring two parallel policies. Scale and VFM complement each other, and both support good member outcomes. However, we do not agree that VFM ratings should be used to disapply structural expectations on scale, and we do not wish to dilute either measure.

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I turn now to Amendments 134, 137 and 138 from the noble Baroness, Lady Noakes. Amendment 137 would make exceptional investment performance a gateway to the new entrant pathway. That would elevate performance above structural considerations and, in practical terms, is ill suited to a scheme with no members. It would also risk undermining consolidation by creating a performanceled exemption to scale, which I realise is what the noble Baroness wishes to do.

[Baroness Noakes (Con)]

I am struggling to understand why the Government are setting their face against good performance. They seem to be obsessively pursuing scale and consolidation of the industry, unable to see that, for pensioners and savers, equally good or better returns can be achieved from sub-scale operators. That is a question of fact. The evidence that the Minister gave earlier merely points to there being a correlation between size and returns; it is not an absolute demonstration that, below a certain scale, you do not achieve good returns for savers. I hope that the Minister can explain why the Government are so obsessed with scale rather than performance for savers.

[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.

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[Baroness Sherlock (Lab)]

We expect schemes with scale in a future landscape to deliver better outcomes for members. Consolidation is not created by the scale measures. It is already happening in the market, but we expect it to accelerate. Those running schemes are expected to carry out due diligence and act in the interests of their members in any consolidation activity. If there is anything else I can say on that, I will write to the noble Baroness. I am happy to look at it. The core question is whether it is a matter for those running schemes to make those judgments.

[Baroness Noakes (Con)]

Does the Minister understand that if you are currently a small scheme, unless you have certainty about being able to qualify to go into transitional relief, you will not be able to raise any money to facilitate your growth? It becomes a Catch-22. The Bill is creating uncertainty, which is destroying the businesses of those who might well be able to come through, but will not be able to convince equity or debt providers that they will be a viable business at the end because of the hurdles that the Government are creating in this Bill.

[Baroness Sherlock (Lab)]

I understand the noble Baroness’s concerns, but I contend that we are doing the opposite. We are creating certainty by being clear about what the intention is, what the opportunities are and where we expect schemes to be able to get to and in creating transition pathways but making it clear that people will have to be able to have a credible plan to do that. We are making that clear now. I have given the reasons why I anticipate that there is a pathway to scale for schemes that are around at the moment, but that is a judgment that schemes will have to make. If they do not believe that they can make scale, they will need to look at alternative futures in a way that is happening in the market already through consolidation. I accept that it may accelerate it, but it is not creating it.

Amendment 134 seeks to remove the no-members requirement entirely, accepting that it would potentially allow any existing DC workplace scheme to claim new entrant status, circumventing the scale policy, which, while contested, is the point of our proposal. Our inclusion of the no-members provisions in Committee in the Commons clarified the original intent and prevented a loophole.

Amendment 137 would mean that existing schemes would be able to access the new entrant pathway if they had stronger investment performance than can be achieved by schemes with scale, which we have touched on. While I understand the intention to reward and maintain strong investment performance, the focus there would be on short-term rather than long-term outcomes. There are various practical problems with doing that in any case, but I am also conscious that there will be occasions where a scheme that depends on its investment performance does not deliver and no longer qualifies on the pathway. That is then not a stable position for employers that use the scheme or its members. At the heart of the requirement is the need to create buying power for schemes to drive lower fees and increase returns. A small scheme simply cannot generate the same buying power, and schemes with scale are expected to deliver better outcomes over the long term.

Amendment 138 would strip the power to define “strong potential to grow” and “innovative product design” in regulations. The Government believe that these are key attributes of a successful new entrant in the market. Like other noble Lords, I know about the importance of ensuring that the measures we implement will be clearly understood and workable in the complex pensions landscape. The form that innovation will take is, by definition, difficult to predict; we would not seek either to define its meaning without input from experts and industry or to fix that meaning in law without retaining some flexibility. Consultation with industry will be important in ensuring that schemes can demonstrate these attributes; to be clear, we will consult on this and other aspects of the new entrant pathway relief first, before regulations determine the meaning of these terms.

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[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.

[Viscount Younger of Leckie (Con)]

My Lords, my noble friend Lady Stedman-Scott and I have only one amendment in this group: Amendment 109, which would remove the Government’s broad mandation power. That has been very much the theme of this debate, of course. I want to be absolutely clear at the outset that we are also seriously and fundamentally opposed to investment mandation in the Bill, which I sure will come as no surprise to the Minister.

Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

These are my questions on this group of amendments, which is about the principle behind the surplus. How much of a surplus is surplus surplus? At 110% to 120%, if you have a major correction in the markets, you could undoubtedly lose that in a year—not actually but notionally. How much of a surplus is available to be released? How do we deal with putting guard-rails around that, as the noble Lord mentioned? Who shares that surplus? How much goes to the employer and, most importantly, how much goes to the members? How much of either of that will ultimately go into investment? For me, the important questions are: what are the guard-rails; what will be done with it; and how do we get the best out of it?

[Baroness Noakes (Con)]

My Lords, I will say a little more in our debate on the next group about how surpluses should be used, but we must recognise that employers in defined benefit schemes underwrite defined benefit scheme finances; they are the ones who have been putting in very large sums of money to keep these schemes going for the past 20-odd years. It is only right that we should recognise the interest that employers have in taking money that is no longer required within a scheme.

We have had so many years of deficits in pension schemes that we have rather forgotten that this was like an everyday happening in the pensions world, if you go back to the 1990s, when surpluses arose. Indeed, pension schemes were not allowed to keep pension surpluses; there were HMRC rules which made that rather difficult to do. These were perfectly ordinary transactions in the pensions world which we have just forgotten about because of the deficits that have existed for the last 20 or 30 years, which employers—not employees—have had to bear the burden of.

On the amendments in the name of the noble Lord, Lord Davies, I understand the technical point about removing assets rather than surplus, but surplus is the language that has always been used in the context of pension schemes; it is in the 1995 Act. The noble Lord’s amendments amend only this Act; as I understand it, they do not go on and amend the earlier Act. It is just language that has been used for a long period; I think people know what it means, and it will be very confusing at this stage to change the language.

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank the noble Lord, Lord Davies, for putting these amendments down and speaking in detail about them. We also heard good words from the noble Lord, Lord Kirkhope, the noble Viscount, Lord Thurso, and the noble Baroness, Lady Noakes. I almost thought, “Is there any point in getting up and speaking?” but I am a politician.

This group goes to first principles. What is a defined benefits pension surplus and what is it for? For us, DB surplus is not a windfall or an accident, as I think others have said. It is a result of long-term assumptions, member contributions, employer funding decisions and investment outcomes—all those—but above all, it exists within a framework of promises made to members in return for deferred pay. We are therefore concerned about renaming—we keep on coming back to this—“surplus” as simply “assets” available for redistribution.

Language matters here because it shapes both legal interpretation and member confidence. Treating surpluses as inherently extractable risks weakening the fundamental bargain that underpins DB provision. Our position is not that surplus should never be accessed, but that it should be considered only after members’ reasonable expectations have been fully protected. That includes confidence in benefits security, protection against inflation erosion, and trust and accrued rights not being retrospectively interpreted. I have always thought that with DB pensions you need prudence. How far do prudence and good governance go?

Finally, the question for Ministers is whether the Bill maintains the principle that DB schemes exist first and foremost to deliver promised benefits or whether it marks a shift towards viewing schemes as financial reservoirs once minimum funding tests are met. In that case, one has to think, “What is the minimum for the funding tests?” We shall come on to that in an amendment that the noble Lord, Lord Sikka, has put down later in the Bill on where companies fail. It is a question of when those surpluses are available, if they are ever available.

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[Viscount Thurso (LD)]

My Lords, I rise principally to speak to my Amendment 38 in this group and to support my noble friend’s Amendment 44, to which I added my name. I am in broad sympathy with the mover of Amendment 26.

I think we can all agree that we would like to deal, if possible, with inflation eroding the purchasing power of a pensioner. As was said on the last group, there is basically a contract between the employer and the employee in a DB scheme, where the employee expects to receive a certain pension. The case I raise in my amendment stems from the many pension schemes that do not offer an absolute inflationary rise as part of their terms and conditions. Quite a number do, but some say in their terms that there would “normally” be an increase of an inflationary amount, but it is not guaranteed. There are a number of schemes where the literature at the time the person went into the scheme—in the 1980s, 1990s or whenever—indicated that they may reasonably expect to get inflationary increases, but they did not.

In this instance, I am grateful to the BP Pensioner Group, which brought its case to my attention and helped with the drafting of this amendment and my others. Broadly behind its request is the fact that the BP scheme, which is now closed, is an extremely good scheme with quite a large surplus in it. It is very well funded and therefore, as per the last group, may well be something that could go back to the company in part. But it has chosen for a number of years to refuse the request of the trustees to make discretionary increases.

It is worth noting just how pernicious the effect of inflation is on these incomes. I used the Bank of England inflation calculator to see what had happened. Bearing in mind that the statutory amount is 2.5%, if you go back with the inflation calculator to 2005, it is 2.8%—you might say that is not too bad—but inflation from 2015 to 2025 was 3.11% and, from 2020 to 2025, it was 4.35%. In every year there has been a modest but rising and quite large difference between what the statutory cap would allow and what the actual inflation was.

Of course, that compounds every year. So, every year, the loss is compounding up. Today, a pensioner may well be significantly worse off than if they had been getting something. By definition, surpluses comprise funds in excess of those required to meet the totality of members’ entitlements in full; they are, therefore, the resource out of which discretionary payments can be made. As such, any payment of surplus to the employer could prejudice the possibility of a discretionary payment to members. What I am seeking, and what my amendment seeks, is to make sure that that is in balance.

As I mentioned, since 2021, inflation as measured by CPI has been well over 4%, much ahead of the cap of 2.5%. The Pensions and Lifetime Savings Association’s survey indicated that, during the recent period of exceptional inflation, only 12% of UK pension funds made permanent discretionary increases to protect the purchasing power of members. In looking at surplus being distributed in part to employers and in part to members, the economic good if the part of the surplus that goes to the employer is used in investment is obvious, but let us not forget the economic good in increasing the purchasing power of the pensioners. There is an equal economic good on both sides of this argument.

The noble Baroness, Lady Noakes, made the valid point that a great many companies supported their pension schemes during the difficult times of the late 1990s and early 2000s, but I would argue that that was in their contracts because they had contracted to make the payment at the end. We are now in a situation where, through the far better quality of trustees, the training offered by the Pensions Regulator—I have taken it and can attest that it is well worth doing—and the governance rules that have been brought in, we have the ability to make those surpluses available.

What this amendment would do is add to Clause 10 that the regulations to be made by the Secretary of State would include the words on the Marshalled List, which would mean simply that the Secretary of State could regulate to ensure that trustees took inflationary pressures into account. That is pretty modest, on the scale of the amendments that are being put forward, to deal with the surplus. Although the amendment is probing at this stage, if it is not met with some sympathy now, it may become a bit more than probing as we go on.

My noble friend Lord Palmer’s Amendment 44 is along the same lines, although it addresses pre 1997, which my amendment does not specifically do; I will leave my noble friend to argue the case for that. In passing this legislation, we owe it to those pensioners who have been left behind to do something to help them catch up.

[Baroness Noakes (Con)]

My Lords, I understand the motivation behind the amendments in this group, which call, in one way or another, for inflation protection, in particular for pre-1997 pensions that do not benefit from indexation to have a first call on pension scheme surpluses. I do not, however, support these amendments.

When compulsory indexation was first introduced by statute, it was applied only to pension rights which accrued after April 1997. That was a deliberate policy choice by government at the time. Although the cap and the index have been tinkered with over time, the basic policy choice has remained intact. The 1997 change was itself quite costly for those employers that had not previously included indexation or inflation protection in their pension offer to employees, which was quite common at the time. I am sure that the Government at the time were aware that imposing indexation on all accrued pension rights would have been very expensive for employers and would very likely have accelerated the closure of DB schemes.

The period after 1997 saw the evaporation of the kind of surpluses that used to exist, which, incidentally, vindicated the 1997 decision to exclude the pre-1997 accrued rights, because if they had been included, that would almost certainly have accelerated the emergence of deficits, which led in turn to employers considering how they could cap their liabilities by closing schemes entirely or future accrual. As we know, the period of deficits lasted until the past couple of years; they lasted a very long time.

Alongside this period of deficits emerging, there was a mutual interest among trustees and employers to de-risk pension schemes. That is why they shifted most of the assets into things such as gilts, which, in turn, increased the sensitivity of the defined benefit schemes to gilt yields, as we saw in the LDI crisis, and resulted, when interest rates started to rise again, in the surpluses starting to emerge. It was not the only cause but a very significant cause of the surpluses that we now see. We now have schemes in surplus: DWP figures suggest £160 billion—that figure will probably change daily as interest rates change—but that was only after significant employer support throughout the 1990s and the noughties was required, when significant deficit recovery plans had to be signed up to by employers to keep their defined benefit schemes afloat.

The amendments in this group seem to be predicated on the thought that these surpluses are now available for member benefits, as though employers had nothing whatever to do with funding their emergence. Because DB pension schemes are built on the foundation of the interests of members, it is obvious that the surplus will have to be shared between the two—that was partly covered in the previous debate—but the one thing we must always remember is that they have emerged largely from the huge amount of funding that has had to be put in since 1997 to keep the schemes afloat. That the surpluses have emerged does not mean that they are available for whatever good thing people want to spend them on. I certainly do not think it is right to use surpluses to rewrite history to create rights that deliberately were not created in 1997, for the very good reasons that existed at the time. For that reason, I do not support these amendments.

[Lord Willetts (Con)]

My Lords, I want briefly to enter this discussion to identify another group not captured in the neat divide of employers and scheme members. When there is £160 billion knocking around, people tend to work out elegant arguments for why some group or another has a claim on that money. I understand the arguments for the pre-1997 claims, but I have to say that what my noble friend Lady Noakes just said is a very accurate account of the history and the thinking at the time. There is indeed an argument that, looking back, there was a fundamental change in the character of the defined benefit pension promise with that legislation then, which probably ended up as the reason for their closure. A with-profits policy became one where you had a set of rights, which were more ambitious and have proved in many cases too onerous for employers.

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[Baroness Noakes (Con)]

I want to comment briefly on Amendment 35, tabled by the noble Lord, Lord Davies of Brixton, where he seemed to characterise the need to have members in the room alongside employers and trustees. He seems to forget that trustees’ responsibility is to act for the members. The members are fully part of the negotiation through the trustees. I personally do not agree with his amendment requiring formal consultation, as with some of the existing listed changes to pension schemes. But there was a good reason why the release of surpluses was not included when that legislation was first drafted, and I have seen no reason to change that.

My Amendment 42 is rather unlike other amendments in this group, which is why I spoke in the previous group and probably should have asked for my amendment to be grouped there. I reiterate my remarks in that group on the importance of the interests of the sponsoring employers, who have for the most part provided the funding which has now led to the surpluses emerging, which is the subject of these clauses in the Bill. My Amendment 42 simply says that regulations made under new subsection (2A) of Section 37 of the 1995 Act may not replace restrictions on employers once surpluses have been paid to them.

The DWP’s post-consultation document on the treatment of surpluses said:

“Employers could use this funding to invest in their business, increase productivity, boost wages, or utilise it for enhanced contributions in their Defined Contribution (DC) schemes”.


The noble Viscount, Lord Thurso, referred to that being used elsewhere as a justification for these new release powers. I agree that they could use it for those things, but there are also other things that they could use it for. For example, they could use it to fund a reduction of prices in the goods and services they sell to gain a competitive advantage in the marketplace.

The thing that concerns me in particular is whether the funds are used to pay dividends or to make a return of capital, because companies have shareholders and that would be a fairly normal use of surplus funds. My key concern is that the Government would use the power in new subsection (2A) to specify that employers could not use the money in the way they chose, and in particular in relation to dividends and share buybacks.

I completely understand the Government’s desire to see more investment, but holding money within the company might be the economically illiterate thing to do. Businesses make investments in assets, productivity or people if they think they have a reasonable prospect of making a return. They do not invest because they happen to have some surplus cash lying around. If they cannot be reasonably sure of making a decent return themselves, the right thing to do is to return the money to the shareholders and let the shareholders recycle that into other investment opportunities which make a reasonable return. That is why low-performing companies are often under pressure to return capital to the shareholders. In the context of the whole economy, that is the sensible thing to do, because it gets capital to the right place in the economy. Therefore, I hope the Minister can reassure me that new subsection (2A) will not be used to restrict what companies do with the surpluses extracted from pension schemes.

The Minister made some quite helpful remarks in the first group about the Government not telling people what to do with the surpluses, but I hope she can be specific in relation to the use of the power in new subsection (2A) that that would not be used to restrict what companies can do.

[Lord Fuller (Con)]

I support my noble friend Lady Noakes in her assertion that members’ interests are already taken into account on many trustee boards. In fact, all but the very smallest schemes have procedures and requirements to appoint member-nominated trustees. It is almost so obvious that it is hardly worth saying, but it is the truth. It is the job of the member-nominated trustees, not the unions or the members themselves, to represent the interests of that cohort. Even the local government scheme has arrangements whereby the needs of the employers and the employees are balanced, so it is not just a question of the private schemes; all schemes have those balances as a principle, and that is entirely appropriate.

I am disappointed to disagree with the noble Lord, Lord Davies, because I felt we got on so well in the previous two days in Committee, but, on this occasion, I part company with him. I do not think his amendments are needed, because of the existence of that member-nominated trustee class. It is their job, and if the members do not like it, they can get another one.

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[Lord Sikka (Lab)]

Just to recap quickly, I was looking at a scenario where an employer had received a surplus from a pension scheme but soon afterwards became bankrupt. Normally, the PPF will rescue, but that is limited to 90%, which means that employees will face a haircut in their pension rights. So the only possibility to help to protect employee pension rights is to prioritise payment to the pension scheme from the sale of the assets of the bankrupt entity. In other words, pension schemes must be paid before any other creditor.

Deficits on pension schemes of bankrupt companies are not uncommon. I was adviser to the Work and Pensions Committee on the collapse of BHS and Carillion, and we looked at that closely. I also wrote a report on the collapse of Bernard Matthews for the same committee. Basically, they showed all kinds of strategies used by companies to deprive workers of their hard-earned pension rights.

This probing amendment seeks to protect employees by ensuring that pension scheme deficits not met by the PPF are made good by being first in line to receive a distribution from the sale of the assets of the bankrupt company. This applies only where the employer has taken a surplus in the last 10 years. As I indicated earlier, there is nothing sacrosanct about 10 years; if noble Lords wish to support this, it could be changed.

From a risk management perspective, it makes sense to put pension scheme creditors above other creditors. Unlike banks and financial institutions, employees cannot manage their risks through diversification. Their human capital can be invested only in one place. Employer bankruptcy is a tragedy because employees lose jobs and pension rights. For those of your Lordships who are not familiar with portfolio theory, the basic message is that there is a correlation coefficient of plus one, and it multiplies their risks. As human labour cannot be stored, employees will have no time to replenish their pension pots, and as we all get older, our capacity to work is also eroded. So, despite making the required contractual payments, employees will face poverty and insecurity in old age.

I urge the Government to protect workers’ pension rights. They should not be left in a worse position after the extraction of surpluses by employers. I beg to move.

[Baroness Noakes (Con)]

My Lords, I do not support Amendment 45A, tabled by the noble Lord, Lord Sikka. I am not sure that the kind of regulations envisaged in this amendment could actually create a creditor which has a priority in insolvency where a creditor does not exist at present. At present, a deficit in a pension scheme is generally not as a matter of law a creditor if the sponsoring employer goes bust.

Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Monday 12th January 2026 Grand Committee

[Lord Katz (Lab)]

I had better write to the noble Lord. I am afraid I do not have the details of that particular case to hand, but it is our understanding that it was coming from a voluntary perspective. But rather than speculating—I do not have the details here—I am very happy to write to him with more detail.

[Baroness Noakes (Con)]

I listened carefully to the Minister’s response, but I am not sure that he answered the question about why the Government need to take power to specify the sources of advice that scheme managers must take and whether that would result in a closed list of scheme advisers that had to be used in any event. Not only is that undesirable from a competition standpoint; it also seems likely to work against producing better returns longer term, because you will just ossify the situation as you find it at the point that the Government decide to make that decision.

[Lord Katz (Lab)]

I thank the noble Baroness for that question. I do not know whether this will give her complete satisfaction, but I understand that requiring funds to take advice from their pool could potentially be a conflict of interest. I would say that, first, asset pool companies will be required to have robust conflict of interest policies and procedures for identifying and managing those areas of conflict. As I said fairly early on in my remarks, integrated models—

[Baroness Noakes (Con)]

It has nothing to do with conflicts of interest; it is about whether the Government can specify a limited number of sources of advice that can be given to scheme managers, what the purpose of that is and whether that does not in fact work against achieving the best returns for members over time.

[Lord Katz (Lab)]

I am sorry; I probably misunderstood the direction of the noble Baroness’s questions. I had better write to her to set that out. I think it is fair to say that—this might help a little—in contrast to external advisers, because asset pools are solely owned by old GPS administering authorities, they exist to provide services of their interests and they do not stand to gain financially, even from partner funds taking their advice or providing poor-quality advice. I am not entirely sure that that gets at her question, but the point is that we do not feel that there will be that impact from limiting sources of advice. I will write to her to provide more detail on that point.

Pension Schemes Bill

Baroness Noakes Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Bennett of Manor Castle. But, not for the first time, she will find that I disagree with practically everything she has just said.

I have a few problems with the Bill, which has a number of sensible things in it. I will focus on aspects of the Bill that are being sold as supporting UK business investment and hence the Government’s growth mission.

I have big concerns about pension scheme money being seen as available for investment in ways that the Government choose but which conflict with the views of trustees, who have a duty to act in members’ best interests. I am as patriotic as anybody, but I do not think it is right to allow the Government to require investment in the UK. There have been times when investing in the UK was a terrible idea financially. I can remember the 1970s, when the only reason anyone held assets in the UK was the existence of exchange controls—we could not get money out. I say to my noble friend Lady Altmann that forcing or incentivising pension schemes into listed UK assets does absolutely nothing to enhance UK growth. These are existing assets; they have nothing to do with new investment.

The Government’s proper role is to create the economic environment where businesses want to invest. That requires confidence in the economic future, taxes that are predictable and low, and regulatory burdens that are kept in check. Anti-business and anti-growth Budgets, and changes to employment laws, are the main drags on investment in the UK at the moment, and no amount of playing around with pension fund assets will change that. With the exception of scale-up financing, which is a problem in the UK, there is no evidence that funds are not available to back profitable business investment in the UK. The powers in the Bill need to be judged against that background.

The part of the Bill that concerns me most, in line with many other noble Lords who have spoken, is Chapter 3 of Part 2, which deals with scale and asset allocation. These provisions go much too far. I get the benefits of scale, both in terms of cost efficiency and the ability to diversify into alternative asset classes. However, I do not think that there is any conclusive evidence that £25 billion is a magic threshold. I am concerned that the Bill will have the effect, after first having consolidated the market, of ossifying the pensions landscape. As I have said many times in your Lordships’ House, I am a believer in competition and markets.

Large players love regulations that create barriers to entry, because they insulate them from market disrupters. The Bill says that subscale players—new entrants—have to be regulated. Risk-averse regulators are not the best people to judge growth potential or the power of innovation. The Bill should encourage new entrants into the pensions market, even if that means a prolonged period of operating below scale. We need to look at how the long term for pensions investment can be protected and I will want to explore that in Committee.

The real shocker, of course, is asset allocation. Put simply, I believe that mandating asset allocation is wrong in principle and carries a significant risk of moral hazard. Pension trustees have a clear fiduciary duty to act in the best interests of their members. The Government should have no right to say to trustees that they must invest in particular things, especially if that conflicts with trustees’ views. I do not doubt the sincerity of the Government’s desire to get pension schemes to invest in a wider range of investments to improve returns for their members: that is broadly what scale facilitates. The danger comes with eliding that desire to facilitate higher returns for members with wanting to direct the investment into particular things, which may or may not turn out to deliver those higher returns. Legally requiring certain types of investment will inevitably result in calls for the Government to pick up the tab if the returns from those sorts of investments fall short. The moral hazard implications of these provisions for mandation are huge.

I am also disturbed to read proceedings in another place where some MPs wanted to direct pension schemes assets into their pet projects; they talked about social housing, hospitals and net zero. Such investments may well be socially desirable but there is no confidence that they will yield high returns for members of pension schemes. If the Bill does not rule out that kind of mandation, I am sure that it should. At the end of the day, trustees need to seek the best possible returns for their members, because it is investment performance that drives the retirement income of defined contribution members.

The drafting of the mandation clause is also a horror story; I will not weary the House with a commentary on that today, but I give notice that I shall want to examine it in Committee. I am sure that in Committee we will also want to look at capping the percentage which could be mandated—if indeed we wish to keep mandation at all, which I suspect we will not.

The other area that I wanted to talk about today is Clause 9, which creates a welcome ability to extract surpluses from defined benefit schemes. While only a tiny number of private sector DB schemes are still open to new members, very many employers are still burdened with schemes which have been long closed to new members or indeed to future accrual. Gordon Brown’s tax raid in 1997, followed by the prolonged period of low interest rates, meant that for the last 25 years, employers have had to pay large amounts to support the funding status of their defined benefit pension schemes. Recently, the good news is that some of those have swung back into surplus. It is only right that there should be an opportunity for those employers, who have borne this burden for such a long time, to get some of that surplus back. Doubtless, trustees will want to argue for further benefits for members in return for returning surpluses, but I hope that they will be mindful of the fact that the corporate sector has borne significant costs of keeping the defined benefit pension promises intact over many years, and they deserve a major share of those surpluses.

The Government have portrayed this as supporting business investment in the employing company, which it might do if the business environment is right for those companies to invest, but it may also be entirely rational for those companies to return excess money to their shareholders because that would be the best outcome for those shareholders. There is a provision in Clause 10 which allows conditions to be set on making payments. I shall want to ensure in Committee that this power cannot be used to direct what companies do with liberated pension surpluses once it has been agreed that it is safe for those surpluses to be removed from the pension scheme.

The Bill focuses on pension schemes, but it does not deal with many of the other problems that continue to exist in the pensions world. The Pensions Commission will tackle some but not all of those problems. In particular, around £1.3 billion of unfunded public sector pension obligations will weigh very heavily on future generations—that is currently largely hidden from sight at the moment. Into that category I would also put the continuation of the triple lock. This Bill is not the end of the pensions story.