Social Security Benefits Up-rating Order 2026
Baroness Sherlock Excerpts(3 days, 12 hours ago)
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Baroness Sherlock
That the draft Orders laid before the House on 12 January be approved.
Relevant document: 49th Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 10 February.
Guaranteed Minimum Pensions Increase Order 2026
Baroness Sherlock Excerpts(4 days, 12 hours ago)
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Baroness Sherlock
That the Grand Committee do consider the Guaranteed Minimum Pensions Increase Order 2026.
Social Security Benefits Up-rating Order 2026
Baroness Sherlock Excerpts(4 days, 12 hours ago)
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Baroness Sherlock
That the Grand Committee do consider the Social Security Benefits Up-rating Order 2026.
Relevant document: 49th Report from the Secondary Legislation Scrutiny Committee
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, in moving this order I will speak also to the draft Guaranteed Minimum Pensions Increase Order 2026. In my view, the provisions in both instruments are compatible with the European Convention on Human Rights.
I will start with the draft Social Security Benefits Up-rating Order. This instrument will increase relevant state pension rates by 4.8%, in line with the growth in average earnings in the year to May/July 2025. It will increase most other benefit rates by 3.8%, in line with the rise in the consumer prices index in the year to September 2025. As such, the uprating order commits the Government to increased expenditure of £9 billion in 2026-27, of which £6 billion will be on state pensions and pensioner benefits, £2 billion on disability and carers’ benefits and £1 billion on working-age benefits. A further £2 billion of expenditure on working-age benefits will be incurred in 2026-27 as a result of uprating decisions made under separate legal powers in the Universal Credit Act 2025, which will set new rates for universal credit and income-related employment and support allowance.
I turn to state pensions in more detail. The Government’s commitment to the triple lock means that the basic and full rate of the new state pension will be uprated by the highest of the growth in earnings, prices or 2.5%. This will be 4.8% for 2026-27, in line with the conventional average earnings growth measure. As such, from April 2026, the basic state pension will increase from £176.45 a week to £184.90 a week, and the full rate of the new state pension will increase from £230.25 a week to £241.30 a week. From April, the full annual rate of the new state pension will increase by around £575, while the full annual rate of the basic state pension will increase by around £440.
Other components of people’s state pension awards, such as those previously built under earnings-related state pension schemes—including the additional state pension—will increase by 3.8% in line with the statutory minimum requirement of prices. The safety net provided by the pension credit standard minimum guarantee will increase by 4.8%. From April, it will be £238 a week for a single pensioner and £363.25 a week for a couple, ensuring that the incomes of poorest pensioners are protected.
I turn now to the support given to people below the state pension age. Most benefits will also increase by 3.8%, including statutory payments such as statutory sick pay and statutory maternity pay, and the personal allowances of income support, housing benefit, jobseeker’s allowance, and contributory employment and support allowance. This order will also increase the child amounts, carer amounts and transitional severe disability premiums in universal credit, as well as the pensioner and carer premiums in income-related employment and support allowance, by 3.8%.
The uprating order will also increase by 3.8% rates for those in England and Wales with additional disability needs and those who provide unpaid care for them. This commits the department to increased expenditure of £2 billion in 2026-27. This means that benefits such as the disability living allowance, attendance allowance, carer’s allowance and personal independence payment will rise in line with the rise in the consumer prices index in the year to September 2025.
I turn now to the Guaranteed Minimum Pensions Increase Order 2026—the GMP increase order. It sets out the amount by which the GMP part of an individual’s contracted-out occupational pension, earned between April 1988 and April 1997, must be increased when it is being paid. The increase is paid by occupational pension schemes. It provides a measure of inflation protection to people who are in receipt of GMPs earned between 1988 and 1997.
GMPs earned between April 1988 and April 1997 must, by law, be increased by the percentage increase in the general level of prices, as measured the previous September, which is capped at 3%. The September 2025 figure was 3.8%. Because of the cap, the increase for the 2026-27 financial year will therefore be 3%. Having the 3% cap gives schemes more certainty. It allows schemes to forecast their future liabilities better, which is clearly important when trustees are considering the scheme’s funding requirements. The GMP indexation requirements strike a balance between protecting members against the effects of inflation and not increasing scheme costs beyond a level that both schemes and sponsoring employers can reasonably afford.
In summary, the draft Social Security Benefits Up-rating Order implements the Government’s commitment to the triple lock, provides for a real-terms increase in the value of the safety net in pension credit, increases the rates of benefits for those in the labour market, and increases the rates of both carers’ benefits and benefits to help with additional costs arising from disability or health conditions. The draft Guaranteed Minimum Pensions Increase Order requires formerly contracted-out occupational pension schemes to pay an increase of 3% on GMPs in payment earned between April 1988 and April 1997. This provides people with a measure of protection against inflation, paid for by their scheme. I beg to move.
Baroness Stedman-Scott (Con)
I appreciate the noble Lord’s intervention. I will read Hansard. We will write to the noble Lord and start some correspondence on that issue. I appreciate the points made by the noble Lord. Everybody knows that he knows what he is talking about and that he is well versed in pensions legislation. If he is happy for me to do so, I will pick that point up with my colleagues.
I turn to the draft Social Security Benefits Up-rating Order 2026. The shadow Secretary of State for Work and Pensions, Helen Whately, has rightly led calls for the Government to move more quickly and clearly in setting out their plans for welfare reform. Sickness and disability benefits alone are forecast to cost the taxpayer £100 billion by 2030. The shadow work and pensions team has consistently argued that the Government are failing to confront the structural drivers behind rising welfare expenditure. Delays in doing so carry a cost not only to the public finances but in missed opportunities to redirect spending towards other pressing government priorities.
It is extraordinary that the Timms review has only just agreed the names of the committee members appointed for a review that Stephen Timms is leading into sickness benefits, including with group members representing the disabled. The work has not yet begun. It is nearly two years after the general election, so can the Minister confirm that his committee is on track to give an interim review this spring? Can she also confirm that it will indeed be 2027 before his committee reports and that, by then, no progress will have been made in this Parliament, allowing for likely legislation following a government response?
These concerns sit alongside the wider economic impact of Labour’s jobs tax. The Autumn Budget 2024, in particular the increase in employer national insurance contributions, has been associated with the loss of an estimated 50,000 full-time equivalent jobs. This has implications for not only employment levels but the long-term health of the National Insurance Fund. The difficulty with this draft order is one not purely of substance but of process. The instrument uprates pensions and working-age benefits together, leaving no scope to consider the appropriateness of each element independently or to debate the Government’s policy intentions for each in detail.
Rather than dwell further on the procedural constraint, it is worth noting that the issues raised by this uprating instrument sit alongside the Government’s announcement yesterday on universal credit reform and the legislation now laid before Parliament. Taken together, they speak to the direction of travel in welfare policy and the assumptions underpinning the current uplift. The Government argue that these reforms are intended to rebalance the benefits system, to address perverse incentives and to support more people into work. We are told that the current gap between health-related universal credit payments and the standard allowance discourages labour market participation, and that narrowing this gap for new claimants is necessary to restore fairness and sustainability.
I therefore have a number of questions for the Minister. First, what assessment has been made of the behavioural impact of introducing a significantly lower health element for new claimants? Secondly, although existing claimants and those with severe or lifelong conditions are protected, how confident are the Government that the criteria used to determine severity are sufficiently robust, consistent and fair across the system? Thirdly, the Government have announced £3.5 billion in employment support alongside the expansion of pathways to work advisers. How will success be measured? Will outcomes be judged by sustained employment, earnings progression or reductions in case loads, and over what period?
Finally, the Government expect these reforms to deliver savings of £950 million by 2030-31. Do those projections assume stable labour market conditions? What sensitivity analysis has been undertaken should employer demand weaken further? I hope that the Minister sees the link and will be happy to answer these questions.
Baroness Sherlock (Lab)
My Lords, I shall get through as many points as I can, and if I cannot, I will check Hansard and write to noble Lords. I am delighted to find that writing to members of the Committee is now a bipartisan activity, rather than just on the government side, so it is all very interesting.
I will start with the overall critique from the noble Baroness, Lady Stedman-Scott. As she said, this is what the shadow social security team throw at the Government on a regular basis: that they are not doing enough to bring down welfare spending, and that everything is terrible. I start by saying that the system the Opposition critique is of course a system that we inherited from them. All the things we are often told are wrong with it are things that were entirely in the gift of the previous Government. They did not address any of those problems. The only attempts they made were struck down by the High Court for being illegal, whereas this Government have actually taken action.
As the noble Baroness alluded to, we have already taken action to make the health and disability system more sustainable by rebalancing rates of universal credit from this April to tackle some of those inappropriate incentives in it. Our investment in pathways to work will help many more people with health conditions back into meaningful work. We have started the Timms review to make sure that we find a sustainable way forward. On timing, I can say to the noble Baroness that we anticipate that the review will report in autumn of this year. I have no reason to believe that it is not on track to do that.
I will come on to some of the critique from the other side. Noble Lords have said that we are either not doing enough to reduce social security spending or not doing enough to increase it, so let me try and lean in the other direction to be balanced. My noble friend Lady Lister is absolutely right: we are in Grand Committee, and many of us have been in Grand Committee on a regular basis—annually—to do this. Some of us have moved positions from one side to the other, but now we are here. This point is that this debate is heard, it goes on the record, and I always look very carefully, whether in government or opposition, at the comments made by noble Lords. I am grateful for them; it is a debate well worth having.
I understand the point my noble friend is making about the adequacy of benefits, but from April, this Government are delivering the first ever sustained above-inflation rise in the basic rate of universal credit since it was introduced. Just under 4 million households will benefit overall from that change, which is estimated to be worth £760 a year by 2029-30 in cash terms for a single parent aged 25 or over, or around £250 above inflation. We have also done other things. We introduced the fair repayment rate from April last year, reducing overall universal credit deductions from 25% to 15%, which again benefited approximately 1.2 million of the poorest households. I respect my noble friend for constantly pushing us to go further, but I put on record that the Government have done something significant, and I thank her for acknowledging this.
In terms of the rebalancing, my noble friend Lady Lister is right that, unusually this year, the personal allowance rates of universal credit are not covered by these because the Universal Credit Act, which did the rebalancing, took them out for the relevant period. They will therefore be made by regulations but when we discussed the primary legislation, the Universal Credit Bill, the formula was made really clear. The only reason the numbers were not in there is because they relate to CPI, so the actual numbers depend on what CPI turned out to be. The percentage relationship to CPI was made clear and there was the opportunity to debate that in the Bill. Hopefully, that reassures her on that front.
I understand my noble friend’s concerns on the local housing allowance point, but we have to step quite carefully in this area. DWP currently supports renters by spending around £34 billion a year on housing support for low-income renters, including £12 billion in the private rented sector. The April 2024 one-year LHA increase cost an extra £1.2 billion in 2024-25. It will be approximately £7 billion over the next five years. This is an area where the changes cost a lot of money. We know that LHA rates will not meet all rents in all areas, but it has always been acknowledged that they would never be able to do that.
This Government are trying to address the underlying problems driving some of these issues by prioritising the fundamental issue of the lack of housing supply, through the £39 billion investment in the social and affordable homes programme, which is still the biggest boost to social and affordable housing in a generation. For those who need additional support and have a shortfall to meet their rent costs, our new crisis and resilience fund replaces discretionary housing payments in the household support fund from this April, supported by £1 billion a year, including Barnett impact, through the spending review period. Importantly, we have been able to give a multi-year reassurance to local authorities that the money is coming through.
On the benefit cap, I know that my noble friend will never be a fan of it, and I understand her concerns, but this Government believe that entering or returning to employment is best for individuals and the economy; we have taken significant steps to help them do so. The benefit cap encourages personal responsibility while maintaining a strong safety net. On uprating, this has to be reviewed every five years, and 2027 is the next time it will definitely have to be done. It is up to the Secretary of State when it is reviewed, and that is the latest it can be.
Lord Davies of Brixton (Lab)
If it helps my noble friend, I will put down some Written Questions to deal with this question. I probably should have done that in the past.
Baroness Sherlock (Lab)
If all my noble friend wants to know is what he has asked me, I can write to him—this would save him the trouble of writing and save me the trouble of writing back to him—but, obviously, he is always entitled to do that.
Finally, the National Insurance Fund is financed on a collective basis, with receipts collected in one year used to pay for certain benefit payments, including the state pension, paid out in the same year. I need to make it clear that, obviously, it is not accurate to suggest that there is a surplus in the fund that can be drawn on. The balance of the National Insurance Fund is managed as part of the Government’s overall management of public finances and reduces the need for them to borrow from elsewhere. Any additional spending from the National Insurance Fund would represent an increase in overall government spending. Without cuts in other areas of spend or additional taxes, it would therefore lead to an increase in government borrowing.
I think I have answered most of the questions asked by noble Lords. The noble Baroness asked some specific questions about metrics. I am not sure that I have an answer to hand; if I have anything, I will certainly write to her. I am grateful, once again, for what is always an interesting debate. I love the fact that this Committee takes these matters so seriously; they truly affect the lives of so many people. I am grateful to noble Lords for their time and expertise.
Pension Schemes Bill
Baroness Sherlock ExcerptsThursday 5th February 2026
(1 week, 2 days ago)
Grand CommitteeRead Full debate Pension Schemes Bill 2024-26 View all Pension Schemes Bill 2024-26 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 152-VII(a) Amendment for Grand Committee (Supplementary to the Seventh Marshalled List) - (4 Feb 2026)
Baroness Stedman-Scott (Con)
My Lords, it is a pleasure to close this debate and respond to the remarks of the noble Lord, Lord Palmer, on his Amendment 184. I am grateful to him for raising this issue, because it goes to the heart of how we ensure that pension reform delivers better outcomes for savers rather than simply neater market structures on paper. I think there is reasonably wide backing across the pensions industry for the Government’s broad objective of greater consolidation and efficiency within the defined contribution market. Many stakeholders accept, and indeed support, the proposition that increased scale, when combined with robust governance, strong investment capability and appropriate oversight, has the potential to deliver stronger long-term outcomes for members. Few would argue for fragmentation for its own sake.
However, support for consolidation is not the same as support for consolidation at any cost, or consolidation pursued without sufficient regard to its secondary effects. Well-founded concerns remain that the current design of the scale test risks it being too blunt an instrument. In particular, it does not distinguish adequately between schemes that are genuinely underperforming and those smaller or mid-sized providers that, despite operating below the proposed thresholds, none the less deliver consistently high-quality, well-governed and, in some cases, market-leading outcomes for savers. Indeed, the Government’s own analysis underlines this risk. The chart contained in paragraph 70 of the Government’s 2024 report shows no clear or consistent correlation between assets under management and gross five-year performance across large parts of the master trust and group personal pension market.
The principal scale-related concern identified appears to relate not to well-run schemes operating below the threshold but to the very smallest arrangements, in particular certain single-employer schemes where governance capacity and resilience can be more limited. That matters because consolidation in a pensions market is not a neutral process. This is not a typical consumer market. Savers are largely captive, choice is constrained, switching is rare and inertia is high. In such an environment, reductions in the number of providers can weaken competitive pressure long before anything resembling a monopoly appears. The risk is not always higher charges tomorrow but slower innovation, less responsiveness and poorer outcomes over time.
That is why this amendment is important. It would ensure that consolidation serves savers and that Parliament retains a clear grip on how the market is evolving. Small distortions in competition today—barely visible in the short term—can compound into materially worse outcomes over 30 or 40 years of saving. In a system built on long horizons, early and structured scrutiny is essential.
There is also the question of innovation. Smaller and newer providers have often been the source of advances in member engagement, digital capability, decumulation options and investment design. If consolidation raises barriers to entry through disproportionate compliance costs, restrictive exit charges or exclusivity arrangements, innovation risks being squeezed out, even where headline charges appear to fall. Efficiency gains that come at the expense of progress are a poor bargain for future retirees.
The report required by this amendment would not obstruct sensible consolidation; nor would it second-guess the direction of travel. Rather, it would provide Parliament with the evidence needed to ensure that consolidation is proportionate, targeted and genuinely in the interest of savers. It would help ensure that regulatory and competition safeguards remain fit for purpose as market structures change, and that opportunities for new high-quality entrants are not inadvertently closed off.
For these reasons, I believe that this amendment strikes the right balance. It is supportive of reform, alert to risk and grounded firmly in the long-term interests of those whose retirement security depends on the decisions we take today.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I thank the noble Lord, Lord Palmer, for introducing his amendment, which would require the Government to conduct a report on the impact of consolidation in the occupational pensions sector within 12 months of the Act being passed. I am grateful to the noble Baroness, Lady Stedman-Scott, for her remarks and her acknowledgement of the benefits of consolidation and the widespread support for it.
The fact is that consolidation is already happening across the pension landscape. The number of DC pension providers has reduced from roughly 3,700 in 2012 to about 950 schemes today. On the DB side, the number of schemes is similarly down from about 6,500 in 2012 to 4,800 in 2026, with a record number of transactions currently estimated in the buyout market. Our aim is to accelerate this trend of consolidation through the DC scale measures and DP superfunds. As I have said before, scale brings numerous benefits directed at improving member outcomes, including better governance, greater efficiency, in-house expertise and access to investment in productive markets.
I am not going to respond in detail to the comments from the noble Baroness, Lady Stedman-Scott, on innovation and other things, because we have given them a decent canter in previous meetings in Committee, but it is absolutely essential that pension schemes remain competitive post-scale. We expect that schemes with scale will innovate and drive competition, especially, for example, in consolidating single-employer trusts. The market will evolve, as will the needs of members, and we expect that the schemes and the industry will be able to align with this.
It is absolutely right that the Bill will lead to major change in the occupational pensions market. Although I do not agree with this particular proposal, I absolutely agree with the noble Lord, Lord Palmer, that we must understand and monitor the impact of these reforms, because the impacts of consolidation really matter. That is why a comprehensive impact assessment was produced, analysing the potential impacts of the Bill, with plans to evaluate the impact in further detail. An updated version of the impact assessment was published as the Bill entered this House; crucially, it included further details of our ongoing monitoring and evaluation plans, including critical success factors and collaboration across departments and regulators.
We have provided the market with clarity on our approach so that changes can be put into effect, but we need to allow time to assess and evaluate the impacts following full implementation. We will assess the overall impacts over an appropriate timeframe, given that the full effects of consolidation will be after the Bill has been implemented.
As I have mentioned before, we published a pensions road map, which clearly sets out when we aim for each measure to come into force. The fact is that many of the regulations to be made under the Bill will not have been made or brought into force within a year of the Bill becoming an Act. Any review at that point could be only very partial. However, the Government are committed to strong monitoring and evaluation of this policy, especially of its impact on members. The noble Lord, Lord Palmer, is absolutely right to point to the crucial role of the Pensions Regulator and the CMA. They are best placed, in the first instance, to monitor the impacts of consolidation as part of their respective statutory functions, including an analysis of emerging trends. The Pensions Regulator, for example, will play a key role in monitoring the impact of consolidation on the trust-based DC pensions market via its value-for-money framework.
I can therefore assure the Committee that we will keep this area under review, consistent with our stated policy aims for the sector and for good member outcomes. We will also continue to monitor our working arrangements with the regulators; this includes their ongoing monitoring of the pensions industry. We will submit a memorandum to the Work and Pensions Select Committee with a preliminary analysis of how the Act has worked three to five years following Royal Assent. The committee may then decide to conduct a fuller inquiry into the Act, consistent with standard practice, as set out in the Cabinet Office’s Guide to Making Legislation.
Given the above, a separate government report risks duplicating work while putting an undue burden on all those involved. If issues are identified by regulators before the Government submit a post-legislative memorandum, and there is a need for government action, then an evidence-based response can be taken. I completely agree with the noble Lord about the importance of this and I thank him for raising this debate. However, I hope that he feels reassured and able to withdraw his amendment.
Lord Palmer of Childs Hill (LD)
My Lords, I thank the Minister for that; it gives me some reassurance, and I am always happy to say when that happens. The aim of the amendment is to improve the Bill, not to undermine it. Some of the things that the Minister has suggested may happen are already happening. When figures are quoted quickly—such as 950 schemes of one sort and 4,826 of the other—the numbers do not seem so large, but they are pretty substantial in terms of those impacted.
We are worried about the impact of consolidation. I rather get the impression that the Minister is aware that there could be problems that need to be reviewed as we go along, and we will need time to assess what is happening. I take cognisance of the Minister’s reassurances: they take us along the same path as I am suggesting. We will have time, obviously, to review what is happening as time progresses. In the light of that, I beg to withdraw my amendment.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the compensation is payable.”Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 28 of Schedule 7 to the Pensions Act 2004 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the pension compensation is payable.
Baroness Sherlock (Lab)
My Lords, the Government recognise that the pension compensation system and the safety net it offers need to work harder for members. Payments from the Pension Protection Fund, the PPF, and the Financial Assistance Scheme, FAS, based on pensions built up before 1997, do not get uprated with inflation—pre-1997 indexation. Over time, they have lost a significant amount of their value in real terms. I am therefore particularly pleased to introduce Clauses 108 to 110, which together provide for pre-1997 indexation in the PPF and FAS, and extend this provision to members covered by the Northern Ireland legislation.
Clause 108 amends the relevant provisions in the Pensions Act 2004 and the Pensions Act 2008. It introduces increases on compensation payments from the PPF that relate to pensions built up before 6 April 1997. These will be CPI-linked and capped at 2.5%, and will apply prospectively to payments for members whose former schemes provided for these increases. Clause 109 makes equivalent amendments to the relevant Northern Ireland provisions, in the same way that Clause 108 does to GB legislation. This will ensure that PPF members covered by Northern Ireland legislation are treated in the same way as their counterparts in Great Britain. Clause 110 amends the relevant FAS regulations to introduce increases on compensation payments from the FAS that relate to pensions built up before 6 April 1997. As with the other clauses, these increases will be CPI-linked, capped at 2.5% and applied prospectively for members whose former schemes provided for these increases. We expect that first payments will be made to members whose former scheme provided for increases from January 2027.
Some affected members only had annual pre-1997 increases within their scheme due to the guaranteed minimum pension, or GMP, part of their pension. There is a statutory requirement for pension schemes annually to uplift any GMPs earned between April 1988 and April 1997. As such, PPF and FAS members who had only a post-1998 GMP will also receive increases on a proportion of their pre-1997 compensation payment. That is because the PPF is not legally required to separately identify GMPs when a scheme transfers to the PPF or qualifies for FAS.
We will therefore calculate a standardised percentage amount for PPF members to ensure that those who had this legal requirement for increases do not miss out. That will be done via regulations, and careful consideration will be given to this standardised approach. The Secretary of State will make the equivalent determination for FAS. Clauses 108 and 109 also give the PPF board the same discretion to adjust the percentage rate of pre-1997 indexation as it currently has for post-1997 increases.
These reforms bring a step change that will make a meaningful difference to affected PPF and FAS members. Incomes will be boosted by an average of around £400 for PPF members and around £300 for FAS members per year after the first five years. The pension compensation system will now offer a stronger safety net for members who, up until now, had lost out on pre-1997 inflation protection following their employer’s insolvency or scheme failure.
We have tabled eight minor and technical government amendments that amend the relevant provisions in the PPF legislation, including the Northern Ireland legislation and the relevant FAS regulations. These are to ensure that the pre-1997 increases in the PPF and FAS are implemented as intended and that affected members are able to receive the appropriate increases.
These amendments apply where an eligible scheme operated with more than one benefit structure. For example, a scheme may have paid increases on pensions built up before 6 April 1997 for one group of members but for another group the scheme may have paid increases only on GMPs built up on or after 6 April 1988. As the provisions were originally drafted, the latter group would not have had an entitlement to pre-1997 increases from the PPF or FAS. We want that group of members to receive indexation on a proportion of their pre-1997 compensation, and these amendments remedy the position.
I will comment on the other amendments in the group when I respond at the end of the debate. I beg to move.
Lord Davies of Brixton (Lab)
I will speak to my Amendment 203ZB. I thank my noble friend for the decision in the Budget to grant future increases. That is very much to be welcomed. As for the technical difficulties, I would love an opportunity to start discussing GMPs and even better if we got on to the anti-franking rules, but that is not the issue that I wish to raise today. As I have not moved the lead amendment, I have only 10 minutes.
In working out what I had to say, I realised that there are three groups dealing with pre-1997 increases: this group, group 2, the next group, group 3, where the noble Baroness, Lady Altmann, will move her amendment, and group 5, where at last I get 15 minutes as the mover of the amendment. There are issues that run through all three groups. That is not to downplay the importance of group 4 and the AWE proposals. There are intertwined issues here. There is the reduction in real terms of members’ benefits since they came into payment and the introduction of future increases. There is also the issue that is the subject of my amendment in group 2 and of the amendments in group 3, which is the losses that have been incurred by pre-1997 pensioners.
I am glad that the Minister said that those pensioners have lost out. I am glad that we have that common ground: they have lost out. Then there is the issue of pre-1997 benefits for schemes that are still active. Whether or not they are open to new members, they have pensioners and their legal entitlements to pre-1997 benefits differ from those post-1997. There are common themes there and I suspect that my remarks on all three groups could be put together and make a more coherent whole. In particular, there is a big issue about inflation protection for pre-1997. It is all about pre-1997. What was the feeling about inflation protection back in those days when it was under discussion? Even though it applies to this group, I am going to save that for group 3, when I shall move my Amendment 203.
I am not going to address in this group, although this is probably the most important point of all, the impact that this has had on the individuals concerned. I have had a substantial postbag, most of it by email, pointing out the problems that they have faced. I am not going to focus on that now because I have a limited amount of time, but to me it is the crucial point.
I shall start with the PPF and then come to the FAS in a moment. The principle has been established that PPF pensioners deserve increases in their pensions in respect of pre-1997 service. The Government agree with that principle but they are only going to implement it for the future. The same principle should apply to the past as to the future. Why should they be entitled to increases in the future if they are not entitled to exactly similar increases for the past? I am not talking about retrospection. This amendment has nothing to do with retrospection; it just says that these pensioners deserve pensions now in real terms that are the same in monetary value as they were when they came into payment.
The only reason why one would make a distinction between the increases in the future and making good the increases that have been lost in the past is the cost. I cannot think of any other plausible reason. There is no difference between them in terms of justice; it is simply about the cost. However, we know, because the PPF has given us the figures, that that does not apply here. The money is in the PPF that can afford these increases. It has a significant and growing excess of assets over liabilities and, because of that, the levy is being suspended. The employer providing these schemes is gaining the benefit—in effect, a sort of refund of the surplus that has been built up. Well, fair enough, they have paid for it, but so have the members and they are entitled to the increase. Whatever they had when their pensions came into payment should be increased from January 2027 to allow for what they would have got in respect of post-1997 benefits. That is clear and I hope that the Government will accept the point.
Then we come on to the FAS. The big difference between the PPF and the FAS is that the FAS is funded out of general taxation. However, let us be clear why the FAS is there: it is because Governments of both parties failed to provide the protection that they were required to give under European law, in the face of the fantastic campaign that was run on behalf of the pensioners of schemes that became insolvent—and employers that became insolvent—prior to the implementation of the PPF. That is the only reason why they are in the FAS. It was the Government’s failure; it was not their failure. Why should they lose out? Governments failed to provide them with protection. They only introduced the PPF from 2005, but the people who lost their pensions prior to that date are just as entitled. The Government gave in because of the fantastic campaign, as I say, but also because of the threat of further legal action at the European court that they knew they would lose. To make a distinction between FAS members and PPF is totally unfair and unreasonable.
There will be a cost and, because it is the FAS, it will fall on the taxpayers, but one principle is clear: where the Government have a debt to make good something that they have got wrong, they cannot excuse themselves from that debt by saying, “Sorry, we don’t quite have the money”. They should pay up. It is quite clear that the same treatment should be afforded to the FAS members as to the PPF members.
Baroness Sherlock (Lab)
My Lords, I am grateful to my noble friend for introducing his amendment and I look forward to the subsequent instalments of his reflections on these important areas. The Government’s reforms are a significant step forward in making the compensation system and its safety net better for members, but I recognise that it does not go as far as some affected members, or indeed some noble Lords, would want.
We recognise the impact that the issue of pre-1997 indexation has had on affected PPF and FAS members. My colleague, the Pensions Minister, has met with many representatives and has heard at first hand the impact on them. I have also had representations coming into my inbox and I understand the position of those who have contacted me. I recognise the intention behind Amendment 203ZB from my noble friend Lord Davies.
This amendment would increase the pension on which indexation is calculated in respect of PPF and FAS members’ compensation. The PPF has fully assessed the impact of retrospection and arrears. I say in response to the noble Baroness, Lady Altmann, that the cost of providing prospective and fully retrospective indexation and arrears—in line with CPI capped at 2.5% for members whose original schemes provided for these increases—is significant, totalling around £5.6 billion: £3.9 billion for the PPF and between £1 billion and £1.7 billion for FAS. If I have understood my noble friend’s amendment correctly, it would have the effect of increasing the baseline compensation paid to all PPF and FAS members, irrespective of whether their original scheme provided for 1997 increases. This would further increase the costs to the PPF and FAS.
The reforms put forward by the Government offer targeted support and introduce changes to indexation to compensation payments prospectively. The Government’s proposal to introduce pre-1997 indexation in the PPF will reduce the PPF reserve by £1.2 billion and cost around £0.3 billion to £0.6 billion for FAS, totalling £1.8 billion over the lifetime of both schemes. This is a significant shift, reflecting the value of the increases to members’ compensation payments.
The PPF reserve protects current and future members, as well as underwriting future claims across the almost £1 trillion DB system. Prudent management of the reserve is needed to ensure that the security it provides for its members, and the DB pension universe, is not compromised. In introducing this change, the Government had to strike a balance of interests for all parties—including eligible members, levy payers, taxpayers and the PPF’s ability to manage future risk—against the backdrop of a tight fiscal envelope. We believe that our reform achieves the right balance. Any further reduction of the reserve increases the risk to members and the PPF’s ability to manage future risk.
While the PPF has confirmed that the Government’s proposal does not affect its plan to switch off the levy, going beyond our proposal increases the possibility of the PPF needing to return to levy payers in the future. As it stands, this is a win for members and for those businesses. Any changes to compensation levels in the PPF and the taxpayer-funded FAS have significant implications for the public finances. Increases to PPF liabilities affect the Chancellor’s fiscal rules, because the present value of these liabilities change annually, which is counted as a cost in the public finances. Any increases to payments from FAS come at a direct cost to the taxpayer. This is why we are concerned about the risks of going further, as well as the risks to the PPF that I have described.
The bottom line is that the PPF and FAS are compensation schemes: they were never designed to fully replace members’ pensions. Members are in a better financial situation than they would have been before these compensation schemes were established. Our changes to the pension compensation system will offer a stronger safety net for members who, until now, had lost out on pre-1997 compensation increases following their employer’s insolvency or scheme failure.
The noble Viscount, Lord Younger, asked me about the solidity of the amendments and whether they would be enough to avoid legal challenge. If a legal challenge were to be brought forward, the Government consider they can successfully defend any such challenge. I hope that reassures him.
We understand that members will want to have a conversation quickly, and the PPF has rightly said that it would like to do it as soon as is practicable, but we have concluded that the earliest opportunity to provide pre-1997 increases to PPF and FAS members is January 2027, because implementation will require the PPF to identify eligible members in order to implement the changes. That is the first possible opportunity to uplift members’ payments pending the appropriate parliamentary processes. We will do it when and as soon as it can be done, but we have to be sensible about that.
I was asked how many members would benefit. I said that more than 250,000 PPF and FAS members are set to benefit from this change. Up to 90,000 may not benefit, although we know that includes a number of people who will benefit where they had post-1988 GMPs, and we are working with the PPF to identify the number of members who had post-1988 GMPs. Some 85,000 PPF and FAS members do not have any pre-1997 service, so they do not fall within the scope of this change.
I think the noble Lord, Lord Wigley, is going to ask about Allied Steel and Wire. The Minister for Pensions has met Financial Assistance Scheme members, including former Allied Steel and Wire workers whose scheme qualified for FAS, and he has heard first hand of the experience of those members. I am happy to confirm that former members of Allied Steel and Wire will benefit from the Government’s proposals of prospective legislation. If that is the question the noble Lord was going to ask, I hope that is enough to satisfy him.
Lord Wigley (PC)
I am very grateful and I hope that the benefit will be substantial.
Baroness Sherlock (Lab)
Just for clarity, the benefit will be exactly as I described in the Government’s amendments—which obviously is incredibly generous but, just to be clear, that is the benefit under question. In the light of this, I am grateful to my noble friend and all noble Lords, and I hope the noble Lord will not press his amendment.
Viscount Younger of Leckie (Con)
As ever, that is a very helpful clarification, but I will leave it up to the Minister to answer that. I stick with my view that we are not persuaded by these amendments. Perhaps there is more debate to be had. I have said all that I need to say; I am afraid that I am unable to support these amendments.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Baroness for introducing her amendment and all noble Lords who have spoken. I am afraid the noble Viscount has given a spoiler regarding my response, because I articulated many of the arguments on this in the previous group in response to my noble friend Lord Davies.
The Government recognise that pre-1997 indexation is an important issue for affected PPF and FAS members. That is why we listened and took the action that we did. The changes proposed by Amendments 186A, 187A, 188A and 189A would, essentially, award payments of arrears for PPF and FAS members who have missed out on pre-1997 increases up to now. As the noble Baroness described, that would mean a one-off lump-sum payment to be made from the PPF reserve. Amendment 203ZA would require the Secretary of State to determine how those additional payments would be funded in FAS.
I acknowledge the impact on members. This has been a long-running issue and, for reasons that noble Lords have clearly articulated, members will want to see their increases quickly now that we have made a decision to act. As I said, we expect that the first payments will be made to eligible PPF and FAS members in January 2027, which is the earliest possible opportunity to do so, and we are working closely with the PPF on implementing that. I recognise that prospective increases do not restore the erosion of the real-terms value of members’ retirement incomes. However, the Government’s reforms will make a meaningful difference to affected members while balancing the impact on levy payers who support the PPF, taxpayers who pay for FAS and affordability for the Government.
In response to the question from the noble Baroness, Lady Altmann, any payment that comes out of the PPF reserve will reduce the size of that reserve and therefore, in our judgment, must make it more likely that there may be a need for a levy to be reintroduced at some point. I shall come back to the arguments in a moment, as I said to my noble friend, but I have noted the importance of responsible management of the PPF reserve following the introduction of our reforms. The noble Baroness’s proposal—creative though it is, and I acknowledge that—would clearly also reduce the reserve. Although the reserve is forecast to grow, without a really substantive PPF levy the PPF will depend on its reserves and its investment returns to manage the risks from existing liabilities and future claims across the £1 trillion DB system.
Historically, the PPF has supported nearly £10 billion in claims, funded in part by the amount collected through levies. Without future levies, the reserve has to cover upcoming claims. The reserve offers protection against future risks, such as new claims and longevity risks, and, as I have said, avoids the need for a significant levy reintroduction. I also noted the significant public finance implications of changes in my earlier remarks.
The Government have not made an assessment of the noble Baroness’s proposal because we considered carefully what we thought it was appropriate to do. We worked with the PPF and fully considered the broader context of introducing pre-1997 indexation in both the PPF and FAS. In the end, it is the responsibility of the Government to strike an affordable balance of interest between all parties. We believe our reform achieves that. This measure is a fundamental shift in the level of protection afforded by the PPF and FAS to their members, but we think that is right and the appropriate balance. In the light of that, I hope the noble Baroness will feel able to withdraw her amendment.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the transferor’s PPF compensation is payable.” Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 17 of Schedule 5 to the Pensions Act 2008 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the pension compensation is payable.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the compensation is payable.”Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 28 of Schedule 6 to the Pensions (Northern Ireland) Order 2005 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the pension compensation is payable.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the transferor’s PPF compensation is payable.”Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 17 of Schedule 4 to the Pensions (No.2) Act (Northern Ireland) 2008 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the pension compensation is payable.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the annual payment is payable.” Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 9 of Schedule 2 to the Financial Assistance Scheme Regulations 2005 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the financial assistance is payable.
Baroness Sherlock
“Chapter 2AAWE Pension SchemeNew public pension schemes
Establishment of new public schemes and transfer of rights(1) The Secretary of State may by regulations establish one or more schemes (“new public schemes”) which provide for pensions or other benefits to be payable to or in respect of persons who are or have been members of the AWE Pension Scheme (“qualifying persons”).(2) The Secretary of State may by regulations make provision for the transfer of qualifying accrued rights to a new public scheme (without the need for any approval or consent of the trustee company or AWE PLC, or any other person, to the transfer). (3) Regulations under subsection (2) may include provision for the discharge of liabilities in respect of qualifying accrued rights that are transferred.(4) In this Chapter—“qualifying accrued rights ” means—(a) any right to future benefits under the AWE Pension Scheme which, at the qualifying time, has accrued to or in respect of a qualifying person,(b) any entitlement under the AWE Pension Scheme to the present payment of a pension or other benefit which a qualifying person has at the qualifying time, or(c) any entitlement to benefits, or right to future benefits, under the AWE Pension Scheme which a survivor of a qualifying person has at the qualifying time in respect of the qualifying person;“the qualifying time ” means the time immediately before the date specified or described in regulations.(5) For the purposes of the definition of “qualifying accrued rights”—(a) references to pensions or other benefits (including future benefits) includes money purchase benefits, and(b) references to a right include a pension credit right.(6) Regulations under subsection (4) specifying or describing a date for the purposes of the definition of “the qualifying time” may make provision for the purposes of transfers of qualifying accrued rights generally, transfers of a particular description or a particular transfer.”Member’s explanatory statement
This new clause provides for the pension scheme of AWE PLC (a wholly owned government company) to be transferred to a new public sector pension scheme, while preserving existing rights of scheme members. It will be the first clause of a new Chapter in Part 4 of the Bill.
Baroness Sherlock (Lab)
My Lords, in moving government Amendment 194, I shall speak also to government Amendments 195 to 202; I would welcome the Committee’s support for them.
The AWE pension scheme is a trust-based defined benefit pension scheme for current and former employees of AWE plc, the Atomic Weapons Establishment. Since 2021, AWE plc has been wholly owned by the Ministry of Defence, and this pension scheme is backed by a Crown guarantee. These proposed new clauses will allow the Government to defund the existing scheme, establishing a new central government pension scheme for its members. The assets held by the scheme will be sold, with the proceeds transferred to the Treasury. The Chancellor announced this measure in her 2025 Budget, but the principle was announced in a Commons Written Ministerial Statement on 6 July 2022.
The new scheme will be an unfunded public pension scheme. This is in accordance with wider government policy that when a financial risk sits wholly with the Government, as it does here because of the Crown guarantee, it should not hold assets to cover that liability. The taxpayer is already exposed to the risks and the liability can be managed more efficiently in the round, along with other unfunded liabilities met out of general taxation. This measure will help to ensure that liabilities are funded in the most efficient way while ensuring the long-term security of members’ benefits. I assure the Committee that these clauses protect the rights that members of the AWE pension scheme have accrued under the current scheme. Neither the terms nor the benefits will be affected. The new public scheme must make provision that is, in all material respects, at least as good as that under the AWE pension scheme.
The new clauses in Amendments 194 and 195 provide that the new scheme should be established by regulations and set out the kind of provision that may be made by these regulations and any amending regulations. Although these are fairly standard for public schemes, I assure the Committee that the Government have considered carefully how these may be relevant to this scheme. The new clause in Amendment 197 ensures that the scheme rules cannot be amended unless prescribed procedures have been followed. In most cases, the requirement is to consult. However, if the proposed amendment might adversely affect members’ rights, the regulations must prescribe additional procedures to protect the interests of members, including obtaining the consent of interested persons or their representatives.
The new clause in Amendment 198 will enable the Government to direct the disposal of the assets currently held by the pension scheme for the benefit of the Exchequer. As we expect that the bulk of the assets will be sold before the new scheme is established, regulations under this clause will ensure that the trustees’ liabilities will be met by public funds, thus ensuring that pensions in payment will not be affected. Regulations under this clause will also be able to exempt the trustee or AWE plc from any liability that might otherwise arise because they have complied with the Government’s direction. This will include the power to disapply or modify specified statutory provisions. These powers can be used only in relation to regulations made under this clause and are intended to protect the trustee. For example, we expect that we will need to disapply the scheme funding regime in relation to the scheme once the sale of the assets begins.
The new clause in Amendment 199 ensures that the transfer of the AWE pension scheme to a new public scheme will be tax neutral, meaning that no additional or unexpected tax liabilities will arise for those affected by the changes. The new clause in Amendment 200 will give the Government the power to make regulations requiring individuals or organisations to provide the information needed to establish the new public scheme, administer the scheme and transfer accrued rights. It should be noted that the Government do not expect to use these powers, as we are working with the AWE pension trustees and others to ensure a smooth transition for the benefit of all members. This provision will be required only in case of non-compliance.
New Clause 201 ensures proper consultation and parliamentary scrutiny for regulations made under this part of the Bill, particularly those affecting the establishment and operation of the new public pension scheme and the transfer of assets. The Government are required to consult the trustee of the AWE pension scheme before making regulations to establish the new public scheme, transfer accrued rights or transfer assets and liabilities. This ensures that the interests of scheme members will be fully considered. Regulations that could adversely affect existing rights, have retrospective effect or set financial penalties are subject to the affirmative procedure. This ensures that significant changes are subject to parliamentary approval and scrutiny. All other regulations under this part of the Bill are subject to the negative procedure, which provides flexibility while maintaining accountability. I hope that this explains the plans for the AWE pension scheme. I commend these amendments to the Committee and I beg to move.
Baroness Neville-Rolfe (Con)
My Lords, I shall speak to government Amendments 194 to 202. The Government’s letter states that the liabilities of the AWE pension scheme will no longer be pre-funded, that the assets of the scheme will be sold and that scheme members will be protected in line with the approach taken to other pensions guaranteed by the Government. The proposed amendments to the Bill are said to provide the legislative framework to achieve this outcome. They would enable the creation of a new public pension scheme into which the accrued rights of AWE scheme members would be transferred. For the avoidance of doubt, Amendment 198 does not establish a conventional funded public sector pension scheme. Instead, it appears to create a hybrid transition mechanism which ultimately results in an unfunded public liability.
In a genuinely funded scheme, assets and liabilities move together into a continuing pension fund. The provisions break the link between members’ accrued rights and any dedicated asset backing. By contrast, a private sector defined benefit pension scheme is funded and backed by invested assets. It is governed by a statement of investment principles, which sets risk tolerance, balances growth and security, aligns investments with member liabilities and is overseen by trustees acting under a fiduciary duty to scheme members. Once members’ rights are transferred into the new public scheme, there is no guaranteed asset pool, there is no meaningful statement of investment principles and benefits are met from future public expenditure rather than from scheme assets, as the Minister explained.
The effect of this is a material change in the nature of members’ interests. Rights that were previously supported by a funded scheme, overseen by fiduciary trustees and governed by a statement of investment principles would instead rest on a statutory public sector framework. In that framework, the investment strategy and long-term funding are determined through central government processes and are therefore exposed to future fiscal and policy decisions. Although the Government’s interest in AWE plc is public in ownership terms, these provisions do not operate at a general or class level. They apply to a single named employer and to a closed and identifiable group of scheme members for whom a bespoke statutory framework is being created. This is the problem.
It is for these reasons that there remains a credible argument that the amendments are prima facie hybridising. I know about this because on Thursday 8 January I tabled my public sector amendment to the Bill, which is now Amendment 217. I was required to amend it before tabling because it named more than one specific pension scheme, as Amendments 194, 195, 196, 198, 199, 200 and 202 do. Interestingly and I think unusually, Amendment 199 also deals with taxation, which is something I confess I have not seen before, but there may be a precedent. My amendment did not move members’ interests at all. It simply required a review of the affordability, sustainability and accounting treatment of public sector schemes. That stands in contrast to the far more substantive and immediate changes affected by Amendments 198 to 202. My original amendment was rejected on grounds of hybridity and I had to take out the specific scheme references. Somehow—and it feels rather suspicious—the Government’s hybrid amendment was accepted by the Public Bill Office.
I urge the Committee to reflect carefully on the nature and consequences of what is proposed and the precedent that it may set for hybridity. I invite the Minister to consider this and to consider perhaps introducing amendments to Amendments 195 to 202 or withdrawing the amendments until the implications are considered by an appropriate constitutional expert. Obviously, I look forward to hearing the Minister’s explanation of why we are facing this situation at this point in time. My issue is with the hybridity rather than with the details of the AWE pension scheme, which is not a matter on which I am in any way expert.
Baroness Sherlock (Lab)
My Lords, I will start by discussing Amendment 203ZC and then come to the other amendments.
Amendment 203ZC would add new provisions to the Pensions Act, which would mean that, if an alternative sponsor provided a sufficient premium, a cash payment or alternative arrangement could be provided for members of that scheme that secured better benefits than the PPF level of compensation. The amendment seeks in particular to help members of the AEA Technology pension scheme. As we have heard, AEAT was formed in 1989 as the commercial arm of the UK Atomic Energy Authority—UKAEA—and was subsequently privatised in 1996. Employees who were transferred to AEAT joined the company’s new pension scheme, and most of them opted to transfer their accrued UKAEA pension into a closed section of the AEAT pension scheme. In 2012, 16 years later, AEAT went into administration, and the AEAT pension scheme subsequently entered the PPF.
I express my sympathy for all AEAT pension scheme members; I recognise their position. I am pleased to say that on pre-1997 indexation in PPF, which is an issue for AEAT members, we have listened and acted. Those with pre-1997 accruals and whose schemes provided for pre-1997 increases, which includes AEAT members, will benefit from this change.
However, the Government do not support this amendment. The noble Baroness outlined some of the issues around AEAT, but this case has been fully considered. We set this out in our response to the Work and Pensions Select Committee inquiry on DB pensions. These investigations included, but are not limited to, reviews by three relevant ombudsmen, debates in the Commons in 2015 and 2016 and a report by the NAO in 2023. This matter has also been considered by previous Governments in the period since AEAT went into the PPF, all of whom reached the same conclusion.
AEAT members have asserted that upon privatisation, insufficient funds were transferred into the scheme. As I understand it from historic responses, this amount was based on the financial assumptions at the time, and the trustees of the scheme agreed the transfer value. Members have also outlined that, given the amount transferred to the PPF, with investment, they could now be paid their full pension. However, the PPF does not work that way; let me explain why.
When schemes enter PPF assessment, evaluation is generally undertaken to determine whether there are enough assets to secure at least PPF-level benefits. Sufficiently well-funded schemes can come out of the assessment supported by PPF-appointed trustees to secure greater benefits than PPF compensation. Schemes that are funded below this level are transferred into the PPF. The PPF does not permit transfers out because it does not work as a segregated fund where individual scheme contributions are ring-fenced and can later be transferred out. That is due to PPF investment policies because the only grounds on which that might happen would be, for example, if PPF investment policies were such that they then became better funded.
The reason that does not work is that the PPF is a compensation scheme operating in the interests of all its members. It is not a collection of individual pension schemes. Funds transferred in from underfunded schemes and insolvency recoveries, alongside the levy and investment returns, are all brought together. Allowing members of schemes that have entered the PPF to transfer back out would undermine its ability to provide compensation for all its members and for future schemes in the case of employer insolvency.
This amendment changes the purpose of the PPF as a compensation fund and that safety net in case of employer insolvency. Schemes go into the PPF either because an alternative sponsor cannot be found to take on the scheme’s liabilities or because the scheme is unable to secure benefits that correspond to at least PPF compensation levels. We do not expect alternative sponsors will be found to pay a premium for schemes that have transferred into the PPF. Additionally, it would place a different role on the board of the PPF to undertake a member-by-member assessment of whether members would get better benefits through a transfer. We do not underestimate the difficulty of this, given the decades since many schemes, such as the AEAT, entered the PPF. Changing the PPF’s role and how it operates as set out would need to be much more broadly considered, alongside impacts on the PPF and potentially unintended consequences.
Baroness Altmann (Non-Afl)
Section 169(2)(d) in the Pensions Act 2004 seems to make provision for this to happen. Therefore, what is the purpose of that clause? I am trying to build on that to specify circumstances in which it could happen. Of course, when a scheme is in the assessment period, it can be extracted. I am trying to say that if it has gone in and can improve the funding of the PPF by paying a premium and give members more than they would have in the PPF, why would there be an objection?
Baroness Sherlock (Lab)
The challenge of this is that of course schemes can come out in the assessment period. That is the point of the assessment period: to work out whether there is a sponsor or enough funds, which could, with appropriate support, be able to deliver greater-than-PPF benefits, in which case the scheme may go out again. It goes into the PPF only if that cannot be the case. Once it has gone in, the scheme does not exist anymore. There are no scheme assets because, at that point, the members are not scheme members but members of a compensation scheme. It cannot be the case that, years later, someone should come along and say, “We now want to try to move a group of former members of a particular scheme back out of the PPF”. That simply does not work.
The noble Baroness asked something else. I apologise for being slightly confused earlier on: I thought this was going to be part of the previous group, so I am slightly scrabbling around trying to put my speaking notes in the right place. The noble Baroness is trying to draw a comparison between AWE and this. Although they were both DB pension schemes in the nuclear industry, the two situations are entirely different. AEAT was created in 1989 as the commercial arm of the UKAEA. It became a private company, with no further government involvement in ownership or management.
By contrast, AWE, which is responsible for manufacturing, maintaining and developing the UK’s nuclear warheads, has since the 1950s either been government owned or the Government have held a special share in the company. It became fully owned by HMG again in 2021, when it became an NDPB. As the Government own and fund AWE, they are also responsible for funding its pension scheme responsibilities. That is why the AWE has a Crown guarantee, granted in 2022, shortly after it became a public body of the MoD, having previously been government owned. I hope that explains why the two are differently treated.
Baroness Altmann (Non-Afl)
I respectfully ask the Minister to consider the possibility, which is arising, of someone who can come along after the assessment period and pay more than the PPF can provide. As I say, that could help the PPF’s funding. It should not in any way impact on the levy, and it is an option to permit that to happen. So my amendment, building on what is already in the Pensions Act 2004 but which has not yet been used, given that schemes are in surplus, would allow them to do that.
The other thing I will say is that everyone in the closed section of the AEAT with accruals before 1997 was in the public sector. They were members of a public sector scheme, and they were advised by the Government Actuary’s Department that if they transferred they would not need to worry about the security of their pension, but that turned out not to be the case. I therefore hope the Minister can see the parallels. I know she is in a difficult position on this, but I thank her for her consideration.
Baroness Sherlock (Lab)
I am not in a difficult position. The Government’s position is clear: these are not comparable schemes. One has a Crown guarantee, for the reasons that I have explained, while the other does not because, for a significant portion of its history, it was a private company. It was privatised, and it subsequently went into administration. Those are not comparable situations. While I have sympathy for the position of individual scheme members, that does not make the two comparable or the Government’s responsibility comparable. I am certainly not aware that someone is out there waiting to sponsor this, although the noble Baroness may be. She is nodding to me, and if she wants to share with the Committee that she has a sponsor ready to do that, I would be glad to hear it, but the idea that this would routinely be a pattern where, for lots of long-dead pension schemes, sponsors are waiting to draw them out just would not be practical for the PPF.
I am also advised that the subsection 2(d) that the noble Baroness mentioned is not in force. That does not make a difference to her argument, but it may make a difference to the nature of this.
I shall try to return now to the issue that we were talking about earlier on, the AWE scheme. On hybridity, I say to the noble Baroness, Lady Neville-Rolfe, that my understanding is that hybrid bills affect the general public but also have a significant impact on the private interests of specified groups. In this case, there is no impact on the general public, only on AWE members. That follows the precedent in Royal Mail and Bradford and Bingley/Northern Rock legislation. This also refers to schemes that were or are to be defunded and replaced with public schemes. I hope that explains why this is not hybrid. I cannot comment on why the clerks did not accept her amendment because I did not quite catch what it was that she was comparing it with.
Baroness Neville-Rolfe (Con)
My Lords, it may be that those are precedents that have been passed in legislation, but I am not clear that they have been put into this sort of Bill. The problem with the amendments is that they are a mixture of the general and the individual. That is what creates hybridity, which is why I ran into trouble with the Table Office when I tried to table my amendment. However, the Minister’s amendment seems not to have run into that issue, so that is something that we need to consider. Perhaps the Minister could have a look at it and bring the amendments back on Report, assuming that she is right and there is not a hybridity issue. I am very concerned about a constitutional innovation without expert guidance. She wrote a letter; I did not get it, but obviously I have been taking advice on this. It is slightly outside the remit of what we are able to agree on.
Baroness Sherlock (Lab)
The noble Baroness makes a very fair point. In the light of her comments, I do not know enough about what she tried to do and why it did not work. I would like to be able to compare them. Given that she makes a perfectly sensible suggestion, I happy to withdraw the amendment and make sure that I can answer her question before we come back on Report, if that is okay with noble Lords. For now, I beg leave to withdraw my amendment.
Baroness Altmann (Non-Afl)
May I just correct the record? I believe that the Goode committee may indeed have recommended limited price inflation up to 5%, and I apologise to the Committee.
Baroness Sherlock (Lab)
I thank my noble friend Lord Davies for introducing his amendment and for the history lesson. It is living history, but he always has the edge on me because he goes back to 1975, and at that point I was more interested in boys and make-up, so I simply cannot compete, I confess, on that front.
The reality is that this Government have to start in 2026 and where we are now, so we have to address what the right thing to do now is for the DB pension universe and for the schemes in general. I can totally understand why my noble friend has introduced this amendment. Members of some schemes are concerned about the impact of inflation on their retirement incomes, and I am sympathetic. We have been around this in previous groups. This amendment would remove references to 6 April 1997 as the start date for the legal requirement on schemes to pay annual increases on pensions in payment. Obviously, as my noble friend indicated, legislation requires increases on DB pensions in payment to be done only from 6 April 1997. That has been a pretty long-standing framework which reflects the balance that Parliament judged appropriate at the time between member protection and affordability for schemes and employers. These changes are normally not backdated; they are normally brought in prospectively.
Most schemes already provide indexation on pre-1997 pensions, either because it is required under the scheme rules or because they choose to award discretionary increases. The Pensions Regulator has done some analysis and is doing more work on this. The latest analysis indicates that practices differ, but many schemes have a track record of awarding such increases. However, imposing a legal requirement on schemes now to pay indexation on pre-1997 benefits would create costs that schemes and employers may simply not have planned for. These costs may well not have been factored into the original funding assumptions or contribution rates. For some schemes and employers, these additional unplanned costs could be unaffordable and could put the scheme’s long-term security at risk.
Many employers are working towards buyout to secure members’ benefits permanently. Decisions on discretionary increases must be considered carefully between trustees and employers against their endgame objective. The reality is that the rules for DB pension schemes inevitably involve striking a balance between the level and security of members’ benefits and affordability for employers. But minimum requirements have to be appropriate for all DB schemes and their sponsoring employers. A strong, solvent employer is essential for a scheme’s long-term financial stability, and that gives members the best protection that they will receive their promised benefits for life, as the employer is ultimately responsible for funding the scheme. Any change to that statutory minimum indexation has to work across the full range of DB schemes. This amendment would increase liabilities for all schemes, regardless of their funding position or governance arrangements. While some schemes and employers may be able to afford increasing benefits in this way, others will not.
The way DB schemes are managed and funded since the 1995 Act was introduced has changed, but the basic principle remains that we cannot increase scheme costs on previously accrued rights beyond what some schemes might be able to bear or that many employers will be willing to fund, and that remains as true now as it was then. Our view is that schemes’ trustees and the sponsoring employer have a far better understanding than the Government of their scheme’s financial position, their funding requirements, their long-term plans and therefore what they can and cannot afford. They are also best placed to consider the effect of inflation on their members benefits when making decisions about indexation. The regulator has already been clear that trustees should consider the scheme’s history of awarding discretionary increases when making decisions about indexation payments.
We discussed earlier in Committee the Government’s reforms on surplus extraction. They will allow more trustees of well-funded DB schemes to share surplus with employers to deliver better outcomes for members. As part of any agreement to release surplus funds to the employer, trustees will be better placed to negotiate additional benefits for members, which could include discretionary indexation. Although I understand the case my noble friend is making—I regret that I cannot make him and the noble Baroness, Lady Altmann, as happy as they wish—I hope that, for all the reasons I have outlined, he feels able to withdraw his amendment.
Lord Davies of Brixton (Lab)
I thank those who have taken part in this debate on an important issue. Many people out there—I have had messages from people who are watching this debate—hope for better news. I am sorry that at this stage the Government are maintaining the line.
On the question of history, I could go back to the 1960s and Richard Crossman’s national superannuation if people would like—I am even slightly tempted to start. But the bit of history I remember is in the 1980s, when many schemes had surpluses and the Government introduced, through the Inland Revenue, limits on surpluses, compelling schemes to deal with them. At that time, employers said to us—I was involved in many negotiations—“Okay, it’s fine, we’ll take the surpluses now, but depend on us. When things get tough, we’ll come up with the additional money required”. What happened is they gave up and walked away. That is why the Labour Government in the early part of this century introduced funding requirements, the Pension Protection Fund and so on because, ultimately, when employers and trustees were put to the test, all too often they failed to deliver the promises that they made when surpluses were available.
The noble Viscount, Lord Younger, rightly tied this to the issue of surpluses and certainly there will be an opportunity on Report to discuss the linkage between employers getting refunds from their schemes and providing better increases for members. That is such an obvious linkage. I would want to go beyond that, but the issue will continue. For the moment, I beg leave to withdraw my amendment.
Baroness Stedman-Scott (Con)
My Lords, the amendments in this group in the name of the noble Baroness, Lady Bowles, are thoughtful and proportionate. They raise genuinely important questions about how we can future-proof the operation of the Pension Protection Fund.
Clause 113 amends the provisions requiring the PPF board to collect a levy that enables the board to decide whether a levy should be collected at all. It removes the restriction that prevents the board reducing the levy to zero or a low amount and then raising it again within a reasonable timeframe. We welcome this change. It was discussed when the statutory instrument passed through the House, at which point we asked a number of questions and engaged constructively with the Government.
The amendments tabled by the noble Baroness would go further; once again, the arguments she advances are compelling. Amendment 203A in particular seems to offer a sensible way to shape behaviour without micromanaging it—a lesson on which the Government may wish to reflect more broadly, especially in relation to the mandation policy. If schemes know that the levy will always be raised in one rigid way, behaviour adapts, and not always in a good way. In contrast, with greater flexibility, employers retain incentives to keep schemes well funded, trustees are rewarded for reducing risk and the levy system does not quietly encourage reckless behaviour on the assumption that everyone pays anyway.
This amendment matters because it would ensure that, if the PPF needed to raise additional funds, it could do so in the least damaging and fairest way possible at the relevant time. I fully appreciate that the PPF is a complex area but, as the market has changed and is changing, and as the pensions landscape continues to evolve, the PPF must be involved in that journey. These are precisely the kinds of questions that should be examined now, not after rigidity has caused unintended harm.
I turn briefly to Amendment 203C. We are open to finding ways to prevent the levy framework becoming overly rigid, which is precisely why we supported the statutory instrument when it came before the House. Instead of hardwiring an 80% risk-based levy requirement into law, this amendment would place trust in the Pension Protection Fund to raise money in the fairest and least destabilising way, given the conditions of the year. Flexibility may well be the way forward. I have a simple question for the Minister: have the Government considered these proposals? If the answer is yes, why have they chosen not to proceed? If it is no, will they commit to considering these proposals between now and Report? I believe that that would be a constructive and proportionate next step.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Baroness, Lady Bowles, for introducing her amendments and explaining why she wants to advance them. As she said, taken together, they would give the PPF much more flexibility—full flexibility, in fact—in deciding how to set the levy by removing the requirement for at least 80% of the PPF levy to be risk-based. Obviously, in the current legislation, 80% of the levy has to be based on the risk that schemes pose to the PPF; this supports the underlying principle that the schemes that pose the greatest risk should pay the highest levy.
Although the PPF is responsible for setting the pension protection levy, restrictions in the Pensions Act 2004 prevent it significantly reducing the levy or choosing not to collect a levy when it is not needed. As has been noted, the PPF is in a stronger financial position and is less reliant on the levy to maintain its financial sustainability. That is why, through the Bill, we are giving it greater flexibility to adjust the annual pension protection levy by removing the current legislative restrictions.
Clause 113 will enable the PPF to reduce the levy significantly, even to zero, and raise it again within a reasonable timescale if it becomes necessary. To reassure levy payers, Clause 113 provides a safeguard that prevents the board charging a levy that is more than the sum of the previous year’s levy and 25% of the previous year’s levy ceiling. The legislative framework will also enable the PPF to continue to charge a levy to schemes it considers pose a specific risk. In support of this change, the PPF announced a zero levy for 2025-26 for conventional DB schemes and is consulting on setting a zero levy for these schemes in the next financial year. That would unlock millions of pounds in savings for schemes and boost investment potential, and it has been widely welcomed by stakeholders.
On the way forward, as the PPF is not currently collecting any levies from conventional schemes, whether risk based or scheme based, the make-up of the split is less consequential for schemes: a different percentage of a zero charge is still zero. But, while the PPF is strongly funded, it underwrites the whole £1 trillion DB universe, as I said. There is inevitably huge uncertainty about the scenarios that could lead to the possibility of the PPF needing to charge a levy again in the future, but it cannot be entirely discounted. We recognise the concern that, if that were to happen, the proposed legislation does not go far enough to allow the PPF to calculate the appropriate split between risk-based and scheme-based levies, particularly as the number of risk-based levy payers is expected to diminish over time.
Obviously, the amendments tabled here would give the PPF full discretion on how the split of the levy is calculated and set. While that may be welcomed by some, our view is that we need to consider any changes carefully to ensure that any legislation is balanced, is proportionate and gives the right flexibility while maintaining appropriate safeguards. That will take time. We will continue to consider whether further structural change to the PPF levies may be required in the future and, where it is, whether it works for the broad spectrum of eligible DB schemes, the PPF and levy payers.
In response to the noble Baroness, Lady Stedman-Scott, the Government’s view is that there is a reason the framework is set in legislation: to give levy payers confidence on future calls. But, as I said, we will consider the way forward. I cannot say to the noble Baroness that we will do that between now and Report—it will take time to reflect on future changes and, if there are to be any, to make sure that they happen—but I am grateful to her for raising the matter and for the debate that it has produced. I hope she will feel able to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD)
I thank noble Lords who spoke. I freely admit that they know more than I do about these aspects, so I am glad that the conversation has started. I understand that this might bring something a little less wide in due course. It is a conversation that, having started, I hope will be continued. I will think about whether I can invent something that is a little less adventurous for Report, but in the meanwhile, I beg leave to withdraw my amendment.
Baroness Janke (LD)
I belatedly state my interest: I am a member of the LGPS. I apologise; I should have said that at the beginning of my speech, so I just put it on the record.
Baroness Sherlock (Lab)
My Lords, I thank all noble Lords for introducing their amendments. On top of the usual suspects, it is nice to welcome my noble friend Lord Hendy and particularly my noble friend Lord Pitt-Watson, who was brave enough to come to Committee and speak on these kinds of topics when he has only just made his maiden. We should all be delighted to have him here, and I especially thank him for his kind words about the Committee. It is a joy, and I look forward to having him here for many more pension debates.
Amendment 204 from the noble Baroness, Lady Stedman-Scott, gives me an opportunity briefly to update the Committee on how the Government are unlocking pension fund investment in projects with social and environmental benefits. We have talked quite a bit about the Mansion House Accord in recent Committees—for newcomers, this is the commitment by 17 major workplace pension providers to invest at least 10% of their default DC funds in private markets by 2030, with a minimum of 5% ring-fenced for UK-based assets.
The Government welcome this initiative because it is going to see funds flow into major infrastructure projects and clean-energy developments. The Sterling 20, set up in October 2025, is a new investor-led partnership between 20 of the UK’s largest pension providers and insurers and will be channelling billions into affordable housing, regional infrastructure and broadband. Initiatives such as the £27.8 billion National Wealth Fund will help increase the UK pipeline of investable opportunities. It is a UK government-created public finance institution designed to crowd in private capital, including pension investment, towards clean energy, low-carbon infrastructure and social housing projects.
This is already happening. Pension schemes have the flexibility to invest in bonds, social housing and green technology where such investments are in members’ best financial interests. Industry is clearly acting. Legal & General has pledged $2 billion by 2030 to deliver 10,000 affordable homes and create thousands of jobs. Nest has committed £500 million to Schroders Capital, including £100 million for UK investments and £40 million for rural broadband. The measures in the Bill, especially those relating to scale and governance for occupational and local government pension schemes, are intended to ensure that pension schemes reach the levels of scale and expertise to be able to invest more in a broader range of assets, including social infrastructure. The Government will be able to monitor those commitments.
It is always a delight to hear the noble Baroness, Lady Stedman-Scott, being passionate about the issues in which she has such experience. I understand the intentions behind the amendment, but the Government are worried that the proposed statutory review-and-fix framework could make the system more complex and costly to operate without a clear enough indication it would deliver better results for savers. However, I am with my noble friend Lord Pitt-Watson that we should all keep talking about these issues. It is one of the debates in which we share so many objectives. We are just talking about the best way in which to do this.
I turn to Amendment 218C from my noble friend Lord Hendy. Again, I fully recognise the intentions behind it and the concerns about human rights issues and investment decisions. UK pension schemes are, in general, not just passive holders of capital but long-term responsible investors required by the regulatory framework to assess environmental, social and governance—ESG— factors across policy setting, integration, stewardship and reporting, all grounded in their statutory duty to consider financially material risks. In many schemes, responsible investment policies set clear expectations on human rights standards. For example, the People’s Partnership policy explicitly sets out how it identifies, manages and mitigates these risks.
UK pension funds invest globally, as my noble friend Lord Pitt-Watson said, but within strict fiduciary duties, requiring them to prioritise members’ long-term interests, rather than simply chasing the highest return. Ethical considerations, including human rights, therefore increasingly shape capital allocation decisions as trustees weigh financial returns alongside reputational, social and sustainability risks. That role carries a significant responsibility for thorough due diligence across the portfolio. Fund managers will typically undertake screening to ensure companies meet minimum ESG standards, including sectors such as weapons, tobacco or fossil fuels and identifying weak labour rights or sustainability practices. Such screening helps manage long-term financial and reputational risks.
A core part of this is human rights due diligence assessing company policies, supply chain practices, labour standards and processes for addressing risks such as modern slavery. Managers also consider controversy histories, sanctions lists and engagement records to identify systemic concerns that may warrant action or divestment. Governance factors, board effectiveness, anti-corruption controls, executive incentives and transparency are also examined, as weak governance signals elevated long-term risk. Investors increasingly expect companies to provide meaningful ESG and human rights data consistent with UN recommendations placing risks to people and planet at the centre of decision-making.
We have seen internationally, most notably in the Netherlands, that funds will divest from companies linked to UN-identified human rights violations. UK schemes, too, are acting. We heard mention of LGPS funds. Southwark has divested itself from companies linked to conflict and genocide. In the private sector, People’s Pension withdrew £28 billion from State Street over reduced ESG and human rights engagement, reallocating the assets to managers with stronger stewardship commitments. These actions demonstrate a clear readiness to adjust strategies where human rights issues affect long-term value or reputational risk. To support such decisions, UK investors draw on respected international frameworks, including the UN guiding principles on business and human rights and the OECD guidelines. Evidence from the 2024 DWP call for evidence shows that trustees actively using these standards and the UN Global Compact to guide their management of social risks.
The DWP and the Pensions Regulator also provide guidance on social factors. The 2024 Taskforce on Social Factors offers practical support on risks such as modern slavery and child labour. As part of our forthcoming statutory guidance on trustee investment duties, we will consider how to embed further practical examples of good practice, from schemes such as Nest, Brunel and People’s Partnership, ensuring that trustees of schemes of all sizes can draw on proportionate, real-world illustrations of effective human rights risk management.
Baroness Altmann (Non-Afl)
My Lords, I add my words of support to the concept being promoted by my noble friend Lord Younger. I hope the Government will look into this, as it might well be a good topic to task regulators with in making sure that either they or pension schemes themselves are helping people to understand pension schemes better, how they work and the free money that goes along with a pension contribution in terms of your own money. There is, as I say, extra free money added by, usually, your employer and other taxpayers. I do not think young people always understand just how beneficial saving in a pension can be relative to, let us say, saving in a bank account or an ISA, or indeed the value of investing. It would be in the interests of the regulators and, indeed, the providers to help people to understand that. The Government’s role in guiding that and setting up this kind of review could be very valuable.
Baroness Sherlock (Lab)
My Lords, I thank the noble Viscount, Lord Younger, for introducing his amendment and all noble Lords who have spoken.
As we have heard, the amendment would introduce a statutory requirement for the Secretary of State to conduct a review of pension awareness and saving among young people. I agree with the Committee about the incredible importance of this issue, and I understand why the noble Viscount has tabled the amendment, but I hope to persuade him that there is another way forward.
The starting point, inevitably, is that last year the Government revived the Pensions Commission. The original commission did an astonishing job; its legacy under the previous Labour Government in effect lead to the creation of workplace pension saving via automatic enrolment. Since then, with support from both parties, automatic enrolment has transformed participation in workplace pension saving. It has been a particular success for younger people. Our participation for eligible employees aged 22 to 25 has gone up from 28% in 2012 to 85% in 2024.
Viscount Younger of Leckie (Con)
My Lords, I will make just a few rounding-up comments. I am very pleased to have the support for my amendment from the noble Lord, Lord Sharkey, from my noble friend Lady Neville-Rolfe in particular, and from the noble Baroness, Lady Altmann. It was very helpful to hear from my noble friend Lady Neville-Rolfe the information she received directly from the review that she undertook into retirement age.
The Minister referred to the importance of education; I took note of her very helpful answers on what is happening at the sharp end of schools. I also took note of the comments from the noble Baroness, Lady Altmann, and the helpful suggestions that the regulators could perhaps play a more proactive role in this area.
I believe that Amendment 205 is modest but necessary. If we are serious about improving retirement outcomes, we must start by understanding why so many young people are disengaged and by shaping policy that meets them where they are, rather than where we wish they were.
I am delighted to see that the noble Baroness, Lady Drake, is in her place. We are all very keen to know what will come out from the Pensions Commission.
One question I put to the Minister now is about the timings. My understanding is that stage one will report in early 2027—one year’s time—but stage two, which is on this subject of pensions adequacy, will be at a later stage. Can the Minister clarify those timings, as they are still a bit unclear? I understand that she is undertaking a huge amount of very important work, but that would be very helpful.
Baroness Sherlock (Lab)
I will simply say that there will be a report early next year. I am very happy to write to the noble Lord to confirm any future timings.
Pension Schemes Bill
Baroness Sherlock ExcerptsTuesday 3rd February 2026
(1 week, 4 days ago)
Grand CommitteeRead Full debate Pension Schemes Bill 2024-26 View all Pension Schemes Bill 2024-26 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 152-VI(a) Amendments for Grand Committee (Supplementary to the Sixth Marshalled List) - (3 Feb 2026)
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, these amendments, debated in the last session, concern trustees’ duties and protections, the design of the savers’ interest test, the risk of regulatory herding and the proportionality of the penalty regime.
I start with the operation of the savers’ interest test and exemptions for many future asset allocation requirements. Amendment 140, from the noble Baroness, Lady McIntosh, would remove the provision that an exemption, once granted under the savers’ interest test, applies only for a period specified by the authority. In practice, this would allow an exemption to become open-ended. Amendment 141 would prevent schemes from being required to change their asset allocation while an application or appeal under the savers’ interest test is pending and it would secure the ability to apply for an exemption for up to three consecutive years.
We need fair and transparent procedures when exemptions are granted or withdrawn. But the Government’s intention is that exemptions should be capable of adapting to changing circumstances rather than becoming de facto permanent exclusions. Market conditions, whether in terms of fees or the availability of suitable opportunities, can and do change. A permanent exemption, as Amendment 140 would allow, could end up entrenching a competitive advantage for particular providers long after the original justification had fallen away.
On Amendment 141, many of the procedural safeguards that the noble Baroness seeks are already enabled by the Bill. New Section 28C allows regulations to set time limits for decisions on savers’ interest applications, to specify the period an approval lasts, to set rules around withdrawals and to require advance notice to be given. Those are the right vehicles for detailed processes to be determined—by regulators and in consultation with industry. The powers do not cap the number of times that an exemption can be renewed, so I assure the noble Baroness that multiyear relief will already be possible where justified.
Turning to trustees’ duties, Amendments 146 and 147, from the noble Baroness, Lady Bowles, address how these new powers sit alongside fiduciary responsibilities. Amendment 146 would say expressly that nothing in this chapter overrides or diminishes trustees’ duty to act in the best financial interests of members. I entirely agree about the importance of that duty. But, as I have said, the Government would not be proposing these powers if there were not strong evidence that savers’ interests lie in greater investment diversification than we see today in the market.
In the last session, the noble Lord, Lord Sharkey, challenged me on the strength of the saver benefits, referring to analysis by the Government Actuary’s Department, which, in illustrative modelling for DWP, found a 2% uplift in a typical saver’s pension pot from a hypothetical private markets allocation. That analysis is just one of various reports that show the benefits of diversification and the potential for higher risk-adjusted returns from a more diversified portfolio. Some of that evidence is referenced in the DWP paper to which the noble Lord referred. As another example, a British Business Bank report identified a potential uplift of 7% to 12% from a 5% allocation to venture capital.
There is a fair degree of consensus around this in the pensions industry. Indeed, the Mansion House Accord explicitly cites the potential for higher risk-adjusted returns as its core justification. The fact is that we are an international outlier. Meanwhile, Australian and Canadian pension funds are investing in the UK, owning airports, roads and telecom companies, making the most of the opportunities available to invest in this country while seeking good returns for their savers.
When it comes to the reserve asset allocation power, as noble Lords know, before it can be exercised, the Government must publish a report on the likely impact on savers. Where asset allocation requirements are in place, the savers’ interest test allows a scheme to seek an exemption if it can show that compliance would cause material financial detriment to members. Crucially, nothing in the Bill disapplies trustees’ existing duties of loyalty, prudence and acting in members’ best interests. These continue to apply.
Our concern with Amendment 146 is that it could cast doubt on the binding nature of any requirements introduced under these powers by implying that trustees can simply disregard them wherever they assert that they are acting in members’ interests. The right place to consider scheme-specific departures is the savers’ interest test, which is overseen by the regulator.
We do not agree with Amendment 147 for similar reasons. It seeks to create a broad statutory safe harbour from penalties or consequences for trustees who fail to meet asset allocation requirements where they believe that they are acting in members’ best interests. The Bill already recognises that there will be circumstances where exemptions are justified and provides a structured route to secure them. A blanket safe harbour would risk undermining that framework.
Amendment 148, which is also from the noble Baroness, Lady Bowles, would place a new statutory duty on trustees to have regard to systemic risks, including economic resilience and climate change. I very much agree with the noble Baroness that such risks can materially affect long-term pension outcomes, and trustees should take them seriously. Our concern is that a new open-ended duty, using terms such as “systemic risk” and “economic resilience” without detailed definition, risks increasing legal uncertainty and costs for trustees without clear benefit. Our preferred approach is to work with the sector on strength and guidance for trust-based private pensions, clarifying how trustees can take account of systemic and sustainability risks within their existing duties.
The noble Lord, Lord Sharkey, pressed me last Monday on the timings of this work. I can confirm that the work is already under way and that an initial round table, with representatives from across the pensions sector and led by the Pensions Minister, took place yesterday. The Pensions Minister has confirmed that he will be convening a technical working group to take this work forward and that there will be a full consultation on the draft guidance later in the spring.
The noble Lord, Lord Sharkey, also asked whether that guidance would clarify the application of the reserve power. The guidance is not conceived as part of our implementation of these reserve powers, which, as I take every opportunity to remind the Committee, may well never be exercised. Rather, its purpose is to address inconsistent interpretations of investment duties across the trusteeship landscape and support everyday investment decision-making. As noble Lords may well be aware, there has been an active area of discussion within legal and financial circles for many years. The recent work of the Financial Markets Law Committee has played an important role in shaping the debate on the extent to which factors such as climate change, quality of life in retirement and sustainability should be considered in investment decisions. Building on that, our forthcoming statutory guidance is intended to provide clear and practical support to trustees on how these factors should be taken into account, ensuring confidence and consistency.
Amendment 142 from the noble Lord, Lord Vaux of Harrowden, deals with a concern about what happens if qualifying assets were to perform poorly, an issue also raised by the noble Baroness, Lady Stedman-Scott, last week. This amendment would require the regulator to indemnify schemes against costs or liabilities if members’ returns are worse than they might have been without any mandated allocation. I recognise the question, but I say again that the Government would not be proposing these powers if we did not think change from the status quo was in savers’ interests. These powers would only ever be used following a statutory impact report and with the savers’ interest test in place.
As I have said previously, trustees continue to be responsible for investing in their savers’ interests. That means savers would continue in all circumstances to be protected by the core fiduciary duties of trustees to act with loyalty, honesty and good faith to savers, and trustees would continue to be subject to a duty to invest in savers’ best interests, in line with the law. We expect that duty would certainly apply to the selection of individual investments in a portfolio; to the balance of different asset classes in a portfolio, including the balance between private asset classes; and to any decision to apply for an exemption under the savers’ interest test. If a provider felt the asset allocation requirement was inappropriate for their circumstances, we would expect their existing duties to guide them to submit an application for exemption to protect their savers’ interests.
There are also, I must say, some significant drawbacks with this amendment, which is not dissimilar to Amendment 167—we are going to cover that in the next grouping, so I apologise if I end up being a little bit repetitive then. An indemnity of this kind would in practice mean that taxpayers and levy-paying firms would underwrite individual schemes’ investment decisions. That would create serious moral hazard and encourage excessive risk-taking, on the basis that any losses could be socialised while any gains would accrue to the scheme. It would also be very hard to operate in practice. Identifying the portion of any loss attributable specifically to the qualifying assets, as distinct from the wider portfolio or market factors, would be highly contentious.
Amendment 150 from the noble Baroness, Lady Bowles, seeks to ensure that the Secretary of State avoids mandating or promoting investment in ways that create herding and to emphasise diversification in guidance. I entirely agree that we must avoid perverse herding effects. At present, DC schemes’ exposure to private markets is relatively low. As that changes, the breadth of potential qualifying assets, infrastructure, property, private equity, venture capital, private credit and others, together with the requirement for a prior report to Parliament, should help to mitigate herding. But while we will need to be alert to this, we do not believe an additional statutory duty is needed. Indeed, schemes will continue to be subject to existing rules and regulations in this area, such as the Occupational Pension Schemes (Investment) Regulations 2005, which require the assets of trust-based schemes to be
“properly diversified in such a way as to avoid excessive reliance on any particular asset”.
Amendment 149, also from the noble Baroness, Lady Bowles, would ensure that listed investment companies and trusts can be treated as qualifying assets on the same footing as other collective vehicles. We have had many an opportunity earlier in Committee to discuss in detail the matters relating to investment companies, so I will not rehearse arguments made previously. But, as I said last week, the design of this reserve power is deliberately aligned with the commitments made by industry under the Mansion House Accord. I have circulated to noble Lords links to the relevant Q&A materials, which I mentioned last Monday in Committee, and which can be found on the websites of Pensions UK, the ABI and the City of London.
The noble Baroness has asked periodically who is responsible for the approach taken to funds. I cannot speak to individual decision processes; what I can do is to echo what I said last week. The signatories self-evidently supported the scope that was eventually drawn, but so did the Government—we have been quite clear about that. Based on my knowledge of the conversations in which the Government were involved, I can also say that government support for this position was not in any way the result of pressure on the Government from signatories or the representative bodies, so the idea that this is some sort of anti-competitive move by the pensions industry is completely misconceived. Instead, it simply follows the logic—
Baroness Bowles of Berkhamsted (LD)
I do not think I was suggesting that it was an anti-competitive move by the pensions industry, but there are segments in it that are advantaged by it. The other concern is that the meetings that took place prior to the signing of the Mansion House agreement were very particular to certain types of organisation; I have yet to know of any that really had interests in listed investment companies or of any of them that were invited. Perhaps the Minister does not know because this is not her field, but I have to say, I am very concerned that this has been a secretive consultation, not a public consultation, among a selection rather than among the many.
Baroness Sherlock (Lab)
My Lords, I am not going to say any more than I have now. The noble Baroness has made a series of complaints about cartels, secrecy and lack of integrity—all kinds of things—none of which are merited. I simply felt that I needed to put something on the record to counter that, and I do not have anything to add. We have made it clear that these were iterative discussions with the industry, looking at what was going to happen specifically in relation to the accord, and I have made the Government’s view on that clear.
On enforcement, Amendment 145, to which the noble Baroness, Lady Stedman-Scott, has added her name, probes whether the maximum penalty of £100,000 per employer in new Section 28I is proportionate. We have worked closely with the regulators and benchmarked against comparable penalty regimes. The intention is to set a maximum that is meaningful as a deterrent to wilful or repeated non-compliance but is not routinely applied. I assure the noble Baroness that it is a cap, not a fixed sum, so the regulators will take account of the facts in each case; in practice, the potential loss of qualifying scheme status for auto-enrolment is likely to be a far more significant consequence than any fine.
We are keen to work with schemes, trustees and providers to ensure that any future use of the reserve asset allocation powers, were that to come to pass, is carefully targeted, evidence-based and consistent with trustees’ duties. We believe that the Bill provides the right framework, including the savers’ interest test, the requirement for a prior report and a proportionate enforcement regime. In the light of all that, I hope that noble Lords can withdraw or not press their amendments.
Baroness McIntosh of Pickering (Con)
My Lords, I am grateful to the Minister for summing up, albeit that there has been a delay of some two working days. I thank everyone who has spoken. I offer a particular thank you to the noble Baronesses, Lady Altmann and Lady Bowles, for lending their support to Amendments 140 and 141.
I note that, in summing up, the Minister said—it was in relation to the amendment in the name of the noble Lord, Lord Vaux, I think—that statutory guidance will be issued. I make a plea: could that be made available before Report, or certainly before the Bill receives Royal Assent, to enable trustees to have sufficient time to prepare in this regard? I do not know whether we have a date for that.
In relation to Amendments 140 and 141, I could not have put it better than my noble friend Lady Stedman-Scott did in summing up when she said:
“They make the framework that the Bill creates more robust, transparent and defensible”.—[Official Report, 26/1/26; col. GC 287.]
Therefore, I am grateful for this opportunity to debate these two amendments, as well as this group of amendments per se, but, for the moment, I beg leave to withdraw the amendment.
Baroness Stedman-Scott (Con)
My Lords, I shall speak briefly to Amendment 167, which was tabled and spoken to eloquently by the noble Baroness, Lady Kramer, and supported by many noble Lords. This amendment touches on a set of concerns that we raised at Second Reading and to which we will return in considerably more detail in our debate on the next group.
For the sake of brevity, at this stage, I will confine myself to the central point of principle. The issue here is not simply asset allocation but where risk is placed and who should take it when investment decisions are shaped by government direction, rather than trusty judgment. The mandation power introduced by the Bill is targeted narrowly at automatic enrolment default funds—the schemes that are relied on by those who are least likely to have made an active choice and are least able to respond if outcomes are adversely affected. That targeting matters. Mandation does not apply evenly across the pensions landscape. It does not touch defined benefit schemes, self-selected funds, SIPPs or bespoke arrangements but falls with notable precision on default savers—those who depend most heavily on the neutrality and integrity of the system to act on their behalf.
Amendment 167 raises a legitimate question about protection and accountability in that context. If default funds are required to follow mandated investment decisions and if those decisions underperform a simple, low-cost benchmark, should the consequences fall entirely on members who neither chose the strategy nor, in practice, have the capacity to respond to it? Of course, it may be said that members are free to move to another fund, but that response lacks behavioural realism. Automatic enrolment defaults exist precisely because many savers do not actively choose, do not regularly review and do not feel equipped to intervene in complex investment decisions. How can we put them in that position?
For a significant proportion of members, remaining in the default is not an expression of preference but a reflection of constraint, limited time, limited confidence and limited financial literacy. Behavioural realism tells us that these savers will not simply move in response to policy changes, however well signposted. To place the full downside risk of mandated investment decisions on that group is therefore not neutral; it is a deliberate allocation of risk to those least able to manage it. The noble Baroness’s amendment is therefore not an attempt to eliminate risk but to highlight the asymmetry that mandation introduces and the absence of any corresponding safeguard for those most exposed to its effects.
These issues around mandation, choice, fiduciary duty and the position of default savers run through the architecture of the Bill. We will return to them in much greater depth in the following group. For now, I simply underline that the concerns raised by Amendment 167 and all those who have spoken are not isolated. I look forward to the Minister’s response and hope that the Government will take note of the concern laid out to them today and do the right thing.
Baroness Sherlock (Lab)
My Lords, I thank the noble Baroness, Lady Kramer, for explaining her amendment, which would in essence introduce a requirement for the Government to establish a framework for compensating savers in the event that they lose out financially because they were invested in assets that they would not have been were it not for the use of these powers. I am sorry to say that because we have just discussed a similar amendment from the noble Lord, Lord Vaux, in the previous group, some of my arguments may sound a little familiar, but I hope that the noble Baroness will bear with me.
First, as I have said, the Government would not be proposing these powers if there was not strong evidence that savers’ interests lie in greater investment diversification than we see in today’s market. That is the Government’s view. I mentioned in the last group that there is a range of evidence out there which goes to this point. I cited one example of it; there are others cited in the DWP paper to which the noble Lord, Lord Sharkey, referred. I pointed out that we are an international outlier in this matter, so that is the Government's view.
The reason we are doing this, once again, is that we believe that it is in the interests of savers to have a small, risk-adjusted diversification within the context of a portfolio; we believe that it is the best thing for savers. DC pension providers themselves have recognised that a small allocation to private markets can offer better risk-adjusted returns as part of a diversified portfolio. The noble Baroness has offered one view as to why people are not doing this. In our view, many providers have so far not done it not because it is necessarily in savers’ best interests not to do it but because of competitive pressure to keep fees low or because of a lack of scale, among other reasons.
Secondly, if the Government ever came to consider exercising these powers, they would first have to publish a report considering the impact of the proposed asset allocation requirements on savers. Crucially, that is an opportunity to confirm that bringing forward the requirements is in savers’ interests, based on the circumstances at that time. I say to the noble Lord, Lord Vaux, that there is also a report required after the powers are used and within five years. Thirdly, if the Government ever did implement the requirements, the legislation provides for a formal process under which providers could apply for an exemption based on evidence that meeting the requirements would cause savers “material financial detriment”.
Crucially, savers will continue in all circumstances to be protected by the core fiduciary duties of trustees. Specifically, trustees would continue to be subject to a duty to invest in savers’ best interests, in line with the law. This comes down to the fact that the Government are not mandating trustees to invest in any particular assets. Were these powers ever to come about, the trustee duty would apply, as I have said, to the selection of individual investments in a portfolio, to the balance of different asset classes in a portfolio, including the balance between private asset classes, and to any decision to apply for an exemption under the savers’ interest test. If a provider felt that the asset allocation requirement was not appropriate for their particular circumstances, we would expect the existing duties to guide them to submit an application under the savers’ interest tests.
Baroness Bowles of Berkhamsted (LD)
If this is such a good idea, why not just mandate it for all pension funds?
Baroness Sherlock (Lab)
The Bill as a whole is trying to pursue scale and is trying to mirror what the Mansion House Accord did. I have been through that argument many times. We are seeking solely a reserve power to act as a backstop to an industry-led decision. The industry itself has decided to go in this direction. It is a simply a reserve power, and the reason why we are using it is that we know that there remains a risk that people will not all follow through on it because of the excessive focus on cost and the competitive advantage that may come from backsliding on that. I fully accept that the noble Baroness does not agree, but those are the Government’s arguments. I hope that the noble Baroness will withdraw the amendment.
Baroness Kramer (LD)
My Lords, it has been such an excellent debate that I will be extremely brief. I am troubled by two things. One is that the Minister does not seem to realise that this is not voluntary action by the pension industry. It is because it sees it as the only way to avoid actual mandation, not because people have sat down and said, “All these years we have been getting it wrong; now we have had a conversation with the Government and we’re going to get it right”. That is not what is going on here.
Secondly, I am troubled that the Minister does not understand the consequences of the level of risk that is embedded in these qualified assets. She is perfectly satisfied that, if they go wrong, the damage falls on the people with the narrowest shoulders. To me, that is seriously incomprehensible because, for those people, the consequence is frequently going to be poverty.
I ask her to sit back and think about this. The Government are right to encourage people to save for pensions, but they also need to understand that, when people have narrow shoulders, low incomes and limited financial knowledge, they are not in a position to take the kind of risks that she is, in essence, saying that they should be taking and, if they take them, they are guaranteed winners. If she believes that they are guaranteed winners, then simply step in and provide the protection that I am talking about, which would cost the taxpayer nothing. I beg leave to withdraw the amendment.
Baroness Sherlock (Lab)
My Lords, I thank the noble Baroness, Lady Noakes, who always throws out good challenges. I welcome the opportunity and hope that I can persuade her with the answers I am about to give.
Let me say at the start that the Government’s objective is clearly to move to a market of fewer, larger providers so that savers can benefit from better governance, greater investment sophistication and lower costs. The measures in the Bill, together with the review and the regulation-making powers in Clauses 42 to 44, are carefully calibrated to reduce fragmentation or preserve the scope for innovation if and where doing so demonstrably serves members’ interests. That is the key.
I accept that much of the fragmentation is a product of history, but we have seen, in the pensions investment review and the responses that came back to the consultation, that master trusts are creating multiple default arrangements. We do not want to see the same issues arising over time as exist in GPPs, where members are in too many default arrangements that do not offer value. The point I would make to the noble Lord, Lord Palmer, and the noble Viscount, Lord Younger, is that this is about members’ interests and returns for members. We are trying to address the multiplicity of default arrangements that do not serve members because they offer poor value.
Amendments 168 to 170 from the noble Baroness, Lady Noakes, would aim to broaden—
The Deputy Chairman of Committees (Baroness Scott of Needham Market) (LD)
My Lords, the Division Bells are ringing. The Committee will therefore adjourn for 10 minutes.
Baroness Sherlock (Lab)
My Lords, as I was saying, as the noble Baroness, Lady Noakes, described so well, the aim of her Amendments 168 to 170 is to shift from measures aimed at restricting the creation of new non-scale defaults towards a wider remit to encourage competition and innovation; I will come back to that in a moment. In addition, her Amendment 171 would expand the statutory review under Clause 43 to examine the extent to which such non-scale defaults contribute to competition.
Although we share the noble Baroness’s desire to see a vibrant, innovative market, we want these characteristics to operate alongside, not separate from, scale. Our concern is that the changes would leave too many default arrangements in place, entrenching fragmentation and preventing members benefiting from scale. Inserting a competition function into this regime would significantly extend the remit of the Pensions Regulator; again, I will come back to that in a moment.
The Government’s view is that there is no tension between scale and competition. Scale enables meaningful competition on quality and on long-term returns. I am sure that noble Lords will have had a chance to read the impact assessment on the Bill—it was green-rated, of which we are incredibly proud—which estimates that between 15 and 20 schemes may operate in this market after the conclusion of the transition pathway in 2035. We think that, by any measure, that represents a market within which successful competition can function; I do not think it would pass the oligopoly test that has been suggested.
However, we also need to remember that a key ingredient for competition is competitive charges for employers. Nest has helped lower charges through its public service obligation. It is important that employers continue to have access to pension products that offer low-charge options; Nest and others will play a key part in that going forward. We see no reason why competition for market share would not continue as it has done in the past. The drive for it is clearly still there.
The new entrant pathway places innovative product design at its core. The aim is to create a space for new solutions while maintaining a strong baseline of member protection. Our view is that, although we understand its underlying intent, we do not believe that Amendment 170 would add greatly to the opportunities for innovative schemes to remain in the market that are already set out in the Bill. Our new entrant pathway will place relatively few additional requirements on new schemes beyond those that exist today.
I agree that, alongside the innovation and competition that will come from existing schemes, there must be space for new market participants—the disruptors. We want to enable them to come to market, but there also needs to be confidence that they can grow to scale—over time, of course—and can deliver good outcomes for members. We recognise that a new scheme cannot come with scale and will need time to build up, obviously, but we need new entrants to demonstrate their plan to build scale.
Innovation is a good indicator of a scheme’s ability to grow. The noble Baroness described what is happening, but the truth is that there is a weak demand side, and it is already difficult, as we have seen, for a new entrant to gain traction. We do not seek to limit innovation, but we want regulators to focus on what innovation can deliver for members and its impact on scheme growth and member outcomes. In short, the Government support innovation that improves outcomes, but we do not want to perpetuate sub-scale defaults at the expense of savers’ interests.
On Clause 45, it might be helpful if I set out the purpose of the clause—
Baroness Neville-Rolfe (Con)
Before the Minister moves on, entry is essential to innovation. The idea that the big firms or any regulators are going to be able to decide the right path for the innovative future is picking winners, and it does not work in my humble business experience.
Baroness Sherlock (Lab)
My Lords, we want innovation. That is what I have just tried to describe. TPR has made innovation the central pillar of its corporate strategy. It launched an innovation service, and it has had the industry test innovative ideas and proposals such as new retirement products and the like. That has been up and running for some time. We want innovation but we want innovation that will serve member interests.
The noble Baroness asked about TPR and competition. While TPR does not have a statutory objective in competition, it does actively consider it, and it forms part of its strategy. Competition has been part of its evolution in a changing landscape; it started off in a world of single employer schemes and it is now in a very different world with a market that has moved towards master trusts and an authorisation supervisory framework. Value for money is a key enabler to drive transparency and competition in the market, and TPR plays a direct role in delivering that for the sector alongside the FCA.
Clause 45 amends the Financial Services and Markets Act 2000 so that the FCA has the necessary powers to monitor and enforce the default arrangement requirements and support the review of non-scale default arrangements on a consistent footing with TPR. In practice, that will mean gathering relevant information for the review, considering applications for any new non-scale default arrangements and—should regulations require it after the review—assessing consolidation action plans.
To make the distinction, Clause 42 relates to restricting new default arrangements for schemes in the market. It aims to reduce fragmentation that does not serve member interests but allows new arrangements to meet member interests. It does not restrict new entrants to the market. Clause 45 allows new regulations to set out the powers for both TPR and the FCA to approve new default arrangements and will work with both regulators to ensure there is alignment and co-ordination between them. In short, Clause 42 introduces the restriction of new default arrangements without regulatory approval and Clause 45 gives the FCA the powers to do this in relation to its functions on FSMA. I hope that has cleared it up.
Lord Willetts (Con)
In the light of what the Minister has said, I am even more struck by the significance of Amendment 170. Given that there is going to be this change in the regulatory regime in terms of the FCA, I do think that Amendment 170 is the crucial one. It absolutely is not inconsistent with the Government’s objectives of scale—I have a lot of sympathy with trying to promote scale—but it just ensures that whatever the appropriate authority is, there is also scope for innovation. The more the Minister talks about the power of these clauses, the more I think the case for this amendment gets stronger.
Baroness Sherlock (Lab)
We may disagree on some of the approaches to the market, but we want innovation, so I do not disagree with the noble Lord on that. However, we want innovation that serves member outcomes, and that may mean different approaches to understanding what innovation does. We do not want innovation to pull away from scale.
The noble Baroness asked about timescale. The intention is that the review will be carried out in 2029, but it will need to follow the introduction of the VFM framework and contractual override measures for this to work. That was set out in both the final Pensions Investment Review and in the pensions roadmap, which the Government published. Hopefully that is helpful.
Baroness Noakes (Con)
Can the Minister explain why that timescale has not been put in the Bill? I cannot think of another review that has been written into law without a relevant timeframe being attached to it.
Baroness Sherlock (Lab)
I think because it has to happen. It has to follow VFM; the pensions road map has set out the connection and the order in which things will happen. My understanding is that it is because it follows that.
Viscount Younger of Leckie (Con)
My Lords, I speak briefly to Amendment 175, tabled by my noble friend Lady Noakes and supported by the noble Baroness, Lady Bowles. This amendment relates to new Section 117D, the best interests test as set out in Clause 48. This new section establishes the test that must be satisfied before a unilateral change can be made. It requires a provider to reasonably conclude that such a change is reasonably likely to lead to
“a better outcome for the directly affected members … (taken as a whole)”
and to
“no worse an outcome for the other members of the scheme”,
also taken as a whole.
Many of the questions that my noble friend and the noble Baroness have raised reflect concerns that have been put to us during scrutiny of the Bill. In particular, there remains uncertainty about what, in practice, is meant by a better outcome, and how that judgment will be assessed, evidenced and challenged. I say again, as we have said on different parts of the Bill, that we believe we need definitions and clarity.
We will listen carefully to the Minister’s response on this point. The clarity and robustness of the best interests test are critical, particularly where changes may occur without the explicit consent of individual members. If that clarity is not forthcoming, this may well be an issue to which we will need to return.
Baroness Sherlock (Lab)
I am grateful to the noble Baroness, Lady Noakes, and others for their contributions. Clause 48 inserts new Part 7A, on
“Unilateral changes to pension schemes”,
referred to as “contractual override”, into the Financial Services and Markets Act 2000. As has been clear, that will enable providers of FCA-regulated DC workplace pension schemes to override the terms of a pension scheme without the consent of individual members. To be clear, that will mean that providers will be able to transfer members to a different pension scheme, to make a change that would otherwise require consent, or to vary the terms of members’ contracts. The Bill provides important protections around the use of such powers, which I will come on to.
The noble Lord, Lord Palmer, asked why we want to do this—why change anything? I will explain. Providers can have thousands of DC arrangements for different employers, which will include a large number of legacy schemes that predate the introduction of auto-enrolment. Some of those arrangements will be delivering poor value for members but, due to the challenges of engaging with members, there is often little that providers can do about it. That is because, currently, providers have to gain individual consent from each member of the scheme to enact the changes that will be allowed under this part. That is time-consuming, costly and often simply impractical. In many cases, members will not even have kept their contact details updated.
Contractual override aims to address that issue and, in doing so, it would establish broad equivalence with the trust-based market, where trustees already have the power to conduct bulk transfers. The measure is necessary to help drive better outcomes for members and help to establish fewer larger pension schemes that are delivering value for money, supporting the scale measures and value-for-money framework also implemented by the Bill.
We want to protect consumers, so the Bill introduces a number of important safeguards, including the best interests test, which must be met and certified by an independent person with sufficient expertise before a contractual override can occur. That test is the focus of the amendments. Amendment 175 from noble Baroness, Lady Noakes, probes the test to assess whether this should proceed. She asked about the relationship to the FCA’s consumer duty—I think she asked why we need it at all if we have the FCA consumer duty. The answer is to provide an additional and clear safeguard. We believe that that is necessary given the nature of what is being provided for here.
However, the Government are committed to making sure that this works well. We will continue to work closely with the FCA as it beds in the consumer duty, and to engage with stakeholders about their experience of the duty and its impact. The FCA will develop its rules for contractual override in its usual manner and will consult on that, so there will be an opportunity for people to respond to the way that engages and to identify any of the issues that have been raised.
Amendment 175A from the noble Baroness, Lady Bowles, would alter the threshold for the best interests test from requiring that a change is “reasonably likely” to achieve a better outcome to requiring that “there is evidence” that the change will achieve a better outcome. I will explain why the Government believe that our test strikes the right balance between providing robust consumer protections and still making it practical for schemes to carry out a contractual override where it is the right thing to do. The test itself allows for a contractual override to take place only when the provider has reasonably concluded that the change is reasonably likely to lead to a better outcome for directly affected members and no worse an outcome for the other members of the scheme. I will break down some of the specific requirements that must be met for it to be satisfied. First, the provider must conclude that it is “reasonably likely” that the contractual override will lead to a better outcome for directly affected members, taken as a whole, and no worse an outcome for the other members taken as a whole.
The provision accounts for the fact that, although no provider can predict the future with certainty, they must conclude based on the information available, with a reasonable level of certainty, that the outcome is better for the directly affected members taken as a whole and no worse an outcome for the other members taken as a whole. That means that the provider must clearly evidence this assertion in order to proceed. We believe that changing the test from “reasonably likely” to “there is evidence”, as in the amendment, would lower the threshold of the test and reduce consumer protection, because the alternative wording provides no requirements about the strength of the evidence and leaves open the possibility that decisions could be taken on the basis of limited or poor evidence. By contrast, the existing wording requires providers to demonstrate that the outcome is a real prospect.
Secondly, a provider must reasonably conclude that the test is met. This requirement is deliberately included to address the risk of a provider reaching a conclusion that is not based on valid evidence or reasoning. The FCA, as the regulator responsible for contract-based workplace pensions, must make detailed rules regarding contractual override. That includes rules about the considerations and information that providers must take into account in determining whether the best interests test is met. As I have said, the FCA will develop those rules in its usual manner, which will include consultation.
Finally, new Section 117E requires that an independent person, with expertise to be defined in FCA rules, has to certify that the best interests test has been met, providing a further safeguard.
Overall, the contractual override policy establishes broad equivalence with the trust-based market and, in doing so, it delivers on a long-requested industry ask, promotes better member outcomes—which is key—and helps to achieve the wider goals for DC pensions that this Bill will deliver. We believe it strikes the right balance, and I hope that noble Lords will not press their amendments.
Baroness Bowles of Berkhamsted (LD)
I appreciate that the response was prepared on the basis of the wording, and I accept that my “evidence” wording was a marker. But will the Minister please look up what the legal “reasonably likely” really does imply? She does not have to take my word for it; I did look it up. Therefore, I maintain that the words “reasonably likely” need adjustment. I hope that can be investigated and accepted, and maybe the Government can come back with their own amendment.
Baroness Sherlock (Lab)
I am happy to reflect on the noble Baroness’s point. If it leads the Government to believe that we have phrased the test badly, then of course we will take appropriate action; if not, then we will say where we are.
Baroness Noakes (Con)
My Lords, I thank noble Lords who have taken part in this short debate. I hope the Minister will look again at the point that the noble Baroness, Lady Bowles, has raised. In fact, that particular issue was raised in the Chamber either yesterday or last Friday—I cannot remember which, as all the days run into each other—in connection with another Bill going through. It very definitely is interpreted as sub-50%, so it is definitely a fairly weak formulation. I am quite surprised if that is what the Government want, so it is worth looking at again.
I do not think I got a satisfactory answer on the difference between the FCA having the consumer duty and what is intended under this Bill, except that the FCA is going to issue more rules about what “best interests” actually means in this context. To me, it seems to be going against the grain of FCA regulation, as I tried to point out earlier, and it could potentially cause problems in understanding.
The Minister did not respond to my point about the last men standing, which was that if you allow groups of members to be transferred because they will be better off and the others are not worse off then, in the long term, you structurally weaken what is left. Does the Minister have any views on whether that is the correct approach? A long-term problem cannot be avoided in that area, which calls into question whether you can leave members behind.
I am still very mystified as to how all this will work in practice, but I will reflect on what the Minister has said and what she has not said before determining whether to come back on Report. I beg leave to withdraw my amendment.
Baroness Coffey (Con)
My Lords, Clause 49 is quite interesting. Clearly, we have been on a journey for some time. Going back 35 years, Maxwell raided his pension fund, completely screwing over his employees at the time, which led to the 1995 Act as a consequence. There were other items in there as well, but that brought in a much more controlling approach to aspects of pensions.
One of the liberations that happened in the previous pensions Acts a decade ago was that people did not have to do a particular thing with their money. I know this is money that was topped up by aspects of tax relief and the like but, ultimately, instead of being forced in a particular direction with an annuity in a different way, people had a choice. I am conscious that various scams happened when people were transferred from one to another. I hope those people will find a special place in hell; they have deprived people of the money that they had rightly gathered over the years and scammed them out of it. But ultimately this did give a choice to people, with all that money, about how they wanted to spend their retirement—instead of somebody else telling them what to do.
I am concerned that this clause, in effect, requires a guaranteed solution. I appreciate that my noble friend Lady Noakes has talked particularly about removing the need for there to be a regular income as part of this solution, but if benefit solutions are going to be required by this legislation, there should not just be a choice of a minimum of one. There should be at least two, so that people can still have that choice. That is why in Clause 49(1)(a), I think that “one or more” should be “a minimum of two”, if that is going to be the way that we go.
The other thing that is not clear to me—perhaps I just have not spent enough time reading this—is what happens if people do not want the default pension. What choice do they have? It does not feel as though they have any choice at all. I am trying to understand something: what is the real problem that Ministers and the Government are trying to address here? Do not get me wrong—we want to make pensions as simple as possible for people. I know that my former employer used to set up a particular approach, saying that it was easy and that you could buy into it, but it was your choice what you did. That is why I am concerned about Clause 49 in particular. I hope that, by the time we get to Report, the Minister will have reconsidered whether ripping away freedoms is the right way for the people whom the Bill is intended to support.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Viscount, Lord Younger, for introducing this debate, and to all noble Lords.
Let me briefly outline the problems that the chapter on guided retirement is seeking to address. The landscape is changing. I will not get into the detail of how we have gotten to where we are with my noble friend Lord Davies, but the reality is that we are now in a position where fewer than a million people in the private sector are saving into a DB pension, whereas more than 15 million are saving into DC schemes. Of course, unlike in DB schemes, DC members carry the risk themselves; what you get out depends entirely on what you put in and how it performs. The result is that DC savers face risks: the risk of savings not lasting through later life; the risk of market fluctuations; and the risk of inflation eroding purchasing power. They also face decision‑making risks, as retirement choices can be complex and poor decisions can have lasting effects. Clause 49 enables the Government to respond to those risks, putting savers first. Our objective is the vast majority of DC savers no longer having to make complex decisions about how to secure a sustainable income in later life, although—I say this in response to the noble Baroness, Lady Coffey—the freedom to choose absolutely will remain.
Let me explain how we envisage this happening. When DC members approach their scheme to access their savings, they will be presented with the default pension solution; in acknowledgement of my noble friend Lord Davies, let us call them “default plans” from this point onwards. At this point, the member will have the option to say yes to the default plan or say, “No, I want to choose a different way to use my assets”; that could be an alternative in their own scheme or elsewhere. We will explore this, including how schemes can give appropriate support, in our consultation. The interaction should not be a surprise to members at this point because we will ensure that, through appropriate communications, members hear about the concept of a default plan from very early on in their pension journey.
Clause 49 will require pension schemes to design and develop pension plans based on the generality of their membership, by which we mean gaining insight of what the vast majority of their members want from their pension assets. The noble Viscount, Lord Younger, wanted to know how they are meant to do this. We know that many schemes already have member panels; we expect these, as well as other channels to obtain member insight, to continue. The Government will not specify unless necessary but the regulator will work with schemes, through guidance, on how to identify the needs of their members. The Government will also consult on whether there should be minimum standards for gathering information so that the solutions reflect the generality of the scheme membership.
We anticipate that the evidence from scheme members will indicate that there is no one common set of aspirations, so we are giving the scheme the ability to introduce more than one default plan. Where there is more than one default plan, there will be a simple triage to determine which one the member is offered. Again, the benefit of this approach is that no member will have to make a complex decision on how to take their pension payments, except to request that they want to start receiving payment. As has been mentioned, the default plans must provide a regular income during retirement. We will consult on the detail, but it will be for trustees to determine exactly how they achieve this; there is scope for product innovation.
The clause also makes provision, as has been noted, for exemption where that would not be appropriate. I will turn to Amendment 178, which relates to this, in just a moment but, crucially, savers will retain the choice to access their pension another way. We know that retirement is not a linear experience and that circumstances change both at and after retirement. Life events such as deciding to work part-time, health conditions and bereavement can all factor in and have an impact on household incomes. That means that gathering insights and engagement with members will be important, alongside well-designed and flexible plans.
Baroness Bowles of Berkhamsted (LD)
I have not intervened on this group because I have not really delved into it. I wonder whether the Minister will go into some of the points she is making. Obviously, there are cases where you want consolidation in order to produce a solution that gives a reasonable retirement income, rather than having it in different bits. However, I am concerned that some people will want to keep things in different pots and have different bits. When the guidance on what might be exempted and so on comes out, will there be any consultation on that so that there is provision for people who have got alternative incomes and other means? They may want to defer taking their pension for a lot longer than is the norm while they have other income.
There is a whole universe of things; indeed, a whole universe of things is happening to me on these issues, in terms of whether I start something or leave it. It is all made more complicated when the Government come in and tax it, but there are all these things that go on. Will all of that be open to a public consultation before guidance comes out to make sure that it is taken account of?
Baroness Sherlock (Lab)
I do not know who we had in mind when we were designing this measure, but I am pretty confident that it was not the noble Baroness. If she were to ring up and say, “I want to take my pension pot”, and we said, “Here is a solution”, she would absolutely be able to say, “Do you know what? I don’t want to do that, thank you very much. I already know what I want to do with it”, or to have a conversation about the alternatives. This is really aimed at and concerned with those who would not be in a good position to make these complex decisions.
However, the consultation will explore these things. We have already talked about what kinds of thing trustees might have to take into account. There will be a range of things. If there is anything specific on which I can write to the noble Baroness, I will do so, but the intention is to consult on the nature of how this will work in practice and all of the design requirements. That is one of the reasons for keeping so much in regulations: to keep it flexible.
We are already finding, though, that providers are coming up with interesting, innovative solutions. Some schemes are offering flex then fix, which would give some flexibility in the years ahead. There are schemes that are doing different things, and we do not want to shut those down because we want there to be alternatives. I do not want to give the impression that we are forcing people into it, that they have to do only one thing before being allowed to take their pension or that their pension freedom has been taken away; none of that has happened because that is not what we are trying to do. I thank the noble Baroness for giving me the opportunity to clarify that.
Amendment 180 would remove regulation-making powers to enable the charging of fees for transfers to be prohibited or limited. The Government recognise that pension schemes rely on the charges they impose on members to operate the administration of the scheme effectively. There is an existing cap on charges, which can be placed on default funds under auto-enrolment, whose purpose is to shield individuals from high and unfair charges that could significantly erode their savings. The guided retirement measures were very conscious. They will introduce the concept of a default route and were, therefore, alive to the risk that individuals placed in a default plan may not scrutinise the costs involved. Therefore, we expect to consult on any detailed policy set out in regulations; we would test any assumptions about the impact of introducing a cap or a prohibition, including for transfers, as part of that consultation.
The Clause 51 and 57 stand part notices from the noble Viscount, Lord Younger, seek confirmation that Clause 51 will provide members with clear and consistent information. I am very happy to provide that assurance. The Government understand the power of communications and the importance of members understanding the default pension plan provided by the scheme, alongside the other options. Through this clause, the Government have the power to specify the format and structure of communications. There is also a requirement that all communications issued by schemes are in clear and plain language to help members make better decisions regarding their retirement income when they wish to do so.
As the noble Viscount mentioned, Clause 53 requires the development of a “pensions benefit strategy” by relevant pension schemes, which will be expected to include details of how the scheme will communicate its default pension plans to its members. Schemes will have to make these strategies available to scheme members and to the regulator for effective scrutiny; the Bill includes corresponding arrangements in respect of FCA-regulated providers. As a minimum, we expect the strategy to present the evidence base for the chosen default or defaults to give the member the opportunity to compare their circumstances and those on which the default is based.
Clause 57 is the corresponding provision in relation to FCA-regulated schemes. This inserts into the Financial Services and Markets Act 2000 a new section that will deliver default pension benefit solutions to FCA-regulated pension schemes, ensuring that members on both sides of the market benefit from default solutions. Clause 57 requires the FCA to make rules, having regard to the rest of Chapter 6 of the Pension Schemes Bill, to make default plans available to members of FCA-regulated pension schemes. This helps ensure that regulatory frameworks are aligned and that members experience broadly equivalent outcomes; it also maintains fairness and consistency across the market. Clause 57 also requires the FCA to aim to ensure, as far as is possible, that the outcomes to be achieved by its rules in relation to this chapter achieve the same outcomes as the rest of this chapter achieves in relation to schemes regulated by TPR.
The noble Viscount asked how schemes will be supported rather than forced into defensive behaviour. The regulator will issue guidance for all trust schemes. DWP officials have been engaging, and will continue to engage, with industry ahead of introduction, including through formal consultation.
The noble Baroness, Lady Neville-Rolfe, asked why the negative procedure and why the affirmative one. The affirmative procedure has been used for certain delegated powers where the power touches on a central aspect of the policy. For example, the power in Clause 49(4)(d) can be used to influence the defaults designed and offered by a scheme, so the affirmative procedure is used.
I have tried to answer all the questions that were asked. I hope that those explanations have been helpful and that noble Lords will feel able to withdraw or not press their amendments.
Viscount Younger of Leckie (Con)
My Lords, before I conclude on this group, I thank in particular my noble friend Lady Noakes for her probing amendments, which ask a number of important questions.
I will make a few points and rounding-up comments but, before I do, I want to pick up on my noble friend Lord Trenchard’s remarks. I must admit that I was very surprised to hear the remarks made by the noble Lord, Lord Davies, on his view of the pensions landscape; they were fairly forceful. As he will expect, I entirely disagree with his comments. I just make the point that our party brought in improvements to auto-enrolment and introduced the dashboard system; I pay tribute to my noble friends Lady Coffey and Lady Stedman-Scott. I have more to say but I will give way.
Baroness Stedman-Scott (Con)
My Lords, I speak to both Amendments 180A, tabled by my noble friend Lady Coffey, and Amendment 206, which stands in the name of my noble friend Viscount Younger of Leckie and myself. Both amendments address the regulation of pensions and how the regulation is best exercised in the interest of scheme members and future pensioners.
It was the intervention of my noble friend Lady Coffey at Second Reading that first prompted me to reflect more deeply on the role of regulators. As my noble friend argued then, and has argued again today in speaking to Amendment 180A, this Bill misses a significant structural opportunity by retaining two separate pension regulators. I agree with her. There is something inherently odd about the fact that very similar pension products can be treated differently depending on whether they fall within the remit of the Pensions Regulator or the Financial Conduct Authority. That observation is not controversial; it is simply a reflection of how the current system operates.
I recall clearly the passage of the then Pension Schemes Bill in February 2020 and remember responding to amendments from across your Lordships’ House by explaining that personal pension schemes were regulated by the FCA, rather than the Pensions Regulator, and that imposing requirements on personal pension providers through that legislation would risk creating a patchwork of overlapping regulatory oversight. Providers, it was argued, would otherwise be required to respond to two separate regulators in relation to the same activity. That was the Government’s position at the time, and it illustrates that the existence of regulatory fragmentation in this area is not a matter of dispute.
A great deal of work has gone into managing the fragmentation, with strategic documents, dating back to 2018, seeking to grapple with the issue. The FCA and the Pensions Regulator have published joint regulatory strategies explicitly acknowledging the complexity that arises where their remits intersect and the need for close co-ordination. More recently, an independent review of the Pensions Regulator in 2023 again highlighted the challenges inherent in this divided regulatory landscape. Taken together, these developments point to structural issues in the regulatory ecosystem that can, at the very least, create confusion and the risk of inconsistency.
It was on the basis of that experience in government and of careful consideration since then that I sought to identify what might realistically be done in this Bill. I came to the conclusion that Amendment 206 represents a proportionate and pragmatic compromise. It would require the Government to establish a formal published protocol setting out clearly how the Financial Conduct Authority and the Pensions Regulator co-ordinate, how responsibilities are divided between them and how they communicate when regulating the pensions industry. The evidence shows that there is complexity, overlap and, at times, confusion between the two regulators. Stakeholders frequently complain of unclear lines of responsibility and the regulators themselves openly acknowledge that co-ordination is difficult, hence the repeated reliance on joint strategies and informal arrangements.
It was our sense that the problem is one not of outright contradiction but of opacity, complexity and accountability. Amendment 206 is, therefore, carefully targeted at the problem, which is clearly evidenced. It seeks to improve co-ordination and clarity without asserting a level of regulatory failure that has not yet been conclusively demonstrated. That does not place it in opposition to the argument advanced by my noble friend Lady Coffey; indeed, I would be very happy to work with her, as we did so constructively on previous pension legislation, to strengthen this area further.
In my view, a formal co-ordination protocol has three important virtues. First, it can evolve over time as the regulatory landscape changes. Secondly, it can be tightened if problems persist or new risks emerge. Thirdly, it can itself become the evidence base for any future decision to pursue more fundamental consolidation of regulatory functions, should that ultimately be judged necessary. For those reasons, I commend Amendment 206 to the Committee and urge the Government to see it not as an obstacle but as a constructive and proportionate step towards greater clarity, accountability and confidence in the regulation of pensions.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Baroness, Lady Coffey. Things are never dull when she is around. Frankly, that is quite a thing to say for a pensions Bill—I apologise to all the pensions nerds.
I thank noble Lords for introducing their amendments. The noble Baroness, Lady Coffey, said that her amendment would require the Secretary of State to do a review exploring the viability of moving the FCA’s pension regulation functions, apart from those for SIPPs, to TPR. On Amendment 206, the noble Baroness, Lady Stedman-Scott, wants a statutory joint protocol, formal co-ordination mechanisms, a published framework for oversight and the mandation of regular joint communication.
The Government keep the regulatory system under continuous review. The noble Baroness, Lady Coffey, has given us an absolutely fair challenge. As we have already found here, the reality is that, when you come to discuss this, some people are on team FCA, some are on team TPR and some—such as the noble Lord, Lord Fuller—do not like any of them and want to throw everybody else into the mix and have somebody reviewing all of them. So it is fair to say that it will not be easy to achieve consensus on this.
Let us come back to the principle. The Government’s view is that there is still a fundamental difference between trust-based and contractual pension schemes. Contract-based pension schemes are based on an individual contract with the saver. As the pension market continues to evolve, and as we move towards a more consolidated market, we will need to ensure that the system evolves with it and that there is more regulatory alignment where it is really needed. However, TPR, the FCA and other bodies, including the PRA, are on to this. So I suppose the exam question here is: do we need one regulator to take over the other, or is it possible to create a regime for regulatory alignment and joint working? I will try to make the case for the latter; the noble Baroness can tell me at the end whether I have a pass or a fail on the exam paper.
The Government’s view is that TPR and the FCA have distinct roles. Each has its own framework, reflecting the range of pension types and the need for tailored oversight. They operate under distinct statutory frameworks, and existing arrangements already enable effective co-ordination between them. TPR and the FCA have established a joint regulatory strategy that outlines their respective roles; that collaboration is underpinned further by a formal memorandum of understanding and, where necessary, joint protocols on specific issues detailing how the two regulators co-operate, share information and manage areas of overlap. They have published a joint document outlining their respective roles. They run joint working groups and consultations. They publish shared guidance, and they conduct regular joint engagement with stakeholders. These mechanisms are well established and provide the flexibility needed to respond to developments in the pensions market. That close collaboration ensures the same good outcomes for pension savers, regardless of legal structure, and aims to avoid the potential for regulatory arbitrage.
The noble Baroness, Lady Stedman-Scott, mentioned the independent review of the Pensions Regulator by Mary Starks in 2023. That review recommended that no changes should be made to the framework. The review concluded that it was far from clear what the benefits of shifting to a single regulator would be and whether that would in fact outweigh the costs and the risks of distraction.
Moving on, we do not believe that a statutory requirement for a joint protocol is needed, as proposed in Amendment 206. It risks duplicating existing arrangements and in fact replicating parts of the memorandum of understanding and joint regulation strategy that are already in place. Where specific regulatory risks would benefit from more formally aligned regulatory approaches, the organisations consider the need for a joint protocol. An example would be the 2019 joint approach to guidance for trustees and advisers supporting pension members with decision-making exercises.
We also do not believe that the review proposed by Amendment 180A is necessary at this time. We continue to keep the system under review to make sure that it continues to deliver. Any future changes need to be evidence-led and shaped through engagement with stakeholders. In the light of that, I hope the noble Baroness, Lady Coffey, will feel that I have passed the exam test and is able to withdraw her amendment.
Lord Fuller (Con)
I am interested, of course, in the opinion of the noble Baroness, Lady Coffey, about the exam, but the Minister has provoked me to respond. I am not against the FCA or the Pensions Regulator. As she says, they have their roles and responsibilities. But there is a piece of work on the interaction between all the actors in the pension space. The old saying is, “If it ain’t broke, don’t fix it”, but there has been enough that is broken to require a fresh look. All the bilateral arrangements between TPR and the FCA, which she explained and which are all very interesting, do not talk about those other wide environmental links to the Bank of England, GAD, the PPF and His Majesty’s Treasury. That is where there should be some work, with a little humility about how the scheme has gone.
I am not making a political point here; I am just making the factual observation that the schemes are not working as I think any of us would like them to. This pensions Bill remedies some of those shortcomings, but the excessive focus purely on the FCA and the Pensions Regulator is obscuring that wider picture. I am not asking to promote some hatred and discord; I am just asking to try to get everyone sat around the table so that we can work out not just the roles and responsibilities but the linkages—and avoid the groupthink, because that is the worst thing. I was grateful to the noble Lord, Lord Davies, for aligning himself with my points. So it is not just me, unless the noble Lord is against everything as well, which I do not think he is.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Lord, Lord Fuller, for clarifying his view and apologise if I misrepresented it. I will not respond at any length but will simply say that there is already considerable join-up between the actors in this space. I do not feel it is necessary to have a single review just to work that out.
Baroness Coffey (Con)
I thank noble Lords for contributing to this debate. Certainly, in speaking to pension providers that are regulated by both TPR and the FCA, this brings additional complexity, which is another reason for this to come in. I appreciate that my noble friend Lord Fuller suggested this could be a batty idea. It is not a new idea. The 2013 report by the Work and Pensions Select Committee chaired by Dame Anne Begg—its Labour chair—called for it then. It was linked to the fact that we were starting auto-enrolment. The whole landscape for people, particularly those new to pension contributions and the like—and indeed for existing people—was shifting to workplace occupation-based pensions, which are all regulated by TPR. So I think it was going for simplicity in that regard.
My noble friend is particularly cross about an aspect of the Pensions Act 2004. I would have invited him to perhaps table an amendment to the Bill with his objections to the statutory funding objective, which is the element that particularly irks him. It replaced the minimum funding requirement, but that is a debate for another day, rather than trying to resolve it all now. I thought the Minister did well, particularly in reading out her brief and keeping the Treasury happy. That is no bad thing for any Minister in a Government but, of course, I beg leave to withdraw my amendment.
Lord Davies of Brixton (Lab)
Everyone agrees that they are a good idea, but in her reply, can my noble friend the Minister tell the Committee what serious contenders there are to take advantage of this quite complicated and lengthy piece of legislation? The practical experience so far is that a good idea has never quite cut it, and other options are now becoming available. Are people actually going to go down this road?
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Baronesses, Lady Noakes and Lady Bowles, for introducing their amendments. I will start with Amendment 181, which would broaden the range of schemes able to apply for a transfer into a superfund by effectively including active schemes.
On the points made by the noble Baroness, Lady Noakes, the responses to the DWP’s initial consultation on DB consolidation noted clear practical difficulties in assessing the future of a scheme. It is not clear how the regulator would conclude that the scheme will have no active members at an unspecified time of transfer. Furthermore, closing DB schemes can be a protracted exercise, where unforeseen complicated issues can arise. This Government, and previous Governments, have been consistent in saying that superfunds should be an option only for closed DB schemes. To avoid such complications for the scheme trustees and the regulator, Clause 65 sets out that closed schemes alone can transfer to a superfund and only where they are unable to secure member benefits with an insurer at the date of application.
Amendment 182 from the noble Baroness, Lady Bowles, would broaden the range of schemes able to apply for a transfer into a superfund by removing the restriction that schemes which can afford insurance buyout cannot transfer to a superfund. By removing this requirement from the Bill, superfunds could compete directly with insurers. That would risk superfunds offering endgame solutions in the same space as insurers, while being held to a lower standard in terms of member security.
The onboarding condition was introduced following industry response to the consultation on superfunds which first identified this risk. There was concern that employers may see superfunds as a way to relinquish their responsibilities at a lower cost than insurance buyout, and that trustees could be pressured to transfer into a superfund when a buyout solution is available. It is important for us to remember that insurers and superfunds operate under very different regimes. Insurers under Solvency UK requirements have stringent capital requirements and their members are fully protected by the FSCS.
Superfunds are built on existing pensions legislation and, as such, the PPF acts as a safety net providing compensation. The PPF provides a great deal of security, but not as much as the FSCS. Superfunds offer a great deal of security, but their capitalisation requirements are not as stringent as insurers as they are not designed to be as secure. That is because superfunds have been designed as a slightly less secure, more affordable endgame solution for schemes that are well funded but cannot afford buyout. They are not intended as a direct competitor for insurance buyout. The onboarding conditions address the risk of regulatory arbitrage, recognising those differences.
Clause 65 therefore provides clarity by ensuring that only appropriately funded schemes can transfer to superfunds. As introduced, it includes the power to substitute another condition if needed. We will consult with industry to assess what, if any, further refinements may be needed to protect scheme members.
Amendment 183 from the noble Baroness, Lady Bowles, would require superfunds to assess their protected liabilities threshold at the lower of a prudent calculation of a scheme’s technical provisions or based on a Section 179 calculation of the buyout price of PPF-level benefits. This amendment, and the noble Baroness, recognise the importance and impact on this threshold of the Chancellor’s Budget announcement that the PPF will provide prospective pre-1997 indexation for members whose schemes provided for this.
The purpose of the protected liabilities threshold is to ensure that in the rare circumstances where a superfund continues to underperform, the scheme is wound up and member benefits are secured at the highest possible level. The threshold is an important part of member protection and has been designed to prevent members’ benefits being reduced to PPF compensation levels should a superfund fail. The threshold also recognises the risk that scheme funding could continue to deteriorate in the time it takes to wind up.
Clause 71 therefore aligns the protected liabilities threshold with the calculation of those protected liabilities. It sets the threshold at a level above the Section 179 calculation, so that members in a failing superfund receive higher-than-PPF benefits. There is the added benefit that PPF-level compensation that is bought out with an insurer protects the PPF itself.
We recognise the impact that changes announced in the Budget have on the superfund protected liabilities threshold, and that it would not be good for members’ outcomes if a superfund is required to wind up prematurely when there is still a strong likelihood that benefits can be paid in full. Any changes to reduce the threshold, however, will require careful consideration and need to ensure that members and the PPF are protected. The level of the protected liabilities threshold will be subject to further consultation with industry as we continue to develop the secondary legislation.
The Committee will also note that for those instances in which technical provisions are lower than the Section 179 valuation of a scheme, Clause 85(4) allows the Secretary of State to provide by regulations that a breach of a threshold has not taken place. These calculations have the potential to converge, and sometimes swap, in very mature schemes and we acknowledge that that occurrence is more likely following the introduction of pre-1997 indexation for prospective PPF benefits.
The use of this power will aim to ensure there are no unintended consequences for well-funded superfunds in those circumstances. It is not our intention to place any additional pressures on superfunds. Providing pre-1997 indexation for PPF benefits is the right thing to do. All members in schemes supported by the PPF benefit from knowing they can count on higher levels of compensation should the worst happen—a fact that should be celebrated. We are committed to working with industry to create, as the noble Baroness, Lady Stedman-Scott, questioned, a viable and secure superfunds market and will consult on issues such as these following Royal Assent to ensure we appropriately balance the metrics of each threshold.
My noble friend Lord Davies asked me to look forward to see what demand there will be for this. That is quite hard to do, but we estimate that around—I am told—130 schemes with £17 billion in assets may take up the option of entering a superfund, but we recognise these figures are highly uncertain. It will depend on how the industry reacts, future economic conditions and competition. The numbers, of course, could be significantly greater if the market grows.
It has been an interesting discussion, but I hope in the light of my remarks, the noble Baronesses feel able not to press their amendments.
Baroness Noakes (Con)
My Lords, at least we are going to please the noble Lord, Lord Katz, this evening. We might even manage to stick within our normal timeframe and not go beyond.
I thank the noble Baroness for setting out the rationale for the time at which schemes have to demonstrate that they are closed. I will consider that carefully. I am sure the noble Baroness, Lady Bowles of Berkhamsted, will consider carefully what the noble Baroness has said in respect of her amendments. I beg leave to withdraw the amendment.
Child Poverty: Faith-based and Voluntary Sector Organisations
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The Lord Bishop of Lincoln
To ask His Majesty’s Government what plans they have to facilitate consultation and collaboration with faith-based and voluntary sector organisations to deliver the Our Children, Our Future: Tackling Child Poverty strategy, published on 5 December 2025.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, the Government are turning the tide on child poverty. This requires consensus, partnership and shared action. Government cannot achieve this goal alone. Input from children and families, charities, experts and organisations, including faith-based and voluntary sector organisations, was vital to developing our child poverty strategy. These organisations are the bedrock of our communities. We plan to continue to work in partnership, including with faith groups and voluntary sector organisations, to build on and galvanise action.
The Lord Bishop of Lincoln
I thank the Minister for her Answer. I know she is deeply aware that faith communities play a vital role in supporting children and families. The right reverend Prelate the Bishop of Derby was grateful for her visit last year, and I look forward very much to her forthcoming visit to Grimsby. However, I am concerned that faith is not mentioned more prominently in the Government’s child poverty strategy—indeed, it is not referenced at all in chapter 2, “Reducing Child Poverty in Partnership”—so I ask the Minister to say more about how faith organisations will be vital to codelivery and how the Government intend to take further steps to draw on the local knowledge, experience and ongoing action of faith communities in order to implement their strategy and drive down child poverty.
Baroness Sherlock (Lab)
My Lords, I am grateful to the right reverend Prelate for mentioning the visits: I had a fantastic visit to Derby, invited by the right reverend Prelate the Bishop of Derby, meeting a range of faith organisations, and I very much look forward to coming to Grimsby with him. The Government are committed to harnessing the power of faith and belief for national renewal, and we know that the insights of faith communities play a key part in informing and shaping policies; they did so in relation to the child poverty strategy. That has not stopped with poverty. For example, the Minister for Employment has met with Church Action on Poverty, and the Minister for Social Security is going to speak at the ChurchWorks summit specifically on opportunities for collaboration around the child poverty strategy with faith organisations.
Whenever I visit a faith organisation, I learn something wonderful. I visited a brilliant Jewish charity a couple of weeks ago at the recommendation of the noble Lord, Lord Polak. I was so glad that I did, because I learned what was happening on the ground to support individuals facing a wide range of challenges in ways that the Government would struggle to engage with. So I reassure the right reverend Prelate that we cannot do without those insights, and we will make sure that we get them.
Baroness Bull (CB)
My Lords, the right reverend Prelate is right to raise the role of faith-based organisations, but I wonder if the Minister is aware of the role of cultural organisations and cultural participation in reducing the impacts of child poverty. I think of personal and social networks, employability skills and self-confidence. To see this in action, will she take a look at Culture Start in Sunderland, which is developing a range of local partnerships with the specific aim of using cultural participation to ensure that all children, however they are born, have the option to benefit from the advantages that cultural participation brings?
Baroness Sherlock (Lab)
I am grateful to the noble Baroness for a great question. I agree with her point that the role of cultural organisations and the opportunity to participate and engage with others to do collective action in different ways are crucial to children’s development—and often those are the kinds of opportunities that children from wealthier families have that others would not. In response to the specifics, Sunderland being very near to Durham, I would be delighted to learn more about what is happening there. I need to go and find out. My office can take note.
Lord Palmer of Childs Hill (LD)
My Lords, I thank the Minister for her reply about how the charities will work, but what worries me is how small, local charities will be included in this. It rather looks as if we are encouraging the larger charities to do all the good work that they do but, as the other questioners said, there are a lot of local charities. I would like to know that they are going to be included in this process.
Baroness Sherlock (Lab)
That is a great question, if I may say so—there are some good questions coming out today. We absolutely are not interested in talking solely to large charities. We are interested in talking to them too, but we need to engage locally. As I am sure the noble Lord knows, one way that this Government are going about our work in the DWP is that we are devolving quite a lot. We are aware that much of the work we want to do can be done much better at a local level. For example, it is much clearer in Manchester than it is in London what should happen in Greater Manchester. So we are devolving and encouraging local organisations in many of the pilots that we are running to engage with local charities, but we will also often engage with organisations that themselves are umbrellas, which can bring together local charities to come and talk to us.
The noble Lord makes a really important point. Having worked in the voluntary sector myself for a long time, I know that there are some insights that national charities give that are really helpful, but other things you find out only when you go to the coalface. Just last week I visited a small charity in Fife that is doing amazing work, and I learned things from it that I would not have learned from the biggest charity. So that is a good point, and I take it on.
Lord Rees of Easton (Lab)
My Lords, when I was mayor of Bristol, we put tackling child poverty at the centre of our approach. We sought to deal with issues of real substance—evidence-based issues that determine the life chances of our children and young people: parental background, income, class, housing stability, family stability, education and health. Does the Minister agree that it is not helpful to set up frameworks that might invite people to believe that the life chances of British-born young people are determined by the fortunes of children born to foreign parents?
Baroness Sherlock (Lab)
My Lords, I commend my noble friend for the work that he did in Bristol, the leadership he showed and all the excellent work that was done there. I am absolutely clear that if we are to invest in the children of our country, we need to invest in all the children of our country, make sure that we reflect their needs and give them the opportunity to thrive within the context of all the things I said on the previous Question. I take the opportunity to say that I do not think these things can be done just by government. The examples he gave are a reason why Whitehall does not always know best. Trying to pull only the levers in my department will not give us the results we need. I absolutely welcome the opportunity to learn from what Bristol has done, and from what other metropolitan and mayoral authorities are doing and will carry on doing.
The Earl of Effingham (Con)
My Lords, parental employment, family stability and early intervention are key to reducing child poverty, but there are currently around 800,000 job vacancies in the UK. How exactly are the Government helping parents to get into work? We have jobs. The employees and employers want them to work together.
Baroness Sherlock (Lab)
The noble Earl makes a really good point. That is what my department is for. One of the reasons why we are reinventing the whole way that jobcentres work is to be able to make sure that we can help these individuals get ready and take those jobs. We have real opportunity out there, but if we are to hit the kind of employment targets we want, we must give the people who are farthest from the labour market the chance to get at those jobs. We must tackle the barriers that stop people getting those jobs. In the case of parents, those barriers can be quite significant. If you are a single mum with two kids trying to afford childcare, to find work that fits around what you do and to get training and skills, then that is a challenge. Our work coaches can work with that mother, help her to get the skills she needs, to find childcare and to get help with that childcare, get her skilled up and get her out there. That shows the children what they can achieve in turn, and everybody benefits. He is absolutely right; this is the way forward.
Baroness Coussins (CB)
My Lords, does the noble Baroness agree that it would make a helpful contribution to tackling child poverty if the Government were to lift the ban on asylum seekers taking paid work?
Baroness Sherlock (Lab)
My Lords, the Government must make an appropriate challenge. If somebody becomes a refugee, they have all the entitlements that that brings, but while the asylum process is going through they are supported and not able to work. We are trying to make sure the immigration policy is appropriate and puts in place the appropriate incentives and processes. I understand the point she makes, but the challenge in asylum is to make sure that only the right people apply, that we process them as quickly as possible, that we make the right decisions and that we then support people who become refugees to rebuild their lives.
Baroness Lister of Burtersett (Lab)
My Lords, faith-based and voluntary sector organisations place great emphasis on listening to the voices of lived experience. I commend the child poverty team for having done so in developing the child poverty strategy. Can my noble friend tell us what the plans are for the next stage of involving people with lived experience of poverty in the implementation and monitoring of the strategy?
Baroness Sherlock (Lab)
My Lords, my noble friend makes a really important point. Any of us who met people with lived experience as part of this process have learned things that we will never forget. The most memorable one for me was when I met a young woman. When she was a child, her family was evicted from social housing. It was a very difficult experience. She was part of a project that used her experience to talk to decision-makers. She was asked to talk to the senior person at the social housing association that had evicted her. As a result of hearing her story, the housing association changed its policy on managing rent arrears. Instead of focusing just on how to evict people, it focused on how to spot problems early, to stop people getting into trouble, to protect the family and to enable them to carry on and thrive. That was such a great example, and every time our officials learn this they know that we are hearing things that we will carry on doing. The Timms review has been co-produced with people from disabled organisations, the universal credit review has had extensive engagements, and the child poverty unit in the DWP will carry on doing that too.
Lord Laming (CB)
My Lords, the Government deserve credit for developing a strategy to tackle child poverty, but does the Minister accept that there has to be a partnership between parents and the state? The state can carry out its responsibilities in tackling poverty, but parents must ensure that their children attend school regularly, with a real commitment to their education.
Baroness Sherlock (Lab)
My Lords, I could not agree more. The noble Lord makes an excellent point. I realise that, from his experience, he will have seen this from all sides. In the end, it is not the job of the state to raise children—parents raise their children. The job of the state is to support families to give them the skills and support they need to enable them to do the best job they can. I have worked with families in different circumstances. In my experience, parents want to do the best for their kids but sometimes life can be tough. Our job in government is to make it possible for them to be the best parents they can and give children the best possible start in life. That means going to school on a regular basis—no exceptions unless absolutely necessary—with children always turning up and doing their work, then things will be okay.
Two-child Benefit Cap: Foreign-born Children
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Baroness Maclean of Redditch
To ask His Majesty’s Government what proportion of increased spending on the two-child benefit cap will be for foreign-born children.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, children should not grow up in poverty. It is bad for them, bad for their aspirations and, ultimately, bad for the country. Experts agree that the most cost-effective way to reduce child poverty is to end the two-child limit, and that is what we are doing. There are strict rules that govern who can access benefits. Parents who are foreign nationals can access universal credit only with a valid immigration status of a kind that gives them the right to access public funds.
Baroness Maclean of Redditch (Con)
My Lords, I thank the Minister for that Answer. I agree that the public do support the safety net of welfare, provided that it is targeted and fair, and goes to British people rather than migrants to the country. However, the Government’s own data shows that fewer than 1% of those who will benefit from the uplift in universal credit have both parents working, and 41% of families have no one working. This does not seem fair to a lot of working families, who have to make very hard choices about the size of their own family. So how many exactly of the “most people” the Minister refers to are British and how many are not?
Baroness Sherlock (Lab)
My Lords, removing the two-child limit is very well targeted: it is targeted on children. Over half—some 59%—of households affected by the two-child limit are in work, and almost half of households affected by this policy did not have any of their children while they were receiving universal credit. The reality is that our immigration system in this country is tough, and our benefit system is tough.
I cannot give the noble Baroness the figures that she wants, because the category “foreign born” is not a category in our benefits system. DWP needs to know what someone’s immigration status is rather than where they were born or what their background is, because that is what determines it. Most foreign nationals must live in the UK for at least five years on a temporary visa before they can apply for settlement and, therefore, even be eligible for public funds, and the Home Office has announced plans to double that.
This Government are going to lift children out of poverty and give them the best start in life, but, for those kids whose families are eligible, it is not right to limit support because of their background or where they were born. No child should feel the effects of this policy.
Baroness Lister of Burtersett (Lab)
This somewhat xenophobic Question concerns increased spending as a result of abolishing the two-child limit, which even the noble Lord, Lord Freud, who introduced it, described as “vicious”. Could my noble friend the Minister perhaps remind us of the cost of not abolishing the cap, in respect of how child poverty has a knock-on effect on health, education and public services, including children’s social care services?
Baroness Sherlock (Lab)
My noble friend is so right. The cost of failing to tackle poverty is too high—for those children but also for our country. Hungry children do not arrive at school ready to learn. Poorer children are more likely to have mental health difficulties by the age of 11. They are more likely to have poorer employment outcomes and earn less. She is absolutely right: the rise in child poverty in England between 2015 and 2020 is estimated to have led to 10,000 more children entering our care system, with all the consequences for those children, as well as for the country and for the Exchequer. A child’s health opportunities and prospects should not be determined by how many siblings they have or by the accident of their circumstances. We will lift children out of poverty and this country will benefit from that.
Lord Palmer of Childs Hill (LD)
My Lords, I thank the Minister for that answer. To follow on from that—to get to the crux of the matter—could she tell us what assessment has been made of the cap’s overall effect on child poverty? Can she clarify and put on the record what the actual effect was and how we can benefit by the removal of the cap?
Baroness Sherlock (Lab)
My Lords, the noble Lord is absolutely right about the effects of this. The Labour Party in government pledged to tackle child poverty. What this Government have brought forward is a child poverty strategy which, including removing the two-child limit, will bring another 550,000 children out of poverty by the end of this Parliament. That is what we are here to do; that is what we are shooting for.
I stress that this is about fairness. Of course, our benefit system is there to support those for whom this is their home; those who contribute. Of course it is there to be fair, but it is also there as a safety net, and our job is to get that balance right. In the case of children, it surely has to be right to tackle child poverty, to give them the opportunity and for the country to benefit from that.
Lord Farmer (Con)
My Lords, given the scale of additional public expenditure involved, and while recognising that welfare policy will not be the primary driver of migration, what steps are the Government taking to ensure that lifting the two-child limit does not inadvertently act as a pull factor for economic migrants to present initially as asylum-seeking families, and how will this be monitored?
Baroness Sherlock (Lab)
My Lords, I have seen no evidence that anything as specific as this has any impact on asylum. I am sure the noble Lord is aware that our system is so strict that, for somebody to be able to come to this country, they need to meet the requirements. If someone is in the country illegally, they are not entitled to access public funds. If they are entitled to universal credit, they are expected to work. Our system is designed to support people into work but also to require that they work. This year the DWP will consult on making sure that we look at the relationship between residence requirements and our benefits system and prioritise resources for those who are making an economic contribution—but nothing in that says that we do not want to tackle child poverty. I am sure the whole House agrees with that.
Baroness Chakrabarti (Lab)
My Lords, can my noble friend say a little more about how this progressive policy relates to the wider child poverty strategy, in particular the wider rollout this week of breakfast clubs in schools and, going forward, perhaps incremental universal free school meals, as some of us would aspire to, for all school-age children?
Baroness Sherlock (Lab)
I am grateful to my noble friend. We have another question in a moment about the child poverty strategy, so I get to spend 20 minutes talking about child poverty. Tackling child poverty has to be done on so many fronts and our strategy looks at people’s incomes, the costs they are facing and how we can give them opportunities. I am so proud that the Government have decided to do things such as extending free school meals to those on universal credit. Children need to arrive at school ready to learn, and you cannot be ready to learn if you are hungry. It is also a way of tackling the cost of living for so many families who are struggling. I am proud that we are making childcare more available and getting more support to those who are on universal credit who want to do the right thing and work but face barriers in their way. And I am proud that we are rolling out Best Start family hubs and all kinds of measures. Our children are not just our present; they are the future of our country. If we invest in them, we invest in Britain. It is the right thing to do.
Viscount Younger of Leckie (Con)
My Lords, let me highlight some more statistics. The Government’s own impact assessment states that the addition to the benefits bill will be £13.6 billion over five years. Families with five children will gain £10,900 per year and those with six children will gain £16,600 per year, and almost half the households involved have no one in work. This is extremely worrying. This policy is surely rewarding worklessness. How are the Government intending to prevent the lifting of the two-child limit weakening work incentives or increasing long-term benefit dependency among larger families?
Baroness Sherlock (Lab)
My Lords, I am sure the noble Viscount knows that, although we are lifting the two-child limit, the Government are not lifting the benefit cap on the total amount that any household can get. The benefit cap encourages parents to take responsibility and work towards financial independence. There is, for example, an exemption from the benefit cap if somebody is in work and earning at least the minimum wage for the requisite number of hours. The challenge for us is to make sure that parents want to work, that we support them to work and that we take away the barriers that are in their way, for example on childcare or being able to get the jobs and the support they need. These things have to be separate. We should be supporting our children, but children benefit from their parents being in work wherever possible, so we should be doing both of these. If we were just doing one, the noble Viscount would have a point. This is part of our strategy to invest in support for parents, to invest in employment support, and to make sure that whole families benefit from our policies.
Baroness Hussein-Ece (LD)
My Lords, the Minister said in a reply to an earlier question that, by giving support to these families, we are investing in the future. These children will grow up to be productive members of society, hopefully working and paying their taxes. Along with many in this House, I come from a family of immigrants and migrants and I am proud that many of my family members now have become businesspeople, teachers, and lawyers. Even Tracey Emin is a cousin. We have contributed to this country, paying back what the country gave to us. Does she agree with me that these comments that somehow we are wasting money by investing in children are an absolute disgrace?
Baroness Sherlock (Lab)
My Lords, I am sure the House is every bit as proud of the noble Baroness as they are of Tracey Emin or any other eminent member of her family, whether they are a lawyer or a doctor, or whatever they may have done. But she makes a good point. We are investing in our children in this country because we want them to have happy, thriving childhoods, but also because, by doing that, we give them every chance of achieving what they can in life. That increases productivity and the wealth of this country. I say again that our job is to be balanced. The benefits system is here to support those for whom this is their home. Migrants have to tackle very high barriers to get them, but we should not be singling out individual children on the basis of where they were born. Let us get all kids out of poverty.
Women’s State Pension Age Communication: PHSO Report
Baroness Sherlock Excerpts(1 week, 5 days ago)
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Lord Palmer of Childs Hill (LD)
My Lords, I thank the Minister for bringing this Statement to the House. The Government say the WASPI women should have known about the changes. I am reminded of a quote from the book The Hitchhiker’s Guide to the Galaxy:
“But the plans were on display … you found the notice, didn’t you? … It was on display in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying ‘Beware of the Leopard’”.
Another relevant quote from the same book said:
“All the planning charts and demolition orders have been on display at your local planning department in Alpha Centauri for 50 … years”.
The issue here is whether these women were communicated with adequately. Some 3.6 million WASPI women have been badly treated. They were given some hope; we have an ombudsman who made a recommendation to provide some justice and pay some compensation. Can the Minister say why this recommendation has been ignored? We have heard apologies but no compensation.
If you were a woman who knew that, at a certain age, you would receive a pension you probably did not give it another thought that the rules had changed. Of course, lots of announcements were made, and lots of letters were sent—sometimes belatedly, as the ombudsman said—but the truth is that the messages were not received or understood. The ombudsman has recommended compensation of £1,000 to £2,950 per person. I ask the Minister, very bluntly, why this recommendation has not been implemented. It is not a question of justice, but a reluctance to spend money on a group of people who cannot fight back.
Can the Minister take back to her colleagues in the department that there is a feeling—I hope—across this House that the WASPI have been maltreated and that the least they should expect is for the recommendation of the independent ombudsman to be put into effect? It is not enough, in my view, but it has come from the ombudsman, and I would like to hear what reasoning the Minister can give for ignoring this. I hope that she will take back to her colleagues in the other House and in the department the feelings of this House that the ombudsman’s decision should be honoured.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I am grateful to both noble Lords for their questions. Last November, the Secretary of State for Work and Pensions told Parliament that the Government would make a new decision in response to the ombudsman’s findings on state pension-age communications. That followed relevant evidence coming to light as part of legal proceedings challenging the original decision announced in December 2024. The Secretary of State has now concluded the process to make a new decision, and there is a copy of the Government’s full response in the Library.
We need to be clear as to exactly what the ombudsman did and did not investigate. The ombudsman did not investigate the decision, first taken in 1995, to equalise the state pension age nor to accelerate the increases. There are different views about the raising of the state pension age and about the decision of the coalition Government in 2011 to accelerate equalisation and the rise to the age of 66. However, that is not the subject of the ombudsman’s decision. What the ombudsman investigated is how the change in state pension age was communicated to the women affected and whether, within a specific and narrow time period, there was maladministration and injustice, and if so, whether it warrants compensation. The ombudsman concluded that the department’s communications met expected standards between 1995 and 2004. However, it found that between 2005 and 2007 there was a 28-month delay in the DWP sending personalised letters to the women affected. The ombudsman found that this was maladministration. We accept that those individual letters could have been sent earlier and the Secretary of State has apologised for that. We also agree with the ombudsman that the women did not suffer any direct financial loss from the delay.
The question is about the impact of the delay in sending those letters. However, the evidence taken as a whole, including that from 2007, suggests that the majority of 1950s-born women would not have read and recalled the contents of an unsolicited pensions letter, even if it had been sent earlier. Further, the evidence also suggests that those less knowledgeable about pensions, the very women who most needed to engage with a letter and where it might have made a difference, were least likely to read it. An earlier letter would therefore have been unlikely to make a difference to what the majority of women knew about their own state pension age. Indeed, the 2007 report concluded that automatic pension forecast letters had only a negligible impact on pensions knowledge and planning and the department stopped sending them.
The evidence also shows that the vast majority of 1950s-born women already knew that the state pension age was increasing thanks to a wide range of public information, including in leaflets, through education campaigns, in GP surgeries, on TV and radio, in cinemas and online.
To compensate specifically only those women who suffered injustice would require a scheme that could reliably verify the individual circumstances of millions of women. That includes whether someone genuinely did not know the state pension age was changing and whether they would have read and remembered a letter from many years ago and acted differently. It would not be practical to set up a compensation scheme to assess conclusively the answers to those questions.
The alternative might be to introduce a targeted scheme, which we considered could possibly allow people to self-certify, but that could not be done in a way that was fair and represents value for money. Even if we asked women to self-certify that they experienced injustice, we would have no way of verifying it. As for a flat-rate scheme, it would cost up to £10.3 billion and would simply not be right or fair, given that it would be paid to the vast majority who were aware of the changes.
I fully recognise the strength of feeling on this issue. Many women born in the 1950s have experienced significant disadvantage, not least in the labour market. We will continue working towards equality for women in the workplace now and in future, and ensure that those with lower pension outcomes due to the inequalities they have faced in the past receive the right support. We are delivering support to low-income pensioners and pensioners more broadly by increasing the rate of the state pension, supporting the poorest through pension credit, and investing more money in the NHS to reduce waiting lists and to strengthen vital services.
For example, as the noble Baroness, Lady Stedman-Scott, mentioned, our pension credit take-up campaign has been promoted to eligible pensioners and their friends and family. That is having a good effect and I would be very happy to talk more on that if noble Lords are interested. We are seeing significant numbers of increases in claims and awards, which is really helpful.
I turn to a couple of the other specific points that were mentioned. The noble Baroness challenged us as to why Labour in opposition took a different view. I will just say two things to her. The first is that she will appreciate, having been both in opposition and in government, that there is information that one has in government that one does not have when one is in opposition. We understand that many people are unhappy with what has happened. Although she is suggesting that it is entirely Labour’s fault, I suggest to her that quite a bit of the anger is about the rise in the state pension age and, in particular, the decision of the coalition Government to accelerate that in 2011, which meant a significant number of women finding that their state pension age went back more quickly than they had expected.
This decision is not about that; we need to separate the two things. We considered the ombudsman’s report very carefully, not just once but twice, and gave it due and proper process, including the information that Ministers were not able to see before they were in government. We concluded that it is right to apologise for the maladministration, but we believe that the decision we have taken on remedy and compensation is the right one.
In response to the noble Lord, Lord Palmer, that is the reason we made the decision. We accepted the ombudsman’s finding of maladministration. We did not accept the ombudsman’s approach to injustice for the reasons that I have explained about the impact of the not sending of those letters. The finding was narrowly about a 28-month delay. Because the evidence suggests that the majority of women were aware that the state pension age was changing, we do not accept that it is possible, on that basis, to construct a compensation scheme that would be targeted at those who experienced injustice.
The noble Lord, Lord Palmer, challenged me about the ombudsman. The ombudsman did their job, and the findings were fully and properly considered, but decisions on a compensation scheme of this scale are properly for Ministers and the Government to take. That is the case and, indeed, always will be.
This is a challenging issue, but it was right for the Secretary of State to review the evidence and to reach a decision based on due process and on the body of evidence. Looking forward to the future, we are taking important steps to support women in retirement to make sure that things like this do not happen again and to help them to build a better life for themselves and their families.
Lord Davies of Brixton (Lab)
My Lords, I should let the House know that I am joint chair of the All-Party Parliamentary Group on State Pension Inequality for Women, which serves to bring the concerns of many 1950s women to the attention of parliamentarians. I am glad that my noble friend the Minister, in answering the question, accepted the Government’s previous position that there was maladministration here. The Statement itself does not use the word. I was going to ask whether the Government still accept that there was maladministration; clearly they do, because my noble friend used the word twice.
My concern about this Statement is that it says:
“We also agree with the ombudsman that women did not suffer any direct financial loss from the delay”.
The trouble with that is that it ignores the first part of paragraph 12 in the ombudsman’s report, which puts that into context:
“We find that maladministration in DWP’s communication about the 1995 Pensions Act resulted in complainants losing opportunities to make informed decisions about some things and to do some things differently, and diminished their sense of personal autonomy and financial control”.
The report goes on at a later stage to say that this is a material injustice. So, although there was no financial loss, there was a material injustice found by the ombudsman. I could ask a whole series of questions, but my specific question is: do the Government accept that damages can be ordered by the ombudsman even when there was no direct financial loss? The Government appear to put considerable weight on the idea that there was direct financial loss, but there has never been a requirement by the ombudsman to require the Government to pay compensation. Does my noble friend accept that point?
Baroness Sherlock (Lab)
My Lords, I do not. I will try to explain. We accept the PHSO’s—the ombudsman’s—findings on maladministration, but we specifically do not agree with the ombudsman’s approach to injustice. The reason for that is that the evidence taken as a whole, including the evidence from 2007, suggests that the majority of 1950s-born women would not have read and recalled the contents of an unsolicited letter. As I said, those less knowledgeable about pensions, the ones to whom it would have made the most difference, were less likely to read it. Therefore, the point is that a letter would have been unlikely to make a difference to what the majority of women knew about their own state pension age.
It is on that basis that we decided it would not be appropriate to pay financial compensation. We accept that the ombudsman recommends it, but it is based on the ombudsman’s approach to injustice, which we do not accept. If we do not accept that it is possible to construct a compensation scheme to compensate only those who have suffered injustice, because we believe the vast majority of those knew that state pension age was changing, then it would not be appropriate and that is the basis of the decision.
Baroness Sherlock (Lab)
My Lords, tempting though it is, I will save my wider comments on the Pension Schemes Bill for tomorrow, when I look forward to seeing the noble Lord once again in Grand Committee. It has been a great delight in recent weeks and I look forward to having the pleasure of discussing these things again tomorrow.
In answer to his questions, the decision was not inevitable. The Secretary of State looked at the evidence, assessed it all carefully and made a decision. Having made that decision based on the evidence, he issued a statement and put his reasons for the decision in the decision document which has been placed in the Library of the House.
I have two further points. One is serious, in that I agree on the importance of people saving. The Government are pursuing the Pension Schemes Bill and all the measures in it to make sure people get proper returns on their money, to ensure people can save more. That is why we set up the Pensions Commission to look at questions of adequacy. Secondly, if the noble Lord’s Government had really wanted certainty on this matter, they could have made their decision at any point before the election—but they did not.
Baroness Bennett of Manor Castle (GP)
My Lords, following the previous question, I note that saving for a pension is extraordinarily difficult for so many people who are struggling to put food on the table and keep a roof over their head. It is really important not to preach to them about savings that they cannot possibly make.
I declare an interest in that I first met the WASPI women in 2015 and advised them on their first petition to Parliament. I am afraid I had to somewhat gently say that yes, they would get 100,000 signatures on that petition and Parliament would debate it, but it did not mean that the obvious sense of their argument would suddenly win. Politics does not work like that. So, here we are now in 2026.
My question to the Minister refers to one particular WASPI woman I met on the road outside here. She had quit her job at the age of 59 because her company was making redundancies. She thought she would get a pension very soon, so she left and took the redundancy so that younger people could keep their jobs. She then found that she would not get her pension for years. She ran out of the redundancy money and ended up on jobseeker’s allowance. She applied for job after job and did not get them. She had been an office manager for decades for a medium-sized enterprise. Then, the Department for Work and Pensions insisted that, to keep her jobseeker’s allowance, she must go on a CV-writing course and a whole lot of other really basic pieces of training. She felt utterly mistreated and abused.
I understand why the terminology in this Statement is the way that it is, and that the Government are talking in careful legalese, but as we have seen in reports today, the WASPI women are planning to fight on, and good on them. More than that, can the Minister understand how people who have been put through that ringer of a decade of poverty and struggle, and of being thoroughly disrespected by the system, would also like to hear words that acknowledge that?
Baroness Sherlock (Lab)
I thank the noble Baroness, and I am grateful to her for bringing an experience into the conversation, rather than talking in generalities. Obviously, she will understand why I cannot comment on the individual’s situation, but she makes a number of really important points there, which I would like to acknowledge. Clearly, there were a number of women who had hoped to retire early and then found they were retiring later. The challenge is that the specifics of this decision were about what difference it would have made had those letters been sent 28 months earlier, because that is what the ombudsman’s finding was about. I know that the issues people are angry about are much wider than that, so the debate has been much wider than that, but that is what the Government had to respond to, which is why it has been said in the way it has.
I was also sorry to hear that that individual did not get the support she would have wanted from the DWP. The Government are now investing very heavily in supporting people of all ages. Some of them find they are not well enough to be in the labour market until retirement; others want to get a job but find it is difficult, and it is hard to be older. But we are investing heavily in trying to support people in all those circumstances, such as those who find that their health is struggling but would still like to get back into work because they are not ready to retire, and those who want to carry on because they need the money. We are investing a lot in our work programmes and work coaches, tailoring the support there. I really hope that if that woman came along to a jobcentre tomorrow, she would get a warm welcome and someone to support her, enabling her to do that. In the meantime, the benefits system provides support for those who cannot work but are not yet ready to retire. I thank the noble Baroness for sharing that experience.
Baroness Wheatcroft (CB)
My Lords, the Minister has made the case for why the Government did not provide any compensation. Quite clearly, the retirement age had to be aligned fairly quickly. In the interests of fairness, we would all support that. But will she accept that, in the wake of what the ombudsman said, the group of WASPI women has once again felt led up the garden path, feeling that they are going to get something at last only to be let down again?
One of the most depressing things in this whole saga is the conviction that these individuals, despite the delay—the maladministration in informing them—would not really have taken any notice of the letters anyhow. Could the Minister tell the House quite what the Government are doing to make sure that people are well aware of what their retirement package will be? The pensions dashboard is all very well, but it is clearly not going to reach the parts that have failed to have been reached in the past. Given how hard retirement will be for a lot of people, is she sure that they are now getting the message?
Baroness Sherlock (Lab)
I thank the noble Baroness for her questions. I fully understand that the fact that the Government had to take the decision twice will have caused uncertainty, but the decision had to be taken again because of a piece of evidence that emerged during the legal challenge. Therefore, the Government faced a choice: should they just ignore that fact and carry on regardless, or should they withdraw the decision, review all of the relevant evidence, including that piece, and make a decision? The Secretary of State took the right decision: to withdraw the decision, look at the information presented to him and the relevant evidence, including that piece, and reach a view.
On the position of individuals, the evidence across the piece suggested that a clear majority of 1950s-born women knew that the state pension age was changing and therefore had the opportunity to find out more. But the noble Baroness raises a really important point: a lot has happened since then, so we have a campaign going on to encourage people to check their state pension age. It is very easy to do this now. You can do it online, which most people can, or you can find non-digital ways. I do it myself every now and again. It tells you when you are going to retire and how much state pension you will get.
Also, bringing forward the dashboard for those who have private pensions will enable them to find out, if they have pots stashed in different places, what they have in them. And there is other support coming through in the Pension Schemes Bill, again to make sure that people get the kind of help they need. We are making sure that in future people will get clear and appropriate amounts of notice and we will do all that we can to communicate with them in a range of ways, so that the message gets across.
Lord Doyle (Lab)
My Lords, given that the person who has studied this the most, namely the ombudsman, said that there was not any direct financial loss from the delay in writing out to people, would my noble friend the Minister agree with me that, given the complexities that she has described of designing a fair scheme, the best use of what are at the end of the day very tight government resources would be to support those pensioners who we know are in financial difficulty through policies such as the pension credit and the triple lock, so we can be confident that we are giving the maximum support to those who really need it?
Baroness Sherlock (Lab)
I thank my noble friend for that question, particularly for the recognition that this sounds simple and in fact is very complex. One of the things that has made it so difficult is that it sounds so simple, but the Government had a very specific job to do, which was to respond to a particular report from the ombudsman which had particular findings, and that is what my honourable friend the Secretary of State did. He reviewed what the ombudsman said, looked at the evidence presented to him and made a decision. But my noble friend is right; the Government want to make sure that we support pensioners. For example, a commitment to the triple lock will mean that pensioners could see their incomes rise by up to £2,100 a year by the end of the Parliament. Through our investment in encouraging people to claim pension credit and in extra help for people for heating their homes, there is lots that we are doing to support pensioners, and that is the place to put scarce resources.
Baroness Nichols of Selby (Lab)
My Lords, does the Minister agree that it is obviously a very difficult situation? I know noble Lords might not believe this, but I speak as a WASPI woman born towards the end of the 1950s. It might have been different for those born between 1950 and 1957, but I am absolutely certain I got a letter telling me that. The issue around women retiring at 60 and men at 65 was done from a post office worker in York, I understand. It was always going to be difficult, because they were never going to put men’s down to 60; it was always going to be the other way around.
I also had a friend who worked in the department at the time, who was absolutely certain that letters did go out. We cannot guarantee that everybody got one, but he is absolutely certain that people probably did. Women sometimes made choices. When I got married, I did not have the option of paying the small stamp, the married woman’s stamp, but people before me did. So, it is about getting that message out to people now that you cannot rely on somebody else’s pension support; you have to do it for yourself.
Baroness Sherlock (Lab)
My noble friend makes an important point. That is why we are trying to get people, particularly women, to check their state pension age and check exactly what they are going to get. Especially now that the new state pension is different from the old state pension, it is important they all know.
I thank my noble friend for her honesty. It makes an important point about the nature of letters. The department did and does write to people sometimes about different things, but people’s recollection of unsolicited letters is not very good. I confessed when we discussed this the last time that when I first went to the department, I said, “I never got a letter about my pension”. And they said, “Well, Minister, we definitely sent them out”. I said, “Well, I didn’t get it”. And then, just over a year ago, I moved house and, when I unpacked a box, what should I find at the top of the box but a letter from the department telling me about the change in my state pension age?
At that point, I became much more open to the notion that most people would not have made a different decision had we sent the appropriate letters in that 28-month period—which is not to say that we should not put all the efforts into communicating as well as we possibly can through all the different ways we can to make sure that everybody knows what is happening. There is little more important when you are coming towards retirement age than knowing you will be able to pay the bills and look after yourself, and I hope we will do all we can to support that.
Pension Schemes Bill
Baroness Sherlock ExcerptsMonday 26th January 2026
(2 weeks, 5 days ago)
Grand CommitteeRead Full debate Pension Schemes Bill 2024-26 View all Pension Schemes Bill 2024-26 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 152-V(a) Amendment for Grand Committee (Supplementary to the Fifth Marshalled List) - (23 Jan 2026)
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
I am grateful to noble Lords who have introduced and spoken to amendments. Clause 40 delivers the Government’s commitment to ensure that DC workplace pension savers benefit from the advantages that flow from scale and consolidation. It establishes a clear, measurable threshold and a framework centred on a single main scale default arrangement—MSDA—so that governance and investment decisions can be applied consistently across large pools of assets. This approach is integral to securing better member outcomes, improved access to productive investment and stronger in-house capability.
We had a preliminary conversation about all this on Thursday, but I know that not all noble Lords were there so, before I dive into specific points on the amendments, I will pick up a couple of the headlines. In response to the noble Lords, Lord Ashcombe and Lord Palmer, the UK’s workplace pension industry accounts for more than £2 trillion in assets, serving more than 16 million savers who have been automatically enrolled and are not engaged in pension savings. It is particularly important that these assets are working as hard as possible to provide better saver returns and security in retirement and, to do that, scale and provision really matter.
Evidence suggests that there are direct benefits derived from scale; they include better governance and economies of scale, whereby greater size reduces average cost per member and creates the ability to move investment in-house, which reduces investment costs in turn. It also enables access to a wider range of assets, including diversification and the ability to invest directly in assets rather than having to be part of a pooled fund. With improved bargaining power, schemes can negotiate lower investment fees, improving net returns.
There is a lot more that I could say, but I have said quite a lot of this before. I will say just a word just about the level of scale and why it is £25 billion. As I explained last week, our evidence shows that, across a range of domestic and international studies, a greater number of benefits can arise from a 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.
That is supported by industry analysis, showing that schemes of this size find it easier to invest in productive finance. International evidence shows that funds in the region of £25 billion invest nearly double the level of private market investment compared to a £1 billion pound fund. We selected the lower band, but there is further evidence that demonstrates that the greater the scale, the greater the benefits.
I can point to a range of studies. Analysis from Australia’s pensions regulator found that funds with around £25 billion were able to spread costs over their membership, keeping fees lower. Pensions UK reported that schemes with £25 billion to £50 billion of assets have considerable governance capability and find it easier to invest directly. The Conexus Institute again found in favour of funds of £25 billion to £50 billion. We have been transparently reporting the evidence via the impact assessment and the previous publication of Pension Fund Investment and the UK Economy, which outlined the evidence.
The noble Lord, Lord Fuller, will have to forgive me; I am not going back to LGPS. We spent two entire days in Committee on the first 10 pages of the Bill and I am not going back there. We can do it on Report. He is not going to stand up; I have not responded to a word he has said yet. Give me a moment. The noble Lord’s point is about scale. The evidence shows that larger schemes are better placed to invest—
Lord Fuller (Con)
The Minister invites me to stand up. The only reason I mentioned the LGPS is because the LGPS funds have been put into pools of £25 billion to £50 billion. We have a real economy experiment of what might happen if these provisions are enacted on the rest of it. The noble Baroness said that there are lower costs of investment. Then she went on to say, just now, that it is transferred with in-house teams. You will therefore have to substitute an externalised team for an in-house team at a scale of £25 billion. You are trying to compete with Fidelity, which has £900 billion in its team. You are setting these people up to fail; you have got the wrong scheme. You need the ability to go to the largest fund managers with the hugest assets under management, not try to recreate the City in aspic on footprints of £25 billion by duplicating all the procedures, staffing, HR and everything else. You have the B team and, guess what, they are always away on holiday in the first two weeks of August when the last three market crashes have happened and there is no one to answer the phone. That is the problem. You are saving one risk and applying the other.
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.
Baroness Stedman-Scott (Con)
My Lords, I wish to speak briefly in support of this group of amendments in the name of my noble friend Lady Altmann. She has once again demonstrated her expertise and the value that she brings to our scrutiny of these important issues. Most importantly, she explained the spirit in which these amendments were tabled.
Throughout our proceedings on this Bill, a consistent theme across the Committee has been the need for proportionality in the steps we are taking on scale and value for money, and for definitions that are sufficiently comprehensive to reflect how the market actually operates in practice. I do not intend to repeat the points already made by the noble Baroness or ask the questions she has posed, but we will listen carefully to the Minister’s response on these issues.
Clause 40, as drafted, risks applying the scale test in an overly narrow and mechanical way by requiring the regulator to assess each default arrangement in isolation without regard to the wider context in which it is offered. That approach is not necessarily proportionate; nor does it reflect the economic reality of how master trust providers operate. This amendment would allow the regulator to take into account the combined assets of several non-scale default arrangements offered by the same provider. In doing so, it would not dilute the principle of scale; rather, it would ensure that scale is assessed in a comprehensive and realistic way, focusing on the resilience, governance and efficiency of the provider as a whole.
That matters because, without this flexibility, we risk forcing consolidation for its own sake and potentially requiring well-run, well-performing defaults to be wound up simply because they fall on the wrong side of an arbitrary threshold—even where the provider clearly operates at scale overall. This amendment therefore speaks directly to the principles that we have already raised in Committee: that regulations should be outcome-focused rather than box-ticking, and that they should avoid unintended consequences that could undermine member confidence rather than enhancing it. For those reasons, I believe this is a sensible and proportionate refinement of Clause 40, and I hope the Minister will give it serious consideration.
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 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 Sherlock
Member’s explanatory statement
This amendment corrects an error.
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.
Baroness Sherlock (Lab)
My Lords, trustees will have to make their own decisions on that. I understand that, were mandation to come in, there would be constraints on this, but let me see whether I will pick up some answers to help with that as we go.
The noble Baroness, Lady Altmann, and, I think, the noble Viscount, Lord Younger, suggested that the Bill explicitly discriminates against listed investment funds. The noble Baroness, Lady Bowles, made this point previously. That concern is perhaps reflected in Amendment 124, which would remove the language that in general serves to exclude listed securities. Nothing in this language refers directly to investment funds or should be construed as a signal of discrimination, but I have listened carefully to the arguments made and I recognise that some people clearly feel otherwise. I am happy to take that away and consider further the arguments about signalling.
A number of noble Lords, starting with the noble Baroness, Lady Bowles, emphasised the issue of underlying investments, pointing out that the Mansion House Accord includes specific language on this. It defines UK private markets as meaning
“where the underlying assets are based in the UK”.
Accordingly, new Section 28C(6) provides the mechanism to reflect this aspect of the accord. Amendment 127 relates to this point, and I will say more when I return to it. I have already recognised that DC funds may invest directly or through funds. That means that, if we ever came to exercise these powers, we would need to implement the regulations under new Section 28C in a way that suitably reflects this. However, we do not consider it necessary to amend the clause to achieve this, since there is sufficient flexibility in new Section 28C to prescribe descriptions of qualifying assets in a way that reflects this, subject to the constraints in new Section 28C(5).
On the matter of competition, the noble Baroness, Lady Bowles, made a more constrained speech than she did last week, and I commend her for that. The question of competition law was raised. For the record, there has been no breach of competition law by the Government, nor are we encouraging a breach of competition law. We strongly welcome the Mansion House Accord; I make that clear for the record.
I turn back to Amendment 127 in the name of the noble Viscount, Lord Younger, because it picks up some of these points. This amendment would remove the provision that allows the Government, if exercising these powers, to specify that a proportion of assets subject to an asset allocation requirement should be invested in the UK. This aspect of the clause was developed with the Mansion House Accord firmly in mind. Under the accord, half of the 10% of default fund assets committed to private markets is intended to be invested in the UK. This provision simply ensures that the powers can operate as a backstop to that commitment. What constitutes a UK investment will vary by asset and will be set out in due course, with new Section 28C(6)(b) making it clear that this can be done through regulations.
Amendment 121, tabled by the noble Baroness, Lady Altmann, also relates to the definition of qualifying assets. Its effect would be to add to the list of examples of private asset classes that may be prescribed as qualifying assets in regulations made under new Section 28C(4). As the noble Baroness is aware, the Government have designed these provisions to mirror closely the asset classes covered by the Mansion House Accord. The clause does not perfectly correspond, word for word, with the drafting of the accord, but the effect is the same. To be clear, I can confirm that UK infrastructure assets, UK scale up capital and UK SME growth market shares, which I assume is what the noble Baroness meant when she referred to quoted companies, are all capable of being designated as qualifying assets, provided that they are not listed on a recognised investment exchange. They are very good examples of the sorts of assets in which these reforms should encourage investment; none the less, it is not necessary to list them individually in the Bill.
I have listened carefully to the many considered points and arguments that have been made in relation to qualifying assets. I recognise that there is not unanimity in the Committee, although it is always interesting when my noble friend Lord Davies agrees with the noble Baroness, Lady Altmann, and, at least in part, the noble Baroness, Lady Noakes, agrees with me; all things are possible, we discover, in Committee in the House of Lords. Given that, and given the arguments that have been made both here and previously, I hope that noble Lords will feel able to withdraw or not press their amendments.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank all noble Lords who have participated in this debate; I also thank the Minister for, from my perspective, attempting to defend the indefensible.
The Minister mentioned the industry documentation underlying the accord. I would be grateful if that could be forwarded to me, made a matter of public record and, perhaps, placed in the Library. As I said in my opening speech, if noble Lords want to know, I have had some 70% of the people representing the default funds—if you take their turnover—say that they did not think that they have agreed to the exclusion of listed investment companies. So something is going wrong here.
Baroness Sherlock (Lab)
I should have quoted what I was referring to; I meant to do so but forgot, so I apologise. I was referring to the question and answer materials that accompany the accord on the ABI’s pensions website, which I am sure the noble Baroness has read. They say:
“The definitions of both global and UK private markets assets include directly held, or via investment through unlisted funds in property, infrastructure, private credit, private equity and venture capital”.
The Government understand that this reflects the intention of the accord to exclude investment in listed investment funds. I would be happy to send these materials round to noble Lords.
Baroness Bowles of Berkhamsted (LD)
I am not sure that “directly held” applies to an LTAF either. The fact is that you have wrappers and underlying assets. It is discriminatory, and that should be tested. I still do not see how, when you have the public policy laid out by the high-level working group set up to create LTAFs, you can then say, “A private negotiation overrides that”. I stand by that.
I know that the Pensions Minister received a letter from a past lord mayor, Alastair King, who is one of the architects of the Mansion House initiatives, on 22 October last year. He relayed that he had encountered both support for the investment trust market and concerns that the Bill did not acknowledge the potential of the investment company structure. That evidence—one of the architects asking, “What’s going on here?”—also seems to have been ignored.
I come to the same basic point: for me, the Government have not provided a clear, public or specific rationale for this exclusion. I would say that neither has the ABI, but I did not know that it runs the country. All of the evidence points the opposite way to what the Government have done. Officials have confirmed in meetings that no assessment of using listed investment companies has been carried out, despite the clear steer of the policy in the working group to do so. It seems that this Q&A from the ABI overrides a Bank of England/FCA/government working group. That cannot be so. The only explanation ever offered is that there are “suitably targeted guardrails”—a phrase that has never been defined, evidenced or justified. What do you have to guard from in a listed investment company? Competition? Transparency? That is a very strange thing to say; it is an instrument of division and discrimination, protecting secrets.
Let us remind ourselves of what we are dealing with: two collective investment vehicles, each of which is a wrapper holding protected assets of net asset value for the pension scheme. That is where they differ from an ordinary equity. An ordinary equity does not have any protection for the assets; if the company goes bust, it is bust. If the listed investment company goes back to the net asset value, the assets are still there for the pension fund. That is the difference, which is why a collective investment vehicle such as a listed investment company belongs with the LTAF; it does not belong with an equity.
I still do not see why they stick so closely to some Q&A but, whether by design or by accident, they have produced a proposal that I still say is without foundation, without evidence and, frankly, without integrity. It is irrational and procedurally unfair, and it fails to take account of relevant and public considerations, relying instead on things that have not been consulted on and that have been presented through private industry discussions. I have never seen anything like this before. There are simple ways to make it fair in various proposed amendments in the rest of this group, spoken to by the noble Baroness, Lady Altmann—
Viscount Younger of Leckie (Con)
My Lords, briefly, this group again underlines a central point that we have been making: mandation should not be in the Bill. Time and again, we have heard concerns about the risks of picking winners and the unintended consequences that inevitably follow. I raised these issues on the previous group, and the noble Baronesses, Lady Bowles and Lady Altmann, have today and previously put those concerns firmly on record.
However, I am grateful to noble Lords for their thoughtful efforts to limit or mitigate the impact of the mandation power. I thank my friend, the noble Baroness, Lady Altmann, supported by my noble friends Lady McIntosh of Pickering and Lady Penn in particular, for their remarks on these issues. However, our view remains unchanged and, for reasons already rehearsed at length, asset allocation mandates have no place in this legislation. There is no compelling evidence that they are either necessary or effective in increasing productive investment in the UK.
If we are serious about addressing the barriers to UK investment, we must be honest about where those barriers lie. They include governance and regulatory burdens; risk-weighting and capital requirements; liquidity constraints and scheme-specific funding; and maturity considerations. None of these challenges is addressed, let alone solved, by mandation. If, notwithstanding these concerns, the reserve power is to be retained, significantly stronger safeguards are essential: a clear cap on the proportion of assets that may be mandated; more robust reporting and evidential requirements before regulations are made; explicit conditions for access to any transition pathway relief; a strengthened savers’ interest test; and rigorous post-implementation review. The question of when and on what basis the power should be sunsetted is one that we will return to on the next group, but the fundamental point must be clear: mandation is the wrong tool and the Bill risks embedding unjustified and anti-competitive discrimination between equivalent investment vehicles, driven not by evidence or public interest but by a narrow and self-interested approach. I will address those issues in more detail in a later group but, for now, I look forward to hearing the Minister’s response to the specific amendments raised.
However—before she gets up—I wish to turn to Amendment 118 in my name. It probes the power that allows regulations made under new Section 28C to include assets of various classes under the broad heading of private assets and to permit the future inclusion of additional asset classes. I appreciate the support of the noble Baroness, Lady Altmann, on this part.
I touched on this matter in some detail in the previous groups, so I will not repeat those arguments here. However, this amendment once again draws attention to our concern about the specific types of asset that the Government have chosen to list on page 46 of the Bill. It remains an issue about which we are deeply concerned, and one on which we will continue to work closely with other noble Lords though to Report.
Baroness Sherlock (Lab)
My Lords, I apologise to the noble Viscount for jumping up prematurely. These amendments relate to the level of any asset allocation requirements and the potential treatment of investments in private equity and private debt as qualifying assets for the purpose of any asset allocation requirement.
I will start with the with the level of any asset allocation requirement, a question raised by the noble Baroness, Lady McIntosh in her Amendment 114 and the noble Baroness, Lady Altmann, on behalf of the noble Baroness, Lady Coffey, in Amendment 112. Both would cap the percentage of default fund assets that could be required to be invested in qualifying assets. I understand why noble Lords were keen to table these amendments and to look for a cap. I have to say to the noble Baroness, Lady Penn, that I am shocked by such cynicism in one so young. I will explain the—perfectly rational—reason the Government have not done this; I hope that she will find it very satisfying and feel suitably chastened at that point. We do not expect to need to exercise the power, but to do so would be a significant step and, as noble Lords may have picked up by now, the Government’s general approach has been to design the power so that it can be used as a backstop to the commitments used in the Mansion House Accord. I underscore that point.
The aim has been to create a backstop to that rather than to fix a numerical cap in primary legislation. That is what it is designed to do. The accord is not a legal document, and its terms and definitions are not of a kind that could simply be lifted into statute. If the Government were ever to exercise these powers, we would need to define key terms precisely, and it is at least possible that those definitions might have some bearing on the precise percentage levels that are appropriate. We have therefore not taken the step of hard-wiring a fixed cap, although I underline that we have included various other safeguards, which I have repeated more than once, so will not repeat again in the interests of time.
In relation to Amendment 113 in the name of the noble Baroness, Lady Altmann, the Mansion House Accord commitment has informed the design of these powers, including the ability for government to require a proportion of assets to be invested in specified qualifying assets. I understand the point that she was making, but our approach has been deliberately limited, going no further than necessary to support the commitments already made. That caution is important, given that this is a novel—and, I discern, a not entirely uncontroversial—part of the Bill. Although we are aligned on the objectives, I would not want to suggest a change in policy direction where none is intended. Our aim is to give the DC pensions industry reasonable clarity about our expectations.
Amendment 119, tabled by the noble Lord, Lord Vaux, and spoken to by the noble Lord, Lord Palmer, interrogates the inclusion of private equity as an example of a qualifying asset. Its effect would be to remove private equity from the illustrative list in new Section 28C(5). Amendment 120 from my noble friend Lord Sikka would do the same, as well as removing private debt.
Lord Ashcombe (Con)
My Lords, it is a privilege to follow the noble Baroness, Lady Bowles, after that. I support Amendments 115 and 152, in the names of my noble friends Viscount Younger of Leckie and Lady Stedman-Scott, concerning the Government’s draft powers to mandate. The matter before us is not, in essence, a question of technical refinement but one that touches directly upon the principles of parliamentary sovereignty and the standards of scrutiny that this House has long upheld.
As has been evident during the deliberations of this Committee, we are all acutely aware that the pensions industry forms the very foundation of the long-term financial security of millions of people across the United Kingdom. It is therefore essential that any mandates imposed upon this sector are framed with clarity, certainty and due consideration for the practical realities—of which we have heard a lot this afternoon—faced by industry participants and savers alike. The sector quite reasonably seeks early and unambiguous direction so that businesses and individuals may plan prudently and with confidence. Ambiguity serves only to sow uncertainty and to heighten risk; it also almost always reduces the probability of the desired outcome.
Clarity alone, however, is insufficient. The process by which such mandates may be introduced or amended must itself be transparent, accountable and subject to full and proper parliamentary oversight. Under the current provisions, potentially substantial changes to the scope of mandation powers could be affected through negative secondary instruments. Such a mechanism falls short of the constitutional rigour expected in matters of this significance. These instruments, as the Committee well knows, may pass with limited visibility and without the robust debate and testing that both Houses are uniquely equipped to provide.
The amendments before us seek to remedy that shortfall by requiring that any future changes to mandation rules receive the express consent of Parliament, rather than proceeding without a vote. This proposition is not, I emphasise, a question of party-political alignment but a question of sound governance, institutional responsibility and public trust.
We must not lose sight of what is fundamentally at stake. Effective parliamentary scrutiny protects not only the interests of the industry and the Government but, most importantly, the millions of individuals, including myself, who have saved faithfully into the pension system and rely on its long-term stability. I therefore urge the Committee to lend its support to these amendments. In doing so, we would strengthen the clarity and certainty required by the pensions and lifetime savings sector; uphold the enduring principle of parliamentary consent; and ensure that the governance of our pension system reflects the transparency, diligence and integrity that the public rightly expects and deserves.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Viscount, Lord Younger, for his introduction to his amendments in this group and all noble Lords who have spoken.
I will start with the sunset provisions. Amendment 115, from the noble Viscount, Lord Younger, would remove one element of these, but I understand that it is obviously tabled for probing purposes. There are two distinct elements to the sunset provision. The first is the element identified in the amendment: the provision in new Section 28C(3), which means that if percentage asset allocation requirements have been brought into effect by the end of 2035, they cannot be increased beyond that date. The second is what I call the “main” sunset provisions, in Clause 122(6), which automatically removes the power from the statute book altogether if it has not been used by the end of 2035. I fully recognise that there is a legitimate debate about where to set those sunset dates. Through her Amendment 116, the Baroness, Lady, Coffey, would prefer it to be shorter. The noble Baroness, Lady Penn, proposes bringing forward to 2030 the date beyond which the requirements cannot be raised. Her Amendment 130A would ensure that not only the enabling powers but any requirements in effect would expire in 2035. This is a significant power that would potentially be at the disposal of different Governments and such restrictions would seek to ensure that it is not on the statute book any longer than required.
The noble Viscount made the point about this being in a subsequent Parliament. In a sense, that is inevitable, because the Mansion House commitments are only to make those commitments by 2030 and, because this is meant as a backstop to the Mansion House Accord, the timeframe is shaped by the timescale within the Mansion House agreement and the Government’s own reform plans. We obviously do not want it on the statute book for longer than it is needed but, on the other hand, the Government do not want—nobody would—to create a situation in which a future Secretary of State felt compelled to use the power prematurely just to avoid it lapsing. It was therefore a genuine judgment about where to land it. In my view, it would not be logical to have the ability to implement a requirement, only for it to expire very shortly afterwards, as Amendment 130A might permit. The Government had to make a judgment between those competing considerations and we came down on 2035. I accept that it is matter of judgment and the Government’s may differ from that of noble Lords, but I hope that explains the competing pressures that made us land in that space.
The Committee has also focused, through a series of amendments, on the requirements for reviewing any asset allocations before and after they are implemented. The Government are acutely aware of the need to both design any regulations with great care and ensure that, if they are every introduced, they work as intended. That is why we have embedded not one but two statutory reporting requirements in Clause 40. The first is the ex ante report, which must be published under new Section 28C(12) before the power is exercised for the first time. In response to the noble Baroness, Lady Penn, her first understanding was correct. The requirement to consult is on first use. This requirement arises from a combination of new Section 28C(12) and (14), but the approach was designed so that the compulsory report and the critical first use of the power are informed by the consultation, and that is why it was put up front.
The second is the post-implementation review, which must be carried out and published under new Section 30A no later than five years after the first regulations come into force. Amendment 154 tabled by noble Baroness, Lady Bowles, would bring forward the mandatory post-implementation review of any asset allocation requirements from five years to three. The noble Baroness, Lady McIntosh, would require an additional review within two years as well as the existing five-year review. The amendment tabled by the noble Viscount, Lord Younger, would remove the time limit altogether.
I understand why noble Lords would want a shorter deadline for the post-implementation review, especially as many have strong reservations about the power in general. Again, the five-year deadline is a matter of judgment, and I accept that we may land at different points, but our concern is to allow enough time for the arrangements to bed in, so that their effects can be properly understood. Markets can take time to adjust. It is possible, for example, that some providers might seek an exemption under the savers’ interest test. Those applications might be granted on a time-limited basis or be subject to an appeal process. That all means that the full impacts of the measure might not be visible after only a short period. On the other hand, by choosing 2035, we have deliberately kept the deadline short enough that it serves as a meaningful check.
I turn now to the content of the pre-implementation and the post-implementation reports. A number of amendments, in the names of the noble Baronesses, Lady McIntosh and Lady Bowles, and others, seek to specify additional matters that the Government should be obliged to review. In the main, I do not demur from the importance of any of the topics that noble Lords have identified; they cover many of the kinds of issues that any responsible Government would want to consider either before or after using a power of this kind. Indeed, it is worth recalling that the Government have already conducted a wide-ranging review of pensions investment that considers many of these topics. The review reported last year and, as noble Lords know, led to many of the measures in the Bill.
However, the Bill already places clear duties on the Secretary of State to look at the key overarching questions: how many measures are expected to affect, and then have actually affected, the financial interests of members in the relevant schemes, and how they affect economic growth in the UK? Both the ex ante and post-implementation reports must cover those core matters, and both are expressly permitted to cover “any other matters” the Secretary of State considers appropriate. That formulation is designed precisely to allow the Government to take account of the kinds of issues included in many of these amendments, but to do so in a way which can be adapted to circumstances at the time, rather than being hard-wired into primary legislation.
I stress that these reporting requirements are not the only safeguards built into the framework. The savers’ interest test provides a route by which providers can apply to the regulator for an exemption, where they consider that complying with the asset allocation requirements would cause material financial detriment to their members. If, for example, the kinds of market distortions or misalignments described in Amendment 155, from the noble Viscount, Lord Younger, were to arise in such a way as to raise material concerns about the impact on savers of meeting the targets, providers might well choose to apply for an exemption.
The issue of transparency was raised by the noble Baroness, Lady Bowles, and implicitly by the noble Viscount, Lord Younger. I absolutely agree that it is good practice to be clear about the evidence and submissions that have informed policy decisions in this area. That has been the Government’s practice to date. In taking forward the pensions investment review, from which these measures have arisen, the Government consulted extensively and then published a 47 page response, including a full list of the 107 organisations that responded. If further formal consultations are carried out to inform the work required under the Bill, they will be conducted in the same spirit of openness. However, I do not think that we need detailed prescriptive publication requirements in primary legislation to achieve that.
Amendment 131 from the noble Baroness, Lady Bowles, would impose a further list of “prior steps” that the Secretary of State must take before using the power. One is a requirement that the Government must obtain clearance from the Competition and Markets Authority prior to exercising the powers. I will not rehearse the debate on investment trusts; we have done that already today. However, I stress again that this mandation clause is neither the work of the devil nor the work of the ABI; it is the work of the Government acting as a backstop to a voluntary Mansion House Accord, which is an industry-led initiative by 17 pension providers, aimed at securing better financial outcomes for DC savers and boosting investment in the UK. It is for the participants of the Mansion House Accord to ensure that they comply with competition law, and I have no reason to believe that they are not doing so. For our part, the Government will of course continue to comply fully with competition law in relation to any actions taken under these powers. I do not think a statutory requirement to seek specific CMA clearance is necessary or justified.
Amendment 130 from the noble Baroness, Lady Noakes, is a probing amendment to understand why we need to override any contrary provisions in scheme trust deeds. New Section 28C(15) simply clarifies that, where there is a conflict between the statutory asset allocation requirements and restrictive provisions in a trust deed, the statutory requirements take precedence. It is designed to give trustees legal certainty, not to dilute their general duties. As I have said, we do not expect to have to use this power but, were it to be exercised, we would want to ensure that there is certainty for trustees that these requirements may be met without inadvertently causing a conflict with a provision in a trust deed or rules.
Obviously, we do not have sight of every set of deeds or rules that schemes operate under, and it may well be that no relevant conflicting provisions exist. The provision is essentially a precaution. It means that it is not necessary for trustees or providers to spend time or money to scrutinise the interaction between the asset allocation provisions and their deeds. It also addresses the risk that a scheme might find itself at risk of closure to new auto-enrolment business due to a trust deed provision that prevents it from complying with the asset allocation requirements, which it may well want to do.
However, I want to draw a clear distinction between any specific provisions within the trust deed and the broader responsibility of trustees to select investments that operate in the best interests of members. That does not change, and trustees would continue to be subject to a duty to invest in savers’ best interests in line with the law.
Pension Schemes Bill
Baroness Sherlock ExcerptsThursday 22nd January 2026
(3 weeks, 2 days ago)
Grand CommitteeRead Full debate Pension Schemes Bill 2024-26 View all Pension Schemes Bill 2024-26 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 152-IV(a) Amendment for Grand Committee (Supplementary to the Fourth Marshalled List) - (22 Jan 2026)
Baroness Warwick of Undercliffe (Lab)
My Lords, I am sympathetic to the probing amendments in the names of the noble Baroness, Lady Altmann, and the noble Viscount, Lord Younger—Amendments 47 and 51 respectively—on value for money, which I alluded to at Second Reading. With any Bill or set of regulations, it is important to have clarity on the intentions and in minimising any unintended risk. That is particularly so when looking at the protection of citizens’ lifetime pension savings.
The FCA, the DWP and TPR have just published their consultation on their detailed proposals for the new value-for-money framework for DC schemes. These proposals come with real bite. When introduced, all relevant DC schemes will have to report on the value that they provide to members across a range of metrics. That assessment report will provide the basis for comparing the value that the scheme provides against other schemes. If a given scheme offers poor value, the firms and trustees must deliver improvements or otherwise transfer their members to a scheme that does provide good value. The framework requires an online central database to capture the disclosure of value-for-money data.
The Bill mandates the framework for contract-based schemes regulated by the FCA. The DWP and TPR will consult on draft regulations for the trust-based schemes. The first value-for-money assessments are expected in 2028. The framework provides for consistent measurement and disclosure on investment performance, costs and service quality; objective and consistent comparison against the market; transparency and disclosure; and action to be taken where a scheme is not delivering value. However, there are clearly concerns—we see them expressed in the briefings that noble Lords have received—that the framework could give rise to problems, which I, too, would like to probe.
The VFM framework provides for forward-looking metrics to be considered alongside backward-looking metrics, with the stated aim of allowing for
“a holistic approach to investment to deliver the best possible long-term outcomes”.
There is a risk that the value-for-money framework could result in herding, as others have alluded to, as schemes seek to avoid poor value assessments. There is also a risk of forward-looking metrics being used to game a scheme’s assessment. I ask the Minister: what guardrails are explicitly allowed for in this Bill to control these risks?
On quality of service, the recently published VFM framework takes a more limited approach to quality service and administration metrics. Furthermore, metrics on how members engage with their pensions have not been included in the framework, but they will be important in informing schemes’ responses to changes, such as guided retirement and the targeted support regime.
Looking ahead, how will these concerns be addressed? Poor-performing schemes that are rated “red”—meaning that they cannot be improved—must transfer out members where it is in their best interests. This is stronger than the originally proposed wording to consider a transfer. It is made possible by the Bill’s provision for a contractual override to allow transfers for contract-based arrangements without members’ consent. However, it is worth noting that some members will have safeguarded benefits. My final question to the Minister is: what will happen to those benefits? It is not clear what mitigations this Bill provides to protect members.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I am grateful to all noble Lords for introducing their amendments and for the debate that followed. The amendments rightly seek an assurance that the VFM framework is strong and effective and they try to clarify how it will take account of a range of important factors that can affect the value that a scheme provides. I regret that I cannot accept them, but I am going to go through the reasons why, as some interesting issues are being raised. Obviously, if I told the Committee that I was going to accept them, noble Lords would all fall over in shock, but this is a good opportunity to get these issues out there.
Let me say at the outset that the aim of the VFM framework is simple: we want to ensure that all savers are in schemes that deliver the best possible long-term outcomes for their retirement. The framework seeks to raise standards across the DC market by driving transparency, comparability and competition on genuine value rather than just on cost—a point made by the noble Baroness, Lady Stedman-Scott.
Clause 11 is deliberately drafted to provide enabling powers that allow the regulations establishing the VFM framework to be developed in consultation with industry and to be adapted as markets evolve. However, the VFM framework must be able to adapt to future financial market developments and to align with the FCA requirements for contract-based schemes. The risk is that hard-wiring any detailed technical criteria or rigid deadlines into primary legislation takes away the flexibility that is genuinely needed. It could get in the way of effective regulation and risks locking in concepts that could become outdated. However, I accept that there is a question around how Parliament gets to scrutinise the detail.
Clauses 11 and 14 set out key features of the VFM regime and provide enabling powers for the Secretary of State to make regulations on how VFM assessments will operate, including the metrics, the benchmarks and the processes that they will have to follow. The regulations will be subject to formal consultation with industry and regulators before being laid in draft for parliamentary approval under the affirmative procedure. In our view, this strikes the right approach: the Bill has the overarching framework in primary legislation while the technical detail is developed transparently through secondary legislation.
However, the noble Baroness, Lady Coffey, made an important point: Parliament needs to be able to understand what the assessment process will look like. A joint consultation was launched in early January by the FCA and the Pensions Regulator; it will run until 8 March. This consultation is the next step in the process of consultation on the technical-level detail of the framework, which will help to inform development and consultation on draft regulations and draft FCA rules—those are, of course, legal instruments.
I am conscious that some of the amendments were tabled before that consultation was launched. Those noble Lords who are up to their ears in the pensions world will no doubt have read the consultation in detail, but I will make sure that we send any noble Lord who has not done so a summary of, as well as a link to, it. I would be happy to answer any questions, if that would be helpful, but I will unpack the basics of this now.
The consultation sets out updated proposals and detailed draft FCA rules for implementing the VFM framework in the workplace DC pensions market and it reflects stakeholder feedback from the previous FCA consultation. FCA rules will apply to contract-based schemes, whereas regulations made under the powers in the Bill will apply to trust-based schemes. By bringing them together, responses to the consultation will help to inform both the draft DWP regulations and the FCA rules, with the obvious aim of ensuring consistency across trust-based and contract-based schemes. We do not want to end up with any kind of regulatory arbitrage in this or any other area. It is important that we do not pre-empt the outcomes of that process to make sure that we get the details right. Draft regulations will be consulted on.
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.
Baroness Coffey (Con)
I am keen to get a sense of what the Government think the current spread is between the different ratings. For example, what proportion might be red? Is there any sense of this at all?
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.
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.
Baroness Sherlock (Lab)
My Lords, I thank the noble Viscount, Lord Younger of Leckie, for introducing his amendments. I should have said at the beginning of the previous group that I thank him for his support for this policy. I recognise that he has tabled his amendments in the spirit of exploring how best to make this work.
Let me start with the proposed amendments to Clause 24, which is a key part of the framework to enable the consolidation of small dormant pension pots. It sets out requirements for transfer notices: communications that inform members when their pot is due to be moved into an authorised consolidator scheme. These notices are an important safeguard, ensuring transparency and giving members the opportunity to opt out if they wish to. Amendment 84 proposes that the transfer notices must be clear, concise, accessible and so on and must be provided in prescribed alternative formats for digitally excluded or visually impaired members.
I fully support this principle, but we think the amendment is not needed because the objectives are already embedded in the Government’s approach. The Bill provides powers to set detailed requirements for transfer notices in secondary legislation, and we have committed to consult to ensure that notices are simple, jargon-free and easy to understand. Moreover, existing regulatory standards and guidance already require schemes to provide communications in accessible formats for vulnerable members, including those who are digitally excluded or visually impaired. We do not think that overlaying additional prescriptive requirements in primary legislation is helpful, but the underlying point is very strong. We need a framework that can evolve as technology and members’ needs change. Locking rigid requirements into the Bill could hinder that process, so we think the right place for these detailed standards is in guidance and regulation, where they can be updated as best practice develops.
Amendment 85 would require the Secretary of State to record and report annually on the number of transfer notices issued and the outcomes arising from them. Again, although I understand the intent, we do not think this amendment is proportionate, given the administrative burden that it would impose. The DWP already has robust mechanisms for monitoring the implementation and effectiveness of pensions policy, including through regular engagement with the Pensions Regulator and industry reporting. We will continue to publish updates on the progress of small pots consolidation as part of our wider reporting on pensions reform. The focus should remain on ensuring that the policy delivers better outcomes for members, reducing fragmentation, improving value for money and supporting a market of fewer, larger schemes. We believe that this can be achieved through existing oversight arrangements and targeted evaluation, rather than setting rigid reporting requirements in primary legislation.
I recognise that the Clause 31 stand part notice has been tabled to probe the extent and scope of the small pots regulations enabled by this clause, with particular focus on the powers conferred on the Pensions Regulator to levy fees. For clarity, Clause 31 does not create new powers beyond those already set out within the small pots measure. Its purpose is to provide clarity and detail on how those powers can be exercised to deliver the small pots consolidation framework effectively. This mirrors the approach taken with the authorisation of master trusts, for example, under the Pension Schemes Act 2017, where fees were introduced to ensure that the costs of regulatory oversight are borne by those seeking authorisation, not by the taxpayer. This is a well-established and proportionate mechanism that supports robust regulation while maintaining fairness.
As already discussed elsewhere, we believe that the clauses within this chapter strike a careful balance. They ensure that key regulations get full parliamentary scrutiny through the affirmative procedure, while allowing the Government to act quickly on minor or technical changes via the negative procedure when necessary.
Clause 31 sets out the circumstances where the use of a Henry VIII power may be required. To be clear, this is about ensuring that the legislation delivers a workable and proportionate framework. The Henry VIII power provides necessary flexibility to apply existing technical and procedural legislation to small pots regulation in order to ensure the effective implementation of the small pots regime. I shall give an example. It may be necessary to make consequential amendments to the Pensions Act 2004 so that the Pensions Regulator’s existing administrative powers can extend appropriately to the small pots framework. An example in the Bill is the amendment to Section 146 of the Pension Schemes Act 1993 to ensure that the remit of the Pensions Ombudsman is broad enough to investigate complaints or disputes in relation to the destination proposer, but this cannot be legislated for before final decisions around the delivery model are made. That is a good example of why this would work. Of course, any regulations made under this power will be subject to the affirmative procedure.
We think that that flexibility is essential for the effective implementation of the small pots regulations. Any regulations made under this power will be affirmative, but it is also worth noting that, given what I have said, removing Clause 31 would reduce the clarity for members and pension schemes on how the power to make small pots regulations may be used.
Finally, I will address the proposed amendments to Clause 32. Clause 32 is essential to maintaining trust and integrity in the small pots consolidation framework. It ensures that the Pensions Regulator can take direct action to uphold compliance with the regulations, protecting members and supporting the volume of transfers required accurately. Amendment 86 seeks to remove subsection (2) as a means of probing the expansion of regulatory powers conferred on the Pensions Regulator. Subsection (2) provides transparency for stakeholders by setting out the types of enforcement tools that may be included in regulations, such as compliance notices, third-party compliance notices and penalty notices. These are not new concepts; they align with the Pensions Regulator’s existing practices and procedures in other areas of pensions regulation. Removing this provision would not prevent enforcement powers being introduced in regulations, but it would remove clarity for schemes and members. Without it, we risk creating ambiguity and undermining confidence in the framework. This clause is not about overreach, but about ensuring that the regulator can act proportionately and effectively where schemes fail to meet their legal duties.
Finally, Amendment 87 seeks to remove Clause 32(4) to probe the rationale behind the maximum penalty limits. Subsection (4) provides clear, proportionate caps on financial penalties: £10,000 for individuals and £100,000 in any other case. These limits have been increased compared to existing frameworks to reflect the importance of compliance in this area. 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 maintain confidence in the system. These amounts align with the wider compliance regime across the Bill. Without this subsection, regulations could still introduce penalties, but without any statutory cap. That would create uncertainty for schemes and could lead to disproportionate outcomes. By contrast, the current approach provides transparency and safeguards, ensuring penalties are significant enough to deter non-compliance but not excessive. It also enables appeals to the First-tier or Upper Tribunal, guaranteeing procedural fairness and accountability.
In conclusion, Clause 32 is not about granting unchecked powers; it is about providing clarity, proportionality and effective enforcement to protect members and deliver the outcomes this policy is designed to achieve. Removing this provision would create uncertainty and risk undermining confidence in the system.
The noble Baroness, Lady Altmann, asked me a question that I think related more to the previous group, but let me see what I can do. Why do we need small pot consolidation if we have the pensions dashboard? I think her question was slightly underpinned by the question, why do we need this at all, why can we not just use dashboards? We think they serve different but complementary roles in strengthening the system.
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.
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.
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.
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.
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.
Baroness Bowles of Berkhamsted (LD)
The Minister has not yet mentioned whether there is any kind of indemnity or legal consequence. What the legislation does is not neutral in the sense that it provides cut offs and reasons not to invest. Is a company doing something wrong by continuing when it should say that it will not be able to make £25 million and it should roll up now? These are issues about which questions have come to me. It has not been looked at in the research. Could the Minister write to me to say whether there are any legal dangers for either side and whether there would be any compensation if the value of the pension becomes less than expected?
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.
Baroness Sherlock (Lab)
My Lords, the broad, combined effect of these amendments would be to remove from the Bill the ability of the Government to require certain pension schemes to hold a prescribed percentage of their assets in qualifying assets. I confess that, after Second Reading, the reaction of some noble Lords has not been entirely a surprise to me. However, I have to say at the start that, although the provisions divide opinion, they deliver an important element of the pensions investment review that the Government concluded last year.
I will make two headline points. First, as I have said, we do not presently expect to have to use the powers, as we are confident that the industry will deliver voluntarily on its commitments made under the Mansion House Accord. Secondly, the Government would not be proposing these powers if there were not strong evidence that savers’ interests lie in greater investment diversification than we see today in the market. DC pension providers recognise that a small allocation to private markets can improve risk-adjusted returns as part of a diversified portfolio. Despite this, in many cases providers are holding back, not because it is necessarily in savers’ best interests but, among other reasons, because of a lack of scale or because of competitive pressure to keep fees low. That problem, alongside the potential economic benefits of this sort of investment, is why we have made investment diversification such a big focus of these reforms and why we have welcomed the Mansion House Accord. It is also why it is so important that the industry is pulling in the same direction and why it is necessary that the Government have taken reserve asset allocation powers as a backstop to be used only if necessary.
Noble Lords have raised various concerns about the powers, which we will no doubt explore in much more detail on Monday—I look forward to that. However, as an opening point, I emphasise that the Government have taken care to build in appropriate guardrails. First, the power is time limited. It will expire in 2035 if it has not been used, and any percentage headline asset allocation requirements that are in force beyond that date will be capped at their current levels.
Secondly, the Government are required to establish a savers’ interests test, in which pension providers will be granted an exemption from the targets, where they can show that meeting them would cause material financial detriment to savers. The Government will need to consult and publish a report on the impacts of any new requirements on savers and economic growth, both before exercising the power for the first time and within the five years following the power being exercised. The regulations implementing this framework will be subject to parliamentary scrutiny.
A number of points have been raised. I will keep my response fairly high level; I know that some of those points will come up again next week, so I will return to them then, given that we have limited time before the Grand Committee must end. I start with the question of whether this is necessary. The Government are strongly encouraged by the Mansion House Accord, which is an industry-led, voluntary commitment by 17 of the UK’s largest pension providers to invest 10% of their default funds in private markets, with at least half of that in the UK, by 2030. It means that savers will benefit from greater diversification and the potential for better long-term returns. In view of this progress, the Government do not currently expect to need to use these powers.
In response to the noble Viscount, Lord Younger, and the noble Lord, Lord Vaux, I note that there is a continued risk of a failure of collective action here. Individual providers are under competitive pressure to keep costs as low as possible, which can discourage them from investing in the full range of asset classes, even where it may be in savers’ interests to do so. The reserve powers signify to the industry that change is happening across the market, and in that way—together with our other reforms—they support the transition to which the industry has itself committed. That is the top line as to why we are taking the power and the circumstances in which we think we would use it. I will come back to the issue of private markets when we have a debate on private markets next week.
We will have a longer debate on trustees and fiduciary duty, particularly the issues around regulations, when we come back next week, if that is okay with the noble Lord, Lord Sharkey. However, the Government do not accept that this proposal cuts across fiduciary duty. There is widespread recognition of the benefits that a diverse investment portfolio can bring for savers. Indeed, that is exactly why the signatories to the Mansion House Accord are committing to investing in private markets. However, if the reserve powers did come to be used, the Bill provides for a savers’ interest test to ensure that schemes can deviate from any asset allocation requirements where they can demonstrate that savers would suffer material financial detriment. The Minister for Pensions has committed to working with the sector to ensure that guidance gives trustees the confidence they need to invest in the best interests of savers and the UK economy. A stakeholder-wide round table will begin this work early next month, and I will keep noble Lords informed on that.
The noble Lord, Lord Vaux, asked what happens if a scheme makes losses. Trustees continue to be responsible for investing in their savers’ interests. We will come back to this in more detail, but the headline is that this means savers would continue in all circumstances to be protected by the core fiduciary duties of trustees. Trustees would also continue to be subject to a duty to invest in savers’ best interests in line with the law. We would expect that duty certainly to apply to the selection of individual investments in a portfolio, the balance of different asset classes in a portfolio and to any decision to apply for an exemption under the savers’ interest test.
The noble Lord, Lord Vaux, asked about sorting out other barriers first. Last year, we completed a comprehensive review of pensions investment, which identified that greater scale, as well as a greater focus on value rather than cost, has the potential to unlock significant additional investment that benefits both savers and the economy. The measures in the Bill tackle that. However, that does not mean that the work stops on barriers and investment opportunities. For example, the FCA announced last month that it will consult on rolling out to the pension funds it regulates a target exemption from the 0.75% charge cap, to accommodate the sorts of performance-based fee structures often used in private market investment. The signatories to the accord have explicitly called for that.
The noble Lord, Lord Sharkey, asked about enablers and whether there are enough investment opportunities. The answer is yes. We will continue to engage closely with the industry on the steps it is taking and any obstacles it is encountering. At this point, we are encouraged by early signs of progress and are confident that the momentum will continue. On future investment opportunities, I draw the noble Lord’s attention to one example of the role that the Government are playing: the Sterling 20 Group of leading pension providers launched by the Chancellor at the October regional investment summit. That group, convened by the Office for Investment, includes all the Mansion House Accord signatories and has already met twice to discuss specific investment opportunities in venture capital and energy generation.
The noble Lord, Lord Sharkey, asked about the consumer duty. The FCA’s consumer protection objective will continue to apply to FCA-regulated schemes. The FCA will apply it in parallel to any asset allocation requirements: in other words, where it does not believe there is a conflict. Or at least, where we do not believe there is a conflict. Or someone does not believe there is a conflict. Savers’ interests tests will be available for FCA-regulated firms, just as for TPR firms.
Lord Sharkey (LD)
Can the Minister respond to the point I made about statutory guidance?
Baroness Sherlock (Lab)
I will answer that next week, if that is okay, when we discuss the issues of fiduciary duty.
Viscount Younger of Leckie (Con)
I have a couple of points to raise. The Minister mentioned that the reserved power was designed to be a signal, and I would argue that it is a pretty strong signal to put in the Bill. Will she strongly consider whether there are other ways to encourage investments in the UK other than using this, and what might they be? This is one of the things that we will want to press.
Secondly, she did not answer my question about the dangers of a future Government taking up these powers, even though she mentioned the sunset clause of 2035, which is, frankly, some time off.
Baroness Sherlock (Lab)
I am sorry I did not namecheck the noble Viscount in responding to the second point. I intended to respond by pointing to the safeguards and the guardrails that have been built in. That was the nature of the response to that.
In response to the first question, I thought I said that the Government accept that this is not the only issue and that we are addressing the other ways. We have been looking at the other barriers and investment opportunities. We also mentioned that the FCA has looked at examples. It is not the only thing; we are looking at the other things as well. We think there is already significant progress, but we think this reserve power is a way of ensuring that progress goes forward and not backwards on this issue.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will be brief. There is a lot that could be said, but we will have other opportunities later on in this Bill.
This should have been a happy Bill, doing good for ordinary workers and building the economy, looking after the future in two interconnected ways. For the main part, we had cross-party policy consensus and continuity. We had public and industry support, which is just what you need for issues such as pensions and long-term investment, aided by significant and consensual regulatory changes—culminating this week—that should enhance diversity, choice and transparency in investment decisions.
However, at the heart, we got this devil’s clause. The Government have not given development a chance and such a reserve power is a massive intervention. It is a clause that, where there was unity, brings division; where there was trust, brings doubt; where there was confidence, brings concern; and where there was hope, brings despair. No wonder noble Lords oppose it. It ticks every bad box. I urge the Government to think again. They have not given policy and process any due regard and therefore I am sure that many of us will return to this on Report. But, for now, I will withdraw my amendment.