Pension Schemes Bill

Lord Fuller Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

I am quite pleased to follow the noble Lord, Lord Willetts, because I feel that we are fishing slightly in the same pond. I added my name to the amendment proposed by the noble Baroness, Lady Altmann, and I support doing something for the pre-1997 people. When you look at something as long-term as pensions and you have different cohorts coming in, moving along and coming out, you have to somehow get into cohort fairness. You will always have the circumstance that people have paid into something and then they get something out when there is something else in the pot. We will come to this even more so when we start to deal with private assets, so I shall not go on at length here, because I will go on at length there. I am in the same camp as the noble Lord, Lord Willetts, in thinking that you do not say that it is clean cut and these people are in and those people are out—you have to look at fairness more broadly across the piece.

[Lord Fuller (Con)]

My Lords, I first became a pension fund trustee in 1997. The trustees at the time knew that there was a turning point, and it was probably just as well to get someone who might be alive 30 years later at least tutored in the principles of pensions at that moment—so it was clearly a moment in time. How right they were, because 30 years later, here I am.

I recall that it was a difficult moment for the scheme of which I was a member, and the private company for which I worked. Since the Barber reviews of 1991, with regard to the benefits payable in the final salary scheme, which was still open, it was the will of the directors that at all costs the final salary scheme should remain open and open to new accruals. Progressively, the benefits were diluted from RPI to RPI capped at 5% to RPI capped at 2.5%. Every step was taken and every sinew strained to keep that scheme open. But in 2003, the actuary reported that, on a scheme with assets of just £5 million, £4 million extra had to be tipped in; that was a sucker punch, and the scheme was inevitably at that stage closed to new members.

It turns out that the assumptions that were made, with the benefit of hindsight, were overly prudent. The deficit was exaggerated. But notwithstanding having put more than £4.41 million—that is the number that sits in my mind—into the scheme, three years later there was another £2.6 million to find as well. My goodness, the company could have made much better use of that capital to grow the business, rather than to fill a hole that history tells us was not there to the extent that it appeared.

We are in a situation where our scheme, which we kept open as long as we could, could not stand it any longer when we got to 2003. There was another turning point in 2006, in “A-day”, but I shall park that to one side. All that money was tipped in—and the suggestion that all the money that has gone into the scheme is some sort of pot to be shared now down the line, equally or in some proportion with the members as well as the company, is a false premise. Without the commitment of these private companies in those darkest days, the schemes would have closed much earlier and members would not have participated for those extra increments that they did.

I listened carefully to the noble Baroness, Lady Altmann, who asked what happens for all those people in the pre-1997 schemes. Well, here is the GMP rub. Astonishingly, I received a payment in the past six months, wholly unexpectedly, from my pre-1997 accrual, for the guaranteed minimum pension. So the suggestion that members are not sharing in any of the benefits of the pre-1997 scheme is a further false premise.

I am no longer a trustee of the scheme, but I know the trustees. The professional and actuarial costs associated with calculating these GMPs have been quite extraordinary. In fact, it would be much better for the trustees to have just made an offer, forget the GMP, and everybody would have been much better off.

The GMP issue illustrates the folly of going down the path that this amendment would lead us. All it is going to do is drive trustees into having more expensive calculations, actuarial adjustments, assessments and consultations, whereas, for the most part, the trustees are minded to make some sort of apportionment and that apportionment needs to be balanced, individual for the scheme in its own circumstances, based on how much excess money was tipped into the scheme for all those years in the post-1997 world. It is about having some sort of fair assessment, a fair apportionment. For the most part, the trustees of private schemes have the benefits and the interests of the members completely at heart and I do not see any circumstance when that does not happen.

This amendment is unnecessary for two reasons. On the one hand, trustees take these things into account. Secondly, that money is truthfully the employers’ money because they went above and beyond, listening in good faith to the professionals, the actuaries and everybody else who had put their oar in on the overly prudent basis, as it now turns out, to make good deficits that were not actually there. I say to noble Lords that for all the pounds that were put in post-1997, when other things happened in the macroeconomy and the Budget—which I will not detain noble Lords with—this country’s pension schemes could have been in a significantly stronger position than they are now had the trustees carried on as they were and not listened to some of the siren voices in government and the so-called professional advisers.

[Lord Davies of Brixton (Lab)]

I strongly support Amendments 26 and 39 from the noble Baroness, Lady Altmann. I have a question on Amendment 39, the proposal that trustees should be able to make one-off enhancements. I understand that there has been some recent change in the tax treatment of such payments, and I wonder if my noble friend could update the Committee on where we are with that.

The noble Lord, Lord Willetts, made the point that we are referring to an issue which will depend on the regulations—one of the problems we face is that this is a skeleton Bill. As I understand it, the question is, in essence: can the trustees use the surplus assets to pay the DC contributions of people who are not in the DB scheme? There is a particular quirk with that. Purely randomly, some schemes established the DC arrangement as part of the DB scheme, and other employers established the DC arrangement as a separate legal entity. It is pure chance which way they went; it depended on their advisers. I have questions about it in idea and principle, but if we are going to admit that, it would be wrong to distinguish between the chance of the particular administrative arrangements that were adapted. I wonder if my noble friend is in a position to comment on that point.

I have significant reservations about the amendment from the noble Lord, Lord Palmer of Childs Hill, for free advice being paid for by surplus. Most members of DB schemes do not need advice—which is the entire point of being in a DB scheme. You just get the benefit. That is what is so wonderful about them. Advice rather than guidance is extremely expensive. The idea that a free, open-ended offer of providing advice should be made needs to be looked at extremely carefully. We have the slight difficulty here in that I am replying to the proposals of the noble Lord, Lord Palmer of Childs Hill, before he has made them, but I have to get my questions in first, and maybe he will comment on that point.

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[Baroness Noakes (Con)]

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

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

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

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


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

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

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

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

[Lord Fuller (Con)]

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

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

[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords who have spoken on these amendments to Clause 10. Having previously set out the Government’s policy intent and the context in which these reforms are being brought forward, I start with the clause stand part notice tabled by the noble Viscount, Lord Younger. As he has made clear, it seeks to remove Clause 10 from the Bill as a means of probing the rationale for setting out the conditions attached to surplus release in regulations rather than in the Bill. It is a helpful opportunity to explain the scope and conditions of the powers and why Clause 10 is structured as it is.

The powers in the Bill provide a framework that we think strikes the right balance between scrutiny and practicality, enabling Parliament to oversee policy development while allowing essential regulations to be made in a timely and appropriate way. It clearly sets out the policy decisions and parameters within which the delegated powers must operate. As the noble Viscount has acknowledged, pensions legislation is inherently technical, and much of the practical delivery sits outside government, with schemes, trustees, providers and regulators applying the rules in the real-world conditions. In pensions legislation, it has long been regarded as good lawmaking practice to set clear policy directions and statutory boundaries in primary legislation, while leaving detailed operational rules to regulations, particularly those that can be updated as markets and economic conditions change and scheme structures evolve, so that the system continues to work effectively over time.

In particular, Clause 10 broadly retains the approach taken by the Pensions Act 1995, which sets out overarching conditions for surplus payments in primary legislation while leaving detailed requirements to regulations. New subsection (2B) sets out the requirements that serve to protect members that must be set out in regulations before trustees can pay a surplus to the employer—namely, before a trustee can agree to release surplus, they will be required to receive actuarial certification that the scheme meets a prudent funding threshold, and members must be notified before surplus is released. The funding threshold will be set out in regulations, which we will consult on. We have set out our intention and we have said that we are minded that surplus release will be permitted only where a scheme is fully funded at low dependency. That is a robust and prudent threshold which aligns with the existing rules for scheme funding and aims to ensure that, by the time the scheme is in significant maturity, it is largely independent of the employer.

New subsection (2C) then provides the ability to introduce additional regulations aimed at further enhancing member protection when considered appropriate. Specifically, new subsection (2C)(a) allows flexibility for regulations to be made to introduce further conditions that must be met before making surplus payments. That is intended, for example, if new circumstances arise from unforeseen market conditions. Crucially, as I have said, the Bill ensures that member protection is at the heart of our reforms. Decisions to release surplus remain subject to trustee discretion, taking into account the specific circumstances of the scheme and its employer. Superfunds will be subject to their own regime for profit extraction.

Amendment 37, tabled by the noble Viscount, Lord Thurso, seeks to retain a statutory requirement that any surplus release be in the interests of members. I am glad to have the opportunity to explain our proposed change in this respect. We have heard from a cross-section of industry, including trustees and advisers, that the current legislation, at Section 37(3)(d) of the Pensions Act 1995, requiring that the release of surplus be in the interests of members, is perceived by trustees as a barrier because they are not certain how that test is reconciled with their existing fiduciary duties. We believe that retaining the status quo in the new environment could hamper trustee decision-making. By amending this section, we want to put it beyond doubt for trustees that they are not subject to any additional tests beyond their existing clear duties of acting in the interests of scheme beneficiaries.

I turn to Amendments 31 and 43, which seek to clarify why the power to make regulations governing the release of surplus is affirmative only on first use. As the Committee may know, currently, only the negative procedure applies to the making of surplus regulations. However, in this Bill, the power to make the initial surplus release regulations is affirmative, giving Parliament the opportunity to review and scrutinise the draft regulations before they are made. We believe that this strikes the appropriate balance. The new regime set out in Clause 10 contains new provisions for the core safeguards of the existing statutory regime; these are aligned with the existing legislation while providing greater flexibility to amend the regime in response to changing market, and other, conditions.

Amendments 35 and 36 seek both to prescribe the ways in which members are notified around surplus release and to require that trade unions representing members also be notified. I regret to say that I am about to disappoint my noble friend Lord Davies again, for which I apologise. The Government have been clear: we will maintain a requirement for trustees to notify members of surplus release as a condition of any payment to the employer. We are confident that the current requirement for three months’ notification to members of the intent to release surplus works well.

However, there are different ways in which surplus will be released to employers and members. Stakeholder feedback indicates that some sponsoring employers would be interested in receiving scheme surplus as a one-off lump sum, but others might be interested in receiving surplus in instalments—once a year for 10 years, say. We want to make sure that the requirements in legislation around the notification of members before surplus release work for all types of surplus release. We would want to consider the relative merits of trustees notifying their members of each payment from the scheme, for example, versus trustees notifying their members of a planned schedule of payments from the scheme over several years. Placing the conditions around notification in regulations will provide an opportunity for the Government to consult and take industry feedback into account, to ensure the right balance between protection for members and flexibility for employers.

I understand the reason behind my noble friend Lord Davies’s amendment, which would require representative trade unions to be notified. They can play an important role in helping members to understand pension changes. However, we are not persuaded of the benefit of an additional requirement on schemes. Members—and, indeed, employers—may well engage with trade unions in relation to surplus payments; we just do not feel that a legislative requirement to do so is warranted. The points about the role of trustees, in relation to acting in the interests of members in these decisions, were well made.

Amendment 34 would require member consultation before surplus is released. I understand the desire of the noble Viscount, Lord Thurso, to ensure that members are protected. The Government’s view is that members absolutely need to be notified in advance, but the key to member protection lies in the duty on scheme trustees to act in their interests. Since trustees must take those interests into account when considering surplus release, we do not think that a legislative requirement to consult is proportionate.

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[Lord Davies of Brixton (Lab)]

I find myself in some difficulty in speaking to these amendments. First, although I declared my interests as a fellow of the Institute of Actuaries at the beginning of Committee, it is appropriate, in accordance with practice where there is a specific interest involved in the amendment, to declare it again. I am not a practising actuary at the moment, but I could be, and this would bear directly on my ability to earn money.

I support what I think is behind the proposals being made by the noble Baroness, Lady Altmann. We should consider ways of strengthening trustee consideration of the way forward, whatever it is. More specifically, an automatic response to go to annuitisation is clearly wrong. If trustees do not consider the other options, they are not acting properly and are not discharging their fiduciary responsibility. The suggestion is that this is happening too often at the moment.

Broadly speaking, I agree that there has been a rush to buy out, but that has happened for a wide variety of reasons, of which I would suggest that the presence or absence of particular actuarial advice is only a small part. To overemphasise this part without looking at what else is going on is a problem. Trustees should be supported to make better decisions, and part of that process is the actuarial report that they produce from their scheme actuary.

Just to provide a bit of background, we need to understand that actuarial regulation is just a little confusing. We have two regulators for actuaries. There is the institute itself, which is responsible for professional standards—“you should not bring shame on the profession and you should make sure that you know what you are talking about before you provide advice”. All that side of things is handled by the profession itself. Technical standards, such as what should be in a valuation report, are the responsibility of the Financial Reporting Council, a completely separate body that is not part of the actuarial profession. Although there are actuaries involved in the work of the FRC, it is not an actuarial body but an independent body. I will not go into the history, but, for whatever reason, it was decided to take that technical supervision away from the institute and place it with the Financial Reporting Council.

The particular standard referred to here is the technical actuarial standard, or TAS 300. That does not mean that there has been a previous 299; it starts at 300. There is a 100, and there are other numbered standards that come and go. This is the one that relates to advice to trustees, not just for valuation purposes but for calculating what basis the fund should use to calculate transfer values, commutation rates and so on. So there is this technical standard, set by an independent body.

I understand that that standard is controversial, and the noble Baroness, Lady Altmann, reflected some of that controversy in her speech. It would be fair to say that views differ. It is also important to understand that the current edition of TAS 300 was issued after extensive consultation last July and came into effect only on 1 November last year. It is always open to debate what the standard should say. My concern is that that standard is intended for actuaries, to tell them how they should provide actuarial advice to trustees. Its role is not to tell trustees how to behave. The problem, which I recognise, and which has been suggested as a reason for these amendments, is that trustees are not behaving properly—or it could be that they are being ill-advised by actuaries. That is not something that I am going to endorse but, if that is true, there is a disciplinary process under the Financial Reporting Council. Again, that is not part of the actuarial profession; it is a separate disciplinary process for anyone identified as not complying with the TAS. The issue can be raised with the FRC, and it may well be that it should have been raised more often, because that is really the first port of call if you think that the advice is wrong. It is not to put it into a piece of legislation.

I am very sorry to find myself in contention with the noble Baroness but, if trustees need to be regulated, it is not the job of the Financial Reporting Council to do it. It is not its job to tell trustees how to do their job. That is an issue that I am sure that we could debate extensively. I recognise the problem, but I am not convinced that we have been presented with the correct answer.

[Lord Fuller (Con)]

My Lords, I know that this is a technical amendment, and in the last group I disagreed with the noble Baroness, Lady Altmann, but on this one I totally agree with her analysis, particularly her identification of the groupthink that trustees suffer, bamboozled and pressured by the FCA, TPR and actuaries, and sometimes investment managers, to be overly risk-averse in some of their investments. In particular, there is a drive—it is explained that it is prudential and that the regulations require it, which means that we need to look at the regulations—for pension funds to apply an increasing proportion of their assets to liability-driven investments.

If your scheme happens to be in deficit, these LDIs will anchor you in deficit for the rest of time, because that is how they work. That is wrong, because the trustees have no control over what the interest rate, discount rate or gilt rate might be. They can adjust—plus or minus, in the case of gilts—but, ultimately, liabilities are driven by the gilt rates. They have no control over that, but they do have control over how the assets in their scheme are invested for the greatest return.

However, that is not how their schemes are valued at the triennial, which is valued on the gilt rate. As the noble Baroness, Lady Altmann, said, the value of their assets is depressed by virtue of being in a scheme. As people buy out and are forced to buy out—Amendment 33A contemplates what happens when you approach a buyout—schemes are being mugged. Members are being short-changed by this artificial diminution in the value of the assets, which at the moment pass into the hands of an insurance company, as the noble Baroness, Lady Altmann, said. No longer impeded, weighed down or anchored from being in a scheme, they can be let rip. The uplift happens quickly, and there is an immediate profit to the insurance company.

It is perverse that the entire regulatory advisory industry is mandating schemes to go into overly prudent investment products, almost suckering them down so that they have to pay a premium to be bought out, and all the profits go somewhere else. That is not prudence; it is short-changing the members of the schemes and diverting huge amounts of productive capital for the engine of our economy and the private businesses that generate wealth and pay taxes.

Regarding Amendment 33A, it is really important that trustees have imagination and are encouraged to think as widely as they possibly can, asking, “What does this mean? Are we in the appropriate asset mix? Should we be rammed into LDIs because we are chasing a deficit, or should we be invested in growth to pay benefits for members?” That is the dilemma, and this amendment shines a light on it almost for the first time in the Bill. Trustees in as many schemes as I can think of are being misdirected, ostensibly to reduce risks. But they are not reducing risks; they are reducing the sustainability of their schemes and their ability to pay for today’s members, including, most importantly, the youngest members of their scheme, who have the longest to go to retirement. Following the dismal, dead hand of these regulators is prejudicing the ability of these schemes to pay out for their youngest members in 20, 30 or 40 years’ time.

I notice that the noble Lord, Lord Willetts, is not in his place, but he made this point in a previous group. This is the generational problem that we have, between the eldest and the youngest people in the scheme. We need to strengthen and empower our trustees to play their roles simply and straightforwardly and not as though they are not competent or do not feel confident to resist the so-called advice they are getting from regulators, which are acting in groupthink and not in the scheme’s best interest, or the interests of either members or companies.