Pension Schemes Bill

Lord Vaux of Harrowden Excerpts

Thursday 19th March 2026 Lords Chamber

[Lord Vaux of Harrowden (CB)]

My Lords, when you are trying to solve a problem, it is best to try to understand the root causes of the problem and then resolve those causes—diagnose and treat the disease, not the symptoms. That is why I have repeatedly asked the Minister why she believes UK pension funds have been so reluctant to invest in so-called UK productive assets. I know she gets frustrated with me asking this question regularly, but she has never answered it. She always responds, as she did again on 11 March, by explaining what the symptom is: that UK pension funds invest a much lower proportion in UK productive assets than international comparators. She is right, and, as noble the noble Baroness, Lady Altmann, just pointed out, I do not think any of us disagree with that, but that does not answer the fundamental question. Why are UK assets apparently so unattractive to UK pension funds? What are the barriers to investment that we need to remove?

The Minister has often told us that the mandation power is just a backstop to the voluntary Mansion House agreement and probably will not be used. That is precisely the problem. It does not need to be used; its very existence is, in effect, mandation. As the Times pointed out so clearly on Saturday:

“A voluntary agreement … ceases to be voluntary … if it is underwritten by the promise of compulsion”.


Even if the power is not used, it still creates a fiduciary duty problem: the trustees are still, in effect, being forced to act in a way that they might not believe to be in the best interests of members, but they will not even have the defence of ,“We were only following orders”, if it turns out badly. The Minister has never given an adequate response to the question of who should bear the risk if the government-mandated assets result in poor performance.

On 11 March, the Minister said:

“This power does not direct schemes into specific assets or projects. What it does is set a broad framework aligned with the industry’s own voluntary commitments under the Mansion House Accord. Trustees retain full discretion over individual investment selection and the balance between asset classes”.—[Official Report, 11/3/26; col. 279.]


But that is not what the Bill says. What it actually does is give the Government power to require that an undefined and unlimited percentage is invested in qualifying assets, which are defined as

“an asset of a prescribed description”.

I stress that it says “an asset”, not just a class of assets.

There is no limit in the Bill on what those assets can be, except that they cannot be listed on a recognised exchange. Contrary to what the Minister has told us, specific assets or projects can be prescribed. Nor does the Bill require them to be in the UK; they can be anywhere in the world. The first regulations to define the asset allocation are subject to the affirmative procedure, but after that, any future Government can prescribe any asset, anywhere in the world, on any percentage, under the negative procedure.

As the noble Baroness, Lady Bowles, pointed out, a scheme can apply for an exemption, but it is an incredibly high hurdle. A scheme must prove that the asset allocation requirement would cause

“material financial detriment to members”.

That is extraordinary—not just that it is “not in members’ interests”, but “material financial detriment”.

Contrary to the Minister’s assurances, this unlimited mandation power can be used to direct trustees to invest in classes of assets or specific assets. It fundamentally undermines the fiduciary duty of pension trustees. This dangerous power must be removed from the Bill. Instead, the Government should, as I said at the beginning, focus their efforts on identifying and removing the underlying barriers to UK investment.

[Lord Johnson of Lainston (Con)]

My Lords, I speak in this mini-debate in full support of this amendment. I am extremely concerned about the principle of government directing any form of investment. I do not think any Government have a strong record on making investments, and to compel pension funds to make such investments would be incredibly dangerous. As the noble Lord, Lord Vaux of Harrowden, has so wisely said, we are setting ourselves a very dangerous precedent here that we will all—as people who want to retire at some point—live to regret.

My second point is a technical one, which the noble Lord, Lord Vaux, touched on but is worth exploring slightly further: namely, the description of what a directed investment is. What is a UK investment—the sort of thing we would be told we have to invest in? Is it a company where the headquarters is domiciled in London, or that employs a certain number of people, or that does a certain thing in the UK specifically related to certain asset classes?

The reality is that you will have enormous problems if you try to force money into certain parts of the economy. You will get crowding out and excess price. An example could be to force these pension funds to invest in infrastructure. You would have a crowding out of other investments into infrastructure projects that would be mispriced, and that would create problems when it came to trying to generate returns. We should be very careful about that. Prescription over investment is one of the worst things a Government can possibly do, and I think we should acknowledge that in this House.

As has been mentioned, why are we talking about forcing people to buy things that other people do not wish to buy when we should be trying to create an economy that people want to invest in? I call upon the Minister to put that as the priority, rather than trying to force people to do things they do not wish to do, which will cause enormous problems in the long term.

--- Later in debate ---

[Baroness Sherlock (Lab)]

It depends on how the market is structured. The decision-makers here are employers. Let us look at what happened under the Mansion House Compact, the predecessor of the accord, brokered under the previous Government. The words were that

“‘too much focus on cost’ remains the key barrier”.

In other words, we have a market in the employment sector where the focus has been for too long on cost, not value. The noble Lord shakes his head, but we have heard this from around the House. Indeed, in Committee many people who do not agree with this power accepted the underlying diagnosis, and that is the basis on which the Government are proceeding.

The Government want the industry to invest in the full range of assets. One of the reasons, I suspect, that the Mansion House Accord is moving together is to make sure that it is clear that the market is going in that direction. That is the problem, we think: there is a risk of a failure of collective action. The accord is a commitment. The power gives providers assurance that the whole market will move so that they will not then be in a position where somebody faces a competitive advantage by reverting back to focusing on cost and not on value.

[Lord Vaux of Harrowden (CB)]

As I understand the noble Baroness’s argument, the focus on cost is the problem. This Bill solves that with the value-for-money framework, so why do we also need the mandation power?

[Baroness Sherlock (Lab)]

This all comes as a package. A lot of attention is focused on this particular reserve power, but in fact it is the combination of all the elements of the Bill that we discussed in some detail in Committee over recent weeks: the question of the investment in scale, the need for the value-for-money framework, the need for the option to consolidate small pots. All these things come together to create the conditions in which this will work. This reserve power is to address a particular question, the risk of collective failure. I fully accept that the noble Lord does not agree with it, but I want at least to have the opportunity to make the argument as to why the Government are proposing to do it in this way.

The Mansion House Accord represents a voluntary commitment by 17 of the UK’s largest DC pension providers to invest 10% of their default funds in private markets, at least half of that in the UK, by 2030. We continue to be encouraged by progress, but the risk of a collective action failure in this market has long been recognised. As I said, individual providers face strong commercial incentives to keep costs low and to defer action until others move first. The reserve power exists as a backstop to ensure that if voluntary progress stalls, the Government have the means to act. Its presence in the Bill sends a clear signal that the commitment to change is underpinned by more than good intentions, and it helps to give each provider confidence that the rest of the market will move too.

At earlier stages we discussed a range of issues around safeguards and other things, which I thought would come up in later groups but that will obviously depend on what happens next. First, the power is time limited. The noble Baroness, Lady Stedman-Scott, thinks this power will outlive us all. I hope it does not, because if it has not been used by the end of 2035 it falls away, so I very much hope that it will not outlive the noble Baroness and me, although obviously we are in the Lord’s hands: should we be called home, what can we do? If it has not been used by 2035, it falls away. If it has been used, any percentage requirements in place cannot be increased beyond that date.

Secondly, the Bill establishes a savers’ interest test. Pension providers will be able to apply for an exemption from the targets where they can show that meeting them would cause material financial detriment to their members. Thirdly, the Government must consult and publish a report on the expected impacts, both on savers and on growth, before exercising the power for the first time, and a post-implementation review must follow within five years. Finally, the regulations implementing any requirements will be subject to the affirmative procedure, so Parliament would have its say.

I will respond to some specific questions. There was a question about how to define UK assets. This would be done in regulations were the power ever to be used. Consideration would have to be given to the characteristics of different asset classes. The Mansion House Accord is accompanied by some high-level guidance on how a UK investment should be identified within each of the different asset classes. That asset class by asset class approach to establishing the location is also the one that the FCA has taken as it consults on the upcoming value-for-money disclosure requirements, which will require firms to provide UK overseas asset allocation split. If the Government ever came to exercise these powers, we would expect similarly to take an asset class by asset class approach.

Questions were raised about a future Government and how this might be used. The noble Baroness, Lady Coffey, prayed in aid the European Convention on Human Rights, and I commend her on that. First, on the question on property rights, this applies to default schemes and people can choose to opt out, but she raises a relevant point. Obviously I hope there will never be one, but if there ever were a Government of a different persuasion, were they to seek to use it in a way beyond what is here, I think they would run into problems. This Government have made it quite clear, in Committee in this House and in the other House, that the purpose of the power is to assure good outcomes for savers and the economy, recognising diversification benefits and the potential for higher returns. It is not an instrument for channelling investment into pet projects or specific companies.

The noble Lord, Lord Vaux, quoted me on this point. It was marvellous—“What he said” is what I would say. That is the Government’s view, and I have spoken about the various safeguards, but even if a future Government wanted to use these powers to do something either much broader or much more specific, of course they would have to abide by established principles of public law, including the requirement for Ministers to act rationally, ensuring procedural fairness and compatibility with ECHR rights when making secondary legislation.

The Government are under no illusions about the significance of this power. It is a substantial intervention and, if we ever found the need to use it, we would have to proceed with great care. I understand the strength of feeling on this. These powers, alongside the scale provisions, the value-for-money framework and the consolidation measures, are a package. Together, they are designed to deliver a step change in outcomes for millions of pension savers. If we remove the reserve power, we remove the mechanism that gives the rest of this framework its teeth when it comes to investment diversification.

For a long time, successive Governments have recognised the need to channel pension capital into productive assets. Auto-enrolment has brought millions more people into saving. We now have a responsibility to ensure that those savings are put to work properly to deliver better long-term returns. But the question before us is whether the Bill should contain the backstop at all. In the Government’s view, the answer is yes. Without it, the voluntary commitments made by the industry would rest on good faith alone. The experience of previous attempts to shift investment patterns in this market suggest that that, on its own, may not be enough. For those reasons, I respectfully ask the noble Baroness not to press her amendment.