Pension Schemes Bill

Lord Wood of Anfield Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

[Lord Wood of Anfield (Lab)]

My Lords, it is a pleasure and an honour to follow the noble Baroness, Lady White, and her excellent maiden speech. I congratulate her on her appointment and her debut outing here in the Chamber and say how much all of us look forward to her future contributions. I am sure her family, not for the first time, is extremely proud of her today.

On that subject, if noble Lords ever worry about the limited breadth of their professional experience, I advise them not to look at the noble Baroness’s CV. In her extraordinary career so far, she has—strap in for a minute—studied at the University of Cambridge and University College London. She worked at Her Majesty’s Treasury twice, at the British embassy in Washington, as a senior official at Downing Street, at the World Bank, at the Department for International Development, at the Ministry of Justice—I have not finished yet—and at the Department for Work and Pensions, before becoming the third chief executive of Ofcom and then the sixth chair of the John Lewis Partnership. She then became the chair of Frontier Economics and a senior managing director at a Canadian pension fund. That is exhausting just to read. I think I am right in saying, however, that her first job after studying was in a church in Birmingham. She has spoken publicly and movingly about the importance of faith to her and her family.

If noble Lords talk to former colleagues of the noble Baroness, Lady White, some of whom are here today, they will find universal agreement that she is someone who faces professional challenges in her career with calmness, humanity to those around her, sound judgment, expertise and a warm inviting intelligence that most of us can only admire. She once told an interviewer:

“You often learn more from things that did not quite go to plan than things that did”.


As a former adviser to Gordon Brown for many years, alongside my noble friend the Minister, I can only endorse those as the wisest of words. We are truly fortunate to have the noble Baroness, Lady White, in our midst, and I am sure everyone agrees that this House’s work will be the richer for her wide-ranging experience, expertise and generosity.

Like the noble Baroness, I strongly welcome aspects of this Bill—most of it, in my case—and the way in which it has been welcomed across the political divide, almost. It will make a positive difference to savers, increasing the value of their savings through pot consolidation and driving greater scale, improving the range of guided retirement products and strengthening the value for money framework—all issues on which other noble Lords have spoken with much greater expertise than I can.

I want to focus my comments on the ambition in this Bill to make UK pension funds a greater driver of investment in UK infrastructure companies and communities, as the noble Baroness, Lady White, said. There is a wide consensus, whatever your view on the measures in the Bill, that we have a big problem in this country with the interface between pension funds as value generators for their clients and their investment contribution to the UK’s real economy.

The statistic has been cited a number of times that, 25 years ago, UK pension funds allocated half their assets to UK equities. That figure is now under 5%. This alarming fall is not for want of scale or size, as many colleagues have mentioned. The UK has, as the noble Baroness, Lady Altmann, remarked, the second largest pool of pension capital in the world. Indeed, UK DC pension assets are set to grow from around £500 billion in 2021 to £1 trillion by 2030. That is a 100% increase in under a decade, with growth predicted to accelerate further after that date. Yet DC pension funds have only 9% of their overall equity allocation in the UK. The global average is 30%. Across all types of domestic pension funds’ equity portfolios, UK equities make up 15% of the total. In Australia, the figure for domestic equities is 52%; in Japan, it is 48%.

We know a lot about why we have become such a worrying outlier in this respect. The £1.5 trillion corporate DB sector has been derisking for some time, as it has approached meeting its liabilities. At the same time, DB schemes have pivoted, for reasons of value generation, from a UK-biased equity approach 30 years ago or so to a global market cap approach in the past 20 years.

One side effect of this move is that the proportion of overseas investors in UK equities has risen to well over 50%, and, because of scarce domestic capital, UK companies have therefore become more reliant on debt for financing expansion. This combination of a growing reliance on debt finance and foreign capital is a matter of concern. As the noble Baroness, Lady Altmann, has written, it is a matter of concern from the point of view of national economic security. There is no simple response to this, but this Bill takes some first important steps to reconfiguring the structure of the industry, the regulatory environment that fund managers face and the incentives that confront them.

One key challenge is to create larger, more powerful and more strategic investment capacity. The last Government made welcome progress on this, and the current Chancellor’s Mansion House Accord, as many colleagues have said, has built further on that. The Bill builds on that accord by gripping the issue of generating scale and simplicity where there is currently too much fragmentation. Like other noble Lords, I welcome the LGPS consolidation, strengthening asset pooling and improving administering authorities’ governance structures. I welcome the requirement for master trusts to reach a minimum size of £25 billion, but I share the concern of the noble Baroness, Lady Altmann, and echo her question to the Minister to assure us that this threshold will not be to the detriment of innovation and new entrants, and to tell us how these two objectives that we all share can be reconciled. The noble Baroness, Lady Penn, also mentioned this.

Lastly, there is the issue of pension mandation, undoubtedly the most contentious issue. It raises issues about the tension between government policy, regulation and fiduciary duties. Again, whatever your view on mandation, our starting point has to be that we have a real problem on our hands here—and the public agrees. The noble Lord, Lord Willetts, mentioned data from a survey on this showing that two-thirds of all UK savers think pension funds should increase investment in UK companies, even if returns are lower. Why do we not listen to them?

The Government in this Bill are taking a reserve power to mandate pension fund investment, but are accompanying it with ministerial protestations that they do not intend to use that power. At the very least, I thank the Government for giving me an excellent case study that I can present for the coming years when I teach my students in the real-world use of game theory. More seriously, I think that I understand the logic of taking the power to do something when you have no intention of using it. The spectre of a big stick locked away in a cupboard, but still on view, is designed to have an incentivising effect on fund managers to reorient their strategies to start to take UK investment much more seriously. Critics might say you cannot have your big stick and eat it, to mix my metaphors—that you cannot have a power and then credibly say that it will never be used, or, to flip it the other way round, that you cannot hope that taking the power will have a chastening effect on the industry while also saying that you will never use it.

My own explanation for what the Government are doing here—I am sure that my friend the Minister will have a better explanation—is that it is a strategy based on sequencing the necessary changes. So, first, the fund industry needs to be defragmented, consolidated and scaled up, which this Bill is primarily about. Secondly, collective reorientation of the UK pension fund industry is incentivised through these reforms but also the accompanying reserve power. Thirdly, alongside the strategic capacity that is being built up, the Government know that they have work to do to make investment in UK equities and non-listed destinations more attractive, which involves lots of measures. By the way, one down payment on these measures that is to be warmly welcomed is the Chancellor’s decision in the Budget to introduce a three-year stamp duty holiday for new listings on the stock exchange. We will see whether this works. For my own part, I am a subscriber to the view of the noble Baroness, Lady Altmann, that 25% of new contributions should be invested in UK public markets.

This Bill is a building block in the attempt to make progress through what we might think of as pressured voluntarism rather than straightforward compulsion, and I welcome that very much. However, we need to be clear that this is a change that, from a UK plc point of view and a public finances and public services point of view, must happen one way or the other.

Youth Unemployment

Lord Wood of Anfield Excerpts

Thursday 14th June 2012 Lords Chamber

[Lord Wood of Anfield]

My Lords, the current downturn has now lasted longer than not only the recession and slow recovery of the early Thatcher years but the great depression of the 1930s. In both these previous cases, GDP—national growth—had returned to its pre-recession level by the 50th month, just over four years after the onset of the decline. However, today, in June 2012, UK GDP is still more than 4% below the level at the beginning of 2008. As well as the short-term impact on living standards and jobs, this depression, which is what I think it is, will create numerous problems, as we all know, for public finances, living standards, skills and business prospects. But surely primary among the concerns that we all have for the legacy impact of this depression is the effect on youth unemployment.

There is a traditional pattern to the debate about unemployment. Those who prioritise economic efficiency tend to caricature those with a concern about the human cost and the social consequences of unemployment as utopian bleeding hearts who do not have the interests of a strong, dynamic economy to the fore. Meanwhile, those concerned with the unemployed and their life chances tend to caricature their opponents as heartless Dickensians putting the interests of business above the interests of working people and their families. If there is a choice between caricatures, noble Lords will not be surprised to hear that my own sympathies tend to the latter, but both views strangely converge on a separation between the economic dimension of unemployment and the social and personal dimension.

I do not believe that this separation makes sense because the evidence strongly confirms that prolonged periods of unemployment not only have severe and long-term consequences for the individuals affected but are very bad for our economy as well. Labour mobility, including occasional transitional phases of unemployment, is of course a necessary lubricant to structural change in a dynamic economy, but seeing large-scale and sustained unemployment, particularly among young people, as a necessary price for the rebalancing of the economy, raising productivity, containing inflation or incentivising greater effort is just plain wrong. It is an economic mistake, it is not supported by evidence, and it is not just prompted by a lack of compassion.

Other people in this debate have talked, and I am sure will talk, about the considerable human and social cost of youth unemployment. For example, there is now overwhelming evidence that prolonged spells of worklessness are linked to significant increases in rates of suicide, cancer and divorce. There is also a transmission effect across generations; we know that unemployment among adults has been shown to have an effect in reducing the earnings of their children when they enter the workforce later. These considerations alone should give us cause to prioritise youth unemployment more than I fear is being done at the moment, whether in good or bad economic times, but I would like to spend three or four minutes looking at the economic effects of unemployment, which are often cited, wrongly I think, in mitigation against the social and personal effects.

From a macroeconomic point of view, the current economic crisis is a curiosity on the unemployment front because the labour market performed relatively well during the initial contraction in 2008-09. In that period, the recession inflicted a fall in GDP of about 6%, which was far worse than that in the recessions of the 1980s and 1990s, with a full six quarters of falling output. However, whereas in the previous two recessions the fall in employment was broadly in line with the fall in GDP, in this recession, the fall in employment has been much less, at around 2%.

The worrying side of unemployment is this: although the rise in unemployment has been less than might have been expected initially, large-scale unemployment has persisted far longer than previous recessions would lead you to expect. In the 1990s, Britain came out of recession at the end of 1991 and unemployment started to fall six quarters later. However, in this downturn we came out of recession in autumn 2009, but nine quarters later unemployment had continued to rise, to 8.4%. This was even before Britain entered a double-dip recession.

Unemployment has risen among all age groups, especially in the past 18 months. This is the result not just of economic stagnation but of policy change. The youth labour market has performed particularly badly in the most recent downturn, rising from 14% to 20%, then stabilising in the middle of last year, before deteriorating further and rising to 22%.

What are the economic effects of this? One consequence of prolonged high levels of unemployment is an increase in the rate of structural unemployment in an economy. We know that shocks that increase unemployment affect the structural rate of unemployment more the longer they persist.

Secondly, far from promoting more efficient labour markets, workers with a history of unemployment—in young people’s case, with little or no history of employment—are often offered less secure jobs because they lose valuable work experience or skills while they are unemployed, or because their unemployment experience is seen by employers as a signal that they are not good enough or are low-productivity workers. Youth unemployment takes people off the ladder of skill and career progression, or away from means that they can never get on to it.

Thirdly, economic evidence suggests that unemployed workers may lower the wages that they think they can get as time passes and accept poorer-quality jobs that are more likely to be eliminated, and so are more likely to experience further unemployment. Repeat spells of unemployment go hand in hand with jobs that are low paid and unstable.

Fourthly, we know that entry into the working population at the start of a recession is more than just bad luck; the longer you spend unemployed or economically inactive in your youth, the greater the prospect of longer periods of unemployment later in life. On average, each one of the quarter of a million or so young people who have currently been unemployed for more than a year will spend around a further year in unemployment and a further year in economic inactivity in the near future.

Lastly, we also know that a wage effect casts a shadow into young people's futures. As well as reducing employment prospects, youth unemployment means lower future wages than you would otherwise expect. Research suggests that someone who has had a spell of unemployment of more than a year in their early years of work will have average pay at the age of 42 that is more than £7,000 less than that of someone who has not suffered unemployment.

These considerations destroy the idea that what may be painful for individuals is beneficial for our society or economy, that the short-term transition impact of unemployment may somehow be a necessary adjustment for long-term efficiency, and that what is suboptimal from a social point of view is optimal from an economic point of view. It is depressing to hear people argue that youth unemployment is down to young people’s reluctance to take jobs. That is a misunderstanding of the economics of the moment. I find it more depressing still to hear the argument that, when it comes to unemployment, there is a choice between what is in our collective economic interest and what is in the interests of the more vulnerable in our labour market. Unemployment is not medicine; it is a sign that something is going wrong.