Pension Schemes Bill Debate
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Baroness Altmann
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(1 day, 7 hours ago)
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Lord Wigley (PC)
My Lords, I support Amendment 203ZB, in the name of the noble Lord, Lord Davies of Brixton. I shall also address the government amendments in this group. I have signed the noble Lord’s Amendment 203, which we will come to later, recognising that he has professional expertise far greater than mine in dealing with these matters and believing that he comes to these issues, as I am certain he does, from a position of recognising that one group of workers in particular—those of Allied Steel and Wire in Cardiff—were extremely badly treated over 20 years ago, about which I spoke earlier in our deliberations.
I listened with interest and concern to the explanation given by the Minister for introducing these amendments, and I am far from certain as to whether, when enacted, the discretion to which she referred will give former employees of Allied Steel and Wire any of the redress which they seek for the pension loss they suffered with regard to their pre-1997 employment. Are we today recognising the fairness of their claim but not providing any vehicle by which it can, in fact, be met? That is my fear.
In Committee in the other place, my Plaid Cymru colleague, Ann Davies MP, introduced two amendments to provide indexation for compensation under FAS and the PPF to cover both pre-1997 and post-1997 service, and to reimburse members for the annual increase they should have received. The Government rejected those amendments, saying they would not work. Ann Davies MP came back on Report proposing a new clause to provide indexation. The Government rejected that clause so, in considering these and possibly later amendments, I ask the Minister whether their combined effect will do anything at all to give the pre-1997 pensions full indexation and not limit them to the 2.5% cap which Ministers supported in the other place? Will they do anything to reimburse those members for the annual increases which they never received?
Baroness Altmann (Non-Afl)
My Lords, I support and have added my name to the amendment from the noble Lord, Lord Davies. I support all his remarks, especially on the only excuse for not recognising that people need pre-1997 indexation going forward. There is a wrong that is being corrected; therefore, that wrong probably applies even more to benefits from the past. One of the reasons why I say “even more so” is because the members who have the most pre-1997 accrual are the oldest—by definition, they must be. They have much less time left to live and many of them have, sadly, already passed away. Therefore, to right this wrong by promising people money in future that they may never see, or will see almost none of, does not seem a solid way of righting a wrong.
I understand—I will go through this in more detail in the next group—that the Financial Assistance Scheme, for example, is supposedly funded by public money, while the PPF itself and employer contributions, in the form of the levy, provides the money for PPF compensation, but £2 billion from the scheme was transferred to the public purse. Thankfully, when we were trying to improve the Financial Assistance Scheme in 2005, Andrew Young recommended stopping annuity purchase, which had been happening and, unfortunately, transferred much of the money to insurers rather than putting it towards the Government to pay out over time. Nevertheless, the Financial Assistance Scheme itself represents some of the biggest losers and the ones with the most pre-1997 accrual.
Therefore, I urge the Government to recognise that the cost of the requirements in the amendment from the noble Lord, Lord Davies, are easily affordable from the PPF reserve—£14.5 billion is available. The cost estimate for this retrospective addition to the pre-1997 accruals that were not paid in terms of inflation uplifts could be around £500 million out of the £14.5 billion, depending on how the arrears are paid. I would be grateful to the Minister if she could confirm some of the Government’s estimates for what this would be; I have looked at the PPF’s estimates.
I add that the Financial Assistance Scheme does not only help those who affected by insolvency. The European court case was about insolvency, but the MFR protected employers who just wanted to walk away from their schemes before the law changed. Paying in only the MFR was hopelessly inadequate to afford the pensions. There was a brilliant campaign by the unions that went to the European court, and the Government had a great fear that they would lose that. Prior to that, we had an appeal by the workers of Allied Steel and Wire and many of the other schemes to the Pensions Ombudsman, who found in their favour and against the Government, and to the Public Accounts Select Committee. Then we had to go to the High Court, taking a case against the Government, and we won. We also went to the Court of Appeal, taking a case against the Government, and we won on behalf of those whose schemes had failed, whether the employers were insolvent or not, which means that they are all now included.
Even so, the Financial Assistance Scheme and the PPF have not recognised the pre-1997 inflation losses that have left many of these members with half their pension, or even less in some cases. I hope that the Government will look favourably on the amendment. I welcome it, and I am very grateful to the Minister for the recognition that we need to do something—there may be further consideration of that; we will come back to it in subsequent groups—to recompense for the losses of the past.
Lord Palmer of Childs Hill (LD)
My Lords, I wish only to say that I agree with the comments from the noble Baroness, Lady Altmann, and the lengthy exposition from the noble Lord, Lord Davies. I give them my support.
This group deals with technical amendments in the main, but they go to a question of basic fairness for pensioners whose schemes have failed. There are eight amendments in the Minister’s name, which shows that Bills can be amended, because the Government are amending their own Bill. Their amendments are no less important than those proposed on this side of the Room or those proposed by the noble Lord, Lord Davies, on the other.
The Government have accepted the principle of restoring inflation protection for pre-1997 service in the PPF and the FAS. These amendments ensure that the policy operates as intended, covering cases where the schemes technically add indexation rules that did not apply to all pre-1997 service.
The concern here is consistency and completeness. As has been said by other speakers, without these clarifications, some pensions will fall through the cracks due to historic scheme design quirks, rather than any distinction of principle. Any schemes that were and will be proposed will have quirks that are going to be found out in due course. I ask the Minister to confirm that the Government’s intention is to deliver equal treatment for those with equivalent service histories and that no group will be excluded because of technical anomalies.
Baroness Altmann
“(2A) After paragraph 28, insert—“Lump sum compensation
28A (1) In all cases which qualify for an increase in periodic compensation under paragraph 28(2A) to (2I), the person may also qualify for a lump sum payment or payments, the amount of which must be—(a) related to the loss of inflation protection on pre-1997 pension benefits, and(b) paid by the Pension Protection Fund out of excess reserves,in recognition of the years of pension increases that were unpaid since the failure of the pension scheme.(2) The Secretary of State may issue guidance about lump sum payments under this paragraph.””Member’s explanatory statement
This amendment seeks to make provision for lump sum payments from the Pension Protection Fund to persons who qualify for an increase in periodic compensation for pre-1997 service to compensate for unpaid increases in the years since the failure of the pension scheme.
Baroness Altmann (Non-Afl)
My Lords, the amendments in this group are designed to give the Government another way of recognising the injustice that has occurred, which their very welcome amendments recognise for members who have lost their pre-1997 inflation protection. I am trying, through this route, to give the Government a way of increasing the amounts paid to people who have lost out on pre-1997 indexation in the past without the striking costs that the Minister suggested would be involved in retrospection and arrears for everybody in the PPF and the Financial Assistance Scheme.
The method by which this could be achieved is to offer lump-sum payments which do not increase the base cost of the pension but do recognise the losses suffered in the past. I hope that the Minister and her colleagues might be able to look favourably on this suggestion, which is another way in which the Government could put right what they have already recognised is a serious wrong.
If my amendments are accepted, the Pension Protection Fund reserve could be used alongside the Government’s welcome Amendments 186 and so on in the previous group. For anyone who is going to receive the prospective inflation protection in the future, the PPF reserve will or could be used to pay a lump sum to be determined related to the losses that they have suffered. That will be a one-off, or it could be over two or three years if so desired, to recognise the past problem to help the oldest people in a practical way and to ensure that there is some modicum of fairness, particularly for those who have the most pre-1997 accrual, who, as I have said, are the oldest.
My Amendment 203ZA is the same proposal for the Financial Assistance Scheme, but subsection (3) of my proposed new clause would allow specification, in consultation with the Pension Protection Fund, as to how this will be funded. Obviously, there is a significant reserve in the Pension Protection Fund. It has written to members, suggesting that there is affordability, and the ability to pay for some element of retrospection—again, to be determined. By the way, the Minister suggested that people would get what they paid for but, of course, with a 2.5% cap on CPI increases, many of them would have paid 5% going forward. So, it is not full retrospection or prospective protection for pre-1997.
I know that the Minister is proud of what the Government are doing, and I welcome it too, but her words that it does not go as far as some affected members would want are absolutely correct. I would say that it does not go as far as some affected members deserve, in the course of an argument about fairness and justice.
Are there any government estimates for the cost of these lump-sum payments, either one-off or spread over two or three years? It is probably easier administratively to make it a one-off, so that only one payment is required. That would also need to be protected in the same way that the new payment in other schemes is protected in terms of the tax system, so that it is not treated as an income in that particular year. If the Government were minded and able to accept the principle of recognising the past in a different way from the suggestion from the noble Lord, Lord Davies, which I also support if that were possible, it would not add to the long-term costs of running the Pension Protection Fund or the Financial Assistance Scheme. It will be a one-off recognition of the past and the future liabilities would be based on the pension as proposed now.
Do the Government have estimates for any possible size of payment that would be acceptable, so that we could then work backwards to finding a lump sum that could be paid and afforded out of the PPF’s obviously significant reserve? There is far more money than is required; it is just sitting there, whereas these pensioners really need the pensions that they paid for and are getting nowhere near. I hope the Minister might be able to help, or I am happy to meet and see whether we can work through some figures that might be acceptable as a way forward to recognise the past and satisfy a number of the people who are seriously ill and may not live to next April or much beyond it and feel so aggrieved—having campaigned with me for years to help people, get the PPF started and improve the Financial Assistance Scheme—that they are not getting the recognition that younger people who are benefiting from their hard work will get. I beg to move.
Viscount Younger of Leckie (Con)
My Lords, I will speak to Amendments 187A, 188A, 189A and 203ZA tabled by the noble Baroness, Lady Altmann. She has long been a formidable and principled advocate for pension savers and much of the Committee will be sympathetic to the underlying concerns that she raised in her remarks. In particular, her consistent focus on member protection, governance and long-term security has materially shaped the debate on pensions policy over many years—and rightly so.
However—the Committee might expect me to say this—while I share the noble Baroness’s objectives, I am not persuaded that the amendments, as drafted, strike the right balance in this instance. I listened carefully to her remarks and her constructive suggestions as to how such payments could be made in the form of lump sums, whether through several lump sums or another way. As ever, she is constructive and positive, and I accept that. These amendments would use the Pension Protection Fund and the Financial Assistance Scheme to make retrospective lump-sum payments to compensate for unpaid historical indexation. We think that that would represent a significant shift in principle.
I listened carefully, as I always do, to the remarks from the noble Lord, Lord Davies of Brixton, who called retrospection a red herring. I was not absolutely sure what he meant by that. As I see it, retrospection is just that: retrospection. I think that it describes the payments in the way that it is meant to do. However, the PPF was designed as a forward-looking safety net, not as a mechanism for reopening past outcomes or making retrospective compensation payments. The Minister, to be fair to her, made this clear in her closing remarks in previous groups.
Such an approach would raise serious concerns about cost, complexity and consistency. Although we are somewhat clearer about costs from the helpful remarks from the Minister in the previous group, I am still uncertain—as, I think, other Members of the Committee are—about what the overall costs would be and what the impact would be on the levy and on other contributors. That uncertainty makes me cautious about supporting these amendments, which risk turning a clearly defined insurance mechanism into an open-ended compensation scheme. I suspect that the Minister—without wanting to steal her thunder—may take a similar view in her response, judging from her remarks in the previous group.
Baroness Altmann (Non-Afl)
The noble Lord just said that this would impact on the levy, but if there is a one-off payment, it would not affect the scheme going forward. Therefore, it should not impact the levy at all; it is a lump-sum payment rather than an increase in the base pension payable going forward.
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 Altmann (Non-Afl)
My Lords, I thank all noble Lords who have spoken. I thank those who have supported this group, and I hope that I might be able to persuade colleagues on this side to offer their support.
I understand the Minister’s dilemma, but I have to ask: what is the PPF reserve for? It is just money sitting there, way above what is needed for the current liabilities, before you take into account new schemes that themselves will have assets attached, and the vast majority of schemes are in surplus at the moment anyway.
There was talk of the cost, complexity and consistency involved in these proposals. The cost we know, because one can design the lump-sum payments to fit the desired cost envelope. The complexity is actually far lower than the Government’s current proposals because they are a one-off payment related to past losses, which will have to be calculated anyway if one is going to do anything of this nature.
Consistency is particularly important here, otherwise we will be treating members of the Pension Protection Fund or the Financial Assistance Scheme very differently based on their age, in effect. Those who are young will get better protection. Those who are older—and need it most, I argue, because they have lost most—get little or nothing from the Government’s welcome proposals. So, at the same time as the Government are designing their forward-looking acknowledgment of the need for pre-1997 uplifts, I hope that we might be able to persuade them that, alongside that, there is an overwhelming case for some recognition of the past.
Lord Davies of Brixton (Lab)
Does the noble Baroness agree that her scheme would work the other way round, because older members will tend to have more pre-1997 service that younger members, whose pre-1997 service will be relatively limited? A scheme along the lines she proposes will have some element of generational fairness.
Baroness Altmann (Non-Afl)
I thank the noble Lord. I would certainly say that there is a significant and obvious element of fairness in this proposal for lump sums to be paid. I argue that it would level the playing field, because those who have lost the most at the moment will continue to lose the most, whereas if you recognise the past losses and the forward uplifts are still being paid then you equalise, to some degree, the fairness and the losses between people of different age groups.
I hope that we can come back to this matter on Report and that we might have a meeting to discuss the potential for something of this nature to be introduced in the Bill. In the meantime, I beg leave to withdraw my amendment.
Baroness Altmann (Non-Afl)
My Lords, I have Amendment 203ZC in this group, but unfortunately the Committee has not received a copy of my amendment.
Baroness Altmann (Non-Afl)
Good. I now have it and I want to check that everyone else has it too. That is my first question dealt with.
In speaking to this amendment, the aim is to enable members of pension schemes that have gone into the PPF after their assessment period to be extracted, with regulations laid that will govern the terms on which they can be extracted. This is particularly relevant to the AEAT scheme: I know that we will come to this in later groups, with a requirement for a review of the situation. My amendment is trying to facilitate a practical resolution to the problems faced by the Atomic Energy Authority scheme. There are parallels with the Atomic Weapons Establishment or AWE scheme: employees originally had a scheme similar to and in fact derived from that of the UK AEA.
The AWE staff and their pensions were transferred to the private sector, and in 2022 the Government granted a Crown guarantee to the private company scheme. However, members of the AEA scheme were told that the scheme that they were encouraged to transfer to in 1996 would be as secure as that provided by the Atomic Energy Authority public sector scheme. This was not the case, though, because it was not offered a Treasury guarantee. It would appear that the Government Actuary’s Department failed to carry out a proper risk assessment of the various options offered to those members in 1996. Indeed, they were apparently specifically told not to worry about the security of the scheme to which they transferred all their accrued benefits. Of course, all these accrued benefits are pre-1997.
What happened after that is that they went into a private sector scheme. It was a closed section of that scheme, only for the members who transferred their public sector rights into it. The public sector rights had full inflation protection for pre-1997 and members paid an extra 30% or so contribution into that private sector scheme in order to conserve the inflation protection. However, as part of that, the pension they were saving for, the base pension, was lower than the one for those members in the open scheme who had joined not from the public sector. They were working on the principle that that their scheme was secure and that they would be getting the uplifts of inflation. When it failed—the private sector company went bust in 2012—and they went into the PPF in 2016, they suddenly discovered that they had paid 30% more for inflation protection, which was gone. And because they had paid 30% more for that protection and were accruing a lower pension, a 180th instead of a 160th scheme, their whole compensation was lower than that of everybody else who had not had any assurances from the Government that transferring their previous rights into a private sector scheme would generate these kinds of losses.
This is probably the worst example I have seen of government reassurance and failed recognition of the risks of transferring from a guaranteed public sector scheme into a private sector scheme. This amendment seeks to require the Government to lay regulations that would transfer members out of the PPF, those members of the closed scheme, if they wish to. I am not forcing anyone to do so within this amendment. You have to offer them the option of going or staying if they are satisfied with the PPF. Also, a sum of money may need to be paid to the PPF, which would take away the liability and thereby reduce PPF liabilities, but also sets up an alternative scheme that could be along the lines of the AWE arrangements, for example. That would potentially be another option. On privatisation, the Government received a substantial sum of money from the sale of that company, the private sector takeover of the commercial arm of the Atomic Energy Authority. That delivered less money than was paid to the private sector scheme to take over the liabilities. Therefore, the Government have money to pay with, which they have never really acknowledged.
I hope that this amendment is a potentially direct way to help the AEAT scheme, if the Government are minded to consider it. It builds on a provision that is already in the Pensions Act 2004, which talks about situations whereby there is a discharge of liabilities in respect of the compensation, which this amendment would be doing. It prescribes the way in which subsection (2)(d) of Section 169 of the Pensions Act 2004 could be used to help the AEAT scheme.
I have also been approached by a private sector employer whose scheme failed and went into the PPF. At the time, the employer did not have sufficient resources to buy out more than the Pension Protection Fund benefits for his staff. He now is in a position to do that and would like to do so but, at the moment, he cannot get his scheme extracted. He is willing to pay an extra premium to do that, in pursuance of a moral duty to try to give his past staff better-than-PPF benefits. That is what this amendment is designed to achieve. It is built on the connection between AEAT and AWE, but could also help other private sector schemes if the employer feels—it would normally involve smaller schemes—that there is a moral obligation that they can now meet, financially, to recompense members at a level better than the PPF, once the assessment period is over and the resources have gone in, and to take it back out again.
Baroness Stedman-Scott (Con)
My Lords, this group concerns the proposed transfer of the AWE pension scheme into a new public sector pension arrangement, as set out after Clause 110 in government Amendments 194 to 202, with the associated measures on extent and commencement in government Amendments 223 and 224.
At first glance, these new clauses are presented as technical and perhaps little more than an exercise in administrative tidying up, reflecting the fact that AWE plc is now a wholly government-owned company. However, on closer inspection, several questions come to mind. This represents a material transfer of long-term pension risk and does so in a way that raises serious questions around principle, process and precedent.
On an IAS 19 accounting basis, AWE plc reported a defined benefit pension deficit of £97 million as at 31 March 2025. The company has already made significant one-off contributions: £30 million in March 2024, following an earlier £34.4 million in March 2022. These payments form part of a recovery plan agreed with the trustee and the Ministry of Defence, and the position is subject to ongoing review. This is an active funding challenge, one that should be considered carefully.
The provisions before us establish a bespoke statutory framework for a single named company. They provide for the creation of a new public sector pension scheme, the transfer of assets and liabilities, the protection of accrued rights, specific tax treatment, information-sharing powers, consultation requirements and arrangements for parliamentary scrutiny. All of this is meticulously itemised and carefully drafted.
Yet my concern lies not with the drafting but with the policy and constitutional choice that sit beneath it. We are told repeatedly that members’ rights will be preserved; that phrase carries considerable weight. The question is a simple one: which rights precisely are being preserved? Are we referring solely to rights accrued through past service or does that protection extend to future accrual as well? Does it encompass accrual rates, indexation arrangements, retirement age and survivor benefits or are members’ entitlements merely frozen as a snapshot at the point of transfer? What happens if the rules of the receiving public sector scheme change in future? These questions go to the heart of both member security and parliamentary responsibility. They deserve answers in the Bill, not assurances in principle or reliance on mechanisms that may evolve long after this Committee has given its consent.
There are also practical questions that remain unanswered. How exactly will trustees be formally discharged of their responsibilities? Additionally, does this change relate to DC members? Will each defined contribution pot be automatically converted or will past defined contribution rights be crystallised, with future accrual taking place under a defined benefit structure? For scheme members, these questions go to the very heart of retirement security.
I also question the decision to legislate company by company. This new clause is not objectionable because it concerns pensions; it is objectionable because it concerns one named corporate identity. Primary legislation should set rules of general application.
If the policy rationale here is sound, and if it is right that the pension schemes of wholly owned government companies should be transferred into the public sector on certain terms, that principle should be capable of being expressed generally and should not be hard-coded for AWE alone. Otherwise, we will face an unhappy choice in the future: if AWE’s status changes again, Ministers must either live with an outdated statute on the books or return to Parliament with yet another Bill to amend it. Neither outcome represents good lawmaking.
There are also practical questions that I hope the Minister will address. Will members receive individualised benefits statements, comparing their position before and after the transfer in clear, comprehensible terms? What support will be made available for members who need independent guidance, rather than reassurance from the scheme sponsor itself? Will there be formal consultation with scheme members and recognised unions, and will the responses to that consultation be published?
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.
Lord Davies of Brixton (Lab)
My Lords, I am going to try to put this issue into context. This is the third leg of our discussion, which centres on what we do now in relation to benefits that accrued for pensionable service prior to 1997.
I am going to take the Committee into a little history. The 1997 date was set by the Pensions Act 1995. I was there; although I had long left the TUC, because the TUC’s normal pensions officer had taken leave of absence for a few months, I was, in effect, acting as the TUC’s pensions officer at the time. On the background, in terms of what people understood about pension increases at that time, I will go all the way back to 1971, when the Pensions (Increase) Act was passed. In 1971, it was obviously under a Conservative Government. They linked public service pensions to inflation—initially RPI then subsequently, from 2011, CPI. That was all well and good. It set the standard, quite properly, for the Government of good pension provision, including increases. I make no apology for that. I am sure that we will return to this issue when we have the debate at our next meeting on public service pensions. The Conservative Government set that standard.
Then, in 1981—again, under a Conservative Government —Margaret Thatcher, the Prime Minister, decided, egged on by Aims of Industry, that there should be a review of pensions and pension increases. She took a personal interest—it is all there in the Thatcher archives—and established the Scott inquiry. Chaired by Sir Bernard Scott, a prominent businessperson at the time, it was a five-person inquiry that undertook a detailed study of pension increases, starting with public service pensions. We do not hear much about this inquiry now—there is another more famous Scott inquiry—because it came up with the wrong answer. Despite the committee being hand-picked by the Prime Minister, it came up with the answer she did not want. It said that index-linking was justified—it is worth saying here that, when it says “index-linking”, it is talking about the limited price index, or LPI, so not full indexation in all circumstances but up to a limit—and that there was no case for its removal from public service schemes.
The committee decided that public service pensions were not overly generous overall. It pointed out that the main driver of costs for public service pensions was not index-linking but the final salary benefit structure. Again, as an aside, it is worth noting that, from 2011 onwards, public service schemes moved away from that; they are now all average salary schemes. The committee advocated for parity of pension increases with state pension increases. So this committee, which was set up to tell the world how bad index-linking was, said that everyone should have index-linking. That was in 1981.
There is another stage. Originally, when schemes contracted out, they promised to provide GMPs. Initially, the GMPs were not index-linked but had a flat rate, and the state scheme was left to provide the indexing on the fixed flat-rate private sector schemes. However, by 1986, it was decided that the private sector schemes could provide LPI, initially at 3%. The scheme had to provide GMP, but it provided inflation linking up to 3%, and inflation over that would still come from the state scheme. This is where the contracting out becomes incredibly complicated, of course. That change to the GMP was when a Conservative Government introduced an additional element of index-linking in occupational schemes.
Then we had the Maxwell scandal, the subsequent Goode report and the Pensions Act 1995. There is a theme here. It was a Conservative Government; William Hague was the Secretary of State. From 1997, they introduced LPI index-linking, initially up to 5% and subsequently reduced to 2.5% in 2005—unfortunately, that was a Labour Government, but there you go. So there is this whole consistent move towards limited price indexation in occupational schemes. It became the accepted approach to providing occupational schemes. A scheme that did not provide some element of indexation in retirement was seen as an inferior scheme.
I was there, as I say, so what was my experience? Many schemes, particularly larger schemes, had LPI in the rules pre 1997, following Scott in the early 1980s. Schemes have gradually introduced it more and more; of course, index-linked bonds were introduced specifically as a follow-on from the Scott report. So many schemes, particularly large schemes, had LPI in the rules.
Other schemes said, “We’re going to provide indexation but we’ll do it under discretionary powers”. However, they still expected to provide increases and funded for them. It is my view, having been there, that, pre 1997, the number of schemes making no allowances for LPI increases was vanishingly small. For some, it was in the rules; for others, it was in the funding basis. Practically every member had a reasonable expectation of LPI in retirement in respect of the benefits that they accrued pre 1997. The statutory requirement was introduced to cover all schemes, as recommended by the Goode report; that was absolutely right.
So the suggestion that people are unreasonable in expecting their pre-1997 benefits to be increased is entirely wrong. It was entirely reasonable for them, and that is what people believed at the time, although they may not have a legal entitlement. This does not affect just the PPF or the Financial Assistance Scheme, where we are told that, if the scheme did not have it in the rules, it will not get these increases. It particularly affects active pension schemes—not necessarily those with new entrants, but those with pensioners to whom the scheme is paying money.
Many of the members will have benefits accrued before 1997, and those members have a reasonable expectation of increases. That is why I move Amendment 203 as a basis for discussion at this stage. In the light of what we hear, I may come back to the issue on Report. The law can now move to requiring increases on pensions accrued pre-1997, whatever it said in the rules, because it is a question of not legal but political justification. Politically, people can reasonably expect the Government to provide them with justice, and there is a reasonable moral expectation that they should now get limited price indexation on their benefits accrued prior to 1997.
The issue here is the position in which so many members find themselves. Their trustees—who were perhaps more engaged, years ago, with the operation of the scheme in those days—gave them a reasonable expectation of the benefits. I wrote to many schemes around that time, asking them what their practice was, having got an increase in the rules. Many of them wrote back to me and said, “Yes, we expect to increase these pensions and we are funding the scheme on that basis”.
Trying now, 30 years later, to distinguish between schemes that provided for these increases in the rules and in the funding basis is politically and morally wrong. These people have a reasonable expectation, and we have this opportunity to see that they are treated correctly. I beg to move.
Baroness Altmann (Non-Afl)
My Lords, I have every sympathy with the noble Lord’s amendment, and I would love the Government to find themselves able to accept it. I would certainly agree on the moral case and on the historical justification for members having reasonable expectations that their pensions would not suddenly be whittled away to a fraction of what they would previously have had. The Goode report recommended unlimited inflation protection, but it was limited when it came in and it was only from 1997 onwards rather than retrospectively. There are echoes there of what we have just heard about the Pension Protection Fund.
I see that the noble Lord, Lord Brennan, is here; he was instrumental in campaigning for the Allied Steel and Wire members and worked so hard to help them, as the noble Lord, Lord Davies, also did. The noble Lord, Lord Wigley, is no longer here, but this would certainly apply to the Allied Steel and Wire members, and I urge the Government to look at the amendments. I fear that there may be little appetite, given that our previously much more modest suggestions were rejected and bearing in mind that not all schemes are in surplus—there may be an issue. But, if the Government were so minded, there is certainly a good case for considering the amendment that the noble Lord, Lord Davies, so ably moved.
Viscount Younger of Leckie (Con)
My Lords, I will speak to Amendment 203 in the name of the noble Lord, Lord Davies of Brixton, and I am grateful to him for his tour d’horizon on the history behind this issue with the uprating, going back through several parties and Parliaments. Like the noble Baroness, Lady Altmann, I fully understand why members find this proposal attractive. The idea that pensions should keep pace with inflation feels intuitively fair, of course, but we think that mandating inflation increases for all pre-1997 service in live defined benefit schemes would be a step too far.
This amendment would dictate in statute how trustees and employers must use scheme resources and any surplus. We believe that this is overly prescriptive and risks being actively anti-business. Many employers are already using DB surpluses constructively, and that includes improving DC contributions for younger workers, supporting intergenerational fairness, and strengthening scheme security through insurance-backed arrangements and special purpose vehicles. We think that these are sensible negotiated outcomes, reflecting the needs of both members and sponsors.
It is also important to remember that employers have carried DB risk for decades. When funding assumptions proved wrong, when markets fell or when longevity rose faster than expected, it was employers who stepped in, often for many years, through additional contributions and balance sheet strain—that might be an understatement. I choose to use a casino analogy, not to make light of a serious subject but to illustrate the basic logic of risk sharing. Here goes.
In a defined benefit scheme, the employer and members effectively walk into a casino together. Trustees place bets on behalf of the scheme on how much risk to take in the investment strategy, what funding assumptions to use, how quickly to de-risk, how to price longevity and inflation exposure. Members benefit if those bets perform well because the scheme is safer and more likely to deliver the promised pension in full. But, crucially, if those bets go wrong—that is, if markets fall, inflation spikes, people live longer than expected or the assumptions prove too optimistic—the bill lands not on members but on the employer. The sponsoring employer is legally on the hook to repair the damage, often through years of additional contributions, cash calls at the worst possible moment and significant strain on the balance sheet. That is what the employer covenant means in practice: it is the backstop when the world does not behave as forecast, which, as we know, it often does not.
So, if we accept that the employer is the party that must cover the losses when the scheme is underwater, surely it cannot be right to argue that, when the scheme comes in above water—when investment returns are strong, funding improves and a surplus emerges—the employer must be barred in principle from any share of that upside. That is not risk sharing; it is risk asymmetry. Heads, the members win; tails, the employer loses. In any rational system, if one party is compelled to underwrite the downside, that party must be permitted—subject, of course, to trustee oversight and member protection—to share in the upside. If we legislate for a system where the sponsor carries all the risk but is denied any benefit when outcomes are good, surely we distort incentives. We make sponsorship less attractive and encourage employers to close schemes faster, de-risk more aggressively or avoid offering good provision in the first place.
This is a crucial point. The fair outcome is not that employers take everything or that members do. It is that surplus is discussed and allocated jointly by trustees and employers, balancing member security, scheme sustainability and the long-term health of the sponsoring employer. That is partnership. Legislation should support that balance but not override it; that is a crucial point.
Mandating automatic inflation uplift would also have wider consequences: higher employer costs; increased insolvency risk, ultimately borne by the PPF; knock-on effects on wages, investment and employment; and, potentially, higher PPF levies. For PPF schemes, uplift is manageable because the employer covenant has gone and Parliament controls the compensation framework. Imposing similar requirements on live schemes, however, risks destabilising otherwise healthy employers. In short, uplift should be an option, not a statutory obligation. As I said earlier, decisions should rest with trustees and employers together and not be compelled by legislation.
That said, focusing on choice does not mean ignoring power imbalances, because in some schemes genuine deadlock leads trustees to sit on surplus and de-risk further. That may be understandable, but I think it is fair to say it is inefficient. Government should be looking at how to enable better use of surplus by agreement, not mandating outcomes. Much more needs to be done on breaking deadlocks, but we believe that Amendment 203 is not the right way to do it.
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.
Baroness Altmann (Non-Afl)
My Lords, I have added my name to these amendments. I very much support the aims of the noble Baroness, Lady Bowles, to ensure there is proper flexibility in the levy paid by companies to the PPF. The PPF can then use its discretion to decide which companies should pay more than others and which companies are more secure than others in terms of their pension schemes. The current requirement is based on circumstances that have fundamentally changed over the past 20 years or so, since the whole system was first thought of.
The PPF is one of our incredible success stories in terms of protecting people’s pensions by successfully investing money that it has taken in. It has worked far better than anyone would have anticipated at the time, and we need to pay tribute to those who have been running the PPF; they have done an extraordinarily good job in the face of sometimes very difficult circumstances. I hope that the Government will think favourably about the possibility of allowing the PPF this kind of flexibility, given that the situation with pension schemes, surpluses and funding levels has changed so fundamentally.
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.
Lord Pitt-Watson (Lab)
My Lords, I rise nervously since it has been only one week since I made my maiden speech. I should declare an interest, as I have worked in the field of responsible investment for the past 25 years; I am not paid for any action there but, on occasion, my old employer allows me to use an office in the City when I have a meeting there.
I want to make two observations. One is about this Committee, which I have been sitting in on over the past few days, and one is more about this debate.
My observation on the Committee is that I am so impressed by the standard of the questioning. I am also extraordinarily impressed by the magisterial answers that can be given in pulling together what is a really complicated pensions Bill, much of which I admit not to understand. I have noted that, in our discussions and debates, there is often a great unity of purpose in terms of where we want to get to, but also some questions around how we might want to get there.
With that in mind, I want to address the issues that we are discussing today. I think that where I want to get to is very similar to the places the proposers of these amendments want to get to, but I might caution them a little to think about the ecosystem for which we are writing rules. If you look at a big UK pension fund, its equity portfolio is probably index-tracked, so it is buying entire markets rather than individual companies. It probably holds stakes in 5,000 different companies, or something like that, so we need to think practically about how we are influencing it.
We also have a situation—I find this extraordinary; I know that both the Government and the Committee are concerned about this—where an average British pension fund might have more equity investments in Nvidia and Apple than in the entire UK stock market because of the way in which assets are allocated. The UK pensions system is, therefore, a very small holder in a very large number of companies. I profoundly agree that we need to uphold international law on human rights, but, if we are to do that, do we not need to think about how we can get everyone to work together on that, rather than just a small proportion that might ultimately divest?
I note that Principles for Responsible Investment, which has $130 trillion of assets under management, has promised to be active owners and to incorporate social and environmental issues into its investment and ownership practices. Might there be some way in which we can hold those promises to account? Also, when thinking about how we can address human rights issues such as modern slavery—we have talked to companies about this—the campaigners often tell us, “Don’t have the companies ticking boxes saying that they know nothing about modern slavery. It is everywhere, and we need to be fighting it everywhere. Let us be open about how we do this”.
One initiative that I support, both in an advisory role and financially, is the Business and Human Rights Resource Centre, a network that investigates 1,500 human rights abuses by companies all around the world. It goes back to the companies and says, “You’ve got to fix this”. I have been particularly keen that, if the company does not fix it, the network can then see their shareholders and make sure, at the next shareholder meeting, that those questions are being raised with the companies. I wonder whether that is something we could leverage.
Recognising how difficult this is, I led the finance initiative to persuade British companies to divest from Myanmar 15 years ago, just before Aung San Suu Kyi took over. Of course, things have gone backwards since then. I was at a party before Christmas where someone remonstrated with me about what a terrible decision it was for British companies to withdraw from Myanmar. This is quite complicated stuff. How do we build on what is already there?
I love the passionate support for new asset classes, because it is so important that we move them forward. What we want to do is to get money flowing to social causes. I am not quite sure that there is always one solution. I was very involved in the development of the green bond market, which reached a $1 trillion issuance last year—that is pretty good. We also have to think about the traditional ways we can get this. Housing associations borrow on normal markets, so how do we get more of that? We have Bridges and the LGPS, which the noble Baroness talked about. I wonder whether we should always want things to be pension specific—although I do know that this is a pensions Bill, so perhaps that is part of it.
Then there is the question of knowing the social impact. We need to be careful about what social impact is. I am struck that, if you were to set up a pension system, a lending system or even a saving system in the developing world, you would be praised for the massive social impact you would make. Similarly, Henry Duncan’s trustee savings bank—he was Scottish, like me, as were Wallace and Webster, who set up the first pension fund—had a huge social impact. As we think about the social impact of the pensions and finance industry, I note that both in terms of its liability—what it is giving the public for their savings—and the assets it is holding on their behalf, the industry is thinking about both sides of that social impact.
Going back what I said earlier, I hear quite a lot of consensus about where we want to get to. Whatever happens to these particular clauses, I wonder whether we could work together on this issue—it is a very big one—in the future in some way. Britain is an absolute leader in responsible investment. If we can listen to beneficiaries, talk to sponsors and gather the industry—and if the Government can help set the framework—we can do something that would be really worth while.
Baroness Altmann (Non-Afl)
I will speak very briefly to support the amendment tabled by the noble Baroness, Lady Stedman-Scott, and the noble Viscount, Lord Younger. I know how passionate the noble Baroness is about the issue of social impact bonds, so it seems to me that this is a very modest and well-constructed amendment that could have significantly positive impacts on growth and local amenities. It would also specifically say, after Clause 117:
“Nothing in this section … requires trustees to invest in social bonds or any other asset class”.
So it does not in any way require this to happen, but it seeks to facilitate a system set up for pension funds to invest in this way in assets that, potentially, would have a significant social benefit, of which the noble Baroness spoke so passionately, having seen the positive results.
Lord Hendy (Lab)
I am sorry to interrupt the noble Baroness, but I emphasise that this amendment is to propose regulations that will be drafted by the Secretary of State. One would expect the Secretary of State to determine whatever issues there are about international law. By the way, international law itself is quite clear. It is about whether the factual situation on the ground meets the particular requirements of international law, but I think that could all be dealt with in regulation.
Baroness Altmann (Non-Afl)
I understand the point that the noble Lord is making. I am just not convinced that one would want to put this type of responsibility on the Government. Of course, judgments in international law change from time to time, and trustees are investing for the very long term. I recall the example of Myanmar given by the noble Lord, Lord Pitt-Watson. There are difficult issues that I understand the Government might regulate for. How pension trustees then build that into their asset allocation is another layer of complexity that I have concerns about, but I certainly have every sympathy with the intentions of the noble Lord, Lord Hendy, and the noble Baroness, Lady Janke. It is a difficult one. I just caution that getting to that level of prescription could be the thin end of the wedge for pension trustees, who already have so many responsibilities upon their shoulders.
Baroness Bowles of Berkhamsted (LD)
I welcome the noble Lord, Lord Pitt-Watson, to the Committee. His comments have inspired me to make a very small intervention. It is true that there is a lot of index investment, and inevitably that will capture things inadvertently, but there are now many more indices that will be socially responsible or environmentally responsible, and trustees can choose to use them.
If pension trustees collectively and pension funds made a little more noise and made more approaches to the index providers, we may well get indices that are more pushy in what they do for social and environmental protection. Ultimately, most of the time they are paid to invent an index or they are doing it for their own platforms, but I see an open door there to apply pressure.
Baroness Neville-Rolfe (Con)
My Lords, I support my noble friend Lord Younger of Leckie in proposing a review of pension awareness and saving among young people.
When I had the honour to review the state pension age for the DWP in 2021-22, I was struck by two things that strengthened the case for better policy in this area. First, I found it much more difficult to get young people or their representatives, or indeed middle career workers, to engage in my review. Those who did were keen to keep pension contributions down and they did not believe the state pension would still be universal by the time they reached the retirement age of, say, 70. They were worried about buying a flat, as my noble friend has said, looking after their children and paying back their student loans.
Secondly, the level of financial education was dire. Schools were focusing well on human rights, the environment and ESG, which was discussed under the previous amendment, but not on pensions or financial management. They were not teaching the importance of early saving, the magical impact of compound interest, the value of a pension matched by the employer and the risk of new sources of profit like cryptocurrencies. Much more such education is needed in our schools but the Department of Education was resistant, partly because teachers are also often a little short on financial education. This is an important area and I am sure the Pensions Commission will look at it, but my noble friend is right to highlight what a big job we have to do.
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.