Pension Schemes Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Thursday 22nd January 2026 Grand Committee

Moved by

[Baroness Bowles of Berkhamsted]

46A: Clause 11, page 13, line 20, at end insert—
“(4A) Value for money regulations must take account of—(a) a VFM assessment over 3, 5 and 10 years;(b) the nature and spread of assets and their purpose in the portfolio including diversity, stability and risk management;(c) the characteristics of the members of the scheme;(d) whether comparisons, benchmarking, scaling and advisory consensus risk herding, market movements, lack of diversity or systemic risk;(e) fee structuring, including performance fee management and inter-cohort fairness, including managing how the J-curve effect and consolidation can shift costs or benefits between different cohorts of pensioners.”

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, those noble Lords who have examined the Marshalled List will know that Amendment 46A constitutes what was in Amendment 46 but with an extra paragraph (e) in the proposed new subsection; that is the difference. The amendment proposes a small number of matters that value for money “must”, rather than merely “may”, take into account. The Bill ultimately leads to schemes being graded as performing or non-performing, so the framework must be sophisticated enough to reflect long-term investment reality, not just short-term metrics.

Value for money is a judgment about appropriateness, risk, purpose and fairness. Paragraph (a) of the proposed new subsection is based on long-term assets requiring a long-term view. I suggest assessments over three, five and 10 years, but that is to illustrate the point, rather than being a fixation. Private assets often show negative early returns and we need a way of understanding valuations through the cycle, especially where valuations drive fees. As more investments are moved into private assets, especially if back books have to be adjusted to meet authorisation percentages, there will be cluster effects. I worry about that and its effect on value for money.

How can we check valuations in the private equity context as well? There is a lot of literature around how it is useful to have a market price comparator for what is an otherwise opaque and infrequent exercise. Listed investment companies are routinely used in institutional analysis as a valuation cross-check for private assets because they provide daily pricing for similar underlying exposures and frequent net asset value valuations. For example, the ICAEW’s 2020 report, Fair Value Measurement by Listed Private Equity Funds, notes that listed funds provide observable market prices for benchmarking unlisted investments. The Bank of England has noted in several financial stability reports that market price vehicles, including listed funds, provide useful information about liquidity conditions and valuation dynamics in private markets, particularly when model-based valuations adjust slowly. These valuation and transparency credentials make it all the more extraordinary—and, I dare say, suspicious—that the Bill shuts them out.

My second point—paragraph (b)—is that value must be assessed in the context of the nature, spread and purpose of the assets. Long-term infrastructure behaves differently from assets for liquidity or inflation protection. The question is whether the assets are good value for what they are meant to do. Some assets, or the way in which they are packaged, serve hybrid purposes—as listed investment companies have long done—combining private asset exposure with market liquidity. Directly held assets have fewer fees, but selection and achieving wide diversity are more challenging. LTAFs will package a mix of illiquid and liquid assets and it will be interesting to see how it works over time.

My third point—paragraph (c)—is that value must be seen in the context of the characteristics of members. Those on lower incomes cannot afford excessive risk or prolonged losses; they are more likely to remain in default funds, and trustees will be mindful of that. A more cautious strategy in lower returns may be entirely legitimate for value for money. Trustees must retain the ability to choose strategies that are appropriate for their members, not strategies that score well on a narrow template. This is particularly relevant because assessments created for the DC default funds may well be adopted more widely.

My fourth point—paragraph (d)—concerns the risk of herding. Too much measurement, comparison and advisory consensus can drive correlated strategy. The Bank of England has repeatedly warned about pro-cyclical behaviour and systemic vulnerabilities. A value-for-money framework must not unintentionally reinforce those behaviours; not going with the crowd is sometimes the value-preserving strategy. If we reduce value for money to consensual metrics, we will distort behaviour and risk repeating the mistakes of the charge cap era.

My final point—this is the new one, paragraph (e)—concerns fairness between cohorts. Private assets, especially private equity, typically follow a J-curve: early losses or flat value followed by rising value and, often, high late gains. Gaming or late realisation of value scores high in performance fees. That can be emphasised deliberately or just through the valuation timetable. Thus early cohorts end up bearing the set-up losses while later cohorts—these are long-term assets, so it may be 10 or 20 years later—are the ones that benefit from the late-stage gains. This will be exaggerated, too, if there is back-book adjustment. Performance fees and valuation-linked fees distort fairness over time. If value for money is to be fair, these effects need to be managed—as, indeed, they do for the payment of the pensions.

Additionally, as funds scale, investment will shift from external vehicles to internal management—the models used in Australia and Canada and, increasingly, by Nest and USS in our own pension funds. It will be important to observe how that affects fees and performance.

I strongly support the amendment tabled by the noble Baroness, Lady Altmann, on member services, which I would have added to my essential list if I had thought of it first—but I did not steal it. I have added my name to the amendment of the noble Viscount, Lord Younger, on fee transparency, with the caution, again, that we must not repeat the mistakes of the current cost disclosure regimes, which do not properly recognise where costs are borne. I note that it will take more ingenuity than fee percentage transparency to get the full picture out of private equity. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I strongly support Amendment 46A from the noble Baroness, Lady Bowles, to which I have added my name and which she so eloquently explained. I will speak to my own Amendment 47, which she referred to and which looks at the value-for-money ratings from the point of view of members. For me, that is an extremely important element that is often overlooked when concentrating on the investment side alone—not that that is not important.

I draw the Committee’s attention to some of the specifications that I have made in my Amendment 47, which I think are crucial to understand when one is choosing a pension scheme for one’s workforce. The quality of service for members can be extremely important and can indeed drive adequacy in ways that are not recognised by the investment side. The investment side is of course important, but if quality of service and the education, guidance and support provided to members are working well, that can be a driver to encourage members to increase their contributions. Ultimately, that can be at least on a par in importance with investment performance over time. If members gradually build up their contribution levels to, say, twice what they were before by adding 1% a year every time they get a bonus, that combined with the investment performance can be an extremely powerful driver for value for money over the long run, which is of course where we are meant to be examining and assessing the schemes.

On communications with members, I have specifically included in that what I call “jargon-light” communications, because I have not yet seen a communication with members about pensions that does not include baffling or off-putting terms, including—I will come to this later—the very term “default funds”. We all know what this refers to, but if you are talking to a young worker or someone in later life who is not on a high salary and does not know a lot about pensions and you tell them that what they are supposed to do with their money is to put it into a default fund, that may not sound terribly attractive to them. The last thing that most people want to do with their money is default.

The Minister is looking somewhat askance at my remarks, but this is just one example. I apologise—perhaps she is just looking at something in her notes. Certainly, those are the kind of looks that one sometimes gets from the pensions industry, which does not tend to understand that the ordinary person has never heard of a default fund and it does not sound particularly attractive. If we can include, in communications, words in plain English that may sound more enticing than the usual pension jargon, I think it could be helpful. I would argue that that is potentially a measure of the value offered in a workplace scheme, which is what the ratings are going to be looking at. I hope that the Committee will understand the aims of my specifications in Amendment 47 and, perhaps as we go through, Members of the Committee may suggest other elements.

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I am very conscious of how long I have been speaking. I hope I have been able to answer most of the questions and to reassure noble Lords. The Government believe the right balance is there: there are clear powers in the Bill, there is technical detail in regulations and there is a lot of detail about the proposals in consultation. Given all that, I hope that noble Lords will decline to press their amendments.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, it falls to me to do the summation as a stand-in. I thank the Minister for her comprehensive reply. I wish I could speak that fast. It answered quite a lot of the points that I raised. It is obviously quite irritating for us when we commence a Bill and then consultations that provide a lot of the key points and information trail behind the Bill. We spend some time thinking about it and then discover we have to do a consultation response. I do not know how the timings for these things would fit together. Nevertheless, it would be quite nice for some of those key points that are being consulted on to perhaps find their way into the Bill somehow. I just point that out.

What is an Act of Parliament supposed to do? It is supposed to give you the front-end lead-in to what people’s expectations are. They cannot easily be expected to go wandering around on regulator websites and rulebooks, because, my goodness, I find those difficult. Talking about finding things difficult, when I retired from being a Member of the European Parliament, I got a booklet sent through because, for some of my time there, I was in the UK pension fund that applies to MPs and MEPs. This was just after I had finished negotiating all the post-financial crisis financial services legislation. I looked at the scheme rules and I gave up. I lost the will to live and thought, “Well, I’ll just take what comes, thank you very much”. If it is going to do that to me, what is it going to do to the ordinary person? We have to take a lot more care about more gentle lead-ins and simple ways of explaining things. Of course, that was some time ago.

I think we have had quite a good trot around the factors. I would still like to see something distilled from the work that has gone on which is accessible and where people might look for things if they are curious—they might be people representing people—and not have to resort to complicated scheme books and complicated regulator rules. Maybe we will have an update by the time we get to Report on the timings and dates and what has come out of these consultations. I suppose it will be a bit early for that. For now, I beg leave to withdraw the amendment.

Amendment 46A withdrawn.

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[Viscount Younger of Leckie (Con)]

My Lords, supported by my noble friend Lady Stedman-Scott, I am glad to be leading off in another group of amendments, largely designed to probe the Government and clarify their thinking, plans and rationale on the small pots regulations in the Bill. Indeed, I know that many industry bodies are watching our proceedings with interest and will be taking note of what the Minister says. This is after we had a series of meetings with those at the sharp end in the industry, as she will probably guess.

I will speak briefly to the other amendments in this group before turning to my own. First, I speak to the amendment in the names of the noble Lord, Lord Vaux, who is not in his place, and the noble Lord, Lord Palmer. Ensuring that a qualifying dashboard service has been available for a period before small pots can be consolidated seems an entirely sensible and proportionate measure. If we are to move pension savings automatically, often without an active decision by the member, it is surely right that individuals should first have a practical opportunity to see and trace their pots in one place and to engage with them themselves.

I also welcome Amendment 81 from the noble Baroness, Lady Bowles, which, as I understand it, would ensure that a pot is not treated as dormant where contributions have ceased for a legitimate and expected reason, such as a temporary break from employment with an intention to return. This strikes me as a pragmatic refinement that would better reflect real-world working patterns and help to ensure that consolidation targets genuine dormancy rather than planned inactivity. I have no doubt the Minister will explain that in more elegant terms than me.

Amendment 88, in the name of my noble friend Lady Noakes, addresses the definitions set out in Clause 34, which itself gives the Secretary of State a broad power to alter the definition of a “small” pension pot, including increasing the threshold, with no upper limit set in the Bill. The amendment would retain flexibility but place a clear ceiling on how far that power could be used. I look forward to my noble friend’s remarks. I know that my noble friend will expand on that point, but I would be grateful if the Minister could also explain why an upper limit is not currently included and how the Government envisage safeguarding against this power being used to capture significantly larger costs in the future. That is an important question that I hope will be raised.

I turn to my first amendment in this group, Amendment 79, which would replace the 12-month dormancy period in Clause 22 with an 18-month period. This is a probing amendment intended to test the rationale for the Government’s choice of a 12-month timeframe. The definition of “dormant” is critical, because once a pot meets that definition it may become eligible for automatic consolidation with no active decision by the member. Many savers engage with their pensions only intermittently, often on an annual basis, and employment patterns do not always follow neat or predictable cycles. Therefore, extending the period to 18 months would allow the Committee to explore whether a full year of inactivity is genuinely sufficient to infer disengagement, or whether it risks capturing individuals who are simply between roles or engaging on a longer cycle.

I want to be clear that this amendment does not seek to undermine the policy of small pots consolidation, which, as the Minister knows, we broadly support. Rather, it is intended to probe how the Government have balanced administrative efficiency with member protection, and what evidence has informed the choice of a 12-month period rather than a longer one. I would therefore welcome the Minister’s explanation of how this timeframe was determined, and whether alternative periods were considered.

Amendment 80 would leave out Clause 22(3)(b). This too is a probing amendment; it is intended to explore what the Government mean by the reference to “prescribed exceptions” in the definition of a dormant pension pot. As drafted, Clause 22(3)(b) assumes that a pot may be treated as dormant not only by reference to contribution inactivity but by whether a member has taken steps to confirm or alter how their pot is invested, subject to exceptions that are left entirely to regulations. Many savers remain in default investment arrangements by choice and engage with their pensions only intermittently, often in ways that are not easily captured by scheme records. Therefore, it is not clear what types of member action the Government intend should prevent a pot being treated as dormant, nor what kinds of behaviour might be carved out as exceptions.

This amendment is intended to prove whether investment-related actions are an appropriate proxy for engagement, how prescribed exceptions will operate in practice and whether the approach adequately reflects real-world member behaviour. I would welcome the Minister’s clarification on how these exceptions are envisaged and why this test has been included in the definition of dormancy.

Finally, my Amendment 82 concerns the level of parliamentary scrutiny applied to regulations made under Clause 22. As drafted, the Bill applies the affirmative procedure to only the first set of small pots regulations or regulations that meet certain specific triggers. Thereafter, changes to the consolidation regime may be made under the negative procedure. This amendment is probing and is not dissimilar to one raised previously in Committee. It is intended to test whether that approach provides sufficient ongoing parliamentary oversight. The regulations made under Clause 22 will govern when and how small dormant pension pots may be consolidated, often without an active decision by the member, and they therefore go to the heart of member protection and confidence in the system itself.

The amendment would require all such regulations to be subject to the affirmative procedure, ensuring that Parliament has the opportunity to scrutinise and approve changes to this framework wherever they are made, not just at first use. I would be grateful if the Minister could explain why the Government consider the negative procedure appropriate for subsequent regulations in this area, and whether there are safeguards to prevent significant policy changes being made without fuller parliamentary scrutiny. I thank in advance the Minister for her comments and answers and all other noble Lords for their contributions on this group, which I feel concerns an important matter. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, my Amendment 81 is very small; I hardly need to say anything about it. It came from one of those occasions when you are going through the Bill and you write a little query which you then convert into an amendment. It concerns Clause 22(3)(b), which says that a pension pot can be moved into a consolidator if

“the individual has, subject to any prescribed exceptions, taken no step to confirm or alter the way in which the pension pot is invested”.

There are instances in which a person may want to stay attached to a pension fund they have in a workplace, particularly if they do not necessarily have a long relationship with an employer or have done some intermittent work and then gone off to have a family, because they may have an informal agreement to go back. How do you cater for that? I realise that it might just fall under “any prescribed exceptions”, which you write in a note to deal with, but that is the basis of the amendment. I am sure it will be very simple for the Minister to say, “Yes, that is covered”.

While I am on my feet, I support Amendment 83. I also support Amendment 88 from the noble Baroness, Lady Noakes, because it is worth having some guardrails for things that are doing very well.

[Baroness Noakes (Con)]

My Lords, my Amendment 88 proposes to limit the power in Clause 34 to increase the size of the pot classified as small so that it is limited to £10,000. I welcome the fact that the power to make regulations under Clause 34 has to be consulted on and that they will be subject to the affirmative procedure, but we know that Parliament has close to zero power to alter the content of regulations, so it is important that the guardrails around the power are sufficiently strong.

There is widespread acceptance in the industry that there should be consolidation of small pots of £1,000 or less. I understand that there are already around 13 million pots of that size, and that is predicted to rise to over 30 million in only a few years’ time, so this is clearly an important issue. There is a concern, however, that the Clause 34 power could be used beyond its core purpose, which is to ensure that multiple small pots do not accumulate within pension providers and that individuals do not lose track of their own pension pots. It is one thing to use the power for sensible tidying up, but it would be quite another if the power were used to drive further consolidation, for example, which would not necessarily be in the interests of either savers or pension providers.

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[Viscount Younger of Leckie (Con)]

My Lords, this is a busy group and I shall not detain the Committee by speaking to all the amendments therein, but I do want to welcome the amendments that have been tabled by other noble Lords, which will allow us to have a detailed and, I hope, fruitful debate and discussion on these important matters.

Amendment 89 is a probing amendment. It would leave out new subsection (1B), which allows the Secretary of State, by regulations, to exempt descriptions of relevant master trusts from the approval requirements in conditions 1 and 2, covering both the scale default arrangement and the asset allocation approvals. The purpose here is to understand the intended scope of this power and the safeguards that will govern its use. As drafted, new subsection (1B) is very broad: it permits exemptions for

“any description of relevant Master Trusts”

and gives examples, including schemes designed to meet the needs of those with protected characteristics and hybrid schemes.

I have three straightforward questions for the Minister at the outset. First, why is it necessary to take such wide exemption powers in the Bill, rather than tightly defining the circumstances in which exemptions may be granted? Secondly, how will the Government ensure that exemptions do not create a route by which schemes can avoid the central policy intent of this chapter: namely, improving outcomes through scale and an appropriate approach to asset allocation?

Thirdly, can the Minister clarify whether these exemption powers are intended, in whole or in part, to apply to collective defined contribution schemes, or other non-standard money purchase arrangements? If so, what is the rationale; and if not, will she put that clearly on the record? I am mindful of the recent debate that we had in this Room on the CDCs. I hope the Minister can respond to those points.

I know that the noble Baroness, Lady Bowles, will set out her reasoning for Amendment 92, so I do not wish to pre-empt or emulate what I know will be a very well-reasoned and informative set of remarks. But, as I have added my name to the amendment, I will briefly say that I welcome this proposal. It would put in the Bill a clear signal that a trust which provides “exceptional” value for money—as assessed by the regulator under its VFM framework—could be a legitimate basis for exemption from the new approval requirements. It seems sensible that trusts that already provide exceptional value for money should be trusted to carry on their good work under the established framework in which they are already operating.

Amendment 100, in my name and supported by the noble Baroness, Lady Altmann, to whom I am grateful, seeks to provide helpful clarity, not to weaken regulation, by making clear that schemes offering genuinely specialist or innovative services can demonstrate that they meet the exemption. This is important because innovation in pensions does not always mean novel technology alone; it can include specialist provision for particular workforces, new approaches to member engagement or delivery models that better serve groups who might otherwise be poorly catered for. Without clarity, there is a risk that worthwhile innovation is discouraged simply because schemes are uncertain about how the exemption will be interpreted.

The amendment also gives the Secretary of State the power, through regulations, to define “specialist or innovative services”. That provides appropriate flexibility, allowing the definition to evolve over time, while ensuring proper scrutiny and regulatory oversight. The amendment supports innovation without undermining member protection, and it gives both trustees and regulators greater certainty about how the exemption is intended to operate. I therefore hope the Minister will look favourably on it and speak to the point that is raises.

Amendments 105 and 107 are intended to ensure that group personal pension schemes are treated fairly and proportionately under the new scale requirements in Clause 40. We are clear that scale alone is not always a reliable proxy for quality or value. There are group personal pension schemes that are smaller by design yet provide highly specialist or innovative services, for example, to particular sectors, workforces or member needs, and that deliver good outcomes despite not meeting a blunt asset threshold. Amendment 105 creates an additional route for relevant GPPs to meet the quality requirement, by allowing those that satisfy an innovation exemption not to be automatically required to meet the scale requirement.

Amendment 107 provides the necessary framework for that exemption. It allows a GPP to demonstrate that it offers specialist or innovative services, and gives the Secretary of State the power, through regulations, to define what those terms mean. That ensures flexibility as the market evolves, while retaining appropriate regulatory and parliamentary oversight. I hope the Minister will see these amendments as a constructive way of balancing scale with innovation, competition and member outcomes, and I look forward to her response.

Amendment 135 would revert the eligibility test for new entrant pathway relief under Clause 40 to the simpler principle-based formulation contained in the Bill as introduced. The purpose of the new entrant pathway is clear: to ensure that credible, innovative schemes are not locked out of the market simply because they are new and have not yet had the opportunity to build scale. As the Bill is currently drafted, that test has become more prescriptive, with a risk that genuinely innovative entrants could struggle to qualify despite having strong growth potential. By refocusing the test on whether a scheme can demonstrate strong potential for growth and an ability to innovate, this amendment would restore the original balance between safeguarding member outcomes and allowing healthy competition and innovation in the market. This amendment would simply ensure that the pathway for new entrants remains realistic and proportionate and is aligned with the policy intent.

Finally, Amendments 165 and 166 are probing amendments about parliamentary scrutiny—back to that subject. Clause 41 gives the Secretary of State the power to make regulations setting out how the Pensions Regulator will assess whether master trusts meet the scale requirement and have sufficient investment capability. These assessments will have a direct bearing on which schemes can operate, which must consolidate and how the market develops over time. As drafted, the Bill provides that the first set of regulations is subject to the affirmative procedure, but all subsequent regulations may be made under the negative procedure. I think we have heard this before. Amendments 165 and 166 would remove that distinction, so that any regulations in this area would require affirmative approval.

The question that these amendments pose is simple: if the initial framework is considered significant enough to warrant full parliamentary scrutiny, why should later changes, potentially just as consequential, receive a lower level of oversight? These regulations are not mere technical updates; they go to the heart of how scale and capability are judged, and therefore to the structure of the pensions market itself. It therefore seems reasonable that Parliament should retain the guaranteed opportunity to debate and approve changes of that kind whenever they are made. I look forward to the Minister’s explanation of why the negative procedure is considered sufficient for subsequent regulations and whether there is scope to strengthen ongoing parliamentary scrutiny in this area. I look forward to contributions from other Members of the Committee and particularly to the Minister’s response. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will speak very briefly to Amendment 92 because it is a “what it says on the tin” amendment. It arose during a conversation. Somebody asked me what happens if a scheme is doing very well but is forced into consolidation because it does not meet the scale requirements. Would there be any legal consequences if it did not do quite so well under consolidation? On whom would those legal consequences fall if, as a result, somebody received a worse pension? Is there any comeback on the scheme because it was not big enough and so got consolidated? Is there any indemnity? Is there any making up? Let us take a theoretical situation in which the consolidator it goes into ends up doing very badly—I would hope that would never happen, but this is just to probe the safeguards around such circumstances. I could not answer the questions. It may be that there is something in the vast number of papers I have not read and the Minister can advise me. There is nothing terribly special or secretive behind it, it is just something that could happen, and can I obtain clarity about what comeback there may or may not be?

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[Baroness Sherlock (Lab)]

The important thing here is clarity. The noble Baroness mentioned a single scheme. I am not going to comment on individual schemes, for reasons she will appreciate—she would not expect me to do so, I know—but we have to set some clear boundaries. The boundary has to be somewhere. As I said, we have actually gone for the bottom end of what was consulted on. We have created a transition pathway precisely to give schemes the opportunity to grow; they need to be able to persuade us that they have a credible path to do that.

In the case that the noble Baroness mentioned, if there were some particular market conditions that caused problems across a sector, she will be aware that in the Bill there is something called a protected period. There are powers in Sections 20 and 26 of the Pensions Act 2008 that give regulators the ability to delay temporarily the impact of the scale measures. That is to ensure that the consequence of a scheme failing to meet the scale requirement—having to cease accepting any further contributions—is planned and managed. There is a range of reasons why that might happen. It might be about an individual scheme that has been approved as having scale but has failed to meet the threshold or it might be a market crash that affects all schemes. There is flexibility there for the Government.

However, the principle is that we have to set some boundaries around that. The Government have reviewed the evidence carefully, and we have concluded that the point that we have chosen is appropriate. We have created a transition pathway in order to do that, and we have created new entrant pathways in order to accommodate those situations. We believe that that will protect members’ interests.

[Baroness Bowles of Berkhamsted (LD)]

The Minister has not yet mentioned whether there is any kind of indemnity or legal consequence. What the legislation does is not neutral in the sense that it provides cut offs and reasons not to invest. Is a company doing something wrong by continuing when it should say that it will not be able to make £25 million and it should roll up now? These are issues about which questions have come to me. It has not been looked at in the research. Could the Minister write to me to say whether there are any legal dangers for either side and whether there would be any compensation if the value of the pension becomes less than expected?

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Moved by

[Baroness Bowles of Berkhamsted]

90: Clause 40, page 38, leave out lines 26 and 27
Member's explanatory statement
This amendment, linked to others in the name of Baroness Bowles of Berkhamsted, is consequential on an amendment leaving out the inserted section 28C from Clause 40. That amendment removes the Government’s broad mandation power.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I did not expect to lead this group, but due to the diligence of the Public Bill Office in tracking down consequential amendments, my Amendment 90 has come to the top.

My Amendment 110, which is my main amendment in this group and on which I will focus my remarks, seeks to delete new Section 28C of FSMA. At the heart of new Section 28C is the asset allocation definition, which is flawed not because of its aspiration but because it rests on a complete misunderstanding of what investment trusts or listed investment companies actually invest in, and it excludes them.

Last Monday, I explained the anti-competitive and reputational effects of encouraging the flow of investment exclusively via the new LTAF vehicle and excluding the long-standing listed investment company structure. Today I have touched on the role that they play in valuation. Before turning to the wider reasons why this clause is fundamentally flawed, I will dispel another misconception I hear in circulation: “Investment trusts do not do infrastructure”. Well, I do not know what you call the Thames Tideway Tunnel, Sizewell C, utility-scale onshore and offshore wind, schools, hospitals, hydroelectric schemes, solar and nuclear energy, space, communications and satellites—but I call them infrastructure. All are substantially invested in, at the building stage, by investment trusts. Perhaps the Minister would accompany me to see some of these, although maybe not in space.

I also hear the claim that they do not do the big infrastructure projects that the Government are focused on. That is not really true, but there is nothing in the asset list of private equity, private debt, venture capital and interests in land that says, “Only the mega size”, or that stops them being qualified assets when held by another route. Anyway, we all need all scales of infrastructure investment and ongoing funding for expansion.

On Monday this week, our much-vaunted new prospectus rules came into effect; they make it easier, cheaper and faster to raise both IPO and follow-on capital. This applies to listed investment companies, too. What was this for? It was precisely so that companies can grow faster, bigger pools of capital can be raised more efficiently and larger infrastructure projects and bigger funds can be built. What is the point of celebrating our new financial market regulation if the Government then block the very vehicles it was designed to support? Why are some people in charge of investment—yes, some of them are to blame, too—still of the mindset that investment trusts do not do primary investment, at the very moment when rule changes are being made to build on the boom in primary infrastructure investment that has come through this route in recent years?

I come on to mandation more generally. I am not against the underlying intent of encouraging more pension investment in private assets. However, there is already a far greater awareness of the need to do that. The policy argument is won, but we have only just got to setting up LTAFs and the listing rule changes. The Government have not given the financial industry the chance to show what it can do. It is hardly a vote of confidence in our largest industry—financial services. What message does that send to the world? It says, “Go somewhere else; we have to bully to get things done in London”. What does it say about our famous and canny asset management in Edinburgh? If the Government want to add encouragement, use “comply or explain”—or, better still, “always explain”—to add transparency and understanding to the system. My goodness, neither the Government nor parts of the pensions industry seem to know what goes on in the wider asset management industry. Do not just ask the same people who have driven the old pension investment strategies.

Then we come to trustees. I have amendments elsewhere in the Bill aimed at clarifying that they can and should look to wider systemic and economic effects, but they should not be overridden. At their core, members’ interests are paramount for trustees. New Section 28C does not have members’ interests paramount. It threatens deauthorisation and the disruption and cost that that would cause if, in the judgment of trustees and in full knowledge of the characteristics of their members, they consider that a little less infrastructure or private equity is appropriate. What if the phasing of big projects means that there is a dip when investments exit? What if you are still in the J-curve dip? If some things perform badly, or the rush to invest exaggerates prices, do trustees have to keep pumping money in at poor value? No, that is the moment for explanation and perhaps a modification of strategy, not compulsion or deauthorisation.

Let us be clear: a deauthorisation power of this kind is not neutral. It creates a structural pressure towards consolidation. If a scheme risks losing authorisation simply because its trustees judge that a different phasing or balance of assets is appropriate for its members, they get closed down or forced to merge. That is backdoor consolidation, not member-focused governance.

These are some of the reasons why I want to remove new Section 28C entirely. It does nothing but harm. It is economically inept, competitively unfair, legally unprincipled and blind to the regulatory opportunities that have only just come on stream. I beg to move.

[Lord Sharkey (LD)]

My Lords, it is a pleasure to follow—and I did—my noble friend discussing the reserved mandatory powers in the Bill. I will speak to my Amendments 111, 161 and 162. I thank the noble Lord, Lord Vaux, for adding his name to all three and the noble Lord, Lord Sikka, for adding his name to the first.

The purpose of these amendments is to remove the reserve power of mandation from the Bill. The case against these reserve mandatory powers has been set out by a large number of important institutions. Most criticism seems to focus on the issue of conflicts with fiduciary duty. Critics of mandation have argued, correctly in my view, that directing trustees to hold a fixed share of specified assets conflicts with the trustees’ duty to act solely in the interests of their members. Mandation of investment in specific asset classes for policy reasons rather than on a risk/return consideration risks subordinating members’ interests to political objectives.

This also exposes trustees to legal liability for breaching their duty, especially if the investments are seen as politically motivated or fail to deliver competitive returns. The lack of legal clarity around the scope of fiduciary duty, particularly regarding systemic risks or broader economic impacts may well exacerbate trustees’ concerns about litigation and regulatory risk.

I know that the Government are alive to the fiduciary duty issue and have promised to produce statutory guidance to help. At our meeting before Second Reading, I asked the Minister whether this guidance would have binding provisions. The answer was no. The guidance will have, apparently, the same force as the many other “have regards” in our financial services sector. I also asked the Minister whether we could see a draft of this guidance before the end of Committee, but I have not had a reply to date. I therefore ask the Minister again whether we will see draft guidance so that we may scrutinise it before the end of Committee, or at least on Report. It is easy to understand, in these circumstances, why some legal experts and industry groups have called for a statutory clarification of fiduciary duty and argue that only primary legislation can provide the cover that trustees need to invest confidently, as the Government wish, without breaching their duties.

There is also the question of definition. What is the appropriate test for “productive” when applied to mandated assets? What is the appropriate test for “UK investment”, or even “qualifying assets”? Can the Minister say what these tests are and when they are likely to be available to Parliament for examination? There are other significant concerns with mandation. For example, it may produce lower returns and higher costs if it drives crowded trades, pushing schemes into lower-quality or overpriced assets simply to hit targets. As the large DC providers have noted, if there are not enough good-quality opportunities in the mandated classes, schemes may be forced into illiquid or sub-optimal funds. This concern has been made clear as a condition of voluntary participation in the Mansion House Accord. Then there may be a risk in reducing diversification. Concentrating pension assets in restricted geography or restricted asset classes inevitably increases vulnerability to UK-specific economic shocks.

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[Baroness Sherlock (Lab)]

I am sorry I did not namecheck the noble Viscount in responding to the second point. I intended to respond by pointing to the safeguards and the guardrails that have been built in. That was the nature of the response to that.

In response to the first question, I thought I said that the Government accept that this is not the only issue and that we are addressing the other ways. We have been looking at the other barriers and investment opportunities. We also mentioned that the FCA has looked at examples. It is not the only thing; we are looking at the other things as well. We think there is already significant progress, but we think this reserve power is a way of ensuring that progress goes forward and not backwards on this issue.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will be brief. There is a lot that could be said, but we will have other opportunities later on in this Bill.

This should have been a happy Bill, doing good for ordinary workers and building the economy, looking after the future in two interconnected ways. For the main part, we had cross-party policy consensus and continuity. We had public and industry support, which is just what you need for issues such as pensions and long-term investment, aided by significant and consensual regulatory changes—culminating this week—that should enhance diversity, choice and transparency in investment decisions.

However, at the heart, we got this devil’s clause. The Government have not given development a chance and such a reserve power is a massive intervention. It is a clause that, where there was unity, brings division; where there was trust, brings doubt; where there was confidence, brings concern; and where there was hope, brings despair. No wonder noble Lords oppose it. It ticks every bad box. I urge the Government to think again. They have not given policy and process any due regard and therefore I am sure that many of us will return to this on Report. But, for now, I will withdraw my amendment.

Amendment 90 withdrawn