Pension Schemes Bill

Baroness Neville-Rolfe Excerpts

Monday 23rd March 2026 Lords Chamber

Moved by

[Baroness Neville-Rolfe]

157: After Clause 117, insert the following new Clause—
“Review of public service pension schemes(1) The Secretary of State must, within 12 months of the day on which this Act is passed, conduct and publish a review of the long-term affordability, intergenerational fairness, fiscal sustainability, and accounting treatment of public service pension schemes.(2) In conducting the review under subsection (1), the Secretary of State must have regard to—(a) the current and projected cost to the Exchequer of such schemes,(b) their affordability in the context of long-term public finances,(c) the impact of such schemes on different generations of taxpayers and scheme members,(d) the implications of demographic change, including longevity and workforce participation, for the sustainability of such schemes, and(e) the manner in which the liabilities associated with such schemes are recorded, disclosed, and accounted for within the public sector balance sheet and related fiscal reporting frameworks. (3) In preparing the review, the Secretary of State must consult—(a) the Office for Budget Responsibility,(b) the National Audit Office,(c) His Majesty’s Treasury, and(d) such other persons or bodies as the Secretary of State considers appropriate.(4) The schemes to which subsection (1) applies are—(a) the NHS Pension Scheme,(b) the Teachers’ Pension Scheme,(c) the Civil Service Pension Scheme,(d) the Armed Forces Pension Scheme, (e) the Police Pension Scheme,(f) the Firefighters’ Pension Scheme, and(g) any other public service pension scheme designated by the Treasury by regulations as operating on an unfunded or pay-as-you-go basis.(5) The review must be laid before both Houses of Parliament.(6) Nothing in this section affects any pension entitlement accrued in respect of service.”Member’s explanatory statement
This new clause would require the Secretary of State to conduct and publish a review of the long-term affordability, intergenerational fairness, fiscal sustainability, and accounting treatment of public service pension schemes.

[Baroness Neville-Rolfe (Con)]

My Lords, my Amendment 157 would require the Secretary of State to conduct and publish a review of unfunded public sector pensions. I am very grateful to my noble friends Lord Moynihan of Chelsea and Lady Noakes for their support. My amendment is the same as the one I moved in Committee but, in the light of our debate then, there is one major point I want to stress. My motivation is in no way to denigrate public servants, nor to assert that they are not entitled to proper pensions, nor that we should renege on entitlements already earned. My aims are to draw attention to the fact that there are no savings pots or funds from which these public sector defined pensions are paid; that, with increasing numbers of public servants, the long-term burden is increasing; and that, when public servant DB pensions are paid, they have to be funded from current taxation, and that fact is insufficiently and obscurely reflected in national accounts. There is a real risk that the burden posed by these pensions will eventually come to be seen as unsupportable. Hence, we should set up a high-powered review.

Given these concerns, it is unfortunate in the extreme that this Bill does nothing to address them. The numbers are big: there are over 3 million active members in the NHS, teachers, Civil Service and Armed Forces schemes, 2.2 million deferred members and 2.8 million pensioners, which is a total of 8 million individuals. As people live longer and public sector employment grows, the proportion receiving gold-plated defined benefit pensions will grow if nothing is done.

Most people are aware that Britain has a huge national debt that is growing and sits at £2.9 trillion, or 97% of GDP. However, the obligations of future public sector DB pensions are equivalent to 75% of GDP and probably growing. When I first learned that, I was amazed, but I am afraid it is true. At the heart of the problem is the fact that this is a very long-term problem—like the national debt—with reform difficult to reconcile with electoral cycles.

However, on the surface things look fine. In 2025-26, according to the Treasury PESA analysis of 2025, there was £56.8 billion-worth of these public sector pensions being paid to some 3.5 million pensioners. This compares with a total of employer and employee contributions of £57.3 billion, which has dramatically risen in recent years. Indeed, according to the OBR in March, because of the growth in the public sector payroll, receipts from working employees are growing more quickly than the growth in pensions paid, which are uprated by CPI, with net spending forecast to be £1.4 billion lower by 2030-31.

So, apparently, all is well, but I am afraid that that is not the case. The sums paid in pension contributions by employees do not go towards their pensions but to pay the pensions of those already retired. There are no savings to pay future retirees. The future liability figure from the OBR in July 2025 is £1.4 trillion, somewhat lower than other estimates. However, it is partly a question of how you do the calculations. Estimates on longevity and long-term public sector salaries are particularly difficult to predict. My main point is that, on any credible estimate with, happily, people living longer, the numbers are frighteningly large.

Moreover, the situation may actually be getting worse, as commitments grow over time and per capita growth—which could transform the situation—recedes. It is unfortunate and regrettable that the scale of the problem is not properly reflected in the national accounts. As the OBR commented in its July report, which is well worth a read:

“Unfunded pension liabilities represent the second-largest government liability after gilts, but are not included in the PSNFL”—


public sector net financial liabilities.

The scale of the problem is hidden by a combination of accounting conventions and the moves in interest and gilt rates which have made things look temporarily much healthier than they are. One of the most important variables in pensions is the interest rate applied to notionally invested contributions. Higher interest rates result, according to standard accounting conventions, in lower pension costs, and vice versa.

When the facts are unravelled, even if no new pension commitments are made from this point—that is if all the current schemes were closed to new accruals—existing public sector pension payments will continue to rise until the early 2060s, which on best estimates will by then amount to some £130 billion annually, with no capping mechanism of any sort. Noble Lords will struggle to find any acknowledgement of that in our national accounts.

More generally, comparison with the private sector is enlightening, particularly now most of the generous defined benefit schemes in that sector have been closed. The net effect for those under 40 is that most—in practice, those in the private sector—will have to rely on defined contribution pensions augmented by non-pension savings and the state pension. This contrasts starkly with the position in the public sector.

One salient and growing cause of the problem is the sheer size of the public sector, the generous pay settlements in 2024 and the barely noticed drift upwards in grading which increases pension costs. For example, in the Civil Service in 2016, before Covid, there were 420,000 employees; today, there are 550,000, and the numbers are growing. The extra pension contributions paid by a bigger workforce make the situation look better in the very short term, as I have acknowledged, but this is illusory. They in fact store up trouble for the future when the pensions have to be paid out of current income. This is very different to the private sector, where we have funded schemes.

I turn now to incentives. One reason why this problem has arisen, I suggest, is that pension costs are not properly taken into account in public sector decision-making. Those adding to the workforce, or making people redundant, rarely take into account, or know, what the long-term consequences of their decisions are for pension costs. Consequences are simply passed on to the Treasury—in other words, on to taxpayers great and small. So even if officials want to do the right thing, they cannot calculate what it is.

That brings me on to the final area, which is intergenerational unfairness. We are constantly adding to the burden on coming generations without any thought as to how the burden can be paid off. That cannot be sensible or fair to those already facing the challenges of housing, childcare, student loans and now inflation. If nothing is done, once the youngsters get to pension age, the pensions promised to them will be unaffordable, so there will be a crisis, and hard and damaging decisions will have to be taken. It is becoming clearer by the day that we need much more transparency in the government accounts and a proper and realistic look at the implications of present policies.

In Committee, the noble Lord, Lord Davies of Brixton, argued against our proposed review and cited a Written Statement relating to the Civil Service scheme. He quoted the Cabinet Office Minister, speaking on 20 December 2011, as having given

“a guarantee, outside of the scheme designs parameters … of no further reform for the next 25 years”.—[Official Report, Commons, 20/12/11; col. 151WS.]

The Minister picked this up. She said that was

“in effect committing to no further major reforms”

in public service pensions

“until 2040”.—[Official Report, 23/2/26; col. GC 318.]

That is a generous interpretation, referring, we should note, to the public sector, not just to the Civil Service. It was not a legal guarantee. In any case, such a guarantee in no way precludes examining the situation. Even if such an examination ended in recommendations for action, these would take time to implement—much time, in my experience. I am surprised that the Minister does not see value in a review, particularly as a number of issues on accounting and transparency have already been raised by the Public Accounts Committee.

I fully accept that all this is not the fault of the present Government only. The situation has developed over many years, but we need to act now before the situation deteriorates further. I am conscious that it is an uncomfortable subject, but for the reasons I have set out, there is a strong case for a special review. This is not a call for a public or independent inquiry, which would cost a great deal and drag on, nor am I making any policy recommendations—but I want Ministers to grip the problem, and to do so with an open mind. Because of the long timescales involved in pensions and the importance of public servants, all parties have an interest. I beg to move, and I may seek to test the opinion of the House.

[Baroness Nichols of Selby (Lab)]

My Lords, I am just going to ask a question because I am slightly confused. The noble Baroness did say that it was not just a problem of this Government, but could she explain why the previous Government did not take this on?

--- Later in debate ---

[Baroness Sherlock (Lab)]

My Lords, I am going to read Hansard, because I very much hope that the noble Lord has not just accused the OBR of having skin in the game. If it was not the OBR, perhaps he would like to write to tell me whom he was accusing of having skin in the game, because I do not recognise the point that he just made.

The point on the whole of government accounts was raised by the noble Baroness, Lady Neville-Rolfe. The whole of government accounts present the liability in accordance with the international financial reporting standards. There are no plans to change that approach and I do not think that there should be. However, I recognise that members of the PAC asked whether the liability could be presented on a more permanent basis to show how it would change in the absence of changes to the discount rate, to make it easier for people to understand it. As I said in Committee, the Treasury is exploring options to present pension liabilities on a constant basis. To be clear, that presentation would be supplementary and would not affect the underlying pension liability calculations in any way, or how they are presented in the financial statements, but the Treasury is looking at whether they can be presented in a supplementary way to aid understanding.

Given that the reforms have already been implemented and all the relevant information is already available, a government-commissioned review would largely replicate and collate existing material. On unfunded schemes, it is true that the schemes referenced are unfunded, but unfunded does not equal unaffordable or unsustainable. I set out that costs are projected to fall as a share of GDP. It is also a long-standing government policy not to hold assets against liabilities that sit fully under the control of the Exchequer, as I explained on an earlier group. Moving from unfunded to funded provision on a like-for-like basis would simply require additional borrowing to build up assets and would not improve the overall fiscal position. However, if the noble Lord, Lord Moynihan, wants to recommend cutting the value of public sector pensions, that is a different matter. It is not what we are discussing here today but it could be discussed within the House.

Factors such as longevity were mentioned, which can affect costs over time. Again, the current framework is designed to capture and manage that. Changes in assumptions are reflected through scheme valuations, which affect employer contribution rates—the point flagged up by the noble Viscount, Lord Younger. The cost control mechanism then operates to require adjustments to member benefits if costs move outside the agreed corridor. Therefore, the Government do not accept the amendment. Had the previous Government felt it to be important, having reviewed and reformed the system, they had 14 years to make a decision. They left government less than two years ago and suddenly this must be done on our watch. We do not think that is the appropriate way forward.

Amendment 164 was tabled by the noble Lord, Lord Palmer. He recognises that we had an exchange in Committee but, since others have raised it, I say simply that these rules were a feature of legacy public service pension schemes, as he knows. Those legacy schemes are now closed. Members are accruing benefits in reformed schemes that do not contain these provisions. The Government do not believe it appropriate to improve retrospectively the terms of previously accrued public service pensions, consistent with the approach taken when the reforms were introduced by the coalition Government.

In response to the question from the noble Baroness, Lady Altmann, I think the Civil Service position is similar to that of the police. With the NHS, forfeiture applies to those who left the service before April 2008. If I am wrong I will write to her, but I believe that is the position and I hope that clears that up.

Amendment 158, tabled by the noble Viscount, Lord Younger, seeks to introduce a statutory requirement for the Secretary of State to conduct a review on retirement incomes. I understand the intention behind this amendment but, as I explained in Committee, the Bill contains a range of reforms which will be implemented in phases over the next decade. A review in the next five years will not have allowed many of the reforms any time to take effect. Changes to retirement outcomes can take a long time to have effect as people build savings and then retire, so this is not appropriate.

An updated version of the impact assessment was published when the Bill entered this House. It detailed our monitoring and evaluation plans. The monitoring has already started. Research is under way with employers. The DWP, the Treasury and the regulators are scoping out further data and research plans, developing key metrics across the core aims of the Bill and committing to regularly monitoring and publishing, as well as conducting new research to fill evidence gaps. Furthermore, the measures contained in the Bill will help to build greater and more consistent data, particularly through the value-for-money framework, helping to create a strong evidence base to monitor and analyse trends. Where we consider it is appropriate to keep measures under review, we have included a review clause, such as the new clause

“Review of any exercise of powers under Section 28C”


in Clause 40(13). That is proportionate and tailored to the specific interventions, and it is the appropriate way forward.

As set out in my letter to noble Lords on 4 March, the Pensions Commission has been tasked with making recommendations about pensions adequacy and support for those approaching retirement. It will publish an interim report this spring, setting out the evidence base and a strategic direction for its work, with final recommendations early next year. A separate statutory review would create confusion and overlap, and would not be helpful.

Amendment 159, tabled by the noble Viscount, Lord Younger, seeks another review, this time on the barriers to UK investment. I recognise that the noble Viscount wants assurance that the Government are taking a holistic approach to increasing UK pensions investment. I will not relitigate all the things that he brought up, some of which are relevant to this Bill and some to other Bills. The Government have already completed a detailed review of pension investment. The pensions investment review—the clue is in the name—consulted widely and considered a range of investment barriers. It reported last year, which led directly to many of the measures in the Bill. The review considered not only the questions of scale and asset allocation but the regulatory environment, fee structures and wider factors that affect how pension schemes invest. It was a serious and comprehensive piece of work. The Bill already requires the Government, if they decide to use the reserve power, to consult and publish a report. That would be the time to consider the investment landscape.

Amendment 170A from the noble Viscount, Lord Younger, seeks a review of how members’ views are considered in the effective governance of pension schemes. Pensions are a significant part of workers’ pay and their security in retirement, so it is important that the voice of the member is heard and considered in the governance of pension schemes. That is one of the reasons why we have focused so much on the role of trustees and on their duty to act in the best interests of members. Well-performing pension schemes already take account of members’ views through their governance and engagement processes. This includes member-nominated trustees, as mentioned by my noble friend Lord Davies, regular surveys and consultations, and feedback gathered through helplines, portals and member meetings. That helps trustees by ensuring that decision-making is better informed, more aligned with member needs and more credible.

Occupational pension schemes with 100 or more members are required by regulations to publish a statement of investment principles and an annual implementation statement setting out their investment policies and stewardship approach, including voting and engagement. The regulations also require trustees to disclose the extent to which non-financial matters—such as members’ ethical or personal preferences—are taken into account in investment decisions. These disclosure tools are important for members’ views because they enhance transparency, strengthen accountability and give a structured way for trustees to explain how member-driven considerations have been reflected in their policies. Guidance from the DWP helps trustees articulate better how such views have been considered when they choose to do so. Well-run pension schemes recognise that members have different investment needs and respond to them. Although trustees consider member views, as they must, they ultimately balance them against their fiduciary duty to act in the interests of beneficiaries.

The Government recently concluded a consultation on trusteeship and governance in trust-based schemes. That consultation emphasised the importance of ensuring that members’ voices are better represented in decision-making and sought feedback on how we can ensure that the voices of members are heard in the market.

A lot of reviews have been called for here. I hope that I have explained why the Government are doing a great deal in all these spaces already. I welcome the debate but ask the noble Baroness to withdraw her amendment.

[Baroness Neville-Rolfe (Con)]

My Lords, I thank the Minister for her comments, and all those who have spoken on the wide variety of reviews that have been proposed, some of which I think will be picked up by the Pensions Commission, by action following the Bill and, indeed, by other reviews that may be undertaken in the coming years.

I return briefly to the uncomfortable subject of public service pensions. We face a serious and deteriorating state of public finances, and my subject represents one significant part of that. It is only sensible to examine whether we are on the right path. That is the thrust of the amendment before us because, as the Minister acknowledged, this is not really picked up by any other ongoing review or legislation.

To answer the question about the previous Government, I would say that we are not looking back but looking forward. In fact, I myself carried out an independent review of the state pension age, which alerted me to the problems of pension sustainability, the intergenerational unfairness and the problems we have with greater longevity. That is one of the reasons why I have come forward with this proposal for a review, which I hope the Government will look at positively.

I thank all those who have spoken. I urge the Government to reflect, but I would like to test the opinion of the House.