Pension Schemes Bill

Baroness Noakes Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Bennett of Manor Castle. But, not for the first time, she will find that I disagree with practically everything she has just said.

I have a few problems with the Bill, which has a number of sensible things in it. I will focus on aspects of the Bill that are being sold as supporting UK business investment and hence the Government’s growth mission.

I have big concerns about pension scheme money being seen as available for investment in ways that the Government choose but which conflict with the views of trustees, who have a duty to act in members’ best interests. I am as patriotic as anybody, but I do not think it is right to allow the Government to require investment in the UK. There have been times when investing in the UK was a terrible idea financially. I can remember the 1970s, when the only reason anyone held assets in the UK was the existence of exchange controls—we could not get money out. I say to my noble friend Lady Altmann that forcing or incentivising pension schemes into listed UK assets does absolutely nothing to enhance UK growth. These are existing assets; they have nothing to do with new investment.

The Government’s proper role is to create the economic environment where businesses want to invest. That requires confidence in the economic future, taxes that are predictable and low, and regulatory burdens that are kept in check. Anti-business and anti-growth Budgets, and changes to employment laws, are the main drags on investment in the UK at the moment, and no amount of playing around with pension fund assets will change that. With the exception of scale-up financing, which is a problem in the UK, there is no evidence that funds are not available to back profitable business investment in the UK. The powers in the Bill need to be judged against that background.

The part of the Bill that concerns me most, in line with many other noble Lords who have spoken, is Chapter 3 of Part 2, which deals with scale and asset allocation. These provisions go much too far. I get the benefits of scale, both in terms of cost efficiency and the ability to diversify into alternative asset classes. However, I do not think that there is any conclusive evidence that £25 billion is a magic threshold. I am concerned that the Bill will have the effect, after first having consolidated the market, of ossifying the pensions landscape. As I have said many times in your Lordships’ House, I am a believer in competition and markets.

Large players love regulations that create barriers to entry, because they insulate them from market disrupters. The Bill says that subscale players—new entrants—have to be regulated. Risk-averse regulators are not the best people to judge growth potential or the power of innovation. The Bill should encourage new entrants into the pensions market, even if that means a prolonged period of operating below scale. We need to look at how the long term for pensions investment can be protected and I will want to explore that in Committee.

The real shocker, of course, is asset allocation. Put simply, I believe that mandating asset allocation is wrong in principle and carries a significant risk of moral hazard. Pension trustees have a clear fiduciary duty to act in the best interests of their members. The Government should have no right to say to trustees that they must invest in particular things, especially if that conflicts with trustees’ views. I do not doubt the sincerity of the Government’s desire to get pension schemes to invest in a wider range of investments to improve returns for their members: that is broadly what scale facilitates. The danger comes with eliding that desire to facilitate higher returns for members with wanting to direct the investment into particular things, which may or may not turn out to deliver those higher returns. Legally requiring certain types of investment will inevitably result in calls for the Government to pick up the tab if the returns from those sorts of investments fall short. The moral hazard implications of these provisions for mandation are huge.

I am also disturbed to read proceedings in another place where some MPs wanted to direct pension schemes assets into their pet projects; they talked about social housing, hospitals and net zero. Such investments may well be socially desirable but there is no confidence that they will yield high returns for members of pension schemes. If the Bill does not rule out that kind of mandation, I am sure that it should. At the end of the day, trustees need to seek the best possible returns for their members, because it is investment performance that drives the retirement income of defined contribution members.

The drafting of the mandation clause is also a horror story; I will not weary the House with a commentary on that today, but I give notice that I shall want to examine it in Committee. I am sure that in Committee we will also want to look at capping the percentage which could be mandated—if indeed we wish to keep mandation at all, which I suspect we will not.

The other area that I wanted to talk about today is Clause 9, which creates a welcome ability to extract surpluses from defined benefit schemes. While only a tiny number of private sector DB schemes are still open to new members, very many employers are still burdened with schemes which have been long closed to new members or indeed to future accrual. Gordon Brown’s tax raid in 1997, followed by the prolonged period of low interest rates, meant that for the last 25 years, employers have had to pay large amounts to support the funding status of their defined benefit pension schemes. Recently, the good news is that some of those have swung back into surplus. It is only right that there should be an opportunity for those employers, who have borne this burden for such a long time, to get some of that surplus back. Doubtless, trustees will want to argue for further benefits for members in return for returning surpluses, but I hope that they will be mindful of the fact that the corporate sector has borne significant costs of keeping the defined benefit pension promises intact over many years, and they deserve a major share of those surpluses.

The Government have portrayed this as supporting business investment in the employing company, which it might do if the business environment is right for those companies to invest, but it may also be entirely rational for those companies to return excess money to their shareholders because that would be the best outcome for those shareholders. There is a provision in Clause 10 which allows conditions to be set on making payments. I shall want to ensure in Committee that this power cannot be used to direct what companies do with liberated pension surpluses once it has been agreed that it is safe for those surpluses to be removed from the pension scheme.

The Bill focuses on pension schemes, but it does not deal with many of the other problems that continue to exist in the pensions world. The Pensions Commission will tackle some but not all of those problems. In particular, around £1.3 billion of unfunded public sector pension obligations will weigh very heavily on future generations—that is currently largely hidden from sight at the moment. Into that category I would also put the continuation of the triple lock. This Bill is not the end of the pensions story.

Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Monday 12th January 2026 Grand Committee

[Lord Katz (Lab)]

I had better write to the noble Lord. I am afraid I do not have the details of that particular case to hand, but it is our understanding that it was coming from a voluntary perspective. But rather than speculating—I do not have the details here—I am very happy to write to him with more detail.

[Baroness Noakes (Con)]

I listened carefully to the Minister’s response, but I am not sure that he answered the question about why the Government need to take power to specify the sources of advice that scheme managers must take and whether that would result in a closed list of scheme advisers that had to be used in any event. Not only is that undesirable from a competition standpoint; it also seems likely to work against producing better returns longer term, because you will just ossify the situation as you find it at the point that the Government decide to make that decision.

[Lord Katz (Lab)]

I thank the noble Baroness for that question. I do not know whether this will give her complete satisfaction, but I understand that requiring funds to take advice from their pool could potentially be a conflict of interest. I would say that, first, asset pool companies will be required to have robust conflict of interest policies and procedures for identifying and managing those areas of conflict. As I said fairly early on in my remarks, integrated models—

[Baroness Noakes (Con)]

It has nothing to do with conflicts of interest; it is about whether the Government can specify a limited number of sources of advice that can be given to scheme managers, what the purpose of that is and whether that does not in fact work against achieving the best returns for members over time.

[Lord Katz (Lab)]

I am sorry; I probably misunderstood the direction of the noble Baroness’s questions. I had better write to her to set that out. I think it is fair to say that—this might help a little—in contrast to external advisers, because asset pools are solely owned by old GPS administering authorities, they exist to provide services of their interests and they do not stand to gain financially, even from partner funds taking their advice or providing poor-quality advice. I am not entirely sure that that gets at her question, but the point is that we do not feel that there will be that impact from limiting sources of advice. I will write to her to provide more detail on that point.

Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Wednesday 14th January 2026 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, as has been stated, this clause introduces compulsory mergers of Local Government Pension Scheme funds, and the word “compulsory” worries me. We on these Benches accept that consolidation can sometimes improve efficiency and governance, but compulsion—I emphasise this—is a serious step that demands strong justification and clear safeguards, as the noble Baroness, Lady Stedman-Scott, stated.

At present, the Bill establishes the power without clearly setting out the criteria, process or routes of challenge. That sequencing matters. Trustees, employers and members need confidence that mergers will occur only when there is compelling evidence of benefit to the people—that is, the pensioners themselves. We on these Benches are concerned that forced mergers, if poorly handled—and some may well be poorly handled—could undermine trust rather than strengthen it. Before endorsing compulsion, which we are asked to do, Parliament should understand how decisions will be made, how dissent will be treated and what protections exist if a merger proves detrimental.

At this stage, it is quite right that there should be probing as to what is behind all this and what will happen in all the various circumstances that need to be in place to protect members of the Local Government Pension Scheme. I wait to see further information as the Bill progresses.

[Baroness Noakes (Con)]

My Lords, I apologise for speaking after the Liberal Democrats—the noble Lord got up rather quickly.

[Lord Palmer of Childs Hill (LD)]

I apologise. I did not see you.

[Baroness Noakes (Con)]

I endorse everything that both speakers have said about understanding more about the use of this power. I want to go back to the Explanatory Notes. They say that Clause 6 amends Schedule 3, et cetera,

“to clarify that, in the case of the LGPS, the responsible authority’s powers also include the power to make regulations”.

That implies that the Government believe that this is a declaration of an existing power. If that is the case, can they explain why they feel it is necessary to put Clause 6 in this Bill? Can they also explain the history of mergers with the involvement of the regulatory authority and what problems, if any, have led to the need to insert this in Clause 6? As the noble Lords who have spoken said, it looks like a very draconian power to be taking and yet the Explanatory Notes imply that they already have the power. It would be useful to have some more background.

[Lord Fuller (Con)]

My Lords, Clause 6, as your Lordships have just heard, includes the powers to merge funds. It is a slim clause, so I will be briefer than you might expect, but I want to ask the Minister what the circumstances are in which these powers would be used and to what end the Minister would require the compulsory merger of funds.

On Monday, when we debated the earlier groups, I pointed out that the country’s smallest fund, the Orkney fund, has the best performance of all the funds in the LGPS. I think that there are lessons to be learned from that—and, furthermore, it has never changed its investment manager. What would happen if the two funds happen to be in different asset pools? What steps would be taken to indemnify the losing and the gaining members and taxpayers for the quite exceptional transition costs in these circumstances? You would be ramming some schemes together, having split them asunder beforehand.

In another Bill before your Lordships’ House, we will shortly contemplate local government reorganisation. I do a bit of work on this and I can certainly contemplate that mergers of councils across county boundaries could be contemplated. With Wiltshire already unitised, it is not unthinkable for Swindon to be placed either in Oxfordshire or perhaps in Berkshire. Paradoxically, the efficiencies of merging councils under LGR may result in the demerging of pension funds to different pools. What discussions have been had and what contingencies have been put in place as Ministers start to take decisions on local government reorganisation?

Going back to scheme mergers, can the Minister tell us whether similar criteria have been published, as with LGR, and how we would consider comparing the relative merits of different proposals for schemes merged? Having announced that schemes are candidates for merger, it is not unthinkable that several competing bids may come forward: “We want this particular scheme”, or rather, “We don’t want that particular scheme, for all sorts of reasons”.

What criteria might be published so that, on an evidential and neutral basis, the decisions can be justified? Are we going to consider population size, assets under management, the number of members, the cost per member, or geography? That is important, because under the earlier parts of the Bill a scheme may be a member only of a single pool, and those pools have become geographically focused, because there are provisions, if the Bill is enacted, for the schemes to connive with their local strategic authorities. You can see straightaway that there could be a mismatch between the host strategic authority and its pool, which may not be local.

This is a small clause, but with big consequences. Following a merger, how might decisions be taken as to which successor authority would be the administrating authority? That begs the LGR question of which authority will assume the pension administration if all the councils in that territory have been abolished. How will we ensure that appropriate governance structures are in place so that all parts of the disaggregated territory are appropriately represented? We see this in local government, at parish council level when two parishes come together. So that not all the members of this community council come from one parish and none from the other, there is a process of warding: the representatives on the board must be distributed from among the previous constituent authorities. What steps might be taken in that case?

I do not think that this clause has been thought through at all. If I think of the Norfolk scheme for a moment, of which I have been a board member since 2007, we have over 100,000 members and I am sure that they would all want to know who is going to be sending P60s, helping with IHT valuations and answering questions. I have previously complained about the length of the Bill, but this shortest of clauses may have the biggest impact. It will directly impact up to 6.7 million workers in our nation, so I support my noble friends because, without the detail that I, as well as the noble Lord, Lord Palmer, and other Members who have spoken, have asked for, Clause 6 is inadequate and cannot and should not stand part of the Bill as currently constructed.

--- Later in debate ---

[Lord Fuller (Con)]

Your Lordships will be pleased to know that peace has broken out again: I agreed with much of what the noble Lord, Lord Davies, said, and I do not accept the characterisations that the noble Baroness, Lady Altmann, laid out in full.

I have sat on five triennial actuarial revaluations of the Norfolk scheme over 20 years, and I can tell noble Lords that we are not unique. We agonise over how we deal with the valuation over months. We look at the assumptions, the different types of employer and the different scenarios that we might realistically use. There is a fan of opportunities that the actuaries run; I would say a thousand or a very substantial number—many hundreds—of different potential scenarios based on membership of the scheme, the sponsoring employers and even the life expectancy per member calibrated by postcode, using the Club Vita methodology. Of course, we think primarily about governance as well.

To a certain extent, if that is going on, one might ask why we need these amendments at all. We do because, as those of us who are involved in the LGPS know, brighter days ought to be ahead after some pretty tricky periods over the last 20 years. But just because the sun is coming over the horizon today, it does not mean it might not set in the future. A Bill like this will have longevity, so we need to get it right rather than be overly optimistic. Overoptimism is the counter to excessive prudence.

I support many of the amendments in this group, but I will start with Amendment 18. I have seen schemes with valuations in the low 70s, when interest rates were low, but some schemes are now funded well into the 130s or 140s. We have heard today about a scheme that is funded 150%. Without excessive prudence, more of them might have been in that bucket.

The sums of money for these fluctuations are enormous. For a mid-sized county scheme with £5 billion under management, 10% could still be £0.5 million—a large sum that can go a long way. So there is a temptation to trim employer contributions when times are good, safe in the knowledge that there is still a substantial cushion to fall back on. I have no problem with that as a principle: after all, when times were bad, employers had to chip in a lot more, so it is only fair that there is a two-way street and hoarding is no good to the member, employer or taxpayer when there is a bypass to pay for.

The problem is how you apportion that rebate or discount to the members if there is a surplus. When times were bad and more contributions were needed, the contribution rate was calculated differently for each employer depending on the maturity of that scheme, the number of members of the employer, the covenant strength of the employer and their individual deficit and funding position. Clearly, a tax-raising council, which does most things itself and can jam-spread those changes over many employees, will have a lower contribution rate for the deficit than a largely contracted-out services authority with much fewer staff. That is why one authority that used to employ a lot of people, but had to let them go by outsourcing most of their services to private contractors, has a contribution rate of 50% on salaries. That is a huge sum of money. However, a well-run council like my own—we do most things ourselves—was in the 20s. That is not unfair; it is just the arithmetic.

As an aside, I would say that outsourcing is all very well but, as the litany of failed outsourcers has shown—Carillion, Connaught, Mears, Steria and many more—when they go bust, those pension liabilities come boomeranging back to the host council that thought it was being smart but was not. One city not far from where I live has had to learn that painful lesson on more than one occasion. At least those councils that are tax-raising bodies, with ratings typically one notch below sovereign, can stand those shocks.

Let us consider one class of admitted body: the academies, which are admitted to the scheme of local government workers for their classroom assistants. There are maybe only a few per school, but they benefit from a Department for Education underwriting. That is a pretty good state-backed guarantee there. They may not be able to raise taxes, but their liabilities are gilt edged. However, when you then think of the small youth work charity which could go bust tomorrow if its local authority cuts its funding, there is a risk there. My point is that all the employers play a different contribution rate within each scheme that relates to their circumstances. That is for one scheme, but there are 89 such schemes, each with their own circumstances. Yes, it is untidy, but matching assets and liabilities to the exact and precise needs of those cohorts provides the best value to the taxpayer and accuracy in computation. So, when you add or take away those contributions, if you are in surplus, the value of the rebate can be calculated accurately.

I am not just trying to be difficult; I am just providing the reality of the situation. To focus on Amendment 18 for a moment, which requires the repayment of surpluses, it is a good proposal, but we need to allow for a much greater degree of complexity there. I hear what my noble friend has said, and there is a specimen number of 120% there. My instinct is that it is significantly more complicated than that, and there should be some sort of covenant-strength weighting—a hard-coded number is not right. Different schemes need different numbers. The underlying principle that, when the surplus gets to a certain amount, there should be a rebate is sound, but I am just really concerned that we overly simplify it and miss the target there.

We certainly need to be aware, as the noble Lord, Lord Davies, mentioned in an earlier group, about the cost cap, and be aware of the situation, which is mainly in the statutory unfunded schemes, where valuations are split between the employer and employees. I was a member of the fire services scheme, an unfunded scheme, and we nearly got into the situation in 2018-19 where there was an excess and we had to take money away from the employees; then in 2023, I think it was, or possibly four years later, it was going the other way. Mercifully, it was so complicated that nothing was done, so we ended up where we were. Just the cost cap in and of itself is a blunt tool. But I am getting ahead of myself.

Each scheme needs its own methodology for its own circumstances, and, of course, there are four separate actuarial companies in competition, so there is innovation which we must welcome—it is invidious to mention their names; some of us know who they are. They get their fees by constantly becoming more and more accurate and refined, and that is a good thing, not just for them but for the taxpayer, the members and employers. So, we need to have that combination of flexibility, but I can see the virtue of standardisation, or at least a standard method of expressing those particular schemes on a common basis so they can be consistently compared, so that my good friend Roger Phillips—who is newly OBE-ed, for the record—can publish his scheme advisory board census annually.

I have explained why each scheme needs its own bespoke valuation, but that does not help Roger. And, in the non-LGPS schemes, the GAD—the Government Actuary’s Department—provides figures because they are a provision for risk sharing between government and members, and so forth.

Amendment 19, and to a certain extent Amendment 17, on benchmarking, are important, but they cannot be the substitute nor override for bespoke measures in each scheme. In the case of benchmarking, the amendment would have been strengthened had we been able to look at cost per member, and there are other metrics too which can help people develop confidence in the schemes.

It is in the public interest that the amendments are accepted. Just because brighter years are ahead—we hope—does not mean that there is no value to these amendments. We need to allow for circumstances when those silver linings may have clouds again, to mix metaphors. I do not want to dilute the thrust and importance of the statutory funding objectives for the LGPS, because it ultimately provides a method by which we can balance appropriate risk with reward for each of the scheme members and the taxpayer who underwrites it all in the end—and that is a good way of doing it.

To a certain extent, the thrust of these amendments would put on a statutory footing the work that the LGPS advisory board does on a voluntary basis. That would be a very good thing for transparency and confidence, demonstrating further the success that is the local government scheme in this country. It is the closest thing that we have to a sovereign wealth fund, and anything that improves its standing has to be a good thing, so I commend this set of amendments.

[Baroness Noakes (Con)]

I shall just comment on Amendment 19. To summarise what the noble Lord, Lord Davies of Brixton, said, there are actuaries’ reports that have all this information, and actuaries understand those reports. Amendment 19 concentrates on publishing something in a form accessible to employers and the public, and I think that that is very important, because actuarial practice is quite difficult to understand sometimes. It cannot be assumed that a member of the public could understand actuarial language. We need to be able to communicate in a way that is accessible to the people who actually bear the costs of the local authority pension scheme—the council tax payers. I do not think that that is met by the actuaries’ reports, which doubtless comply with all kinds of standards issued by the FRC and long-standing actuarial practice but, in my limited experience of looking at these things, are pretty difficult to understand.

[Lord Davies of Brixton (Lab)]

I do not think that I said that it was okay if actuaries understood the report even if no one else did. I have in front of me the last valuation report from the pension panel of the London Pensions Fund Authority. I have been looking through it and I think that it is a wonderful example of presenting difficult actuarial information in a way that is understandable to any member of the fund who is prepared to put a modicum of effort into understanding it. The report starts with a very clear and concise executive summary, picking out the important points, then goes through all the issues that need to be explained, around levels of prudence and why particular assumptions have been made. It is all in there, with lots of appendices alongside if you want a deep dive into the detailed data.

I do not think I said that these reports were understandable only by actuaries; these are big commercial organisations which support their clients by providing information in an accessible manner. That is part of their job and it is what I always tried to do when I was a scheme actuary. The feedback that I received was that people were pleased to understand what was happening to their money.

--- Later in debate ---

[Lord Fuller (Con)]

I speak as the vice-chair—former chairman—of the Local Government Pension Committee, the body that represents the employers’ part of the LGPS in the scheme advisory board. I welcome this set of amendments because it gives us an opportunity to place on record the breadth of what it takes to run a pension scheme: not just the sexy bits—investment and all that sort of stuff that you might read about in the Financial Times—but the real boilerplate of operating a scheme for nearly 7 million people.

It is wise to put on record some of the nuts and bolts that hold that boilerplate together. It is not just about risk management, governance, data quality, member engagement or the huge dashboard project. There are benefits statements, which have to be calculated accurately of course, within timeframes, and engaging with the department—I see in the Box some faces that I recognise in that respect. It is about advising on bulk transfers in and out, AVCs, commutation, tax, survivor benefits, McCloud, GMP, the exit cap, ill health adjustments and subject access requests—to name a small subset of about 100 different activities that pension fund administrators undertake. There is interpretation of regulations and helping software providers to keep up with the torrent of regulations so that pensions can be paid to the beneficiaries accurately and in a timely manner.

This work often encompasses helping bereaved families at a difficult time in their lives to navigate changes in benefits, inheritance tax and so forth. It is also a very important part of it that the scheme works together to train up a new generation of administrators alongside engaging with the Local Government Association, their Welsh colleagues, COSLA in Scotland and the Northern Irish scheme. I have had the pleasure of meeting many of these people engaged in these activities, and when you meet them you realise the fragility of the behemoth that is the LGPS. I pay tribute to their dedication, which is completely unsung, which ensures that the promises made to local government workers are kept and will be kept.

All those things that I have mentioned the Bill is silent on, which is a real shame. While it is not the purpose of a Bill to enumerate every single detail, more could have been said about the breadth of the work that is involved in running a pension scheme, which goes beyond fund management. These amendments from my noble friend seek to right that wrong, and I commend them.

[Baroness Noakes (Con)]

My Lords, without wishing to take anything away from what my noble friend Lord Fuller has just said, it is true that this definition of management relates to the funds and assets of the scheme, not the totality of the operation of everything that is managed within a scheme. Having said that, non-exhaustive lists are always problematic. However, the issue raised by my noble friend Lord Younger is crucial to the management of assets, and its absence seems strange to me.

Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

These are my questions on this group of amendments, which is about the principle behind the surplus. How much of a surplus is surplus surplus? At 110% to 120%, if you have a major correction in the markets, you could undoubtedly lose that in a year—not actually but notionally. How much of a surplus is available to be released? How do we deal with putting guard-rails around that, as the noble Lord mentioned? Who shares that surplus? How much goes to the employer and, most importantly, how much goes to the members? How much of either of that will ultimately go into investment? For me, the important questions are: what are the guard-rails; what will be done with it; and how do we get the best out of it?

[Baroness Noakes (Con)]

My Lords, I will say a little more in our debate on the next group about how surpluses should be used, but we must recognise that employers in defined benefit schemes underwrite defined benefit scheme finances; they are the ones who have been putting in very large sums of money to keep these schemes going for the past 20-odd years. It is only right that we should recognise the interest that employers have in taking money that is no longer required within a scheme.

We have had so many years of deficits in pension schemes that we have rather forgotten that this was like an everyday happening in the pensions world, if you go back to the 1990s, when surpluses arose. Indeed, pension schemes were not allowed to keep pension surpluses; there were HMRC rules which made that rather difficult to do. These were perfectly ordinary transactions in the pensions world which we have just forgotten about because of the deficits that have existed for the last 20 or 30 years, which employers—not employees—have had to bear the burden of.

On the amendments in the name of the noble Lord, Lord Davies, I understand the technical point about removing assets rather than surplus, but surplus is the language that has always been used in the context of pension schemes; it is in the 1995 Act. The noble Lord’s amendments amend only this Act; as I understand it, they do not go on and amend the earlier Act. It is just language that has been used for a long period; I think people know what it means, and it will be very confusing at this stage to change the language.

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank the noble Lord, Lord Davies, for putting these amendments down and speaking in detail about them. We also heard good words from the noble Lord, Lord Kirkhope, the noble Viscount, Lord Thurso, and the noble Baroness, Lady Noakes. I almost thought, “Is there any point in getting up and speaking?” but I am a politician.

This group goes to first principles. What is a defined benefits pension surplus and what is it for? For us, DB surplus is not a windfall or an accident, as I think others have said. It is a result of long-term assumptions, member contributions, employer funding decisions and investment outcomes—all those—but above all, it exists within a framework of promises made to members in return for deferred pay. We are therefore concerned about renaming—we keep on coming back to this—“surplus” as simply “assets” available for redistribution.

Language matters here because it shapes both legal interpretation and member confidence. Treating surpluses as inherently extractable risks weakening the fundamental bargain that underpins DB provision. Our position is not that surplus should never be accessed, but that it should be considered only after members’ reasonable expectations have been fully protected. That includes confidence in benefits security, protection against inflation erosion, and trust and accrued rights not being retrospectively interpreted. I have always thought that with DB pensions you need prudence. How far do prudence and good governance go?

Finally, the question for Ministers is whether the Bill maintains the principle that DB schemes exist first and foremost to deliver promised benefits or whether it marks a shift towards viewing schemes as financial reservoirs once minimum funding tests are met. In that case, one has to think, “What is the minimum for the funding tests?” We shall come on to that in an amendment that the noble Lord, Lord Sikka, has put down later in the Bill on where companies fail. It is a question of when those surpluses are available, if they are ever available.

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[Viscount Thurso (LD)]

My Lords, I rise principally to speak to my Amendment 38 in this group and to support my noble friend’s Amendment 44, to which I added my name. I am in broad sympathy with the mover of Amendment 26.

I think we can all agree that we would like to deal, if possible, with inflation eroding the purchasing power of a pensioner. As was said on the last group, there is basically a contract between the employer and the employee in a DB scheme, where the employee expects to receive a certain pension. The case I raise in my amendment stems from the many pension schemes that do not offer an absolute inflationary rise as part of their terms and conditions. Quite a number do, but some say in their terms that there would “normally” be an increase of an inflationary amount, but it is not guaranteed. There are a number of schemes where the literature at the time the person went into the scheme—in the 1980s, 1990s or whenever—indicated that they may reasonably expect to get inflationary increases, but they did not.

In this instance, I am grateful to the BP Pensioner Group, which brought its case to my attention and helped with the drafting of this amendment and my others. Broadly behind its request is the fact that the BP scheme, which is now closed, is an extremely good scheme with quite a large surplus in it. It is very well funded and therefore, as per the last group, may well be something that could go back to the company in part. But it has chosen for a number of years to refuse the request of the trustees to make discretionary increases.

It is worth noting just how pernicious the effect of inflation is on these incomes. I used the Bank of England inflation calculator to see what had happened. Bearing in mind that the statutory amount is 2.5%, if you go back with the inflation calculator to 2005, it is 2.8%—you might say that is not too bad—but inflation from 2015 to 2025 was 3.11% and, from 2020 to 2025, it was 4.35%. In every year there has been a modest but rising and quite large difference between what the statutory cap would allow and what the actual inflation was.

Of course, that compounds every year. So, every year, the loss is compounding up. Today, a pensioner may well be significantly worse off than if they had been getting something. By definition, surpluses comprise funds in excess of those required to meet the totality of members’ entitlements in full; they are, therefore, the resource out of which discretionary payments can be made. As such, any payment of surplus to the employer could prejudice the possibility of a discretionary payment to members. What I am seeking, and what my amendment seeks, is to make sure that that is in balance.

As I mentioned, since 2021, inflation as measured by CPI has been well over 4%, much ahead of the cap of 2.5%. The Pensions and Lifetime Savings Association’s survey indicated that, during the recent period of exceptional inflation, only 12% of UK pension funds made permanent discretionary increases to protect the purchasing power of members. In looking at surplus being distributed in part to employers and in part to members, the economic good if the part of the surplus that goes to the employer is used in investment is obvious, but let us not forget the economic good in increasing the purchasing power of the pensioners. There is an equal economic good on both sides of this argument.

The noble Baroness, Lady Noakes, made the valid point that a great many companies supported their pension schemes during the difficult times of the late 1990s and early 2000s, but I would argue that that was in their contracts because they had contracted to make the payment at the end. We are now in a situation where, through the far better quality of trustees, the training offered by the Pensions Regulator—I have taken it and can attest that it is well worth doing—and the governance rules that have been brought in, we have the ability to make those surpluses available.

What this amendment would do is add to Clause 10 that the regulations to be made by the Secretary of State would include the words on the Marshalled List, which would mean simply that the Secretary of State could regulate to ensure that trustees took inflationary pressures into account. That is pretty modest, on the scale of the amendments that are being put forward, to deal with the surplus. Although the amendment is probing at this stage, if it is not met with some sympathy now, it may become a bit more than probing as we go on.

My noble friend Lord Palmer’s Amendment 44 is along the same lines, although it addresses pre 1997, which my amendment does not specifically do; I will leave my noble friend to argue the case for that. In passing this legislation, we owe it to those pensioners who have been left behind to do something to help them catch up.

[Baroness Noakes (Con)]

My Lords, I understand the motivation behind the amendments in this group, which call, in one way or another, for inflation protection, in particular for pre-1997 pensions that do not benefit from indexation to have a first call on pension scheme surpluses. I do not, however, support these amendments.

When compulsory indexation was first introduced by statute, it was applied only to pension rights which accrued after April 1997. That was a deliberate policy choice by government at the time. Although the cap and the index have been tinkered with over time, the basic policy choice has remained intact. The 1997 change was itself quite costly for those employers that had not previously included indexation or inflation protection in their pension offer to employees, which was quite common at the time. I am sure that the Government at the time were aware that imposing indexation on all accrued pension rights would have been very expensive for employers and would very likely have accelerated the closure of DB schemes.

The period after 1997 saw the evaporation of the kind of surpluses that used to exist, which, incidentally, vindicated the 1997 decision to exclude the pre-1997 accrued rights, because if they had been included, that would almost certainly have accelerated the emergence of deficits, which led in turn to employers considering how they could cap their liabilities by closing schemes entirely or future accrual. As we know, the period of deficits lasted until the past couple of years; they lasted a very long time.

Alongside this period of deficits emerging, there was a mutual interest among trustees and employers to de-risk pension schemes. That is why they shifted most of the assets into things such as gilts, which, in turn, increased the sensitivity of the defined benefit schemes to gilt yields, as we saw in the LDI crisis, and resulted, when interest rates started to rise again, in the surpluses starting to emerge. It was not the only cause but a very significant cause of the surpluses that we now see. We now have schemes in surplus: DWP figures suggest £160 billion—that figure will probably change daily as interest rates change—but that was only after significant employer support throughout the 1990s and the noughties was required, when significant deficit recovery plans had to be signed up to by employers to keep their defined benefit schemes afloat.

The amendments in this group seem to be predicated on the thought that these surpluses are now available for member benefits, as though employers had nothing whatever to do with funding their emergence. Because DB pension schemes are built on the foundation of the interests of members, it is obvious that the surplus will have to be shared between the two—that was partly covered in the previous debate—but the one thing we must always remember is that they have emerged largely from the huge amount of funding that has had to be put in since 1997 to keep the schemes afloat. That the surpluses have emerged does not mean that they are available for whatever good thing people want to spend them on. I certainly do not think it is right to use surpluses to rewrite history to create rights that deliberately were not created in 1997, for the very good reasons that existed at the time. For that reason, I do not support these amendments.

[Lord Willetts (Con)]

My Lords, I want briefly to enter this discussion to identify another group not captured in the neat divide of employers and scheme members. When there is £160 billion knocking around, people tend to work out elegant arguments for why some group or another has a claim on that money. I understand the arguments for the pre-1997 claims, but I have to say that what my noble friend Lady Noakes just said is a very accurate account of the history and the thinking at the time. There is indeed an argument that, looking back, there was a fundamental change in the character of the defined benefit pension promise with that legislation then, which probably ended up as the reason for their closure. A with-profits policy became one where you had a set of rights, which were more ambitious and have proved in many cases too onerous for employers.

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[Baroness Noakes (Con)]

I want to comment briefly on Amendment 35, tabled by the noble Lord, Lord Davies of Brixton, where he seemed to characterise the need to have members in the room alongside employers and trustees. He seems to forget that trustees’ responsibility is to act for the members. The members are fully part of the negotiation through the trustees. I personally do not agree with his amendment requiring formal consultation, as with some of the existing listed changes to pension schemes. But there was a good reason why the release of surpluses was not included when that legislation was first drafted, and I have seen no reason to change that.

My Amendment 42 is rather unlike other amendments in this group, which is why I spoke in the previous group and probably should have asked for my amendment to be grouped there. I reiterate my remarks in that group on the importance of the interests of the sponsoring employers, who have for the most part provided the funding which has now led to the surpluses emerging, which is the subject of these clauses in the Bill. My Amendment 42 simply says that regulations made under new subsection (2A) of Section 37 of the 1995 Act may not replace restrictions on employers once surpluses have been paid to them.

The DWP’s post-consultation document on the treatment of surpluses said:

“Employers could use this funding to invest in their business, increase productivity, boost wages, or utilise it for enhanced contributions in their Defined Contribution (DC) schemes”.


The noble Viscount, Lord Thurso, referred to that being used elsewhere as a justification for these new release powers. I agree that they could use it for those things, but there are also other things that they could use it for. For example, they could use it to fund a reduction of prices in the goods and services they sell to gain a competitive advantage in the marketplace.

The thing that concerns me in particular is whether the funds are used to pay dividends or to make a return of capital, because companies have shareholders and that would be a fairly normal use of surplus funds. My key concern is that the Government would use the power in new subsection (2A) to specify that employers could not use the money in the way they chose, and in particular in relation to dividends and share buybacks.

I completely understand the Government’s desire to see more investment, but holding money within the company might be the economically illiterate thing to do. Businesses make investments in assets, productivity or people if they think they have a reasonable prospect of making a return. They do not invest because they happen to have some surplus cash lying around. If they cannot be reasonably sure of making a decent return themselves, the right thing to do is to return the money to the shareholders and let the shareholders recycle that into other investment opportunities which make a reasonable return. That is why low-performing companies are often under pressure to return capital to the shareholders. In the context of the whole economy, that is the sensible thing to do, because it gets capital to the right place in the economy. Therefore, I hope the Minister can reassure me that new subsection (2A) will not be used to restrict what companies do with the surpluses extracted from pension schemes.

The Minister made some quite helpful remarks in the first group about the Government not telling people what to do with the surpluses, but I hope she can be specific in relation to the use of the power in new subsection (2A) that that would not be used to restrict what companies can do.

[Lord Fuller (Con)]

I support my noble friend Lady Noakes in her assertion that members’ interests are already taken into account on many trustee boards. In fact, all but the very smallest schemes have procedures and requirements to appoint member-nominated trustees. It is almost so obvious that it is hardly worth saying, but it is the truth. It is the job of the member-nominated trustees, not the unions or the members themselves, to represent the interests of that cohort. Even the local government scheme has arrangements whereby the needs of the employers and the employees are balanced, so it is not just a question of the private schemes; all schemes have those balances as a principle, and that is entirely appropriate.

I am disappointed to disagree with the noble Lord, Lord Davies, because I felt we got on so well in the previous two days in Committee, but, on this occasion, I part company with him. I do not think his amendments are needed, because of the existence of that member-nominated trustee class. It is their job, and if the members do not like it, they can get another one.

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[Lord Sikka (Lab)]

Just to recap quickly, I was looking at a scenario where an employer had received a surplus from a pension scheme but soon afterwards became bankrupt. Normally, the PPF will rescue, but that is limited to 90%, which means that employees will face a haircut in their pension rights. So the only possibility to help to protect employee pension rights is to prioritise payment to the pension scheme from the sale of the assets of the bankrupt entity. In other words, pension schemes must be paid before any other creditor.

Deficits on pension schemes of bankrupt companies are not uncommon. I was adviser to the Work and Pensions Committee on the collapse of BHS and Carillion, and we looked at that closely. I also wrote a report on the collapse of Bernard Matthews for the same committee. Basically, they showed all kinds of strategies used by companies to deprive workers of their hard-earned pension rights.

This probing amendment seeks to protect employees by ensuring that pension scheme deficits not met by the PPF are made good by being first in line to receive a distribution from the sale of the assets of the bankrupt company. This applies only where the employer has taken a surplus in the last 10 years. As I indicated earlier, there is nothing sacrosanct about 10 years; if noble Lords wish to support this, it could be changed.

From a risk management perspective, it makes sense to put pension scheme creditors above other creditors. Unlike banks and financial institutions, employees cannot manage their risks through diversification. Their human capital can be invested only in one place. Employer bankruptcy is a tragedy because employees lose jobs and pension rights. For those of your Lordships who are not familiar with portfolio theory, the basic message is that there is a correlation coefficient of plus one, and it multiplies their risks. As human labour cannot be stored, employees will have no time to replenish their pension pots, and as we all get older, our capacity to work is also eroded. So, despite making the required contractual payments, employees will face poverty and insecurity in old age.

I urge the Government to protect workers’ pension rights. They should not be left in a worse position after the extraction of surpluses by employers. I beg to move.

[Baroness Noakes (Con)]

My Lords, I do not support Amendment 45A, tabled by the noble Lord, Lord Sikka. I am not sure that the kind of regulations envisaged in this amendment could actually create a creditor which has a priority in insolvency where a creditor does not exist at present. At present, a deficit in a pension scheme is generally not as a matter of law a creditor if the sponsoring employer goes bust.

Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Thursday 22nd January 2026 Grand Committee

[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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[Baroness Noakes (Con)]

My Lords, Amendments 134, 137 and 138 in this group are in my name. I thank my noble friend Lady Neville-Rolfe for adding her name to Amendment 137; unfortunately, she needs to be in the Chamber imminently so was unable to stay in the Committee.

I support the other amendments in this group. I am very sorry that the noble Lord, Lord Davies of Brixton, is not in his place; I hope he has not been silenced by his Front Bench. On our first day in Committee, I found myself in near agreement with the noble Lord—that is quite unusual for me—when he said that he was not totally convinced by the Government’s line that big is necessarily beautiful. He said that he was open to that debate, but my position is less nuanced: I am absolutely certain that big is not always beautiful. There are plenty of examples of big being beautiful. The US tech industry is probably a good example of that, at least from a shareholder perspective. On the other hand, there are many examples of where being big is not good. Big can be bureaucratic and low-performing. It can be hampered by groupthink, unresponsive to customer needs and hostile to innovation and competition; we can all name organisations in that category, I am sure.

I buy, as a general proposition, that an investment management scale has many attractions, including efficiency of overhead costs and the ability to diversify into a wider range of asset classes in order to achieve superior investment returns, but I have absolutely no idea whether £25 billion is the right threshold for forcing people into certain kinds of investment. I am absolutely certain that we should not dogmatically force all organisations towards that asset threshold in order to leave the door wide open for new entrants and players who can demonstrate good returns for savers and innovation.

My Amendment 137 would widen the qualification for the new entrant pathway relief so that it can include schemes that will produce above-average performance. If smaller, more agile providers can provide equal or better returns than the big boys, why should they be excluded? If a provider has a winning formula, why must it also demonstrate that it will achieve scale? What benefit is there for pension savers in restricting the market in this way? Noble Lords should also ask themselves why the big providers in the market, in their emails to us, have generally not challenged the scale proposals. The answer is very simple: this Bill acts as a barrier to entry, and large players love barriers to entry. We must not let them get away with it.

Amendment 134 probes why subsection (2)(a) of new Section 28F, which is to be inserted into the Pensions Act 2008 by Clause 40, restricts new entrant pathway relief for schemes that do not have any members. The main scale requirement is to have assets of £25 billion under management by 2030. The transitional pathway is for existing smaller players, provided they have assets of £10 billion under management by 2030 and have a credible plan for meeting £25 billion by 2035. The new entrant pathway relief is available only to completely new schemes—that is, those with new members—and only if they have strong potential to reach £25 billion. This leaves a gap in which new players that have been set up very recently, or will emerge between now and when this bit of the Bill comes into force, will not qualify for new entrant pathway relief and may also not qualify for transitional pathway relief. They may well have strong potential to pass the new entrant test—that is, if they were allowed to because they had no members—but they would not satisfy the regulator that they have a credible plan for transitional pathway eligibility.

Growing a business is not a linear matter. At various points, additional capital will generally be needed, but the Bill will make it difficult to raise funds because of the significant uncertainty about whether a pension provider would satisfy the transitional pathway test; and failing that test would mean that the business could not carry on and would thus be very risky for investors or lenders. Do the Government really intend to drive out of the market new providers that have only recently started or will start between now and the operation of the scale provisions? I am completely mystified by this.

My Amendment 134 deals with the substance of Amendment 136 in the name of the noble Baroness, Lady Altmann, which she has degrouped into a separate group and which will not come up until later. I think they deal with the same issue, but I will wait to see what she has to say on her amendment in due course.

Finally, my Amendment 138 seeks to delete subsection (4) of new Section 28F in order to probe why the Government need a regulation-making power to define “strong potential to grow” and “innovative product design”. The Government are probably the last place I would go to find out about growth or innovation. The regulators that will implement the new entrant pathway are, or ought to be, closer to their markets and therefore will understand in practice how to interpret the terms for the providers they regulate. Why can the Government not simply leave it to them? What value can the Government possibly add to understanding how these terms should be implemented in practice? I look forward to the Minister trying to convince me that the Government know about growth and innovation.

[Baroness Altmann (Non-Afl)]

My Lords, as the noble Baroness, Lady Noakes, said, my Amendment 136 is in a later group and was degrouped deliberately to explore the issues that she has just raised. If the Committee is comfortable for me to deal with Amendment 136 here today, I do not mind doing so, but that would potentially cause a problem for the Ministers or other Members of the Committee. May I do so? Alternatively, I could speak to it later; whatever the Committee decides is fine with me.

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[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords for introducing their amendments. As this is the first time we are going to debate scale, let me first set out why we think scale matters. I hope to persuade the noble Baroness, Lady Noakes, with my arguments, but she is shaking her head at me already, so my optimism levels are quite low given that I am on sentence two—I do not think I am in with much of a chance.

Scale is central to the Bill. It adds momentum to existing consolidation activity in the workplace pensions sector and will enable better outcomes for members, as well as supporting delivery of other Bill measures. These scale measures will help to deliver lower investment fees, increased returns and access to diversified investments, as well as better governance and expertise in running schemes. All these things will help to deliver better outcomes for the millions of members who are saving into master trusts and group personal pension plans.

[Baroness Noakes (Con)]

Will the Minister say what the evidence base is for the assertions she just made?

[Baroness Sherlock (Lab)]

I was going to come on to that, but I am happy to do so now. Our evidence shows that across a range of domestic and international studies, a greater number of benefits can arise from scale of around £25 billion to £50 billion of assets under management, including investment expertise, improved governance and access to a wider range of assets. This is supported by industry analysis, with schemes of this size finding it easier to invest in productive finance. International evidence shows funds in the region of £25 billion invested nearly double the level of private market investment compared to a £1 billion fund. Obviously, we consulted on these matters and we selected the lower band, but there is further evidence that demonstrates the greater the scale, the greater the benefits to members. We did go for the lower end of that.

I turn to the amendments to Clause 40 from the noble Viscount, Lord Younger. This probing of how exemptions might operate, especially in relation to CDC schemes, is helpful. Our intent is clear: to consolidate multi employer workplace provision into fewer, larger, better run schemes. To support this, exemptions will be very limited and grounded in enduring design characteristics; for example, schemes serving protected characteristic groups or certain hybrid schemes that serve a connected employer group. I can confirm that CDC schemes are outside the scope of the scale measures. Parliament has invested considerable effort to establish this innovative market, and we will support its confident development while keeping requirements under review.

I turn to the broader point about why the exemptions are intended for use for schemes for specific characteristics; for example, those that solely serve a protected characteristic or those that serve a closed group of employers and has a DB section—hybrid schemes. I agree with the noble Lord that, if we were to have too many exemptions, it would simply mean the policy had less impact, but we need to have some flexibility and consultation.

Amendment 92 from the noble Baroness, Lady Bowles, proposes that master trusts delivering “exceptional” value under the VFM framework could be exempted from scale and asset allocation requirements. Exemptions listed in new Section 20(1B) relate to scheme design and are intended to be permanent. Introducing a performance based exemption tied to ratings would be inherently unstable for members and would risk blurring two parallel policies. Scale and VFM complement each other, and both support good member outcomes. However, we do not agree that VFM ratings should be used to disapply structural expectations on scale, and we do not wish to dilute either measure.

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I turn now to Amendments 134, 137 and 138 from the noble Baroness, Lady Noakes. Amendment 137 would make exceptional investment performance a gateway to the new entrant pathway. That would elevate performance above structural considerations and, in practical terms, is ill suited to a scheme with no members. It would also risk undermining consolidation by creating a performanceled exemption to scale, which I realise is what the noble Baroness wishes to do.

[Baroness Noakes (Con)]

I am struggling to understand why the Government are setting their face against good performance. They seem to be obsessively pursuing scale and consolidation of the industry, unable to see that, for pensioners and savers, equally good or better returns can be achieved from sub-scale operators. That is a question of fact. The evidence that the Minister gave earlier merely points to there being a correlation between size and returns; it is not an absolute demonstration that, below a certain scale, you do not achieve good returns for savers. I hope that the Minister can explain why the Government are so obsessed with scale rather than performance for savers.

[Baroness Sherlock (Lab)]

I feel that we will have to agree to disagree on this point. The Government are not obsessed with scale; the Government believe that the evidence points to scale producing benefits for savers. We find the evidence on that compelling. I understand the noble Baroness’s argument, but the benefits of scale are clear. They will enable access to investment capability and produce the opportunity to improve overall saver outcomes for the longer term.

I cannot remember whether it was this amendment or another one that suggested that a scheme that did well on value for money should be able to avoid the scale requirements; the noble Baroness, Lady Altmann, is nodding to me that it was her amendment. The obvious problem with that is that schemes’ VFM ratings are subject to annual assessment and, therefore, to change. It is therefore not practical to exempt schemes from scale on the benefit of that rating alone.

We are absolutely committed to the belief that scale matters. It is not just that we think big is beautiful—“big is beautiful” has always been a phrase for which I have affection—but I accept that it is not just about scale. It is not so for us, either. We need the other parts of the Bill and the Government’s project as well. We need value for money; we need to make sure that schemes have good investment capability and good governance; and we need to make sure that all parts of the Bill work together. This vision has been set out; it emerged after the pension investment review. The Government have set it out very clearly, and we believe that it is good.

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[Baroness Sherlock (Lab)]

We expect schemes with scale in a future landscape to deliver better outcomes for members. Consolidation is not created by the scale measures. It is already happening in the market, but we expect it to accelerate. Those running schemes are expected to carry out due diligence and act in the interests of their members in any consolidation activity. If there is anything else I can say on that, I will write to the noble Baroness. I am happy to look at it. The core question is whether it is a matter for those running schemes to make those judgments.

[Baroness Noakes (Con)]

Does the Minister understand that if you are currently a small scheme, unless you have certainty about being able to qualify to go into transitional relief, you will not be able to raise any money to facilitate your growth? It becomes a Catch-22. The Bill is creating uncertainty, which is destroying the businesses of those who might well be able to come through, but will not be able to convince equity or debt providers that they will be a viable business at the end because of the hurdles that the Government are creating in this Bill.

[Baroness Sherlock (Lab)]

I understand the noble Baroness’s concerns, but I contend that we are doing the opposite. We are creating certainty by being clear about what the intention is, what the opportunities are and where we expect schemes to be able to get to and in creating transition pathways but making it clear that people will have to be able to have a credible plan to do that. We are making that clear now. I have given the reasons why I anticipate that there is a pathway to scale for schemes that are around at the moment, but that is a judgment that schemes will have to make. If they do not believe that they can make scale, they will need to look at alternative futures in a way that is happening in the market already through consolidation. I accept that it may accelerate it, but it is not creating it.

Amendment 134 seeks to remove the no-members requirement entirely, accepting that it would potentially allow any existing DC workplace scheme to claim new entrant status, circumventing the scale policy, which, while contested, is the point of our proposal. Our inclusion of the no-members provisions in Committee in the Commons clarified the original intent and prevented a loophole.

Amendment 137 would mean that existing schemes would be able to access the new entrant pathway if they had stronger investment performance than can be achieved by schemes with scale, which we have touched on. While I understand the intention to reward and maintain strong investment performance, the focus there would be on short-term rather than long-term outcomes. There are various practical problems with doing that in any case, but I am also conscious that there will be occasions where a scheme that depends on its investment performance does not deliver and no longer qualifies on the pathway. That is then not a stable position for employers that use the scheme or its members. At the heart of the requirement is the need to create buying power for schemes to drive lower fees and increase returns. A small scheme simply cannot generate the same buying power, and schemes with scale are expected to deliver better outcomes over the long term.

Amendment 138 would strip the power to define “strong potential to grow” and “innovative product design” in regulations. The Government believe that these are key attributes of a successful new entrant in the market. Like other noble Lords, I know about the importance of ensuring that the measures we implement will be clearly understood and workable in the complex pensions landscape. The form that innovation will take is, by definition, difficult to predict; we would not seek either to define its meaning without input from experts and industry or to fix that meaning in law without retaining some flexibility. Consultation with industry will be important in ensuring that schemes can demonstrate these attributes; to be clear, we will consult on this and other aspects of the new entrant pathway relief first, before regulations determine the meaning of these terms.

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[Baroness Altmann (Non-Afl)]

My Lords, I support all the amendments in this group. I echo the words of noble colleagues in the Committee about the dangers of the Government mandating any particular asset allocation, especially the concerns about mandating what is the highest risk and the highest cost end of the equity spectrum at a time when we are aware that pension schemes have probably been too risk-averse and are trying to row back from that.

What is interesting, in the context of the remarks made by the noble Lord, Lord Vaux, is that I was instrumental in setting up the Myners review in 1999, which reported in 2001, under the then Labour Administration. As Chancellor, Gordon Brown’s particular concern was about why pension funds do not invest much in private equity or venture capital. That was the remit of the review. The conclusions it reached were that we needed to remove the investment barriers, to change legislation, to encourage more asset diversification, to have more transparency and to address the short-term thinking driven by actuarial standards—at the time, it was the minimum funding requirement, which was far weaker than the regime established under the Pensions Regulator in 2004.

So this is not a new issue, but there was no consideration at that time of forcing pension schemes to invest in just this one asset class. The barriers still exist. In an environment where pension schemes have been encouraged, for many years, to think that the right way forward is to invest by reducing or controlling risk and to look for low cost, it is clear that the private equity situation would not fit with those categories. Therefore, I urge the Government to think again about mandating this one area of the investment market, when there are so many other areas that a diversified portfolio could benefit from, leaving the field open for the trustees to decide which area is best for their scheme.

I am particularly concerned that, as has been said in relation to previous groups, private equity and venture capital have had a really good run. We may be driving pension schemes to buy this particular asset class at a time when we know that private equity funds are trying to set up continuation vehicles—or continuation of continuation vehicles—because they cannot sell the underlying investments at reasonable or profitable prices and are desperately looking for pools of assets to support those investments, made some time ago, which would not necessarily be of benefit to members in the long run.

[Baroness Noakes (Con)]

My Lords, I support all the amendments in this group. When I came to draft my own amendments, I discovered that this area of mandation was a rather crowded marketplace, so I decided not to enter it. I will not speak at length on the subject, but I endorse everything that has been said so far and wish to commit my almost undying belief that mandation must not remain in the Bill.

[Viscount Younger of Leckie (Con)]

My Lords, my noble friend Lady Stedman-Scott and I have only one amendment in this group: Amendment 109, which would remove the Government’s broad mandation power. That has been very much the theme of this debate, of course. I want to be absolutely clear at the outset that we are also seriously and fundamentally opposed to investment mandation in the Bill, which I sure will come as no surprise to the Minister.