Pension Schemes Bill

Baroness Penn Excerpts

Monday 26th January 2026 Grand Committee

[Baroness McIntosh of Pickering (Con)]

My Lords, this is the first time I have been able to speak on the Bill. I am delighted to follow my noble friend, who I still consider the pension tsar and who is so knowledgeable in this field. I apologise for being absent when Amendments 132 and 133 were reached; unfortunately, with all the business in the House, there are inevitable clashes, and we cannot be in two places at one time.

I thank the ABI and others who have briefed me in advance of the Bill proceedings. I have to say, I agree with their conclusions. I believe that they are right when they say that the Government are right that it is not necessary to mandate asset allocation by pension funds.

This amendment is intended as a probing amendment for debating purposes; I am sure that the debate will represent the broad consideration of views in Committee this afternoon. The aim, really, is to provide reassurance to pension providers by capping the mandatory asset allocation at a total of, say, 10%, which is a figure that my noble friend Lady Coffey and I independently happened upon; I also added 5% for geographical locations, such as the UK, as a proportion either of total assets or of a subset of assets.

It is true to say that the industry is generally opposed to mandating asset allocation at all. This amendment would provide some reassurance, which is what I shall seek from the Minister when she comes to respond to this debate, to pension providers of that by capping the mandatory asset allocation to a total of these two figures—10% and 5%—as a proportion either of total assets or of a subset of assets.

There has been much talk of the Mansion House Accord this afternoon. I would like to chip in also and say that this power would align with the accord, which had widespread support across the industry—as well as from government, as it was supported by the Chancellor. I understand that the accord was led jointly by the ABI, Pensions UK and the City of London Corporation. It followed extensive discussion between the industry and the Pensions Minister and had a 17 signatories, who committed

“to the ambition of allocating at least 10% to private markets across all main DC default funds by 2030; and … within that, at least 5%”—

and I have now lost my briefing, so I am completely at sea.

I hope that I have given a little taste of where we are. I am not saying that these are the definitive figures; I am just throwing into the wash that this afternoon would be a good opportunity to give some reassurance to the pension providers in the way I and my noble friend Lady Coffey have sought to do.

[Baroness Penn (Con)]

My Lords, I will speak briefly in support of Amendments 112, 114 and 117 in the names of my noble friends Lady Coffey and Lady McIntosh of Pickering, which aim to set a cap on asset allocation.

In response to our debate on the previous group, the Minister consistently described the mandation power as seeking to achieve a “modest but meaningful” investment in private assets; and said, importantly, that it was designed as a “narrow backstop” to delivering the Mansion House Accord. If that is the case, why is the proportion of assets that can be mandated under this power not capped in line with that accord? Indeed, as I read it, it could be up to 100% of assets. Why is that? The Minister may point to consultation and other measures that will constrain the use of the power but, for something so controversial and which the Government say they do not want to use, I cannot understand why they are not constraining it in primary legislation.

I will touch on timescales in our debate on the next group, but the Minister says that this Government do not want to use this power. However, as things currently stand, it would be open to the next Government to use the power, and the one after that—as well as a couple of Governments in between if we do not go to full Parliaments, as we have not always done in recent years. In those circumstances, it would also be sensible to limit the power to delivering what the Government say they want it to do.

Why do the Government not want a maximum limit in primary legislation? What is their objection to it? The cynic in me wonders whether the power is so widely drawn that, when we remove mandation on Report—I might be getting ahead of myself but that is on the cards—the Government could bring forward a series of concessions at ping-pong to limit the use of the power to what they say they want it to do. I am sure that that is not the case, but it might be better than the position in which the Government think that this power, as it appears in the legislation, has been drawn appropriately. I am really interested in the Minister’s response on this.

[Lord Palmer of Childs Hill (LD)]

My Lords, I will come in at this moment because I wish to speak in favour of the amendment from the noble Lord, Lord Vaux, which I have co-signed, because he is unable to be with us today. These words are both mine and the noble Lord’s, more or less.

I am not in favour of the asset allocation mandation clauses generally. Amendment 119, however, seeks to probe the reasons why the Government have chosen a particular asset class for mandation: private equity. I have no problem with pension schemes choosing to invest in private equity; historically, it has generated good returns, in large part because of the use of debt to leverage those returns. Private equity may be a good investment for pensions schemes, and this amendment would not prevent that.

However, my understanding is that the principal motive of the Government for mandating asset allocation is to drive greater economic growth. I agree that venture capital and private debt—two other asset types listed in the Bill—may indeed create growth, but I do not understand why the Government believe that private equity is a growth driver. I have to assume that this is because the Government have fallen for the story that the private equity industry often tells about how much investment it makes, how many people it employs, what great returns it generates, and so on. What private equity actually does is buy existing companies or assets, allowing the previous owners to cash out.

Very rarely, I believe, does a private equity company provide new equity into a company. Rather, it typically does the opposite: it funds the acquisition with a very high proportion of debt. The leveraged buy-out is the basic model of most private equity activity. That debt is not borrowed by the private equity itself; rather, it is pushed down into the underlying company, and the interest and any debt repayments are made from that company’s profits.

One effect of this is to reduce the taxable profits—in other words, the debt interest is tax deductible—and therefore the tax is payable by the company. The debt itself is often located in offshore low-tax locations, so tax is not paid on the interest by the private equity or the lender, which may well be related. This is a direct loss to the Exchequer. I hope the Minister can reply to that.

The high leverage also has the effect of reducing investment by the company in its products or services. Instead of investing in its future growth, the company now has to use much of its cash flow to pay the interest. What often happens is that the private equity undertakes a cost-rationalising exercise so that the profits are improved in the short term with a view to selling the business again as soon as possible. The leveraged effect of the debt means that private equity can make a substantial gain even if the underlying business grows only in line with inflation.

The cost rationalisation often invokes workforce reductions. Studies indicate that private equity-owned companies typically have lower levels of employment even five years after the original buy-out. This certainly tallies with my experience, although I have not had the benefit of the experience of the noble Lord, Lord Vaux, who worked for private equity-owned companies during his career.

In the meantime, if there are any profits left, rather than being invested in growth they are usually paid out as dividends. In fact, it is not uncommon, if a company has managed to reduce its debt ratio, for a PE to recapitalise the company to put in more debt in order to allow the payment of a dividend. Of course there are exceptions, but, as many examples show, such as Thames Water—indeed, much of the water industry—Debenhams, Southern Cross and Silentnight, private equity cannot legitimately claim to be a force for growth. Are there good returns for its investors, and particularly its partners? Yes—but is it a force for growth? It is not really. It is said that £29.4 billion was invested in UK firms by private equity in 2024. Yes, but that investment was almost entirely in buying out existing businesses, which is very different from providing capital for growth.

So the noble Lord, Lord Vaux, and I are baffled as to why the Government think that mandating pension funds to invest in private equity will be good for the country. It may be good for someone but not necessarily for the country. I repeat that I have no problem with a pension fund investing in private equity if the trustees believe it is right for the fund and its members, but I see no benefit, and probably a downside, for the country as a whole. If we must mandate allocation, let us at least target it to asset types that generate growth, such as venture capital or infrastructure. If the Government’s primary motive for mandation is to drive UK growth, we should exclude private equity from the list. I hope the Minister and her colleagues will give thought to this, because we are on the same wavelength and we want the same answer, but not in the way that the Bill proposes at the moment.

--- Later in debate ---

The Minister may be forgiven for thinking that these amendments are intended to probe; they are, with so many questions, but my points are designed to force clarity on the Government’s case. I look forward to the Minister’s response and beg to move.

[Baroness Penn (Con)]

My Lords, my noble friend Lord Younger has asked many of the questions that my Amendments 116A and 130A seek to probe on the rationale for the Government’s timescales in the Bill. They are also intended to shorten those timescales and implement an absolute sunset; I want to be clear to the Minister that I do not think that a deadline by which the maximum asset allocation cannot be raised further is a sunset.

I heard what the Minister said in our debate on the previous group about introducing a maximum allocation cap. I am not sure that I really buy into that argument but, if that is the rationale, are the Government really saying that it might take 10 years to work out what the definite figures agreed under the Mansion House Accord are and that that is why they have their timescales in place? Are the Government really saying to those who signed up to the Mansion House Accord—or, indeed, to those who did not—that the figures that could be mandated under this power could go above 10% and 5%? That would make it an even harder power for people to swallow. Further, this could be over by an unlimited amount—not even a variance of maybe up to 15%, but up to any level.

The Government have used the argument for the mandation power that it creates certainty for those pension funds but, the more we discuss it, the more uncertainty there seems to be. The figures of 10% and 5% do not seem to be the figures of 10% or 5% any more. Under the Government’s approach, we will get a cap, but maybe in 10 years’ time, while the assets required to be invested under that cap can still change in perpetuity. I used the example at Second Reading of one Government wishing to mandate investment in net zero and the other wishing to mandate investment in defence assets; both are conceivable things that we might see happen in the longer term. The point is that, the longer this power is in place, the greater the risk that it is used not for this Government’s intention but for something else.

On the guardrails outside of the primary legislation, which the Minister referred to but rightly did not go into in our debate on the other group, I have a question about one: the requirement to consult. At Second Reading, the Minister said that the Government would be required to consult before using these powers for the first time. I want to check whether this means that they will not be required to consult when amending them subsequently or they will be required to consult each time they bring forward regulations under this power. I had thought that it was the former—consulting each time they used the powers—but, if it is not, and it is only the first time when they are used, I would be grateful if the Minister could clarify that point.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am grateful to my noble friend Lord Younger of Leckie for introducing this group and setting the scene so eloquently, and to my noble friend Lady Penn for speaking to her amendment. I shall speak to the amendments in my name and I thank the noble Baroness, Lady Altmann, for lending her support to Amendments 129, 153 and 156. They follow on neatly from the other amendments about which we have heard. The Bill requires the Government to publish a report before the introductory regulations are brought into force to bring in the reserve powers, but it covers only how the financial interests of savers will be affected and the effect of the regulations on economic growth.

The purpose of my Amendment 129 is to set out additional items to be covered in the report, to ensure that the Government properly and comprehensively assess the impacts of any future regulations, such as, for example, the functioning of workplace pensions markets and impacts on the market of assets to be mandated and other requirements. What I am proposing in Amendment 129 is to test whether the Government have done enough to justify using such a drastic power. I am also suggesting, taking up the point of my noble friend Lord Younger, that the first report should be in less than five years: the first report should be after two years, because a lot of damage could be done in the first two years and even more damage could be done if there is no report for five years.

Amendment 156 continues on this theme, looking at a different part of Clause 40 for these purposes. Amendment 153 says that there should be a review, as I have mentioned, which should take place within at least two years, in addition to a review within at least five years. While the review in the Bill allows for mandation to be in place for five years before the Secretary of State must review its impact, I believe that that is too long and that it could potentially allow for negative effects to set in under the regulations under the Bill for affected default schemes. Taken together, Amendments 153 and 156 bring forward the review of regulations to take place within two years after those regulations have been in force, as well as after another three years to stop any further damage being done. We set out here what those reviews should look at

“the functioning of the market for Master Trusts … what effects the measures have had on that market … what effects the measures have had on the markets for qualifying assets”,

and so on, as set out in these amendments.

I hope the Minister will look favourably on these amendments, particularly since there is a mood on this side to coalesce around a review within the first two years.