Pension Schemes Bill

Baroness Sherlock Excerpts

Committee stage
Tuesday 3rd February 2026 Grand Committee

Debate on Amendment 140 resumed.

[The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)]

My Lords, these amendments, debated in the last session, concern trustees’ duties and protections, the design of the savers’ interest test, the risk of regulatory herding and the proportionality of the penalty regime.

I start with the operation of the savers’ interest test and exemptions for many future asset allocation requirements. Amendment 140, from the noble Baroness, Lady McIntosh, would remove the provision that an exemption, once granted under the savers’ interest test, applies only for a period specified by the authority. In practice, this would allow an exemption to become open-ended. Amendment 141 would prevent schemes from being required to change their asset allocation while an application or appeal under the savers’ interest test is pending and it would secure the ability to apply for an exemption for up to three consecutive years.

We need fair and transparent procedures when exemptions are granted or withdrawn. But the Government’s intention is that exemptions should be capable of adapting to changing circumstances rather than becoming de facto permanent exclusions. Market conditions, whether in terms of fees or the availability of suitable opportunities, can and do change. A permanent exemption, as Amendment 140 would allow, could end up entrenching a competitive advantage for particular providers long after the original justification had fallen away.

On Amendment 141, many of the procedural safeguards that the noble Baroness seeks are already enabled by the Bill. New Section 28C allows regulations to set time limits for decisions on savers’ interest applications, to specify the period an approval lasts, to set rules around withdrawals and to require advance notice to be given. Those are the right vehicles for detailed processes to be determined—by regulators and in consultation with industry. The powers do not cap the number of times that an exemption can be renewed, so I assure the noble Baroness that multiyear relief will already be possible where justified.

Turning to trustees’ duties, Amendments 146 and 147, from the noble Baroness, Lady Bowles, address how these new powers sit alongside fiduciary responsibilities. Amendment 146 would say expressly that nothing in this chapter overrides or diminishes trustees’ duty to act in the best financial interests of members. I entirely agree about the importance of that duty. But, as I have said, the Government would not be proposing these powers if there were not strong evidence that savers’ interests lie in greater investment diversification than we see today in the market.

In the last session, the noble Lord, Lord Sharkey, challenged me on the strength of the saver benefits, referring to analysis by the Government Actuary’s Department, which, in illustrative modelling for DWP, found a 2% uplift in a typical saver’s pension pot from a hypothetical private markets allocation. That analysis is just one of various reports that show the benefits of diversification and the potential for higher risk-adjusted returns from a more diversified portfolio. Some of that evidence is referenced in the DWP paper to which the noble Lord referred. As another example, a British Business Bank report identified a potential uplift of 7% to 12% from a 5% allocation to venture capital.

There is a fair degree of consensus around this in the pensions industry. Indeed, the Mansion House Accord explicitly cites the potential for higher risk-adjusted returns as its core justification. The fact is that we are an international outlier. Meanwhile, Australian and Canadian pension funds are investing in the UK, owning airports, roads and telecom companies, making the most of the opportunities available to invest in this country while seeking good returns for their savers.

When it comes to the reserve asset allocation power, as noble Lords know, before it can be exercised, the Government must publish a report on the likely impact on savers. Where asset allocation requirements are in place, the savers’ interest test allows a scheme to seek an exemption if it can show that compliance would cause material financial detriment to members. Crucially, nothing in the Bill disapplies trustees’ existing duties of loyalty, prudence and acting in members’ best interests. These continue to apply.

Our concern with Amendment 146 is that it could cast doubt on the binding nature of any requirements introduced under these powers by implying that trustees can simply disregard them wherever they assert that they are acting in members’ interests. The right place to consider scheme-specific departures is the savers’ interest test, which is overseen by the regulator.

We do not agree with Amendment 147 for similar reasons. It seeks to create a broad statutory safe harbour from penalties or consequences for trustees who fail to meet asset allocation requirements where they believe that they are acting in members’ best interests. The Bill already recognises that there will be circumstances where exemptions are justified and provides a structured route to secure them. A blanket safe harbour would risk undermining that framework.

Amendment 148, which is also from the noble Baroness, Lady Bowles, would place a new statutory duty on trustees to have regard to systemic risks, including economic resilience and climate change. I very much agree with the noble Baroness that such risks can materially affect long-term pension outcomes, and trustees should take them seriously. Our concern is that a new open-ended duty, using terms such as “systemic risk” and “economic resilience” without detailed definition, risks increasing legal uncertainty and costs for trustees without clear benefit. Our preferred approach is to work with the sector on strength and guidance for trust-based private pensions, clarifying how trustees can take account of systemic and sustainability risks within their existing duties.

The noble Lord, Lord Sharkey, pressed me last Monday on the timings of this work. I can confirm that the work is already under way and that an initial round table, with representatives from across the pensions sector and led by the Pensions Minister, took place yesterday. The Pensions Minister has confirmed that he will be convening a technical working group to take this work forward and that there will be a full consultation on the draft guidance later in the spring.

The noble Lord, Lord Sharkey, also asked whether that guidance would clarify the application of the reserve power. The guidance is not conceived as part of our implementation of these reserve powers, which, as I take every opportunity to remind the Committee, may well never be exercised. Rather, its purpose is to address inconsistent interpretations of investment duties across the trusteeship landscape and support everyday investment decision-making. As noble Lords may well be aware, there has been an active area of discussion within legal and financial circles for many years. The recent work of the Financial Markets Law Committee has played an important role in shaping the debate on the extent to which factors such as climate change, quality of life in retirement and sustainability should be considered in investment decisions. Building on that, our forthcoming statutory guidance is intended to provide clear and practical support to trustees on how these factors should be taken into account, ensuring confidence and consistency.

Amendment 142 from the noble Lord, Lord Vaux of Harrowden, deals with a concern about what happens if qualifying assets were to perform poorly, an issue also raised by the noble Baroness, Lady Stedman-Scott, last week. This amendment would require the regulator to indemnify schemes against costs or liabilities if members’ returns are worse than they might have been without any mandated allocation. I recognise the question, but I say again that the Government would not be proposing these powers if we did not think change from the status quo was in savers’ interests. These powers would only ever be used following a statutory impact report and with the savers’ interest test in place.

As I have said previously, trustees continue to be responsible for investing in their savers’ interests. That means savers would continue in all circumstances to be protected by the core fiduciary duties of trustees to act with loyalty, honesty and good faith to savers, and trustees would continue to be subject to a duty to invest in savers’ best interests, in line with the law. We expect that duty would certainly apply to the selection of individual investments in a portfolio; to the balance of different asset classes in a portfolio, including the balance between private asset classes; and to any decision to apply for an exemption under the savers’ interest test. If a provider felt the asset allocation requirement was inappropriate for their circumstances, we would expect their existing duties to guide them to submit an application for exemption to protect their savers’ interests.

There are also, I must say, some significant drawbacks with this amendment, which is not dissimilar to Amendment 167—we are going to cover that in the next grouping, so I apologise if I end up being a little bit repetitive then. An indemnity of this kind would in practice mean that taxpayers and levy-paying firms would underwrite individual schemes’ investment decisions. That would create serious moral hazard and encourage excessive risk-taking, on the basis that any losses could be socialised while any gains would accrue to the scheme. It would also be very hard to operate in practice. Identifying the portion of any loss attributable specifically to the qualifying assets, as distinct from the wider portfolio or market factors, would be highly contentious.

Amendment 150 from the noble Baroness, Lady Bowles, seeks to ensure that the Secretary of State avoids mandating or promoting investment in ways that create herding and to emphasise diversification in guidance. I entirely agree that we must avoid perverse herding effects. At present, DC schemes’ exposure to private markets is relatively low. As that changes, the breadth of potential qualifying assets, infrastructure, property, private equity, venture capital, private credit and others, together with the requirement for a prior report to Parliament, should help to mitigate herding. But while we will need to be alert to this, we do not believe an additional statutory duty is needed. Indeed, schemes will continue to be subject to existing rules and regulations in this area, such as the Occupational Pension Schemes (Investment) Regulations 2005, which require the assets of trust-based schemes to be

“properly diversified in such a way as to avoid excessive reliance on any particular asset”.

Amendment 149, also from the noble Baroness, Lady Bowles, would ensure that listed investment companies and trusts can be treated as qualifying assets on the same footing as other collective vehicles. We have had many an opportunity earlier in Committee to discuss in detail the matters relating to investment companies, so I will not rehearse arguments made previously. But, as I said last week, the design of this reserve power is deliberately aligned with the commitments made by industry under the Mansion House Accord. I have circulated to noble Lords links to the relevant Q&A materials, which I mentioned last Monday in Committee, and which can be found on the websites of Pensions UK, the ABI and the City of London.

The noble Baroness has asked periodically who is responsible for the approach taken to funds. I cannot speak to individual decision processes; what I can do is to echo what I said last week. The signatories self-evidently supported the scope that was eventually drawn, but so did the Government—we have been quite clear about that. Based on my knowledge of the conversations in which the Government were involved, I can also say that government support for this position was not in any way the result of pressure on the Government from signatories or the representative bodies, so the idea that this is some sort of anti-competitive move by the pensions industry is completely misconceived. Instead, it simply follows the logic—

[Baroness Bowles of Berkhamsted (LD)]

I do not think I was suggesting that it was an anti-competitive move by the pensions industry, but there are segments in it that are advantaged by it. The other concern is that the meetings that took place prior to the signing of the Mansion House agreement were very particular to certain types of organisation; I have yet to know of any that really had interests in listed investment companies or of any of them that were invited. Perhaps the Minister does not know because this is not her field, but I have to say, I am very concerned that this has been a secretive consultation, not a public consultation, among a selection rather than among the many.

[Baroness Sherlock (Lab)]

My Lords, I am not going to say any more than I have now. The noble Baroness has made a series of complaints about cartels, secrecy and lack of integrity—all kinds of things—none of which are merited. I simply felt that I needed to put something on the record to counter that, and I do not have anything to add. We have made it clear that these were iterative discussions with the industry, looking at what was going to happen specifically in relation to the accord, and I have made the Government’s view on that clear.

On enforcement, Amendment 145, to which the noble Baroness, Lady Stedman-Scott, has added her name, probes whether the maximum penalty of £100,000 per employer in new Section 28I is proportionate. We have worked closely with the regulators and benchmarked against comparable penalty regimes. The intention is to set a maximum that is meaningful as a deterrent to wilful or repeated non-compliance but is not routinely applied. I assure the noble Baroness that it is a cap, not a fixed sum, so the regulators will take account of the facts in each case; in practice, the potential loss of qualifying scheme status for auto-enrolment is likely to be a far more significant consequence than any fine.

We are keen to work with schemes, trustees and providers to ensure that any future use of the reserve asset allocation powers, were that to come to pass, is carefully targeted, evidence-based and consistent with trustees’ duties. We believe that the Bill provides the right framework, including the savers’ interest test, the requirement for a prior report and a proportionate enforcement regime. In the light of all that, I hope that noble Lords can withdraw or not press their amendments.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am grateful to the Minister for summing up, albeit that there has been a delay of some two working days. I thank everyone who has spoken. I offer a particular thank you to the noble Baronesses, Lady Altmann and Lady Bowles, for lending their support to Amendments 140 and 141.

I note that, in summing up, the Minister said—it was in relation to the amendment in the name of the noble Lord, Lord Vaux, I think—that statutory guidance will be issued. I make a plea: could that be made available before Report, or certainly before the Bill receives Royal Assent, to enable trustees to have sufficient time to prepare in this regard? I do not know whether we have a date for that.

In relation to Amendments 140 and 141, I could not have put it better than my noble friend Lady Stedman-Scott did in summing up when she said:

“They make the framework that the Bill creates more robust, transparent and defensible”.—[Official Report, 26/1/26; col. GC 287.]


Therefore, I am grateful for this opportunity to debate these two amendments, as well as this group of amendments per se, but, for the moment, I beg leave to withdraw the amendment.

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[Baroness Stedman-Scott (Con)]

My Lords, I shall speak briefly to Amendment 167, which was tabled and spoken to eloquently by the noble Baroness, Lady Kramer, and supported by many noble Lords. This amendment touches on a set of concerns that we raised at Second Reading and to which we will return in considerably more detail in our debate on the next group.

For the sake of brevity, at this stage, I will confine myself to the central point of principle. The issue here is not simply asset allocation but where risk is placed and who should take it when investment decisions are shaped by government direction, rather than trusty judgment. The mandation power introduced by the Bill is targeted narrowly at automatic enrolment default funds—the schemes that are relied on by those who are least likely to have made an active choice and are least able to respond if outcomes are adversely affected. That targeting matters. Mandation does not apply evenly across the pensions landscape. It does not touch defined benefit schemes, self-selected funds, SIPPs or bespoke arrangements but falls with notable precision on default savers—those who depend most heavily on the neutrality and integrity of the system to act on their behalf.

Amendment 167 raises a legitimate question about protection and accountability in that context. If default funds are required to follow mandated investment decisions and if those decisions underperform a simple, low-cost benchmark, should the consequences fall entirely on members who neither chose the strategy nor, in practice, have the capacity to respond to it? Of course, it may be said that members are free to move to another fund, but that response lacks behavioural realism. Automatic enrolment defaults exist precisely because many savers do not actively choose, do not regularly review and do not feel equipped to intervene in complex investment decisions. How can we put them in that position?

For a significant proportion of members, remaining in the default is not an expression of preference but a reflection of constraint, limited time, limited confidence and limited financial literacy. Behavioural realism tells us that these savers will not simply move in response to policy changes, however well signposted. To place the full downside risk of mandated investment decisions on that group is therefore not neutral; it is a deliberate allocation of risk to those least able to manage it. The noble Baroness’s amendment is therefore not an attempt to eliminate risk but to highlight the asymmetry that mandation introduces and the absence of any corresponding safeguard for those most exposed to its effects.

These issues around mandation, choice, fiduciary duty and the position of default savers run through the architecture of the Bill. We will return to them in much greater depth in the following group. For now, I simply underline that the concerns raised by Amendment 167 and all those who have spoken are not isolated. I look forward to the Minister’s response and hope that the Government will take note of the concern laid out to them today and do the right thing.

[Baroness Sherlock (Lab)]

My Lords, I thank the noble Baroness, Lady Kramer, for explaining her amendment, which would in essence introduce a requirement for the Government to establish a framework for compensating savers in the event that they lose out financially because they were invested in assets that they would not have been were it not for the use of these powers. I am sorry to say that because we have just discussed a similar amendment from the noble Lord, Lord Vaux, in the previous group, some of my arguments may sound a little familiar, but I hope that the noble Baroness will bear with me.

First, as I have said, the Government would not be proposing these powers if there was not strong evidence that savers’ interests lie in greater investment diversification than we see in today’s market. That is the Government’s view. I mentioned in the last group that there is a range of evidence out there which goes to this point. I cited one example of it; there are others cited in the DWP paper to which the noble Lord, Lord Sharkey, referred. I pointed out that we are an international outlier in this matter, so that is the Government's view.

The reason we are doing this, once again, is that we believe that it is in the interests of savers to have a small, risk-adjusted diversification within the context of a portfolio; we believe that it is the best thing for savers. DC pension providers themselves have recognised that a small allocation to private markets can offer better risk-adjusted returns as part of a diversified portfolio. The noble Baroness has offered one view as to why people are not doing this. In our view, many providers have so far not done it not because it is necessarily in savers’ best interests not to do it but because of competitive pressure to keep fees low or because of a lack of scale, among other reasons.

Secondly, if the Government ever came to consider exercising these powers, they would first have to publish a report considering the impact of the proposed asset allocation requirements on savers. Crucially, that is an opportunity to confirm that bringing forward the requirements is in savers’ interests, based on the circumstances at that time. I say to the noble Lord, Lord Vaux, that there is also a report required after the powers are used and within five years. Thirdly, if the Government ever did implement the requirements, the legislation provides for a formal process under which providers could apply for an exemption based on evidence that meeting the requirements would cause savers “material financial detriment”.

Crucially, savers will continue in all circumstances to be protected by the core fiduciary duties of trustees. Specifically, trustees would continue to be subject to a duty to invest in savers’ best interests, in line with the law. This comes down to the fact that the Government are not mandating trustees to invest in any particular assets. Were these powers ever to come about, the trustee duty would apply, as I have said, to the selection of individual investments in a portfolio, to the balance of different asset classes in a portfolio, including the balance between private asset classes, and to any decision to apply for an exemption under the savers’ interest test. If a provider felt that the asset allocation requirement was not appropriate for their particular circumstances, we would expect the existing duties to guide them to submit an application under the savers’ interest tests.

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[Baroness Bowles of Berkhamsted (LD)]

If this is such a good idea, why not just mandate it for all pension funds?

[Baroness Sherlock (Lab)]

The Bill as a whole is trying to pursue scale and is trying to mirror what the Mansion House Accord did. I have been through that argument many times. We are seeking solely a reserve power to act as a backstop to an industry-led decision. The industry itself has decided to go in this direction. It is a simply a reserve power, and the reason why we are using it is that we know that there remains a risk that people will not all follow through on it because of the excessive focus on cost and the competitive advantage that may come from backsliding on that. I fully accept that the noble Baroness does not agree, but those are the Government’s arguments. I hope that the noble Baroness will withdraw the amendment.

[Baroness Kramer (LD)]

My Lords, it has been such an excellent debate that I will be extremely brief. I am troubled by two things. One is that the Minister does not seem to realise that this is not voluntary action by the pension industry. It is because it sees it as the only way to avoid actual mandation, not because people have sat down and said, “All these years we have been getting it wrong; now we have had a conversation with the Government and we’re going to get it right”. That is not what is going on here.

Secondly, I am troubled that the Minister does not understand the consequences of the level of risk that is embedded in these qualified assets. She is perfectly satisfied that, if they go wrong, the damage falls on the people with the narrowest shoulders. To me, that is seriously incomprehensible because, for those people, the consequence is frequently going to be poverty.

I ask her to sit back and think about this. The Government are right to encourage people to save for pensions, but they also need to understand that, when people have narrow shoulders, low incomes and limited financial knowledge, they are not in a position to take the kind of risks that she is, in essence, saying that they should be taking and, if they take them, they are guaranteed winners. If she believes that they are guaranteed winners, then simply step in and provide the protection that I am talking about, which would cost the taxpayer nothing. I beg leave to withdraw the amendment.

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These concerns sit squarely alongside the issues raised by mandation. If we are to intervene so directly in the structure and investment behaviour of pension schemes, we must do so with humility, transparency and a clear understanding of who bears the risk. There is a further question of responsibility: who bears the risk if government intervention has been to the detriment of performance, to put it rather bluntly? Those are the issues before the Committee, and I hope the Minister will address them directly—I am sure she will.

[Baroness Sherlock (Lab)]

My Lords, I thank the noble Baroness, Lady Noakes, who always throws out good challenges. I welcome the opportunity and hope that I can persuade her with the answers I am about to give.

Let me say at the start that the Government’s objective is clearly to move to a market of fewer, larger providers so that savers can benefit from better governance, greater investment sophistication and lower costs. The measures in the Bill, together with the review and the regulation-making powers in Clauses 42 to 44, are carefully calibrated to reduce fragmentation or preserve the scope for innovation if and where doing so demonstrably serves members’ interests. That is the key.

I accept that much of the fragmentation is a product of history, but we have seen, in the pensions investment review and the responses that came back to the consultation, that master trusts are creating multiple default arrangements. We do not want to see the same issues arising over time as exist in GPPs, where members are in too many default arrangements that do not offer value. The point I would make to the noble Lord, Lord Palmer, and the noble Viscount, Lord Younger, is that this is about members’ interests and returns for members. We are trying to address the multiplicity of default arrangements that do not serve members because they offer poor value.

Amendments 168 to 170 from the noble Baroness, Lady Noakes, would aim to broaden—

[The Deputy Chairman of Committees (Baroness Scott of Needham Market) (LD)]

My Lords, the Division Bells are ringing. The Committee will therefore adjourn for 10 minutes.

[Baroness Sherlock (Lab)]

I was going so well; I was in full flow.

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[Baroness Sherlock (Lab)]

My Lords, as I was saying, as the noble Baroness, Lady Noakes, described so well, the aim of her Amendments 168 to 170 is to shift from measures aimed at restricting the creation of new non-scale defaults towards a wider remit to encourage competition and innovation; I will come back to that in a moment. In addition, her Amendment 171 would expand the statutory review under Clause 43 to examine the extent to which such non-scale defaults contribute to competition.

Although we share the noble Baroness’s desire to see a vibrant, innovative market, we want these characteristics to operate alongside, not separate from, scale. Our concern is that the changes would leave too many default arrangements in place, entrenching fragmentation and preventing members benefiting from scale. Inserting a competition function into this regime would significantly extend the remit of the Pensions Regulator; again, I will come back to that in a moment.

The Government’s view is that there is no tension between scale and competition. Scale enables meaningful competition on quality and on long-term returns. I am sure that noble Lords will have had a chance to read the impact assessment on the Bill—it was green-rated, of which we are incredibly proud—which estimates that between 15 and 20 schemes may operate in this market after the conclusion of the transition pathway in 2035. We think that, by any measure, that represents a market within which successful competition can function; I do not think it would pass the oligopoly test that has been suggested.

However, we also need to remember that a key ingredient for competition is competitive charges for employers. Nest has helped lower charges through its public service obligation. It is important that employers continue to have access to pension products that offer low-charge options; Nest and others will play a key part in that going forward. We see no reason why competition for market share would not continue as it has done in the past. The drive for it is clearly still there.

The new entrant pathway places innovative product design at its core. The aim is to create a space for new solutions while maintaining a strong baseline of member protection. Our view is that, although we understand its underlying intent, we do not believe that Amendment 170 would add greatly to the opportunities for innovative schemes to remain in the market that are already set out in the Bill. Our new entrant pathway will place relatively few additional requirements on new schemes beyond those that exist today.

I agree that, alongside the innovation and competition that will come from existing schemes, there must be space for new market participants—the disruptors. We want to enable them to come to market, but there also needs to be confidence that they can grow to scale—over time, of course—and can deliver good outcomes for members. We recognise that a new scheme cannot come with scale and will need time to build up, obviously, but we need new entrants to demonstrate their plan to build scale.

Innovation is a good indicator of a scheme’s ability to grow. The noble Baroness described what is happening, but the truth is that there is a weak demand side, and it is already difficult, as we have seen, for a new entrant to gain traction. We do not seek to limit innovation, but we want regulators to focus on what innovation can deliver for members and its impact on scheme growth and member outcomes. In short, the Government support innovation that improves outcomes, but we do not want to perpetuate sub-scale defaults at the expense of savers’ interests.

On Clause 45, it might be helpful if I set out the purpose of the clause—

[Baroness Neville-Rolfe (Con)]

Before the Minister moves on, entry is essential to innovation. The idea that the big firms or any regulators are going to be able to decide the right path for the innovative future is picking winners, and it does not work in my humble business experience.

[Baroness Sherlock (Lab)]

My Lords, we want innovation. That is what I have just tried to describe. TPR has made innovation the central pillar of its corporate strategy. It launched an innovation service, and it has had the industry test innovative ideas and proposals such as new retirement products and the like. That has been up and running for some time. We want innovation but we want innovation that will serve member interests.

The noble Baroness asked about TPR and competition. While TPR does not have a statutory objective in competition, it does actively consider it, and it forms part of its strategy. Competition has been part of its evolution in a changing landscape; it started off in a world of single employer schemes and it is now in a very different world with a market that has moved towards master trusts and an authorisation supervisory framework. Value for money is a key enabler to drive transparency and competition in the market, and TPR plays a direct role in delivering that for the sector alongside the FCA.

Clause 45 amends the Financial Services and Markets Act 2000 so that the FCA has the necessary powers to monitor and enforce the default arrangement requirements and support the review of non-scale default arrangements on a consistent footing with TPR. In practice, that will mean gathering relevant information for the review, considering applications for any new non-scale default arrangements and—should regulations require it after the review—assessing consolidation action plans.

To make the distinction, Clause 42 relates to restricting new default arrangements for schemes in the market. It aims to reduce fragmentation that does not serve member interests but allows new arrangements to meet member interests. It does not restrict new entrants to the market. Clause 45 allows new regulations to set out the powers for both TPR and the FCA to approve new default arrangements and will work with both regulators to ensure there is alignment and co-ordination between them. In short, Clause 42 introduces the restriction of new default arrangements without regulatory approval and Clause 45 gives the FCA the powers to do this in relation to its functions on FSMA. I hope that has cleared it up.

[Lord Willetts (Con)]

In the light of what the Minister has said, I am even more struck by the significance of Amendment 170. Given that there is going to be this change in the regulatory regime in terms of the FCA, I do think that Amendment 170 is the crucial one. It absolutely is not inconsistent with the Government’s objectives of scale—I have a lot of sympathy with trying to promote scale—but it just ensures that whatever the appropriate authority is, there is also scope for innovation. The more the Minister talks about the power of these clauses, the more I think the case for this amendment gets stronger.

[Baroness Sherlock (Lab)]

We may disagree on some of the approaches to the market, but we want innovation, so I do not disagree with the noble Lord on that. However, we want innovation that serves member outcomes, and that may mean different approaches to understanding what innovation does. We do not want innovation to pull away from scale.

The noble Baroness asked about timescale. The intention is that the review will be carried out in 2029, but it will need to follow the introduction of the VFM framework and contractual override measures for this to work. That was set out in both the final Pensions Investment Review and in the pensions roadmap, which the Government published. Hopefully that is helpful.

[Baroness Noakes (Con)]

Can the Minister explain why that timescale has not been put in the Bill? I cannot think of another review that has been written into law without a relevant timeframe being attached to it.

[Baroness Sherlock (Lab)]

I think because it has to happen. It has to follow VFM; the pensions road map has set out the connection and the order in which things will happen. My understanding is that it is because it follows that.

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[Viscount Younger of Leckie (Con)]

My Lords, I speak briefly to Amendment 175, tabled by my noble friend Lady Noakes and supported by the noble Baroness, Lady Bowles. This amendment relates to new Section 117D, the best interests test as set out in Clause 48. This new section establishes the test that must be satisfied before a unilateral change can be made. It requires a provider to reasonably conclude that such a change is reasonably likely to lead to

“a better outcome for the directly affected members … (taken as a whole)”

and to

“no worse an outcome for the other members of the scheme”,

also taken as a whole.

Many of the questions that my noble friend and the noble Baroness have raised reflect concerns that have been put to us during scrutiny of the Bill. In particular, there remains uncertainty about what, in practice, is meant by a better outcome, and how that judgment will be assessed, evidenced and challenged. I say again, as we have said on different parts of the Bill, that we believe we need definitions and clarity.

We will listen carefully to the Minister’s response on this point. The clarity and robustness of the best interests test are critical, particularly where changes may occur without the explicit consent of individual members. If that clarity is not forthcoming, this may well be an issue to which we will need to return.

[Baroness Sherlock (Lab)]

I am grateful to the noble Baroness, Lady Noakes, and others for their contributions. Clause 48 inserts new Part 7A, on

“Unilateral changes to pension schemes”,


referred to as “contractual override”, into the Financial Services and Markets Act 2000. As has been clear, that will enable providers of FCA-regulated DC workplace pension schemes to override the terms of a pension scheme without the consent of individual members. To be clear, that will mean that providers will be able to transfer members to a different pension scheme, to make a change that would otherwise require consent, or to vary the terms of members’ contracts. The Bill provides important protections around the use of such powers, which I will come on to.

The noble Lord, Lord Palmer, asked why we want to do this—why change anything? I will explain. Providers can have thousands of DC arrangements for different employers, which will include a large number of legacy schemes that predate the introduction of auto-enrolment. Some of those arrangements will be delivering poor value for members but, due to the challenges of engaging with members, there is often little that providers can do about it. That is because, currently, providers have to gain individual consent from each member of the scheme to enact the changes that will be allowed under this part. That is time-consuming, costly and often simply impractical. In many cases, members will not even have kept their contact details updated.

Contractual override aims to address that issue and, in doing so, it would establish broad equivalence with the trust-based market, where trustees already have the power to conduct bulk transfers. The measure is necessary to help drive better outcomes for members and help to establish fewer larger pension schemes that are delivering value for money, supporting the scale measures and value-for-money framework also implemented by the Bill.

We want to protect consumers, so the Bill introduces a number of important safeguards, including the best interests test, which must be met and certified by an independent person with sufficient expertise before a contractual override can occur. That test is the focus of the amendments. Amendment 175 from noble Baroness, Lady Noakes, probes the test to assess whether this should proceed. She asked about the relationship to the FCA’s consumer duty—I think she asked why we need it at all if we have the FCA consumer duty. The answer is to provide an additional and clear safeguard. We believe that that is necessary given the nature of what is being provided for here.

However, the Government are committed to making sure that this works well. We will continue to work closely with the FCA as it beds in the consumer duty, and to engage with stakeholders about their experience of the duty and its impact. The FCA will develop its rules for contractual override in its usual manner and will consult on that, so there will be an opportunity for people to respond to the way that engages and to identify any of the issues that have been raised.

Amendment 175A from the noble Baroness, Lady Bowles, would alter the threshold for the best interests test from requiring that a change is “reasonably likely” to achieve a better outcome to requiring that “there is evidence” that the change will achieve a better outcome. I will explain why the Government believe that our test strikes the right balance between providing robust consumer protections and still making it practical for schemes to carry out a contractual override where it is the right thing to do. The test itself allows for a contractual override to take place only when the provider has reasonably concluded that the change is reasonably likely to lead to a better outcome for directly affected members and no worse an outcome for the other members of the scheme. I will break down some of the specific requirements that must be met for it to be satisfied. First, the provider must conclude that it is “reasonably likely” that the contractual override will lead to a better outcome for directly affected members, taken as a whole, and no worse an outcome for the other members taken as a whole.

The provision accounts for the fact that, although no provider can predict the future with certainty, they must conclude based on the information available, with a reasonable level of certainty, that the outcome is better for the directly affected members taken as a whole and no worse an outcome for the other members taken as a whole. That means that the provider must clearly evidence this assertion in order to proceed. We believe that changing the test from “reasonably likely” to “there is evidence”, as in the amendment, would lower the threshold of the test and reduce consumer protection, because the alternative wording provides no requirements about the strength of the evidence and leaves open the possibility that decisions could be taken on the basis of limited or poor evidence. By contrast, the existing wording requires providers to demonstrate that the outcome is a real prospect.

Secondly, a provider must reasonably conclude that the test is met. This requirement is deliberately included to address the risk of a provider reaching a conclusion that is not based on valid evidence or reasoning. The FCA, as the regulator responsible for contract-based workplace pensions, must make detailed rules regarding contractual override. That includes rules about the considerations and information that providers must take into account in determining whether the best interests test is met. As I have said, the FCA will develop those rules in its usual manner, which will include consultation.

Finally, new Section 117E requires that an independent person, with expertise to be defined in FCA rules, has to certify that the best interests test has been met, providing a further safeguard.

Overall, the contractual override policy establishes broad equivalence with the trust-based market and, in doing so, it delivers on a long-requested industry ask, promotes better member outcomes—which is key—and helps to achieve the wider goals for DC pensions that this Bill will deliver. We believe it strikes the right balance, and I hope that noble Lords will not press their amendments.

[Baroness Bowles of Berkhamsted (LD)]

I appreciate that the response was prepared on the basis of the wording, and I accept that my “evidence” wording was a marker. But will the Minister please look up what the legal “reasonably likely” really does imply? She does not have to take my word for it; I did look it up. Therefore, I maintain that the words “reasonably likely” need adjustment. I hope that can be investigated and accepted, and maybe the Government can come back with their own amendment.

[Baroness Sherlock (Lab)]

I am happy to reflect on the noble Baroness’s point. If it leads the Government to believe that we have phrased the test badly, then of course we will take appropriate action; if not, then we will say where we are.

[Baroness Noakes (Con)]

My Lords, I thank noble Lords who have taken part in this short debate. I hope the Minister will look again at the point that the noble Baroness, Lady Bowles, has raised. In fact, that particular issue was raised in the Chamber either yesterday or last Friday—I cannot remember which, as all the days run into each other—in connection with another Bill going through. It very definitely is interpreted as sub-50%, so it is definitely a fairly weak formulation. I am quite surprised if that is what the Government want, so it is worth looking at again.

I do not think I got a satisfactory answer on the difference between the FCA having the consumer duty and what is intended under this Bill, except that the FCA is going to issue more rules about what “best interests” actually means in this context. To me, it seems to be going against the grain of FCA regulation, as I tried to point out earlier, and it could potentially cause problems in understanding.

The Minister did not respond to my point about the last men standing, which was that if you allow groups of members to be transferred because they will be better off and the others are not worse off then, in the long term, you structurally weaken what is left. Does the Minister have any views on whether that is the correct approach? A long-term problem cannot be avoided in that area, which calls into question whether you can leave members behind.

I am still very mystified as to how all this will work in practice, but I will reflect on what the Minister has said and what she has not said before determining whether to come back on Report. I beg leave to withdraw my amendment.

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[Baroness Coffey (Con)]

My Lords, Clause 49 is quite interesting. Clearly, we have been on a journey for some time. Going back 35 years, Maxwell raided his pension fund, completely screwing over his employees at the time, which led to the 1995 Act as a consequence. There were other items in there as well, but that brought in a much more controlling approach to aspects of pensions.

One of the liberations that happened in the previous pensions Acts a decade ago was that people did not have to do a particular thing with their money. I know this is money that was topped up by aspects of tax relief and the like but, ultimately, instead of being forced in a particular direction with an annuity in a different way, people had a choice. I am conscious that various scams happened when people were transferred from one to another. I hope those people will find a special place in hell; they have deprived people of the money that they had rightly gathered over the years and scammed them out of it. But ultimately this did give a choice to people, with all that money, about how they wanted to spend their retirement—instead of somebody else telling them what to do.

I am concerned that this clause, in effect, requires a guaranteed solution. I appreciate that my noble friend Lady Noakes has talked particularly about removing the need for there to be a regular income as part of this solution, but if benefit solutions are going to be required by this legislation, there should not just be a choice of a minimum of one. There should be at least two, so that people can still have that choice. That is why in Clause 49(1)(a), I think that “one or more” should be “a minimum of two”, if that is going to be the way that we go.

The other thing that is not clear to me—perhaps I just have not spent enough time reading this—is what happens if people do not want the default pension. What choice do they have? It does not feel as though they have any choice at all. I am trying to understand something: what is the real problem that Ministers and the Government are trying to address here? Do not get me wrong—we want to make pensions as simple as possible for people. I know that my former employer used to set up a particular approach, saying that it was easy and that you could buy into it, but it was your choice what you did. That is why I am concerned about Clause 49 in particular. I hope that, by the time we get to Report, the Minister will have reconsidered whether ripping away freedoms is the right way for the people whom the Bill is intended to support.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Viscount, Lord Younger, for introducing this debate, and to all noble Lords.

Let me briefly outline the problems that the chapter on guided retirement is seeking to address. The landscape is changing. I will not get into the detail of how we have gotten to where we are with my noble friend Lord Davies, but the reality is that we are now in a position where fewer than a million people in the private sector are saving into a DB pension, whereas more than 15 million are saving into DC schemes. Of course, unlike in DB schemes, DC members carry the risk themselves; what you get out depends entirely on what you put in and how it performs. The result is that DC savers face risks: the risk of savings not lasting through later life; the risk of market fluctuations; and the risk of inflation eroding purchasing power. They also face decision‑making risks, as retirement choices can be complex and poor decisions can have lasting effects. Clause 49 enables the Government to respond to those risks, putting savers first. Our objective is the vast majority of DC savers no longer having to make complex decisions about how to secure a sustainable income in later life, although—I say this in response to the noble Baroness, Lady Coffey—the freedom to choose absolutely will remain.

Let me explain how we envisage this happening. When DC members approach their scheme to access their savings, they will be presented with the default pension solution; in acknowledgement of my noble friend Lord Davies, let us call them “default plans” from this point onwards. At this point, the member will have the option to say yes to the default plan or say, “No, I want to choose a different way to use my assets”; that could be an alternative in their own scheme or elsewhere. We will explore this, including how schemes can give appropriate support, in our consultation. The interaction should not be a surprise to members at this point because we will ensure that, through appropriate communications, members hear about the concept of a default plan from very early on in their pension journey.

Clause 49 will require pension schemes to design and develop pension plans based on the generality of their membership, by which we mean gaining insight of what the vast majority of their members want from their pension assets. The noble Viscount, Lord Younger, wanted to know how they are meant to do this. We know that many schemes already have member panels; we expect these, as well as other channels to obtain member insight, to continue. The Government will not specify unless necessary but the regulator will work with schemes, through guidance, on how to identify the needs of their members. The Government will also consult on whether there should be minimum standards for gathering information so that the solutions reflect the generality of the scheme membership.

We anticipate that the evidence from scheme members will indicate that there is no one common set of aspirations, so we are giving the scheme the ability to introduce more than one default plan. Where there is more than one default plan, there will be a simple triage to determine which one the member is offered. Again, the benefit of this approach is that no member will have to make a complex decision on how to take their pension payments, except to request that they want to start receiving payment. As has been mentioned, the default plans must provide a regular income during retirement. We will consult on the detail, but it will be for trustees to determine exactly how they achieve this; there is scope for product innovation.

The clause also makes provision, as has been noted, for exemption where that would not be appropriate. I will turn to Amendment 178, which relates to this, in just a moment but, crucially, savers will retain the choice to access their pension another way. We know that retirement is not a linear experience and that circumstances change both at and after retirement. Life events such as deciding to work part-time, health conditions and bereavement can all factor in and have an impact on household incomes. That means that gathering insights and engagement with members will be important, alongside well-designed and flexible plans.

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[Baroness Bowles of Berkhamsted (LD)]

I have not intervened on this group because I have not really delved into it. I wonder whether the Minister will go into some of the points she is making. Obviously, there are cases where you want consolidation in order to produce a solution that gives a reasonable retirement income, rather than having it in different bits. However, I am concerned that some people will want to keep things in different pots and have different bits. When the guidance on what might be exempted and so on comes out, will there be any consultation on that so that there is provision for people who have got alternative incomes and other means? They may want to defer taking their pension for a lot longer than is the norm while they have other income.

There is a whole universe of things; indeed, a whole universe of things is happening to me on these issues, in terms of whether I start something or leave it. It is all made more complicated when the Government come in and tax it, but there are all these things that go on. Will all of that be open to a public consultation before guidance comes out to make sure that it is taken account of?

[Baroness Sherlock (Lab)]

I do not know who we had in mind when we were designing this measure, but I am pretty confident that it was not the noble Baroness. If she were to ring up and say, “I want to take my pension pot”, and we said, “Here is a solution”, she would absolutely be able to say, “Do you know what? I don’t want to do that, thank you very much. I already know what I want to do with it”, or to have a conversation about the alternatives. This is really aimed at and concerned with those who would not be in a good position to make these complex decisions.

However, the consultation will explore these things. We have already talked about what kinds of thing trustees might have to take into account. There will be a range of things. If there is anything specific on which I can write to the noble Baroness, I will do so, but the intention is to consult on the nature of how this will work in practice and all of the design requirements. That is one of the reasons for keeping so much in regulations: to keep it flexible.

We are already finding, though, that providers are coming up with interesting, innovative solutions. Some schemes are offering flex then fix, which would give some flexibility in the years ahead. There are schemes that are doing different things, and we do not want to shut those down because we want there to be alternatives. I do not want to give the impression that we are forcing people into it, that they have to do only one thing before being allowed to take their pension or that their pension freedom has been taken away; none of that has happened because that is not what we are trying to do. I thank the noble Baroness for giving me the opportunity to clarify that.

Amendment 180 would remove regulation-making powers to enable the charging of fees for transfers to be prohibited or limited. The Government recognise that pension schemes rely on the charges they impose on members to operate the administration of the scheme effectively. There is an existing cap on charges, which can be placed on default funds under auto-enrolment, whose purpose is to shield individuals from high and unfair charges that could significantly erode their savings. The guided retirement measures were very conscious. They will introduce the concept of a default route and were, therefore, alive to the risk that individuals placed in a default plan may not scrutinise the costs involved. Therefore, we expect to consult on any detailed policy set out in regulations; we would test any assumptions about the impact of introducing a cap or a prohibition, including for transfers, as part of that consultation.

The Clause 51 and 57 stand part notices from the noble Viscount, Lord Younger, seek confirmation that Clause 51 will provide members with clear and consistent information. I am very happy to provide that assurance. The Government understand the power of communications and the importance of members understanding the default pension plan provided by the scheme, alongside the other options. Through this clause, the Government have the power to specify the format and structure of communications. There is also a requirement that all communications issued by schemes are in clear and plain language to help members make better decisions regarding their retirement income when they wish to do so.

As the noble Viscount mentioned, Clause 53 requires the development of a “pensions benefit strategy” by relevant pension schemes, which will be expected to include details of how the scheme will communicate its default pension plans to its members. Schemes will have to make these strategies available to scheme members and to the regulator for effective scrutiny; the Bill includes corresponding arrangements in respect of FCA-regulated providers. As a minimum, we expect the strategy to present the evidence base for the chosen default or defaults to give the member the opportunity to compare their circumstances and those on which the default is based.

Clause 57 is the corresponding provision in relation to FCA-regulated schemes. This inserts into the Financial Services and Markets Act 2000 a new section that will deliver default pension benefit solutions to FCA-regulated pension schemes, ensuring that members on both sides of the market benefit from default solutions. Clause 57 requires the FCA to make rules, having regard to the rest of Chapter 6 of the Pension Schemes Bill, to make default plans available to members of FCA-regulated pension schemes. This helps ensure that regulatory frameworks are aligned and that members experience broadly equivalent outcomes; it also maintains fairness and consistency across the market. Clause 57 also requires the FCA to aim to ensure, as far as is possible, that the outcomes to be achieved by its rules in relation to this chapter achieve the same outcomes as the rest of this chapter achieves in relation to schemes regulated by TPR.

The noble Viscount asked how schemes will be supported rather than forced into defensive behaviour. The regulator will issue guidance for all trust schemes. DWP officials have been engaging, and will continue to engage, with industry ahead of introduction, including through formal consultation.

The noble Baroness, Lady Neville-Rolfe, asked why the negative procedure and why the affirmative one. The affirmative procedure has been used for certain delegated powers where the power touches on a central aspect of the policy. For example, the power in Clause 49(4)(d) can be used to influence the defaults designed and offered by a scheme, so the affirmative procedure is used.

I have tried to answer all the questions that were asked. I hope that those explanations have been helpful and that noble Lords will feel able to withdraw or not press their amendments.

[Viscount Younger of Leckie (Con)]

My Lords, before I conclude on this group, I thank in particular my noble friend Lady Noakes for her probing amendments, which ask a number of important questions.

I will make a few points and rounding-up comments but, before I do, I want to pick up on my noble friend Lord Trenchard’s remarks. I must admit that I was very surprised to hear the remarks made by the noble Lord, Lord Davies, on his view of the pensions landscape; they were fairly forceful. As he will expect, I entirely disagree with his comments. I just make the point that our party brought in improvements to auto-enrolment and introduced the dashboard system; I pay tribute to my noble friends Lady Coffey and Lady Stedman-Scott. I have more to say but I will give way.

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[Baroness Stedman-Scott (Con)]

My Lords, I speak to both Amendments 180A, tabled by my noble friend Lady Coffey, and Amendment 206, which stands in the name of my noble friend Viscount Younger of Leckie and myself. Both amendments address the regulation of pensions and how the regulation is best exercised in the interest of scheme members and future pensioners.

It was the intervention of my noble friend Lady Coffey at Second Reading that first prompted me to reflect more deeply on the role of regulators. As my noble friend argued then, and has argued again today in speaking to Amendment 180A, this Bill misses a significant structural opportunity by retaining two separate pension regulators. I agree with her. There is something inherently odd about the fact that very similar pension products can be treated differently depending on whether they fall within the remit of the Pensions Regulator or the Financial Conduct Authority. That observation is not controversial; it is simply a reflection of how the current system operates.

I recall clearly the passage of the then Pension Schemes Bill in February 2020 and remember responding to amendments from across your Lordships’ House by explaining that personal pension schemes were regulated by the FCA, rather than the Pensions Regulator, and that imposing requirements on personal pension providers through that legislation would risk creating a patchwork of overlapping regulatory oversight. Providers, it was argued, would otherwise be required to respond to two separate regulators in relation to the same activity. That was the Government’s position at the time, and it illustrates that the existence of regulatory fragmentation in this area is not a matter of dispute.

A great deal of work has gone into managing the fragmentation, with strategic documents, dating back to 2018, seeking to grapple with the issue. The FCA and the Pensions Regulator have published joint regulatory strategies explicitly acknowledging the complexity that arises where their remits intersect and the need for close co-ordination. More recently, an independent review of the Pensions Regulator in 2023 again highlighted the challenges inherent in this divided regulatory landscape. Taken together, these developments point to structural issues in the regulatory ecosystem that can, at the very least, create confusion and the risk of inconsistency.

It was on the basis of that experience in government and of careful consideration since then that I sought to identify what might realistically be done in this Bill. I came to the conclusion that Amendment 206 represents a proportionate and pragmatic compromise. It would require the Government to establish a formal published protocol setting out clearly how the Financial Conduct Authority and the Pensions Regulator co-ordinate, how responsibilities are divided between them and how they communicate when regulating the pensions industry. The evidence shows that there is complexity, overlap and, at times, confusion between the two regulators. Stakeholders frequently complain of unclear lines of responsibility and the regulators themselves openly acknowledge that co-ordination is difficult, hence the repeated reliance on joint strategies and informal arrangements.

It was our sense that the problem is one not of outright contradiction but of opacity, complexity and accountability. Amendment 206 is, therefore, carefully targeted at the problem, which is clearly evidenced. It seeks to improve co-ordination and clarity without asserting a level of regulatory failure that has not yet been conclusively demonstrated. That does not place it in opposition to the argument advanced by my noble friend Lady Coffey; indeed, I would be very happy to work with her, as we did so constructively on previous pension legislation, to strengthen this area further.

In my view, a formal co-ordination protocol has three important virtues. First, it can evolve over time as the regulatory landscape changes. Secondly, it can be tightened if problems persist or new risks emerge. Thirdly, it can itself become the evidence base for any future decision to pursue more fundamental consolidation of regulatory functions, should that ultimately be judged necessary. For those reasons, I commend Amendment 206 to the Committee and urge the Government to see it not as an obstacle but as a constructive and proportionate step towards greater clarity, accountability and confidence in the regulation of pensions.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Baroness, Lady Coffey. Things are never dull when she is around. Frankly, that is quite a thing to say for a pensions Bill—I apologise to all the pensions nerds.

I thank noble Lords for introducing their amendments. The noble Baroness, Lady Coffey, said that her amendment would require the Secretary of State to do a review exploring the viability of moving the FCA’s pension regulation functions, apart from those for SIPPs, to TPR. On Amendment 206, the noble Baroness, Lady Stedman-Scott, wants a statutory joint protocol, formal co-ordination mechanisms, a published framework for oversight and the mandation of regular joint communication.

The Government keep the regulatory system under continuous review. The noble Baroness, Lady Coffey, has given us an absolutely fair challenge. As we have already found here, the reality is that, when you come to discuss this, some people are on team FCA, some are on team TPR and some—such as the noble Lord, Lord Fuller—do not like any of them and want to throw everybody else into the mix and have somebody reviewing all of them. So it is fair to say that it will not be easy to achieve consensus on this.

Let us come back to the principle. The Government’s view is that there is still a fundamental difference between trust-based and contractual pension schemes. Contract-based pension schemes are based on an individual contract with the saver. As the pension market continues to evolve, and as we move towards a more consolidated market, we will need to ensure that the system evolves with it and that there is more regulatory alignment where it is really needed. However, TPR, the FCA and other bodies, including the PRA, are on to this. So I suppose the exam question here is: do we need one regulator to take over the other, or is it possible to create a regime for regulatory alignment and joint working? I will try to make the case for the latter; the noble Baroness can tell me at the end whether I have a pass or a fail on the exam paper.

The Government’s view is that TPR and the FCA have distinct roles. Each has its own framework, reflecting the range of pension types and the need for tailored oversight. They operate under distinct statutory frameworks, and existing arrangements already enable effective co-ordination between them. TPR and the FCA have established a joint regulatory strategy that outlines their respective roles; that collaboration is underpinned further by a formal memorandum of understanding and, where necessary, joint protocols on specific issues detailing how the two regulators co-operate, share information and manage areas of overlap. They have published a joint document outlining their respective roles. They run joint working groups and consultations. They publish shared guidance, and they conduct regular joint engagement with stakeholders. These mechanisms are well established and provide the flexibility needed to respond to developments in the pensions market. That close collaboration ensures the same good outcomes for pension savers, regardless of legal structure, and aims to avoid the potential for regulatory arbitrage.

The noble Baroness, Lady Stedman-Scott, mentioned the independent review of the Pensions Regulator by Mary Starks in 2023. That review recommended that no changes should be made to the framework. The review concluded that it was far from clear what the benefits of shifting to a single regulator would be and whether that would in fact outweigh the costs and the risks of distraction.

Moving on, we do not believe that a statutory requirement for a joint protocol is needed, as proposed in Amendment 206. It risks duplicating existing arrangements and in fact replicating parts of the memorandum of understanding and joint regulation strategy that are already in place. Where specific regulatory risks would benefit from more formally aligned regulatory approaches, the organisations consider the need for a joint protocol. An example would be the 2019 joint approach to guidance for trustees and advisers supporting pension members with decision-making exercises.

We also do not believe that the review proposed by Amendment 180A is necessary at this time. We continue to keep the system under review to make sure that it continues to deliver. Any future changes need to be evidence-led and shaped through engagement with stakeholders. In the light of that, I hope the noble Baroness, Lady Coffey, will feel that I have passed the exam test and is able to withdraw her amendment.

[Lord Fuller (Con)]

I am interested, of course, in the opinion of the noble Baroness, Lady Coffey, about the exam, but the Minister has provoked me to respond. I am not against the FCA or the Pensions Regulator. As she says, they have their roles and responsibilities. But there is a piece of work on the interaction between all the actors in the pension space. The old saying is, “If it ain’t broke, don’t fix it”, but there has been enough that is broken to require a fresh look. All the bilateral arrangements between TPR and the FCA, which she explained and which are all very interesting, do not talk about those other wide environmental links to the Bank of England, GAD, the PPF and His Majesty’s Treasury. That is where there should be some work, with a little humility about how the scheme has gone.

I am not making a political point here; I am just making the factual observation that the schemes are not working as I think any of us would like them to. This pensions Bill remedies some of those shortcomings, but the excessive focus purely on the FCA and the Pensions Regulator is obscuring that wider picture. I am not asking to promote some hatred and discord; I am just asking to try to get everyone sat around the table so that we can work out not just the roles and responsibilities but the linkages—and avoid the groupthink, because that is the worst thing. I was grateful to the noble Lord, Lord Davies, for aligning himself with my points. So it is not just me, unless the noble Lord is against everything as well, which I do not think he is.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Lord, Lord Fuller, for clarifying his view and apologise if I misrepresented it. I will not respond at any length but will simply say that there is already considerable join-up between the actors in this space. I do not feel it is necessary to have a single review just to work that out.

[Baroness Coffey (Con)]

I thank noble Lords for contributing to this debate. Certainly, in speaking to pension providers that are regulated by both TPR and the FCA, this brings additional complexity, which is another reason for this to come in. I appreciate that my noble friend Lord Fuller suggested this could be a batty idea. It is not a new idea. The 2013 report by the Work and Pensions Select Committee chaired by Dame Anne Begg—its Labour chair—called for it then. It was linked to the fact that we were starting auto-enrolment. The whole landscape for people, particularly those new to pension contributions and the like—and indeed for existing people—was shifting to workplace occupation-based pensions, which are all regulated by TPR. So I think it was going for simplicity in that regard.

My noble friend is particularly cross about an aspect of the Pensions Act 2004. I would have invited him to perhaps table an amendment to the Bill with his objections to the statutory funding objective, which is the element that particularly irks him. It replaced the minimum funding requirement, but that is a debate for another day, rather than trying to resolve it all now. I thought the Minister did well, particularly in reading out her brief and keeping the Treasury happy. That is no bad thing for any Minister in a Government but, of course, I beg leave to withdraw my amendment.

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[Lord Davies of Brixton (Lab)]

Everyone agrees that they are a good idea, but in her reply, can my noble friend the Minister tell the Committee what serious contenders there are to take advantage of this quite complicated and lengthy piece of legislation? The practical experience so far is that a good idea has never quite cut it, and other options are now becoming available. Are people actually going to go down this road?

[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Baronesses, Lady Noakes and Lady Bowles, for introducing their amendments. I will start with Amendment 181, which would broaden the range of schemes able to apply for a transfer into a superfund by effectively including active schemes.

On the points made by the noble Baroness, Lady Noakes, the responses to the DWP’s initial consultation on DB consolidation noted clear practical difficulties in assessing the future of a scheme. It is not clear how the regulator would conclude that the scheme will have no active members at an unspecified time of transfer. Furthermore, closing DB schemes can be a protracted exercise, where unforeseen complicated issues can arise. This Government, and previous Governments, have been consistent in saying that superfunds should be an option only for closed DB schemes. To avoid such complications for the scheme trustees and the regulator, Clause 65 sets out that closed schemes alone can transfer to a superfund and only where they are unable to secure member benefits with an insurer at the date of application.

Amendment 182 from the noble Baroness, Lady Bowles, would broaden the range of schemes able to apply for a transfer into a superfund by removing the restriction that schemes which can afford insurance buyout cannot transfer to a superfund. By removing this requirement from the Bill, superfunds could compete directly with insurers. That would risk superfunds offering endgame solutions in the same space as insurers, while being held to a lower standard in terms of member security.

The onboarding condition was introduced following industry response to the consultation on superfunds which first identified this risk. There was concern that employers may see superfunds as a way to relinquish their responsibilities at a lower cost than insurance buyout, and that trustees could be pressured to transfer into a superfund when a buyout solution is available. It is important for us to remember that insurers and superfunds operate under very different regimes. Insurers under Solvency UK requirements have stringent capital requirements and their members are fully protected by the FSCS.

Superfunds are built on existing pensions legislation and, as such, the PPF acts as a safety net providing compensation. The PPF provides a great deal of security, but not as much as the FSCS. Superfunds offer a great deal of security, but their capitalisation requirements are not as stringent as insurers as they are not designed to be as secure. That is because superfunds have been designed as a slightly less secure, more affordable endgame solution for schemes that are well funded but cannot afford buyout. They are not intended as a direct competitor for insurance buyout. The onboarding conditions address the risk of regulatory arbitrage, recognising those differences.

Clause 65 therefore provides clarity by ensuring that only appropriately funded schemes can transfer to superfunds. As introduced, it includes the power to substitute another condition if needed. We will consult with industry to assess what, if any, further refinements may be needed to protect scheme members.

Amendment 183 from the noble Baroness, Lady Bowles, would require superfunds to assess their protected liabilities threshold at the lower of a prudent calculation of a scheme’s technical provisions or based on a Section 179 calculation of the buyout price of PPF-level benefits. This amendment, and the noble Baroness, recognise the importance and impact on this threshold of the Chancellor’s Budget announcement that the PPF will provide prospective pre-1997 indexation for members whose schemes provided for this.

The purpose of the protected liabilities threshold is to ensure that in the rare circumstances where a superfund continues to underperform, the scheme is wound up and member benefits are secured at the highest possible level. The threshold is an important part of member protection and has been designed to prevent members’ benefits being reduced to PPF compensation levels should a superfund fail. The threshold also recognises the risk that scheme funding could continue to deteriorate in the time it takes to wind up.

Clause 71 therefore aligns the protected liabilities threshold with the calculation of those protected liabilities. It sets the threshold at a level above the Section 179 calculation, so that members in a failing superfund receive higher-than-PPF benefits. There is the added benefit that PPF-level compensation that is bought out with an insurer protects the PPF itself.

We recognise the impact that changes announced in the Budget have on the superfund protected liabilities threshold, and that it would not be good for members’ outcomes if a superfund is required to wind up prematurely when there is still a strong likelihood that benefits can be paid in full. Any changes to reduce the threshold, however, will require careful consideration and need to ensure that members and the PPF are protected. The level of the protected liabilities threshold will be subject to further consultation with industry as we continue to develop the secondary legislation.

The Committee will also note that for those instances in which technical provisions are lower than the Section 179 valuation of a scheme, Clause 85(4) allows the Secretary of State to provide by regulations that a breach of a threshold has not taken place. These calculations have the potential to converge, and sometimes swap, in very mature schemes and we acknowledge that that occurrence is more likely following the introduction of pre-1997 indexation for prospective PPF benefits.

The use of this power will aim to ensure there are no unintended consequences for well-funded superfunds in those circumstances. It is not our intention to place any additional pressures on superfunds. Providing pre-1997 indexation for PPF benefits is the right thing to do. All members in schemes supported by the PPF benefit from knowing they can count on higher levels of compensation should the worst happen—a fact that should be celebrated. We are committed to working with industry to create, as the noble Baroness, Lady Stedman-Scott, questioned, a viable and secure superfunds market and will consult on issues such as these following Royal Assent to ensure we appropriately balance the metrics of each threshold.

My noble friend Lord Davies asked me to look forward to see what demand there will be for this. That is quite hard to do, but we estimate that around—I am told—130 schemes with £17 billion in assets may take up the option of entering a superfund, but we recognise these figures are highly uncertain. It will depend on how the industry reacts, future economic conditions and competition. The numbers, of course, could be significantly greater if the market grows.

It has been an interesting discussion, but I hope in the light of my remarks, the noble Baronesses feel able not to press their amendments.

[Baroness Noakes (Con)]

My Lords, at least we are going to please the noble Lord, Lord Katz, this evening. We might even manage to stick within our normal timeframe and not go beyond.

I thank the noble Baroness for setting out the rationale for the time at which schemes have to demonstrate that they are closed. I will consider that carefully. I am sure the noble Baroness, Lady Bowles of Berkhamsted, will consider carefully what the noble Baroness has said in respect of her amendments. I beg leave to withdraw the amendment.