Pension Schemes Bill

Baroness Stedman-Scott Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

[Baroness Stedman-Scott (Con)]

My Lords, I too look forward to the maiden speech of the noble Baroness, Lady White. I have every confidence that she will make a great contribution, including to the work of the House generally. Having had some interface with her at the DWP, I am very confident that will happen.

Although the Bill is not perfect, I hope the Minister will take comfort from the broad cross-party consensus that exists around many of its core measures. Across your Lordships’ House, we share a common ambition: having a pensions system that delivers strong returns for those it serves.

In 2010, we inherited from the previous Labour Government a private pensions system that was not fit for purpose. The shift from defined benefit to defined contribution had left millions behind and, in 2011, just 42% of people were saving into a workplace pension. The cornerstone of reform was auto-enrolment—a Conservative innovation and an undeniable success. Today, around 88% of eligible employees are saving for retirement, with most opt-outs made on the basis of sound financial advice.

Workers deserve dignity in retirement, not merely a safety net. That is why, before the last election, the Government rightly focused on two enduring challenges: value for money and pensions adequacy.

Let me begin by acknowledging what the Bill gets right. We welcome progress on the pensions dashboard, which will help savers access their information more easily and plan for retirement. We also support the Bill’s emphasis on consolidation, including larger pension funds, the consolidation of the Local Government Pension Scheme, and the long-overdue merging of small, stranded pots—all of which have the potential to improve efficiency and value for money, provided that risks are properly managed. Finally, we welcome the humane and necessary measures to improve access to pensions for those facing terminal illness. Taken together, these provisions represent steps in the right direction.

However, while there is much to commend, there are also areas where we believe the Bill falls short, and in ways that matter deeply to the millions depending on it. The most striking omission in the Bill is the absence of any meaningful progress on pension adequacy. The uncomfortable truth is that too many people are simply not saving enough to secure a decent standard of living in retirement: a situation made all the more difficult in the current economic circumstances.

Auto-enrolment was never intended to be the finished article. It was a foundation, not the building itself. Yet the Bill proceeds as though the task were complete. The central question of whether current savings levels are sufficient is not confronted but deferred: pushed into the second stage of the review. This is not reform: it is a holding space, in which difficult but necessary decisions risk being postponed rather than resolved.

Adequacy should have been the organising principle of this legislation. Instead, it has been quietly parked for another day. In its place, the Government have focused on taxing pension contributions, increasing the cost of employment, and layering additional regulation on to the terms and conditions of work. We are regulating, taxing and constraining the very mechanisms through which retirement savings are generated, yet we have failed to address the most basic and consequential question of all: are people saving enough to retire with security and dignity?

A further missed opportunity is the failure to support the self-employed with new and innovative ways to save affordably for their retirement—more than 4 million people who drive our economy, create jobs and take risks, yet too often face retirement with no provision at all. Only around one in five self-employed workers earning over £10,000 a year currently saves into a pension. This is not a marginal problem; it is a structural gap in our pensions system. We need practical and pioneering solutions to support this growing group, and the Bill should have set that direction. We have spoken directly to the self-employed in preparation for this legislation, and in Committee we stand ready to assist the Minister by bringing that engagement and evidence to bear.

Our wider engagement also brought into sharper focus the Bill’s treatment of public sector pensions. This Bill is, in our view, decidedly LGPS-light. We will therefore table amendments to address that omission, ensuring that the scheme operates with greater clarity, flexibility and accountability. At the heart of our concern is the need for a more transparent, simpler and reformed approach to reviewing employer contribution rates for local authorities. This is not about loosening discipline or weakening the scheme. It is about prudent financial management and giving councils the tools they need to govern responsibly. This is what local authorities deserve and it is good financial governance.

The Bill shows no enthusiasm for addressing excessive prudence and the record surpluses within the Local Government Pension Scheme. We are not naive enough to suggest that the LGPS surpluses can be extracted or treated in the same way as those of private defined benefit schemes. But, under the Chancellor’s revised fiscal rules, those surpluses are now treated as assets offsetting public debt. That may be fiscally convenient but it represents a missed opportunity to enhance councils’ resilience. In appropriate circumstances, those surpluses could—and should—be used to support reductions in employer contribution rates. However, too often, overly cautious actuarial methodologies, excessive prudence and a lack of transparency have locked councils into contribution rates that are simply too high.

Proportionality and openness in how assumptions are set and decisions are reached are pivotal. Without transparency, those assumptions cannot be properly challenged through due diligence, and Section 151 officers cannot fully discharge their statutory duties. We must therefore ensure that interim reviews of employer contributions are more accessible, transparent and accountable, through clearer statutory trigger conditions, published policies, improved actuarial transparency and strengthened statutory guidance.

Kensington and Chelsea demonstrated precisely that approach in the aftermath of the Grenfell tragedy. Yet, across the country, councils are still forced into an exhausting and uncertain process to navigate the existing regulatory framework simply to secure interim contribution reductions after a formal valuation. We look forward to engaging constructively with the Government to ensure that councils are properly supported in delivering services while fully meeting their LGPS obligations.

Finally, I turn to what I regard as the most troubling element of the Bill: the proposed reserve power to mandate pension fund investment strategies within master trusts and group personal pension schemes used for automatic enrolment. Mandation is not a neutral tool; it is the quiet nationalisation of pension investment strategy. It is a fundamental shift in who ultimately controls investment decisions. Automatic enrolment has succeeded because it is trusted. Mandation threatens that trust: automatic enrolment is trusted by employers, by industry, and above all by millions of ordinary savers who have neither the time nor the confidence to manage complex financial decisions themselves.

It is therefore deeply concerning that this power is targeted specifically at automatic enrolment default funds. These are the schemes used disproportionately by those with the least means and the least financial confidence: the very people who rely most heavily on the integrity and independence of the system we have built over decades.

This is where the injustice bites. Those with the fewest means and the least financial confidence are the ones Labour’s mandation would trap. The savviest can opt out; the poorest get locked in. That is the injustice of mandation. Those savers need our protection, not a situation in which their pension outcomes become indirectly shaped by ministerial preferences, however well intentioned. Conservatives built automatic enrolment; Labour now stands a chance of threatening it.

We built automatic enrolment on a simple settlement: the state sets the framework, but trustees make the investment decisions. The Bill risks blurring that line. At stake here is trustee independence and fiduciary duty, principles that sit at the very heart of pensions policy. Trustees are bound, both legally and morally, to act in the best financial interests of their beneficiaries. Pension schemes exist to serve savers, not to serve the shifting political priorities of the day.

In this context, I am reminded of the warning offered by the respected pensions expert Tom McPhail, who invoked Chekhov’s famous dramatic device: the gun on the wall. If the gun is hung on the backdrop of the stage in the first act, it will be fired by the third. Once a Government arm themselves with a power, no matter how benignly it is presented, history suggests that it will eventually be used. If the Government do not intend to use the power, why is it in the Bill?

Rather than relying on the logic of “mandation as a backstop”, I urge the Minister and her team to step back and address the underlying reasons why pension funds are not investing more in the UK in the first place. Low domestic investment is not simply a collective action problem, as the Government suggest. It reflects real structural barriers, and the Government should compile the relevant evidence and report back on how those obstacles might be removed.

Will the Minister undertake to do this? There are better and far less constitutionally troubling ways to unlock long-term investment. I offer her just one example. Solvency rules continue to constrain insurers from investing in productive UK assets that offer stable long-term returns. Reforming those outdated rules could, according to Aviva, unlock billions of pounds over the next decade. That is how we should be driving growth, by removing barriers to investment and not by inserting the state into decisions that properly belong to independent trustees acting solely in the interest of savers. It is therefore striking that the Government have chosen to expend so much political capital on a mandation policy that commands little support beyond the DWP and lacks a wider consensus across the industry. Can the Government provide assurances that savers in auto-enrolment pension schemes will not subsequently discover that their pension providers have been instructed to invest in specific entities such as Thames Water?

I close by reaffirming our commitment to work constructively with the Government. Stability and confidence in the pensions market are paramount. It is in that spirit that we approach this Bill. Where improvements can be made, we will table amendments. We will engage in good faith to ensure that the detail is right and that the framework ultimately serves savers, schemes and the wider economy. We broadly support the direction of travel that the Government are pursuing. However, as today’s debate has made clear, there remain important questions around the detail, the intent of forthcoming regulations and what has been omitted from the Bill.

When closing today’s debate, my noble friend Lord Younger of Leckie will expand on these points, set out further concerns and put several direct questions to the Minister. We hope that the Government will reflect carefully on those issues as the Bill progresses. I look forward to working with the Minister in the weeks and months ahead and to continuing this constructive, robust dialogue as we seek to strengthen the legislation.

Pension Schemes Bill

Baroness Stedman-Scott Excerpts

Committee stage
Monday 12th January 2026 Grand Committee

[Viscount Thurso (LD)]

My Lords, I will briefly give my support to the noble Lord, Lord Davies. I believe that many schemes would absolutely like to put money into social housing. The scheme of which I am a trustee, and which I mentioned earlier, has recently put 5% into social housing—it is entitled to do that, and it did so based on an investment case. It has put a further 5% into social infrastructure—it has also done that based on an investment case; it is part of the protection assets within the fund. We are allowed to do that, so can the Minister therefore say whether anything in the Bill prevents the funds that we are discussing from doing exactly the same thing?

[Baroness Stedman-Scott (Con)]

My Lords, we come to another group of largely probing amendments, which I welcome. A good deal of the process on the Bill will be about unpacking what the Government intend, how these provisions will work in practice and what the industry can anticipate. Certainly, those are the questions that have been raised with me in my engagement with representatives.

I will speak briefly to the amendments in the names of other noble Lords, many of which are clearly probing in nature and raise important and legitimate questions about how Local Government Pension Scheme assets might be deployed to support wider economic and social objectives. We welcome that debate. It is right that Parliament explores how long-term patient capital can help support UK growth, infrastructure and social outcomes. I recognise the spirit in which these amendments have been brought forward.

However, from our side, we believe that it is important to be clear about a central principle: LGPS funds are, first and foremost, fiduciary vehicles. Scheme managers have a legal duty to act in the best financial interests of members and beneficiaries, and that duty must remain paramount. However, I note that the Local Government Pension Scheme’s advisory board has already warned that:

“New government regulations could ‘directly usurp’ the most fundamental duty of council pension funds”.


Could the Minister address that in his response?

Opportunities for investments in areas such as UK growth assets or social housing should therefore be presented, structured and made investable in a way that meets risk-adjusted return requirements and not mandated or directed through statute. There is a clear difference between creating a strong pipeline of investable opportunities and compelling capital allocation. Once we move from encouragement to prescription, we risk undermining trustee independence.

Many of the amendments in this group helpfully test where that boundary should sit, and I hope that the Minister can reassure the Committee that the Government’s approach is to enable, not to direct, in order to attract pension investment through quality and value, not through compulsion. If we keep fiduciary duty at the centre and focus on making UK opportunities genuinely competitive investments, growth and good pensions will go hand in hand. That is the balance that we are keen to see maintained.

I shall speak to my two amendments in this group, Amendments 9 and 11, which are intended to improve clarity, accountability and future-proofing in Clause 2, rather than to change the underlying investment powers of the scheme managers.

Amendment 9 would require scheme managers to publish an annual report on the local investments held within their asset pool companies, including both the extent of those investments and their financial performance. If local investment is to play an increasing role within LGPS portfolios, transparency is essential. Members, employers and taxpayers are entitled to understand not only where capital is being deployed but how it is performing. This amendment would not mandate local investment; nor would it direct decision-making. It simply asks that where such investments are made, they are visible, measurable and open to scrutiny. The question it poses to the Government is straightforward: is transparency, rather than compulsion, the right way to build confidence in local investment? We believe that it is.

I add at this point that a great many Bills are coming before your Lordships’ House in which the interaction with post-devolution structures is far from clear. The Government should be making more of an effort to provide clarity on the post-devolution picture when drafting legislation. I therefore ask the Minister—here come the exam questions—how do the Government intend to keep the definition of strategic authorities under review as devolution evolves? What assurances can be given that future legislation will align properly with the new devolved arrangements? Do the Government accept that there is a risk of confusion and overlap if these definitions are not regularly updated to reflect constitutional changes? More broadly, what steps are the Government taking to ensure a coherent and consistent approach to the interaction between the new powers and devolution settlements? Crucially, how will assets and liabilities be carved up post devolution, and can the Minister assure us that this will be done independently? I am very happy for the Minister to write, rather than bombarding him with a massive amount of work now—although maybe we should; I do not know.

Amendment 11 is probing in nature and concerns the definition of strategic authorities. Currently, the Bill hard-codes a specific list of bodies in primary legislation, yet the architecture of English devolution is changing rapidly, not least through the forthcoming English devolution Bill. This amendment therefore asks whether that definition is sufficiently agile and future-proofed or whether it risks becoming outdated almost as soon as it is enacted. It invites the Minister to explain how the Government intend to ensure that LGPS governance can adapt to evolving local and regional structures without requiring repeated primary legislation.

Taken together, these amendments seek to strengthen Clause 2 by reinforcing accountability on the one hand and flexibility on the other, while preserving the core principle that investment decisions must remain firmly rooted in fiduciary duty. I look forward to the Minister’s response to the questions the amendments raise and his reassurance that the Government’s approach is to enable good investment decisions through transparency and clarity rather than prescription.

[Lord Katz (Lab)]

My Lords, I am grateful to noble Lords for these amendments and for the probing and helpful debate that we have had on this group.

I turn first to Amendment 7 in the name of my noble friend Lord Davies of Brixton, which explores how LGPS assets might be used to provide social housing. The Government aim to ensure that LGPS investments support the prosperity and well-being of their local communities, just as members did throughout their working lives—an aim that is certainly reflected in my noble friend’s amendment. However, the Government do not wish to direct asset pools as to the manner of their investments—to be fair to my noble friend, he said that this was not about mandation. To respect the independence of LGPS funds, it remains the responsibility of administering authorities to set their investment strategy.

The reforms will require administering authorities to co-operate with strategic authorities to identify and develop appropriate investment opportunities, which may include social housing-related investments. While social housing is a high priority for local areas and may provide suitable opportunities for investment, it should be for strategic authorities to consider and set priorities appropriate for their areas.

My noble friend asked whether the revised regulations might act as a barrier to investing in social housing. We would say that that is not the case; there will not be a barrier. Administering authorities will continue to set the investment strategy for their fund, including local investment priorities. They must have regard to local growth priorities in setting their investment strategy and can recommend opportunities to their pool. Local investments are not restricted to any asset classes. The Government see housing as one of as the investment sectors with the greatest potential for local government impact.

My noble friend Lady Warwick of Undercliffe spoke cogently and with some passion on the importance of increasing social housing. That is something the Government would align with. She asked whether we were confident that, without reference to social housing in the Bill, the LGPS will invest in it. I say to her—to be fair there was some acknowledgement of this in her comments and in those of my noble friend Lord Davies—that there is a long history of local investment by the LGPS. Cornwall Pension Fund, for example, has committed more than £100 million to a local impact fund with a focus on solar farms and affordable housing. Greater Manchester Pension Fund has backed major housing and regeneration projects in the north-west, to which it commits 5% of its total assets. The LPP pool is a major investor in the Haweswater Aqueduct Resilience Programme. The London and LPP pools have established the £250 million London fund, to which my noble friend Lord Davies referred. It invests in opportunities in London, including in residential property and affordable housing, as well as community regeneration, digital infrastructure and clean energy.

My noble friend Lady Warwick asked whether the Government would ensure that all LGPS have the right tools to provide the best returns for members. The Government’s expectation is that the reforms will deliver the wider benefits of professionalised asset management, including long-term savings and efficiency. We are also aiming to strengthen LGPS fund governance. Better governance ensures decisions are more effective, with decision-makers able to be agile, better at managing risk and able to pick up opportunities.

Amendment 11 was mentioned by a number of noble Lords and was tabled by the noble Baroness, Lady Stedman-Scott. I agree that the definition of strategic authority should be consistent across all relevant legislation. This Bill and the draft regulations that the Government have prepared will ensure that the authorities that are treated as strategic authorities in England for the purpose of the English Devolution and Community Empowerment Bill are treated as such for the purpose of LGPS investments. If any new authorities become strategic authorities, the Government will use the regulation-making powers to ensure that their treatment remains the same. I hope that addresses some of the concerns raised by the noble Baroness, Lady Stedman-Scott. She talked about her concerns about potential confusion over a changing and emerging landscape. I am happy to write to her with more details, as she was so kind in setting so few exam questions compared with her Front Bench colleague on my earlier group. Her restraint is commendable.

Regarding Amendment 12, I understand the noble Lord’s intention is to encourage greater domestic investment across the whole of the UK and, indeed, growth is the number on mission of this Government. The LGPS already invests approximately 30% of its assets in the UK. Greater consolidation will build on this success story as the pools will have greater capacity and expertise to invest domestically, including in infrastructure and unlisted assets.

The noble Lord, Lord Fuller, asked about the duty to co-operate and whether it would make it difficult for schemes to invest outside their locality. I reassure him that the proposals do not prevent investment outside the area of the funds or the pool. Administering authorities are free to set whatever local investment target they consider appropriate. While investment across the UK is strongly encouraged, the purpose of this requirement is to promote investment that has tangible benefits to the fund or its pool. Expanding the definition to the whole of the UK would go too far and local benefits would be diluted.

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[Lord Palmer of Childs Hill (LD)]

I have always reckoned that the duty of pension fund managers is to the members. What we are trying to do now is say that they have other duties; however, it is not very clear where the borderline is.

[Baroness Stedman-Scott (Con)]

I know how frustrating it is when Members keep getting up to ask questions, but I have to do this. The Minister referred to a backstop. For what purpose? In what circumstances would it be used? Can the Minister help us understand that?

[Lord Katz (Lab)]

The backstop power relates to our earlier discussion on previous amendments. It would be used in extremis. The problem is that the noble Baroness is asking me to conject on what are hypothetical situations. Some of these issues will be set out in some of the regulations that will follow.

I am happy to go back a couple of interventions and pick up the point made by the noble Baroness, Lady Altmann. I would be happy to write to try to clarify the distinction that we are making. Of course we want to see good levels of investment in a range of different asset classes, but we are absolutely not saying that this is a slippery slope to taking powers of direction or mandation. We are very clear on that. Ultimately, this is the nature of pensions legislation: some of the clarity comes down stream. We are clear that the Government’s intention in the Bill is purely to provide the framework to ensure that we can harness the potential of these asset pools to make some meaningful investments.

[Baroness Stedman-Scott (Con)]

This is in the Bill. I know that the Minister cannot do this now—I accept that he can write to me—but can he please help us? If it is in the Bill, we need to know what it means before regulations come.

[Lord Katz (Lab)]

I am not sure whether I can provide much more clarity than I have done so far, so I would be very happy to write to the noble Baroness to spell that out.

I realise that I have not given the levels of satisfaction and clarity that Members perhaps wanted but, as these are probing amendments, we contend that they would have a minimal impact. On that basis, I ask the noble Baroness to withdraw her amendment.

Pension Schemes Bill

Baroness Stedman-Scott Excerpts

Committee stage
Wednesday 14th January 2026 Grand Committee

This amendment seeks to probe the process that the Secretary of State will be required to follow in order for a compulsory merger to take place, and the wider considerations that will be applied in deciding whether such a merger is appropriate.

[Baroness Stedman-Scott (Con)]

My Lords, it is a pleasure to open today’s debate on the remaining groups of amendments relating to the Local Government Pension Scheme. We are conscious that Ministers have already undertaken to write to the House on a number of points, and we do not wish to add unduly to that correspondence or set exam questions. However, we hope that today’s debate may allow some of these issues to be addressed in real time.

Let me be clear at the outset that this is a probing stand-part notice intended to seek clarity from the Government. Clause 6 is striking in its brevity, but the power it confers is anything but modest. It would allow scheme regulations to provide for the merger explicitly, including a compulsory merger, of local government pension funds. Compulsory merger is a significant and, in many cases, irreversible intervention. It has profound implications for governance, funding positions, local accountability and, ultimately, the retirement savings of millions of scheme members and the obligations of employers. We are dealing here with very substantial sums of public money and the livelihoods of millions of people.

Before such a power is afforded to a Secretary of State who may have little or no specialist expertise in pensions, it is only right that the Committee understands clearly how this power will be exercised and what safeguards will apply. The clause itself, however, tells us very little. It provides no indication of the process that will be followed, the criteria that will be applied or the protections that will be in place for members, employers and administering authorities. I therefore hope that the Minister can assist the Committee on a number of points.

First, on expertise and decision-making, pension scheme governance is highly complex and technical. What confidence can the Government offer that the Secretary of State is the appropriate decision-maker for imposing compulsory mergers, particularly in the absence of any requirement in the Bill to obtain independent expert pensions advice?

Secondly, on process, what precise procedural steps will be required before a compulsory merger can be ordered? Will there be a statutory consultation and, if so, with whom? Will affected scheme managers, administering authorities, employers and scheme members have a formal opportunity to make representations before a decision is taken?

Thirdly, on safeguards and accountability, what independent checks and balances will exist to ensure that the Secretary of State cannot act unilaterally? Will decisions be required to meet defined tests, such as necessity or proportionality, and to be supported by evidence? Will there be any right of review or challenge where a fund believes a compulsory merger is not in the best interests of its members?

Fourthly, on financial risk, given the scale of the assets involved, what assurances can the Government provide that members’ savings will not be exposed to undue risk or that decisions will not be influenced directly or indirectly by political or short-term considerations rather than long-term fiduciary interest?

Finally, on precedent, does the Minister accept that conferring such a broad enabling power sets an important precedent for ministerial intervention in pensions governance more widely? If so, how do the Government justify that approach, and why are the limits of this power left entirely to secondary legislation?

We ought to have answers to these questions before the conclusion and passing of the Bill. Clause 6 confers wide discretion in a highly technical and sensitive area, with potentially far-reaching consequences. It is therefore entirely appropriate for the Committee to press the Government to explain how this power will be exercised, what safeguards will be in place and how the interests of scheme members will be protected. I look forward to the Minister’s response.

[Lord Palmer of Childs Hill (LD)]

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

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

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

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[Lord Katz (Lab)]

I am seeking help from my noble friend Lady Sherlock in a helpful conference on the side. The investment assets are in pools, so that is not necessary. The backstop powers are very clear: if there is a need for a merger or we are worried about a failing scheme, there is that backstop power and this is why. It would not be used to direct particular investment strategies.

[Baroness Stedman-Scott (Con)]

My Lords, I thank all noble Lords who have taken part in this debate, and I also thank the Minister for his full and detailed response to the questions that were asked. The Minister talked about perhaps using these powers when there are local government reorganisations; that is highly likely in the current climate, I would think.

The purpose of this stand part notice is not to resist sensible reform but to underline the importance of clarity, certainty and proper accountability where Parliament is being asked to confer powers on this scale. Clause 6 is framed at a very high level, yet it opens the door to decisions that could permanently reshape local government pension arrangements, where powers are capable of compelling structural change. It is vital that those affected understand not only that the power exists but the principles that will govern its use. Clarity matters for scheme managers, employers and, above all, scheme members, whose long-term interests depend on confidence in the stability and predictability of the system. Certainty matters because pension funds operate on long horizons, and opaque or open-ended powers can create risk.

Most of all, the responsible exercise of delegated powers depends on transparency. When Parliament is asked to delegate authority in a highly technical and sensitive area, it is entirely reasonable to expect a clear account of how that authority will be exercised and what safeguards will guide it. However, in view of the response given by the Minister—I am sure that all noble Lords who have taken part in this debate will look at Hansard; if there are any issues, we will go back to the Minister—I beg leave to withdraw the stand part notice.

Clause 6 agreed.

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Moved by

[Baroness Stedman-Scott]

14: After Clause 7, insert the following new Clause—
“Review of the cost and sustainability of the Local Government Pension Scheme(1) The Secretary of State must conduct a review of the long-term cost and sustainability of the Local Government Pension Scheme.(2) The review must give particular consideration to admitted bodies, including housing associations.(3) A report must be laid before Parliament within 12 months of the day on which this Act is passed.”Member’s explanatory statement
This amendment requires the Government to review the long-term cost and sustainability of the Local Government Pension Scheme, with particular consideration given to admitted bodies such as housing associations, and to report its findings to Parliament.

[Baroness Stedman-Scott (Con)]

My Lords, this group of amendments is the first of three groups that together seek to ensure that the Local Government Pension Scheme operates more effectively and proportionately, protecting member benefits, supporting long-term sustainability and remaining affordable for employers.

The context is critical. The financial position of the scheme has changed profoundly. On a low-risk basis, the LGPS was around 126% funded in March 2025, rising to around 147% by September, with surpluses of £87 billion and £147 billion respectively. This is a striking shift from the 2022 valuation, when the scheme stood at around 65% funded. In short, the scheme has moved decisively from deficit recovery into sustained overfunding.

That shift has unavoidable implications for contribution rates. On prudent assumptions, future services costs are around 15%—falling closer to 6% once surplus is taken into account—yet employers continue to pay contributions of around 21%, costing roughly £9 billion a year across the scheme. Even under highly cautious assumptions, those levels now appear materially higher than is necessary to maintain long-term solvency. These amendments do not seek root-and-branch reform; they ask whether the regulatory framework is still operating as intended and whether contribution setting remains fair, transparent and proportionate.

Amendment 14 therefore requires a review of Regulation 62 of the Local Government Pension Scheme Regulations 2013, which lie at the heart of how employer contributions are determined. The concern here is not actuarial prudence in valuing liabilities but contribution prudence—the policy choice to extract additional buffers from employers, even where funds are demonstrably in surplus. At the centre of this issue are the undefined concepts in Regulation 62(6): desirability, stability, long-term cost efficiency and solvency. Their ambiguity has allowed increasingly conservative interpretations to become embedded in valuation practice, driving contribution rates beyond what the funding position alone would justify.

So I would like to ask the Minister three questions. How do the Government define “desirability”? How do they define “stability”? And how do they define “solvency” in this context? If the Government cannot clearly articulate what these terms mean, how can they be applied consistently when determining contribution rates? If Ministers cannot explain their intent, how can those responsible for applying the regulations be expected to reflect the Government’s wishes rather than their own interpretation? Does the Minister accept that, in the absence of clear guidance, it will be pension funds and actuaries that end up defining these terms in practice? This interpretation will shape outcomes.

In practice, expansive interpretations of “stability” and “long term cost efficiency” can justify unaffordable contribution rates, diverting resources from adult social care, housing delivery and other front-line services, while offering employers little scope to make legitimate trade-offs. There is also a clear imbalance of power. Employers bear the full cost of contributions yet often have limited influence over outcomes. Practice on the treatment of surpluses varies widely, with some funds permitting release and others prohibiting it on opaque grounds. Does the Minister agree that greater clarity and consistency would plainly be beneficial?

Amendment 15 asks a simple but necessary question: is the Local Government Pension Scheme affordable in the long term? It requires a review of long-term costs and sustainability, including impacts in respect of admitted bodies such as housing associations, with the findings reported to Parliament. This is an attempt not to undermine the LGPS but to ensure transparency, proportionality and long-term affordability—principles this House has always upheld.

This analysis is not abstract; a growing body of concrete cases now demonstrates how these regulatory interpretations are operating in practice. I would be very happy—indeed, delighted—to share the full set of these examples with the Minister, should he not already be aware of the scale and consistency of the issue. I trust that he will feel free to take up this offer if it helps.

I will briefly outline one such case. In this instance, the fund in question is assessed as being 107% funded on a gilts minus 0.2% basis. This compares with the previous valuation basis of gilts plus 2.3%. At the current valuation, the council had a reported surplus of £57 million. Despite that clear surplus, measured on an exceptionally prudent valuation basis, the contribution outcome is, frankly, striking. Under the fund’s stabilisation policy, the employer’s primary contribution rate is permitted to reduce by no more than 2%. At the same time, the employer is still required to pay approximately £20 million per year in secondary, or so-called deficit recovery, contributions. That outcome is extraordinarily difficult to justify. Secondary contribution rates exist for one purpose only: to repair deficits. In this case, there is no deficit. Assets exceed liabilities, even under assumptions more conservative than those typically employed by insurers, whose pricing is generally close to a gilt-flat basis. Yet, notwithstanding that surplus position, the employer is still being required to make substantial deficit recovery payments. The council involved has been forced to seek exceptional financial support from MHCLG.

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[Lord Davies of Brixton (Lab)]

The noble Baroness cited a particular case and gave considerable detail about the circumstances. Is there any reason why the Committee cannot be told which authority it concerns? As things stand, there is no way that I or any other Member of the Committee could comment on that case. If the noble Baroness can tell us which authority it is, in the interest of transparency, I urge her to do so.

[Baroness Stedman-Scott (Con)]

I have always been a supporter of transparency. I do not know the answer to the noble Lord’s question, but I will find out and let him know either the name of the council or the reason why I cannot give it to him. We have other examples that we are happy to share. I hope that answers the noble Lord’s question. I beg to move.

[Lord Davies of Brixton (Lab)]

It is a pleasure to take part in this debate. It is an important issue and public money should always be open to scrutiny and deep thought about how we approach these issues. The noble Baroness, in introducing the amendments, quoted the significant switch round in the financial state of the Local Government Pension Scheme. She will be able to have an interesting discussion with her former colleagues, Liz Truss and Kwasi Kwarteng, as to why exactly that has happened. They have had more influence on it probably than the actuarial profession.

My message essentially is, “If it ain’t broke, don’t fix it”. What we have here is the Official Opposition attempting to make a crisis out of a significant success. The Local Government Pension Scheme has been successful, as attested to by the noble Lord, Lord Fuller, yet here we are being presented with it as if there is some crisis to address. We should recognise that, in actuarial terms, the financial management of the scheme has been a significant success. It is up to those suggesting reviews—two in this group of amendments and two more in the following group, which should more accurately be here—to explain, rather than providing anonymous details, what the problem is.

The context is that, compared to private sector funded schemes, where contributions have been increasing, what we are going to see in the coming year is the opportunity of significant cost reductions. This is for two reasons. First, it is because of the successes of Local Government Pension Scheme investments, with returns of around 9% per annum since the last valuations. As a result, that has generated significant surpluses—significant excess of assets over liabilities. I shall come back to that in a later group. Following the latest set of triennial valuations, substantial reductions will be available. It is up to individual authorities to make their decisions, but the opportunity will be there, certainly for most funds.

As far as actuaries who support and work within the local government sector are concerned, as I explained on Monday, this discussion comes as a bolt from the blue. What we really need in this area is stability. It would be far better to promote discussion first within the sector, with those who know what they are talking about, before producing these proposals, which inevitably lead to uncertainty.

It is not a surprise, given the environment we are in, that there has been no consultation on this, unlike the investment changes, because it is part of a programme that we see with amendments submitted later in this Bill. There are some people who just do not like successful collective pension provision. There is an agenda at work here. As I say, I do not oppose consideration of the issues, but we should understand where it is coming from.

It is important to understand that the last valuations were in 2022. The current valuations, as at 31 March last year, are under way and we do not yet have the full results. Early results have been provided and we know the direction of travel, but we do not know the final results, which is why I question the figures being quoted. We do not yet know the results over the sector as a whole of the current series of valuations. Any speculation about that outcome misses the point.

The second point I want to make is that there is no one-size-fits-all solution to the funding of local government pension schemes. They vary widely in their size. The staff membership has to be taken into account, and that varies, and you also have to understand that some of these funds have significant numbers of non-local government members through the admitted body process and each of those has to be assessed in a proper way. There is no way you can have a one-size-fits-all approach to the actuarial management of these funds. You need the professional knowledge and judgment of actuaries—you may think I am promoting my own profession—to decide what is the best approach.

Clearly, that judgment should be open to review and, of course, it has been reviewed. That is what is so nonsensical about these proposals. Under Section 13 of the Public Service Pensions Act 2013, the Government can ask for reviews of the funded public service schemes, which effectively means local government schemes. Indeed, such a review has been carried out and a full detailed report produced by the Government Actuary, setting out the approach that has been adopted, comparing the different approaches—there are four firms of actuaries, which all have slightly different approaches—reconciling them and judging the assumptions that have been made.

Broadly speaking, the Government Actuary has given these valuations a clean bill of health. Therefore, any suggestion that there is anything wrong about the actuarial approach that is being taken is denied by the Government’s own actuarial adviser. Funds need to take account of local needs and public interest has a role in deciding how services can be employed in these funds. There is no question of refund in these funds, but the way in which it affects contributions is crucial.

Another point, which I think the noble Baroness ignored, is that these funds are all subject to the cost- capping arrangements set out in the coalition Government’s review of public service pensions of 14 or 15 years ago. There is a cost cap. I made a note of what the noble Baroness said: that the full cost of the contributions “bears on the employers”. That is just wrong. It bears on the employers and the members together. It is the employers’ costs that are capped under legislation and it is the members who bear the risk of increasing costs and stand to enjoy the benefit of reducing costs. The cost cap is crucial in these schemes and to ignore its important role fails to understand what we are doing. I am sorry—I could go on, but I think the situation is clear.

There was just one other point—I will go on. It arises under the next group and it is the idea of a statutory funding standard. Of course, we tried that with private sector pension schemes and it was a disaster. Everyone agreed it was a disaster and we had to have a new system—whether the new system was any better is a matter for debate. However, the idea of having a statutory funding standard just did not work.

To conclude—I hope it is a conclusion this time—there is no evidence that the existing system has failed. Indeed, we expect to see the benefits of the current approach when we decide what these funds should be in the light of the forthcoming valuation results.

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In conclusion, I consider that the existing statutory processes already provide routes to examine and remedy any issues of affordability in the scheme. I ask the noble Baroness to withdraw her amendment.

[Baroness Stedman-Scott (Con)]

My Lords, I thank those taking part in this interesting debate, and the Minister for his response. I completely agree with the noble Lord, Lord Davies of Brixton, that discussion and consultation is best first. I will take advice on the naming of the authority, and I will certainly take advice on speaking to Kwasi Kwarteng. This is not a matter of political inheritance; it is a matter of changed circumstances. In 2022, when many Local Government Pension Scheme funds were still in deficit, higher employer contribution rates were, on balance, the correct and responsible course of action. At that point, the application of prudence, both actuarial and contribution-based, were broadly aligned with the financial position of the scheme.

What has changed is the context. Market conditions have shifted materially in recent years. Higher interest rates, improved funding positions and stronger asset values have transformed the balance sheets of many funds. This has been underscored by the most recent triennial valuation in 2025, which has revealed the scale of surplus that was neither anticipated nor problematic in earlier cycles. It is precisely at this point that the interpretation of the regulations, particularly Regulation 62(6), has come to the fore. The issue is no longer whether prudence is appropriate but how it is being applied in a materially different financial environment. Rules that operated sensibly when schemes were in deficit are now, through interpretation rather than legislation, producing outcomes that risk becoming disproportionate and unaffordable.

That is why the amendment matters. It is not an attempt to rewrite history or to relitigate past policy decisions; it is a forward-looking attempt to ensure that a regulatory framework designed for balance and sustainability remains fit for purpose as conditions change. This should not be a partisan issue. It is about ensuring that regulation keeps pace with reality, that prudence remains proportionate and that employers are not locked into contribution levels that no longer reflect the underlying financial position of the scheme. I hope noble Lords have appreciated the spirit in which we have tabled these amendments but, for now, I beg leave to withdraw the amendment.

Amendment 14 withdrawn.

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Moved by

[Baroness Stedman-Scott]

20: After Clause 7, insert the following new Clause—
“Interim reviews of employer contribution rates in the Local Government Pension Scheme(1) The Secretary of State must by regulations made under section 3 of the Public Service Pensions Act 2013 (scheme regulations) amend the Local Government Pension Scheme Regulations 2013 (S.I. 2013/2356) as follows.(2) After regulation 58(4), insert—“(5) The funding strategy statement must comply with regulation 64A(2) and be published in a form accessible to non-specialist readers.”(3) Regulation 64A (revision of rates and adjustments certificate: scheme employer contributions) is amended as set out in subsection (4).(4) For paragraphs (1) and (2), substitute—“(1) The administering authority may obtain a revised rates and adjustments certificate where the funding strategy statement sets out the administering authority’s policy on revising contributions between valuations and one or more of the following conditions is met—(a) there has been a significant change in the liabilities arising or likely to arise since the last valuation;(b) there has been a significant change in the employer’s ability to meet its obligations to the Scheme, consistent with that employer’s obligations to deliver value for money and services for local taxpayers;(c) the employer requests a review and agrees to meet the reasonable costs of that review.(2) The funding strategy statement must include a clear and accessible policy on revising contributions between valuations, including—(a) the process and evidential requirements for employers to request a review,(b) indicative timescales for the administering authority to determine such a request,(c) the criteria the administering authority and fund actuary will apply (including risk appetite and prudence levels), and(d) the approach to apportioning reasonable costs of any review.(2A) Where an employer makes a request under paragraph (1)(c), the administering authority must—(a) acknowledge the request within 10 working days,(b) determine the request within 12 weeks (or such longer period as is agreed with the employer), and(c) provide written reasons for its decision.(2B) For any review under this regulation, the fund actuary must prepare an Actuarial Methods Statement which— (a) explains, step by step, the models and methodologies used to project liabilities, assets and funding needs,(b) sets out all material assumptions, including discount rates, inflation, salary growth, mortality, longevity improvements and any smoothing or damping mechanisms,(c) specifies the level of prudence applied and how that prudence has been determined, and(d) provides sensitivity and scenario analysis showing potential outcomes under varying market conditions and employer covenant assessments.(2C) The administering authority must publish the Actuarial Methods Statement alongside the decision under paragraph (3)(c), subject only to the redaction of information which is commercially sensitive or relates to individuals. (2D) The Secretary of State must issue statutory guidance on—(a) how councils and other employers may make requests under paragraph (1)(c),(b) the matters administering authorities should take into account when considering such requests, including the balance between Scheme solvency and local taxpayers’ interests in the continued delivery of core services, and(c) the minimum standards for actuarial transparency under paragraph (5).(2E) Administering authorities must have regard to guidance issued under paragraph (6)(a).(2F) The Secretary of State must publish the guidance within six months of the day on which this Act is passed and keep it under review.””Member’s explanatory statement
This new Clause aims to strengthen Regulation 64A of the Local Government Pension Scheme Regulations 2013 to make interim reviews of employer contribution rates more accessible and transparent.

[Baroness Stedman-Scott (Con)]

My Lords, I hope the Committee will forgive me for the length of this amendment, which is tabled in my name and that of my noble friend Lord Younger of Leckie.

Despite its length, its purpose is in truth a simple one. It seeks to ensure that the provision for interim reviews of employer contribution rates under the Local Government Pension Scheme is not merely available in theory but genuinely usable in practice. At present, while the regulation allows interim reviews, the circumstances in which they may be triggered are so narrowly framed and so conservatively interpreted that many employers find them effectively inaccessible. The consequence is that contribution rates can remain detached from the financial reality and workforce profile for prolonged periods, even when there has been a clear and material change in circumstances.

I will not revisit the funding position of individual schemes, but it is important to note, once again, how sharply the position of the Local Government Pension Scheme has changed. Recent low-risk analysis shows the scheme moving from around 65% funded in 2022 to significant and sustained overfunding in 2025, with all funds now above 100%. That shift has clear implications for contributions. Even on prudent assumptions, implied future service rates are far below the roughly 21% that employers currently pay, at a cost of around £9 billion a year.

The difficulty is that the formal valuation process is not designed to respond quickly to changing circumstances. In this case, the 2025 valuation cycle in a number of cases has already concluded. As a result, councils now face contribution rates based on assumptions that no longer reflect current financial conditions, with no realistic prospect of adjustment through the normal valuation timetable. In those circumstances, the interim review mechanism becomes the only viable route to a fair and proportionate outcome.

Valuations are infrequent by design, but financial reality does not always conform to that schedule. Where there has been a material change in funding position, workforce composition or employer risk, interim reviews are intended to act as a safety valve, allowing contribution rates to be reassessed before costs are locked in for years at a time. In practice, however, access to that mechanism is so constrained that it often fails to perform the role it was created to serve. For that reason, although previous amendments address the deeper structural drivers of the current contribution pressures, I will turn to the interim mechanism.

The proposed new clause before us does not change the intent of the law. It seeks only to ensure that the safeguards Parliament has already provided can be used effectively by councils whose contribution rates may no longer be justified by the scheme’s underlying financial position. Specifically, it strengthens Regulation 64A of the 2013 regulations by addressing the practical barriers that councils face when seeking a review. It clarifies when a review may be requested, requires funds to set out clearly how requests are made and assessed, introduces transparency around the actuarial assumptions and underpinning contribution rates, and promotes greater consistency through statutory guidance.

Taken together, these changes do not weaken prudence or undermine solvency, but they make the process intelligible and navigable for the employers expected to engage with it. The underlying problem, therefore, is not that councils lack the right to request an interim review but that they lack a realistic means of exercising that right. Processes are unclear, evidential thresholds are opaque, and actuarial models are often presented in ways that make meaningful engagement extremely difficult.

In those circumstances, Regulation 64A functions less as a practical safeguard and more as a theoretical reassurance. That matters, because the financial consequences for councils are immediate and real. Pension contributions represent a significant and growing share of local authority expenditure. When contribution rates remain misaligned with financial reality, they absorb resources that would otherwise support front-line services. Yet councils remain fully accountable to local taxpayers for their financial decisions, even when the assumptions driving those costs are neither transparent nor consistently applied. The result is a system that undermines sound financial management at precisely the moment when many authorities are already under severe strain.

This brings us directly to the statutory duties that already rest on local government. Section 151 of the Local Government Act 1972 requires every authority to appoint a Section 151 officer, typically the chief financial officer, who bears personal responsibility for the proper administration of the authority’s financial affairs. These officers are legally obliged to ensure that expenditure is lawful, prudent and sustainable, and that duty does not stop at pension cost. Where long-term liabilities appear misaligned with risk, or where contribution volatility threatens service delivery, it is entirely reasonable that a Section 151 officer should be able to seek closer scrutiny through an interim review.

If such an officer believes that the assumptions underpinning contribution rates warrant examination, the system should enable that scrutiny rather than obstruct it. This clause does not ask actuaries to abandon prudence or funds to compromise solvency; it simply ensures that those charged with financial stewardship are given the transparency and procedural clarity necessary to discharge their existing legal responsibilities. Indeed, this is the most significant change made by the amendment. It clarifies the trigger conditions for an interim review by amending the second condition so that an employer’s ability to meet its LGPS obligations is assessed in a way that is consistent with its statutory duties to deliver value for money and to maintain services for local taxpayers.

At present, actuarial assessments tend to treat local authorities as possessing an effectively risk-free covenant, on the assumption that central government would ultimately step in to prevent failure. As a result, actuaries are understandably reluctant to accept that a council might be unable to meet its pension obligations, and contribution rates are set on the basis that payment is in practice guaranteed. However, that assumption does not reflect the financial reality facing local government. The strength of a council’s covenant is not unlimited; it is ultimately constrained by its local tax base and its legal obligation to balance its budget. Councils cannot borrow indefinitely to meet pension costs, and they also cannot insulate those costs from their wider responsibilities to residents.

This amendment would require the actuarial assessments to recognise that balance. Prudence must not operate as a one-way ratchet, where contribution levels can only ever rise or remain elevated, regardless of changing circumstances. Instead, prudence must be weighed alongside councils’ duties to local taxpayers, while continuing to protect and secure the benefits of scheme members. In short, this change does not undermine member security but simply ensures that assessments of affordability reflect the real-world constraints under which councils operate rather than an abstract assumption of unlimited state backing. The law already allows interim reviews in principle but, in practice, the system makes them inaccessible. This proposed new clause would close the gap, clarify the rules, improve transparency, introduce consistency and strengthen accountability, ensuring that interim reviews function as a real safeguard rather than a theoretical one.

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With that, I ask the noble Baroness, Lady Stedman-Scott, to withdraw her amendment, given that the information is already publicly available and because of the importance of consultation on changes.

[Baroness Stedman-Scott (Con)]

My Lords, I thank all noble Lords who have contributed to the debate on these amendments; I also thank the Minister for his response. I thank in particular my noble friend Lady Altmann for both her amendment and the way in which she explained it. Her expertise, track record and knowledge of this industry are second to none; I know that others in the Room are equally in that position.

My noble friend Lady Scott made a very important point about local government reorganisation, which is bound to have an impact on pension schemes. The question that she asked on financial statements was pertinent.

I have been intrigued to watch the relationship between my noble friend Lord Fuller and the noble Lord, Lord Davies of Brixton, develop. I am sure that it will become even more interesting as the Bill carries on. I can tell the noble Lord, Lord Davies of Brixton, that we have chapter and verse on the information to which we have referred today; where we are able to share it, we will do so.

The Minister made the important point that the markets change; the skill is in knowing at what point to intervene and review matters, but it is important that we have the right process and framework in place to do so.

In closing, I reiterate that this amendment is ultimately about making the system work as Parliament intended. Interim reviews exist on the statute book for a reason. They are meant to provide flexibility where circumstances change materially between formal valuations, and to prevent contribution rates becoming detached from economic reality. Yet where a safeguard exists in law but cannot be exercised in practice, it ceases to be a safeguard at all.

This amendment seeks not to weaken the Local Government Pension Scheme or to second-guess actuarial judgment but to ensure that prudence operates as a balanced discipline rather than an inflexible default. Where funding positions have strengthened significantly and where contribution rates place growing pressure on local services, it is reasonable that employers should be able to access a clear, transparent and intelligible process to seek reassessment. Clarity matters here. Councils are legally required to manage their finances prudently, deliver value for money and protect essential services for local taxpayers. They cannot discharge those duties effectively if contribution-setting processes are opaque, thresholds are unclear or review mechanisms are practically out of reach.

This amendment would simply align pension governance with those existing statutory responsibilities. It would make explicit how interim reviews may be requested, how they will be assessed and on what basis assumptions will be scrutinised. In doing so, it would strengthen confidence that decisions affecting billions of pounds of public expenditure are being taken proportionately, transparently and in full recognition of the real-world constraints under which councils operate. In short, it would turn a theoretical right into a usable one and restore the balance between member security, financial sustainability and the proper stewardship of public funds. That, I suggest, is not unreasonable but a modest and responsible objective. With that, I beg leave to withdraw my amendment.

Amendment 20 withdrawn.

Pension Schemes Bill

Baroness Stedman-Scott Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

[Lord Palmer of Childs Hill (LD)]

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

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

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

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

[Baroness Stedman-Scott (Con)]

My Lords, when I entered the department in July 2019, defined benefit pension schemes did, on occasion, report surpluses. However, those surpluses were neither of the scale nor the character that we are now observing. If one looks back over the past quarter of a century and beyond, it is evident that both the funding position of defined benefit schemes and the methodologies used to assess that funding have changed materially.

The surpluses reported today are not simply large in absolute terms but different in nature. They are measured against significantly more prudent assumptions, particularly in relation to discount rates, longevity and asset valuation, than would have been applied historically. It is therefore right that these emerging surpluses are examined with care and transparency. Bringing them into the open is necessary, and I say at the outset that the Government are right to have raised this issue explicitly in the Bill.

That said, we consider that the Bill does not yet fully reflect a number of the practical and operational issues faced by both trustees and sponsoring employers when seeking to make effective use of those provisions. In that respect, our position is not materially distant from that of the Government. Our concerns are not ones of principle but of application and implementation. We recognise that issues relating to potential deadlock between trustees and sponsors are important, but we are content for those matters to be considered at a later stage in the Committee’s proceedings. Our immediate focus is on understanding how the proposals are intended to operate in practice, how decisions are expected to be taken within existing scheme governance arrangements and how these new powers interact with established trustee fiduciary duties and employer covenant considerations.

This is a busy group, and noble Lords have done a sterling job in setting out their reasoning and rationale. I shall, therefore, not detain the Committee further by relitigating those points but will speak to my Amendment 25 in this group. Like a number of our amendments in this part of the Bill, it is a probing amendment intended to seek clarity. Clause 9 inserts new Section 36B into the Pensions Act 1995. The new section gives trustees of defined benefit trustee schemes the ability by resolution to modify the schemes’ rules so as to confirm a power to pay surplus to the employer or to remove or relax existing restrictions on the exercise of such a power.

The clause contains one explicit limitation on that power. New Section 36B(4) provides that the section does not apply to a scheme that is being wound up. In other words, wind-up is the only circumstance singled out in the Bill in which the new surplus release modification power cannot be used. Amendment 25 would remove that specific exclusion, and I want to be clear that the purpose of doing so is not to argue that surplus should be released during winding-up; rather, it is to test the Government’s reasoning in identifying wind-up as the sole circumstance meriting an explicit prohibition in primary legislation.

By proposing to remove subsection (4), the amendment invites the Minister to explain whether the Government consider wind-up to be genuinely the only situation in which surplus release would be inappropriate or whether there are other circumstances where the use of this power would also be unsuitable. If those other safeguards are already captured elsewhere, it would be helpful for the Committee to have that clearly set out on the record. Equally, if wind-up is used here as a proxy for a broader set of concerns, the Committee would benefit from understanding why those concerns are not addressed more directly.

Surplus release is a sensitive issue. The way in which the boundaries of this new power are framed therefore matters. Where the Bill chooses to draw a line in the legislation, it invites scrutiny as to why that line has been drawn there and only there. This amendment is intended to facilitate that discussion and to elicit reassurance from the Minister about how the Government envisage this power operating in practice and what protections they consider necessary beyond the single case of wind-up. On that basis, I look forward to the Minister’s response and any clarification she can provide to the Committee.

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

My Lords, I am grateful to my noble friend Lord Davies of Brixton and the noble Baroness, Lady Stedman-Scott, for explaining their amendments, and to all noble Lords, who have spoken so concisely—we positively cantered through that group; may that continue throughout the day.

It is worth saying a word about the Government’s policy intent, but let me start by saying that the DB landscape has changed dramatically, a point made by the noble Baroness, Lady Stedman-Scott. Schemes are currently enjoying high levels of funding. Three in four schemes are running a surplus and there is around £160 billion of surplus funds in the DB universe. Schemes are also now more mature. The vast majority minimise the risk of future volatility with investment strategies that protect against interest rate and inflation movements. In addition, the DB funding code and the underpinning legislation require trustees to aim to maintain a strong funding position so that they can pay members’ future pensions. In response to the noble Lord, Lord Palmer, that is the primary purpose of DB funding schemes: above all, they must be able to pay members’ pensions. That is what is set out quite clearly in the DB funding code and the underpinning legislation. That is overseen by the Pensions Regulator.

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[Lord Palmer of Childs Hill (LD)]

My Lords, I will try to make this quick. Proposed new clause in Amendment 45 requires the Secretary of State to commission an independent review into the application and impact of state deduction mechanisms in occupational defined benefit pension schemes. It focuses on the clawback provisions, particularly in the Midland Bank staff pension scheme and associated legacy arrangements.

Why is this review needed? State deduction provisions can reduce members’ pension entitlements, sometimes in ways that are complex or unclear. There are concerns about fairness and transparency and a disproportionate impact, particularly on lower paid staff and women. It ensures members, regulators and Parliament have clarity about the origin, rationale and effects of these provisions.

The review will examine the history and rationale for state deduction in a Midland Bank staff pension scheme and assess clarity. It will be conducted by a person or body independent of HSBC and associated schemes. We will also try to ensure that it must consult affected scheme members, employee representatives, pension experts and stakeholder organisations. I beg to move.

[Baroness Stedman-Scott (Con)]

My Lords, we are broadly supportive of the purpose behind this amendment. It raises an important set of questions about whether members of defined benefit schemes have been given clear, timely and accessible information about state deduction or clawback provisions, and whether the rationale for those provisions has been properly explained to them over time.

Of course, individuals must take responsibility for managing their own finances and retirement planning. But that responsibility can only be exercised meaningfully if people are properly informed in advance about what will happen to their pension, when it will happen and why. When changes or reductions are triggered at state pension age, members need adequate notice so that they can make sensible and informed financial decisions. In that context, a review of the adequacy of member communications, the transparency of the original rationale and the accessibility of this information is welcome. While we may not necessarily agree with some of the more precise parameters and timetables set out in the amendment, as a way of posing the question and prompting scrutiny, it is a reasonable approach.

That said, we have spoken to someone who has intimate, working knowledge of the Midland Bank pension scheme and has experience of the workings of the scheme. They confirmed to us that they were fully aware of this provision, because it was in all the literature they were sent when they were enrolled. Given this, can the noble Lord give some more insight into why he thinks some members of this scheme were aware, and others not, and how could this be addressed?

I would be interested to hear from the Minister whether she has any initial views on the issues this amendment raises. In particular, how accessible is this information to members in practice today, and what steps, if any, would the Government or Department for Work and Pensions take if it became clear that these arrangements are not well understood?

[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Lord, Lord Palmer, for introducing his amendment and drawing attention to this issue, which is of real importance to some members in integrated schemes. After a lifetime of work, people rightly expect their pension to provide security and stability in retirement. For many, their occupational pension forms a key part of that.

Integrated schemes can feel confusing or unexpected to those affected, particularly when their occupational pension changes at the point when their state pension is paid. These schemes are designed so that the occupational pension is higher before state pension age and then adjusted downwards once the state pension is paid, because the schemes take account of some or all of a state pension when calculating the pension due. However, if it is not clearly explained, the change could come as a surprise. I acknowledge that and the worries some members have expressed. It is important to be clear that members are not losing money at state pension age. The structure of these schemes aims to provide a smoother level of income across retirement by blending occupational and state pension over time.

Concerns have been raised that deductions applied within integrated schemes may represent a higher proportion of income for lower-paid members, many of whom are women. This reflects wider patterns of lower earnings during their working lives, rather than any discriminatory mechanism within the schemes themselves, but I appreciate why this feels unfair to those affected. The rules governing these deductions are set out in scheme rules. Employers and trustees can decide on their scheme’s benefit structure within the legislative framework that all pension schemes must meet. The Government do not intervene in individual benefit structures but do set and enforce the minimum standards that all schemes must comply with.

Although this type of scheme is permitted under legislation, it is essential that members understand how their scheme operates. Therefore, it is extremely important that people have good, clear information about their occupational pension scheme so that they can make informed decisions about their retirement. What matters just as much as the rules is that people understand them. Good, clear information is essential so that members are not taken by surprise when they reach state pension age.

If a member believes that the information they received was unclear or incomplete, they are not without redress. They can make a complaint through their scheme’s internal dispute process or, if needed, escalate their case to the Pensions Ombudsman for an independent determination.

The Government absolutely share the desire for people to have confidence in the pensions they rely on, but, given the protections already in place and the long-established nature of schemes, we do not believe that a review is necessary. For those reasons, I ask the noble Lord to withdraw his amendment.

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[Baroness Altmann (Non-Afl)]

My Lords, I have enormous sympathy with the thoughts behind the amendment of the noble Lord, Lord Sikka. However, I share the concerns expressed by the noble Baroness, Lady Noakes, in that it is not clear how that would work, because this would then need to be a contingent payment or some kind of conditional payment which can be recouped, and that would impact creditors or debt holders of the company as well. Does the noble Lord feel that if, as a consequence of the surplus payment, members also got enhanced benefits, that would in some ways compensate for the future eventuality of what he is concerned about?

Finally, in the days before we had a Pension Protection Fund, I was very much in favour of increasing the status of the unsecured creditor position of a pension scheme. But in the current environment, where there is a Pension Protection Fund, and where the Bill will be improving the protections provided by it, it is much less important to increase the status on insolvency of the pension scheme itself than it would have been in past times. I certainly agree with the noble Lord, Lord Palmer, that if there were to be any such provision, it should be a lot less than 10 years.

[Baroness Stedman-Scott (Con)]

My Lords, I am grateful to the noble Lord, Lord Sikka, for tabling this amendment, which is clearly motivated by a desire to protect scheme members and guard against the risk that pension surpluses are extracted prematurely, only for employers to fail some years later. I suspect that there is broad sympathy with this objective across the Committee. However, I have a number of questions about how this proposal would operate in practice and whether it strikes the right balance between member protection, regulatory oversight and the wider framework of insolvency law. My noble friend Lady Noakes, the noble Lord, Lord Palmer of Childs Hill, and the noble Baroness, Lady Altmann, have all raised points connected to this amendment. I hope I am not duplicating their questions, but I will ask mine.

First, can the noble Lord say more about how this amendment would interact with the existing hierarchy of creditors under the Insolvency Act 1986? As drafted, it appears to require pension schemes to be paid ahead of all other creditors, including secured creditors and those with statutory preferential status? Does the noble Lord envisage this as a complete reordering of creditor priorities in these cases? If so, what thought has he given to the potential consequences for lending decisions, access to capital or the cost of borrowing for employers that sponsor defined benefit schemes?

Secondly, I would be grateful for further clarity on the choice of a 10-year clawback period, which other noble Lords have raised. As has been said, 10 years is a very long time in corporate and economic terms, and insolvency occurring at that point may bear little or no causal connection to a surplus payment made many years earlier, perhaps in very different market conditions. What is the rationale for that specific timeframe, and how does the noble Lord respond to concerns that this could introduce long-tail uncertainty for employers and their directors when making decisions in good faith?

Thirdly, how does the amendment sit alongside the existing powers of the Pensions Regulator? At present, trustees must be satisfied that member benefits are secure before any surplus is paid, and the regulator already has moral hazard powers to intervene where it believes scheme funding or employer behaviour to be inappropriate. Does the noble Lord consider those tools insufficient and, if so, can he point to evidence of systemic failure that would justify addressing this issue through restructuring insolvency priorities rather than through pension regulations?

I am also interested in the practical operation of this provision. Proposed new subsection (2) would allow amendments to both the Insolvency Act 1986 and the Enterprise Act 2002 to achieve the intended outcome. That is a very broad power, even acknowledging the use of the affirmative procedure. Has any thought been given to how this would operate in complex insolvencies; for example, where surplus has been paid to a parent company, where assets are held across a corporate group or where insolvency proceedings involve cross-border elements?

Finally, although I understand the protective instinct behind this amendment, I wonder whether there is a risk of unintended consequences. Might the creation of a potential super-priority for pension schemes discourage legitimate surplus extraction, even where schemes are demonstrably well funded, trustees are content and regulatory requirements have been met? If that were to occur, could it inadvertently weaken employer covenant strength over time rather than strengthen it?

None of these questions is intended to diminish the importance of member protection or suggest that concerns about surplus extraction are misplaced. Rather, they are offered in the spirit of probing whether this amendment is the most proportionate and effective way of addressing those concerns, or whether there may be alternative approaches, perhaps within the existing regulatory framework, that could achieve similar objectives with fewer systemic risks. I look forward to hearing the noble Lord’s response and the Minister’s comments.

[Baroness Sherlock (Lab)]

My Lords, I thank my noble friend Lord Sikka for introducing Amendment 45A. For clarity, I will speak to the amendment as if intended to address the power to pay surplus under Section 37, as Section 36B contains the modification power.

I fully recognise the concern that members’ benefits must remain protected when surplus is paid and that trustees take a long-term view of scheme funding and employer covenant. This is why there are strong safeguards, which I have described, as set out in Clause 10. Before the release of any surplus, trustees will need to make sure that the scheme is prudently funded and seek advice and sign-off from the scheme actuary, and other advisors, about the viability of any release and the impact that may have on the long-term health of the scheme.

While trustees perform an essential role in safeguarding members’ benefits, prioritising them above all other creditors in these circumstances risks distorting the already established insolvency regime. It creates uncertainty for businesses, ultimately harming the very members we all seek to protect.

On the points made by the noble Baroness, Lady Noakes, it is our concern that placing trustees ahead of other unsecured creditors could create significant uncertainty, increased borrowing costs and restricted access in future to finance, especially for smaller businesses. In the long term, this could potentially weaken employer support for pension schemes and threaten their sustainability, rather than strengthen it.

It is important to recognise that the current system already provides significant security for pension scheme members. Pension funds in UK occupational schemes are held in trust and are legally ring-fenced from the employer, so they cannot be accessed by creditors in an insolvency. The PPF exists precisely to offer a safety net to members who would otherwise risk losing their pensions when their employer fails.

Following the Chancellor’s announcement at the Budget, this Bill will also introduce annual increases on compensation payments from the PPF and FAS on pensions built up before 6 April 1997.

The insolvency regime is designed to operate alongside the compensation system. The structure of the pension protection levy already reflects the risk of employer failure and spreads that risk fairly across eligible schemes. The PPF assumes the creditor rights of the pension scheme trustees in the event of insolvency of the sponsoring employer and seeks to maximise recoveries from the insolvent employer’s estate.

Pension schemes, backed by a strengthened PPF, are already in a stronger position than many unsecured creditors. Giving trustees priority would leave small suppliers, contractors and even some employees with significantly reduced recoveries, despite having far fewer protections. We should not create a system where small businesses and individual workers bear disproportionate losses because a pension scheme deficit overrides all other obligations. There is also the risk of moral hazard, where trustees could be less prudent when deciding to release surplus, knowing that, under employer insolvency, they would have guaranteed priority above other priorities.

The amendment could affect the employer’s business plans as creditors may be less likely to lend money to the employer. Equally, banks may place conditions on borrowing to prevent surplus release if trustees were given priority. That dynamic could push companies towards insolvency earlier, not later, having a knock-on effect on members.

The only other thing I will add is that there are other tools open to trustees that are concerned about the strength of the employer covenant and the security of benefits. It is open to trustees during funding discussions or other negotiations to seek a fixed or floating charge over the employer’s assets, which would, in effect, elevate the scheme’s position in the insolvency priority order, providing additional protection should the employer become insolvent.

I want to be clear that trustees will have the final decision on whether to release the surplus. Before they can do so, the Bill stipulates statutory safeguards before a surplus can be released. I thank the noble Lord for his concern but for the reasons I have outlined, I ask that he withdraw his amendment.

Pension Schemes Bill

Baroness Stedman-Scott Excerpts

Committee stage
Thursday 22nd January 2026 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, as has been expressed, this group establishes the foundation of the value-for-money framework. We welcome the ambition to improve outcomes for savers. However, the effectiveness of value for money will depend on how it is defined, measured and implemented, and I welcome the comments from the noble Baronesses, Lady Bowles, Lady Altmann and Lady Kramer, which elaborated on these points.

I shall concentrate on Amendments 49 and 54 and I hope I can persuade the noble Baroness, Lady Coffey, that they are of value. These amendments will extend the scope of the Bill’s value-for-money provisions. They ensure that they apply not only to defined contribution schemes but defined benefit occupational pension schemes as well.

The arrangements make it clear that regulations can make different provision for different types of scheme. Critically, however, all schemes must be covered by the value-for-money assessment, with a proper value-for-money rating. Members of DB schemes deserve the same transparency and assurance about value for money as members of DC schemes. DB schemes still represent a significant part of the pensions landscape. Excluding them risks creating an uneven playing field and less scrutiny where it is still needed.

A single, consistent framework across occupational pensions improves comparability, avoids regulatory gaps and ensures that all savers benefit from the same standards of accountability. The two amendments in my name would ensure that the Bill delivers on its promise of value for money across all pension schemes. The measure is simple: every saver in every scheme, whatever its type, deserves value for money. Other noble Lords have expressed this in detail.

The noble Baroness, Lady Altmann, spoke about pensions jargon. We are here in a very rarefied atmosphere, where people have some knowledge—I have less than many in the Room—of what pensions are about and what phrases such as “default pensions” mean. We need to make it clear to people who have no interest in pensions other than receiving a cheque at the end of the month at a certain age what it all means. Some people need to be clear about the choices they make, and we need to do as much as we can. These amendments, both those that have been spoken to already and the two in my name, seek to protect people’s interests.

[Baroness Stedman-Scott (Con)]

My Lords, we come again to a varied group. I shall focus my remarks on the amendments in my name and that of my noble friend Lord Younger of Leckie. I welcome the contributions from other noble Lords and I look forward to the Minister’s response. We have a few amendments in this group: Amendments 50, 51, 52, 53, 57 and 74, and the Clause 13 do not stand part proposition.

Before I turn to the amendments in my name and that of my noble friend Lord Younger of Leckie, I will say a few words about the value-for-money framework that sits at the heart of the Bill. The introduction of a value-for-money framework has the potential to be genuinely transformative for workplace pensions if it is designed and implemented well. We support the principle of value for money. However, much of what this legislation seeks to achieve will stand or fall on how the framework is designed, applied and enforced.

As drafted, the provisions are relatively skeletal, despite the pivotal role that value for money is expected to play. If value for money is to drive real improvement rather than box ticking, it must be transparent in its methodology, robust in its metrics and genuinely comparable across schemes. Cost alone cannot be the determining factor. A scheme that is cheap but delivers persistently weak net returns does not represent good value for money for savers. Comparability will be key. Without clear, standardised metrics, there is a risk that value for money simply reinforces price-chasing behaviour rather than improving outcomes. My amendments are therefore intended not to oppose the concept of value for money but to strengthen it, to ensure that it is implemented in a way that improves saver outcomes, respects fiduciary duty and avoids unintended consequences.

I turn to the amendments in more detail. Amendments 50 to 53 in my name and that of my noble friend Lord Younger of Leckie, and the noble Baroness, Lady Bowles of Berkhamsted in the case of Amendment 53, are probing amendments that go to the heart of whether the value-for-money framework established by Clause 11 will operate as a genuinely effective tool for improving saver outcomes.

Clause 11 creates a very broad enabling power. It allows for the creation of a value-for-money framework, but is largely silent on what value for money should actually consist of. Given the centrality of value for money to the Bill as a whole, it is important to test the Government’s intentions on the minimum elements that will underpin the framework.

Amendment 50 would require value-for-money regulations to include publication of a fees-to-returns ratio. The purpose here is straightforward: cost on its own is not value. As I have said, a scheme that is cheap but delivers persistently weak net returns cannot sensibly be said to offer good value to members. If value for money is to be outcome-focused, it must show what savers are receiving relative to what they are paying, rather than allowing headline charges to dominate decision-making.

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[Lord Palmer of Childs Hill (LD)]

These are obviously probing amendments. They are all to do with the jargon: if we are arguing about the jargon, how much more confused will the normal punter be in trying to understand the jargon. This group focuses on how value for money is expressed, enforced and communicated.

We support the principle that members should be able to understand whether their scheme is performing well. However, value-for-money ratings also carry significant power. They will influence trustee behaviour, in particular, as well as employer decisions and market structure. That makes proportionality and precision essential.

I am particularly concerned about overreliance on short-term performance metrics. Saving for a pension is, or certainly should be, inherently long-term. Schemes should not be penalised for temporary underperformance driven by market cycles or responsible long-term investment strategies.

We also question whether compliance mechanisms become blunt instruments. Labelling schemes “poor value” without clear context may drive consolidation for the wrong reasons, reducing competition without improving outcomes. Clear language matters—I use the word “jargon” once again—but so does nuance. Members need information they can trust, not simplified labels about market complexity.

I have some questions for the Minister. How will this regime distinguish between persistent structural failure and short-term variation? How will it use this intermediate rating? How will it encourage genuine improvement rather than defensive behaviour by trustees? Trustees are meant to be very careful; they will be cognisant of the intermediate position. I will be interested to hear the Minister’s views on that.

[Baroness Stedman-Scott (Con)]

My Lords, again, this is a substantial group. I will not detain the Committee for too long but, before I turn to my amendments, I briefly welcome those tabled by the noble Baroness, Lady Altmann. As she set out so clearly, her amendments seek to simplify the language used in value-for-money assessments so that they are more readily and intuitively understood by scheme members. This goes to a point that has arisen repeatedly during our discussions in Committee: many of the concepts in this Bill, as well as the language used to describe them, are dense, technical and difficult to grasp. A considerable level of prior knowledge is often required simply to understand what is being proposed, let alone its practical effect. I am reminded of a remark attributed to Joseph Pulitzer. He said that information should be put before people,

“briefly so that they will read it, clearly so that they will understand it … picturesquely so that they will remember it, and, above all, accurately”.

Surely that is the standard to which we should aspire, in not only this Bill but more broadly in our legislative work. Clarity, intelligibility and accessibility should be central objectives. The language we choose and the way in which we define key terms in legislation are fundamental, yet they are too often treated as secondary concerns.

I therefore warmly welcome the amendments in the name of the noble Baroness, Lady Altmann, precisely because they address this issue head-on. Jargon is easy to reach for, but it is also, in a sense, lazy. When we are constructing a value-for-money framework whose purpose is to communicate value for money, we must be vigilant about terminology that obscures rather than illuminates and about euphemisms and phrases that sound authoritative but fail to convey real meaning. Many noble Lords will be familiar with Eric Blair’s essay, Politics and the English Language, and the amendments tabled by the noble Baroness serve as a timely reminder of some of the lessons it contains.

The first amendments in this group to which I have added my name—Amendments 60 and 61—would remove sub-paragraph (ii) from Clause 15(1)(b) as well as subsection (2). These amendments speak to a simple point: where responsible trustees or managers have determined that a scheme is not delivering value for money, that judgment should be sufficient to justify a rating of “not delivering” without the need to satisfy additional statutory conditions that risk being overly prescriptive.

Trustees already sit at the centre of this framework. They are charged with assessing investment performance, costs, charges, service quality and long-term member outcomes. They are subject to fiduciary duties and regulatory oversight. It is therefore entirely reasonable to trust their professional judgment when they conclude that a scheme is failing to deliver value for money. As the Bill is currently drafted, that judgment must be supplemented by one of a series of defined conditions, whether persistent intermediate ratings, a lack of realistic prospect of improvement or regulatory non-compliance. While well-intentioned, those conditions risk turning what should be a principles-based regime into a mechanistic one, encouraging trustees to focus on meeting thresholds rather than acting decisively in members’ best interests.

Pension Schemes Bill

Baroness Stedman-Scott Excerpts

Committee stage
Monday 26th January 2026 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank all noble Lords who have contributed to this debate. As we know, this group addresses the use of scale, as measured by assets under management or monetary value, as a determinant of scheme quality.

The noble Lord, Lord Fuller, gave the example of the Orkney trust. I ask myself: what is the reason? Is it size? Personally, I think it is the calibre of the single malt whisky. Then we go to the other end of the country, to Guernsey. Is it because trusts are at the extremes of the country that causes the good benefits, or is it something else? You can always look for a reason: it could be size, location or anything else—or, indeed, the quality of the whisky.

We accept that scale can bring efficiencies, but there is a strong question over whether size alone is a reliable proxy for value. Amendments 91 and 95 recognise that some master trusts and group personal pension schemes deliver strong investment performance despite being below prescribed thresholds. Amendment 98 similarly acknowledges that innovation and specialism do not always depend on scale, location or whatever else.

We are also concerned about the rigidity of fixed monetary thresholds in the Bill. Amendments 99, 101, 106 and 108 in the name of the noble Baroness, Lady Altmann, are concerned about the rigidity of fixed monetary thresholds in the Bill. These amendments probe whether the figures chosen are evidence-based and future-proofed, or whether they risk being outdated—that is the point—as the market evolves. It is not cast in stone, and we should not try to see it as such.

Amendments 101, 104 and 108 in the names of the noble Baroness, Lady Altmann, and others, raise an additional concern: the risk of mandating common investment strategies. Diversity of approach is a strength of a pension system. Forcing schemes into uniform strategies risks herding behaviour and systemic vulnerability. My question to the Minister is this: is the Government’s objective genuinely better member outcomes—which I believe we all want—or prioritising administrative simplicity at the expense of innovation, competition and resilience? All the amendments in this group tackle this problem, and those in the name of the noble Baroness, Lady Altmann, particularly stress that. I hope we will continue to push these through to the next stage of the debate on this Bill.

[Baroness Stedman-Scott (Con)]

My Lords, today’s groups build directly on the issues explored in last Thursday’s debate. That discussion was both stimulating and constructive, and the contributions made, particularly on mandation, highlight the value of the scrutiny that this Bill continues to receive in Grand Committee. On this group, in the interests of brevity—I am sure that will please the whole Committee—I shall keep my remarks focused on the amendments in my name and that of my noble friend Lord Younger of Leckie. A number of significant and related issues have been raised by other noble Lords, and we will wish to return to these later today. We will listen carefully to the Minister’s response to the points made on this group.

Amendment 98 would introduce a clear and proportionate innovation exemption for relevant master trusts under Clause 40, so that schemes delivering genuinely specialist or innovative services are not automatically required to meet the scale threshold simply because of their size. We have been challenged today not to be obsessed with size. We recognise the policy aim of improving outcomes through scale. However, as I said, size is not always a reliable proxy for quality or value: there are master trusts that are smaller by design yet deliver strong member outcomes through innovation, whether in investment approach, governance or engagement with particular workforces. As the Bill is currently drafted, such schemes risk being forced to consolidate or exit, not because they are failing members but because they do not meet a blunt asset size test.

Amendment 98 provides a sensible alternative route, recognising that innovation and specialisation can also deliver high-quality outcomes. This amendment simply ensures that size alone is not determinative. I hope the Minister will see this as a constructive amendment that supports innovation and choice while remaining fully aligned with the Bill’s objective of improving outcomes for savers.

Amendment 102 is, again, a probing amendment. Clause 40 gives the Secretary of State the power to determine by regulations the method for calculating a master trust’s total assets for the purposes of this provision. That is a potentially significant power, because the way that total assets are defined and measured will determine which schemes fall within scope and which may benefit from exemptions.

--- Later in debate ---

[Lord Palmer of Childs Hill (LD)]

My Lords, I congratulate the noble Baroness, Lady Altmann, on having a group of nine amendments all on her own. We normally share groups rather than have them all on our own. This group considers how scale requirements interact with default pension arrangements where most savers remain invested. I have listened to the debate and, having spent a large part of my career in accountancy and advising clients, I know that the trouble is that the majority of clients are not expert enough to know what they should do with their pension. They seek advice from various organisations on what they should do. We should make sure that the quality of the advice they get suits their position in life. As other noble Lords have said, we are concerned about the overly rigid scale test, which could unintentionally narrow choice within defaults and push schemes towards one-size-fits-all designs.

Amendment 97 highlights the importance of allowing defaults that reflect members’ differing ages, health conditions, retirement plans and risk profiles. Amendments 97A to 101B probe—this is the point—whether the authority can take account of the combined value of assets across multiple default arrangements, rather than assessing each in isolation. Without this flexibility, schemes that offer well-designed cohort-based defaults could be penalised simply for tailoring provision.

Amendments 168A and 170A reinforce this point, seeking to ensure that schemes are not excluded from the market for moving beyond crude uniform defaults. Our concern is that defaults should be designed around member needs, not regulatory convenience. I hope the Minister will explain how the Bill avoids pushing schemes towards uniformity at the expense of suitability and long-term outcomes.

I hope the Minister does not regard the series of amendments in this group as combative. They are meant to try to help pensioners or future pensioners. It is wrong if the Government look for a simple process but do not look at the benefit for the people concerned. I think it was the noble Lord, Lord Fuller, who talked about what happens in gilts and the like. I come from a period in the chartered accountant profession when you always went into gilts in what you thought were the last few years of your working life. Now, things have changed. We have to look at what you do and when you do it, and those things depend on the people involved.

I hope the Minister will see that these amendments are trying to say that things should not be too prescriptive. They are not against what the Government are trying to do, which is look after people. But are doing it on a one-size-fits-all basis, which does not work in the real world that we are in. I hope the Government go back and think about this a little more so that, when we come to Report, we can be a little more innovative.

[Baroness Stedman-Scott (Con)]

My Lords, I wish to speak briefly in support of this group of amendments in the name of my noble friend Lady Altmann. She has once again demonstrated her expertise and the value that she brings to our scrutiny of these important issues. Most importantly, she explained the spirit in which these amendments were tabled.

Throughout our proceedings on this Bill, a consistent theme across the Committee has been the need for proportionality in the steps we are taking on scale and value for money, and for definitions that are sufficiently comprehensive to reflect how the market actually operates in practice. I do not intend to repeat the points already made by the noble Baroness or ask the questions she has posed, but we will listen carefully to the Minister’s response on these issues.

Clause 40, as drafted, risks applying the scale test in an overly narrow and mechanical way by requiring the regulator to assess each default arrangement in isolation without regard to the wider context in which it is offered. That approach is not necessarily proportionate; nor does it reflect the economic reality of how master trust providers operate. This amendment would allow the regulator to take into account the combined assets of several non-scale default arrangements offered by the same provider. In doing so, it would not dilute the principle of scale; rather, it would ensure that scale is assessed in a comprehensive and realistic way, focusing on the resilience, governance and efficiency of the provider as a whole.

That matters because, without this flexibility, we risk forcing consolidation for its own sake and potentially requiring well-run, well-performing defaults to be wound up simply because they fall on the wrong side of an arbitrary threshold—even where the provider clearly operates at scale overall. This amendment therefore speaks directly to the principles that we have already raised in Committee: that regulations should be outcome-focused rather than box-ticking, and that they should avoid unintended consequences that could undermine member confidence rather than enhancing it. For those reasons, I believe this is a sensible and proportionate refinement of Clause 40, and I hope the Minister will give it serious consideration.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Baroness, Lady Altmann, for the clarity of the exposition of her amendments, and I thank all noble Lords who have spoken. I will try to explain what the Government are trying to do here and then pick up the specific points that the noble Baroness raised.

To maintain the policy on scale and secure its benefits for pension scheme members, there will need to be centralised decision-making over a large pool of assets. The Bill sets out that this will be delivered by the main scale default arrangement, which is subject to a common investment strategy. I recognise that the noble Baroness has raised concerns about the common investment strategy being able to accommodate different factors, but I will tell the Committee why it is there. A key purpose of the policy is to minimise fragmentation in schemes and to have a single default arrangement at the centre of schemes’ proposition. Fragmentation is an issue, not because it is a piece of government dogmatism but because it is in the interests of members that those who run their schemes have a big wallet at the centre to give the scheme the buying power and expertise they need, because that enables them to deliver on the benefits of scale.

When we consulted, the responses told us that there were schemes with hundreds of default arrangements that have been created over a long period of time and that this is a problem. Members in these arrangements get lower returns and pay higher charges, which some consultation responses also told us. It is important that we deal with that fragmentation and that we improve member outcomes.

However, the Government also recognise that there are circumstances where a different default arrangement is needed to serve specific member needs only—for example, for religious or ethical regions. These will be possible through Chapter 4 but they will not count towards the main scale default arrangement. If the scale measure encompassed multiple default arrangements or combined assets, as these amendments would allow, it would not drive the desired changes or support member outcomes derived from the benefits of scale. Following consultation, there was clear consensus that scale should be set at the arrangement level as that is where key decisions about investments are made. Simply put, centralised scale is the best way to realise benefits across the market for savers.

The pensions industry has told us there are too many default arrangements in some schemes, and that fragmentation—

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[Lord Sharkey (LD)]

My Lords, I will speak briefly under the auspices of Amendments 146 and 147 when we resume some of the discussions the Minister promised last week to continue, notably on mandation and statutory guidance. In our debate last week, I tried to establish the evidence base for the Minister’s assertion that

“the Government would not be proposing these powers”—

mandation—

“if there were not strong evidence that savers’ interests lie in greater investment diversification than we see today in the market”.—[Official Report, 22/1/26; col. GC 218.]

The key words here are “strong” and “evidence”. There are certainly those whose opinions would align with the Minister’s assertion, but opinion is not the same as evidence and not nearly the same as strong evidence.

As I said last week, the DWP recently commissioned the Government Actuary’s Department to model four variations of pension scheme strategies. I will not list them again, but the study concluded that across a range of economic scenarios the model portfolios deliver very similar projected pension pot sizes. But it also showed that if the current underperformance of the UK versus global equities persists, UK-heavy allocations will underperform the baseline. The Government Actuary’s Department said in a post on GOV.UK on 15 November 2024:

“Our analysis showed that a greater level of exposure to private markets may deliver slightly improved outcomes to members. However, there is considerable uncertainty, particularly with the assumptions for projected future investment returns”.


That does not sound like strong evidence for anything.

The Institute and Faculty of Actuaries makes the same point. It says that, based on the Government’s own impact assessment, “We do not think there is strong, clear evidence that in most foreseeable scenarios savers’ interests lie in greater investment in private markets and infrastructure”. It believes that there exists a very uncertain central estimate of an extra two percentage points over 30 years, equivalent to 0.066% a year compounded. It goes on to say: “Given the inherent uncertainty in such estimates, this is almost negligible and could easily turn out to be negative over the next 30 years or indeed much higher”. The IFoA goes on to say: “The point is that it is far from clear that there would be a material benefit”. That does not sound like strong evidence commendation either, yet this is the basis on which the Government seek to mandate investment, which raises as a consequence significant concerns about the operation of fiduciary duty.

The proposals in this Bill, for there is a power to mandate investment, cause uncertainty about trustees’ duties to their members. That uncertainty is understandable, especially because the case for mandation is weakly evidenced, if evidenced at all. The uncertainty is also unnecessary in many ways because of the existence of the Mansion House Accord for which, as others have said, 17 leading pension providers have already signed up. How will the anticipated statutory guidance, for example, contribute to the model of co-operation embedded in the Mansion House Accord? Is it no more than a useful threat? What role will the statutory guidance play in modifying the application of fiduciary duty? In fact, can the Minister confirm that the promised statutory guidance will have something to say about the possible clashes between mandated action and fiduciary duty, if only to confirm the primacy of fiduciary duty?

Minister Bell responded on 22 January to a Written Question from my honourable friend the Member for Stratford-upon-Avon about the scope of the coverage of the upcoming guidance on fiduciary duties. His reply did not refer to the mandation powers at all. Will the Minister confirm that the guidance will be non-binding and have the same have force as many other “have regards” that exist in the financial services sector? If the guidance has, or could plausibly be read as having, detectable, real-world influence, it should come before Parliament for scrutiny, and it should come before us when we can recommend changes.

Minister Bell’s Written Answer, as I mentioned a moment ago, says of the guidance that:

“Work will commence shortly beginning with an industry roundtable to gather views and technical expertise to ensure the guidance meets the identified need”.


I suppress my astonishment at this rather late start for thinking about statutory guidance. I notice that, in the reply, there was no mention of Parliament and the role it might play or of timescale in all this, except we now know that it has either just started or is about to start. In other words, as things stand, the likelihood of effective parliamentary scrutiny of anything to do with statutory guidance is unlikely. This is entirely unsatisfactory for the reasons that the noble Lord, Lord Ashcombe, has argued so forcefully.

There is no compelling evidence that mandation will work. If the Mansion House Accord is to be taken seriously and the Government play their part, mandation will be unnecessary. Mandation would interfere with or complicate the principal of fiduciary duty. It is also opposed by major stakeholders including, as I mentioned previously, the Governor of the Bank of England.

The Institute and Faculty of Actuaries ends its latest assessment of the situation by saying that trustees should not be leaned on to invest in ways that conflict with their own best judgment. Instead, those investments and markets that the Government wish to promote should continue to be made more attractive through initiatives such as LTAFs and so on. The pension schemes will freely choose to follow in a way that is right for them and their members. We agree with that and will continue to try to convince the Government that the reserve power is not necessary or desirable—activated or not—and that there is no sound basis for using it.

[Baroness Stedman-Scott (Con)]

My Lords, I will speak briefly on the other amendments in this group before turning to Amendment 145 in my name and that of my noble friend Lord Younger of Leckie. As noble Lords have already set out, Clause 40 represents a significant extension of regulatory influence over asset allocation in defined contribution default arrangements. Given the scale of that change, it is both reasonable and necessary that we consider carefully how risk, responsibility and accountability are apportioned within the framework the Bill creates.

The amendments in the name of my noble friend Lady McIntosh of Pickering, and the noble Baronesses, Lady Bowles of Berkhamsted and Lady Altmann, seek to introduce greater certainty and procedural fairness into the operation of the savers’ interest test. Removing an automatic time limit on exemptions, ensuring that schemes are not compelled to alter asset allocations while determinations or appeals are ongoing and requiring the authority to give reasons for its decisions are all, in my submission, entirely sensible propositions. They make the framework that the Bill creates more robust, transparent and defensible.

In a similar vein, allowing schemes to apply for the savers’ interest test over a limited number of consecutive years, while demonstrating a credible pathway to compliance, reflects a realistic understanding of how long-term investment strategies are developed and implemented. It recognises that good outcomes for savers are not always delivered by abrupt or mechanically imposed changes.

Several of the amendments in this group speak directly to the core point of fiduciary responsibility, which, as was powerfully reinforced during our debate on the final group last Thursday, is an absolutely central point to the approach being adopted by noble Lords across the Committee. The amendments reinforcing fiduciary duty and proposing a safe harbour for trustees acting in good faith on professional advice and in accordance with their duties are an attempt to clarify that nothing in this Bill should place trustees in an impossible position, caught between regulatory direction on the one hand and their fundamental obligation to act in the best financial interests of members on the other.

Related to this, the probing amendment from the noble Lords, Lord Vaux of Harrowden and Lord Palmer of Childs Hill, asks an important and unresolved question: where investment decisions are mandated by the state, in effect, where does liability sit if those investments underperform? Even if the Government do not accept the mechanism proposed, the question itself cannot simply be wished away; I hope that the Minister will address it directly.

I also wish to touch on the amendments that deal with systemic risk, structural neutrality and herding behaviour. Requiring trustees to have regard to long-term systemic risks, including economic resilience and climate change, is entirely consistent with existing best practice and does not mandate investment in any particular asset or vehicle. Ensuring that listed investment funds are not structurally disadvantaged helps preserve choice and diversification. The amendment on regulatory herding speaks to a well-understood risk: overly prescriptive frameworks can drive homogeneity of behaviour, amplifying systemic risk rather than mitigating it.

I hope, therefore, that the Minister will engage seriously with the questions these amendments ask around process, liability, fiduciary duty and risk. Even where the Government may not be minded to accept the amendments, as drafted, they highlight issues that, given the provisions in the Bill, deserve clear and careful answers.

As has been our consistent approach throughout these days in Committee, my own amendment seeks to probe the Government on a key question: why have they provided for a maximum civil penalty of £100,000 for failure to comply with the mandation requirements set out in this chapter? Given the nature of those requirements and the breadth of discretion that they confer on the authority, it is not at all clear in the Bill how the Government have arrived at that figure or why it is considered proportionate. We are dealing here with decisions around long-term asset allocation in pension default arrangements—areas where reasonable, professional judgment may legitimately differ and where the consequences of regulatory direction may not be apparent for many years. In that context, a six-figure penalty is not a trivial matter.

This amendment is designed to invite the Government to explain the rationale for the level of the penalty; how it is expected to be applied in practice; and whether sufficient regard has been had to scheme size, intent and the nature of any alleged breach. I hope that the Minister can set out clearly why £100,000 is the appropriate ceiling; how proportionality will be ensured; and what safeguards will exist to prevent penalties being applied in a blunt or mechanistic way.

[Lord Katz (Lab)]

We have to have a hard stop at 8 pm, I am afraid, so I move that the Committee do now adjourn.