Pension Schemes Bill (First sitting)

John Milne Excerpts

Committee stage
Tuesday 2nd September 2025 Public Bill Committees

[Sarah Edwards]

Q I am interested in hearing a little more about unlocking surplus and some of the challenges, particularly in the way that it is described or calculated, and what the thresholds might be. Obviously, there is an opportunity, but there is also a balance around conflicts arising when an employer might wish to access the surplus. Perhaps you could comment on your understanding and interpretation of how the Bill deals with that issue.

Rob Yuille: The challenge is aligning it with scheme members’ interests so that they are not put at risk. If a surplus turns to a deficit, which it can do because it is by no means guaranteed, and if an employer then fails, there is actual detriment to those scheme members. As we know, economic conditions can change. It is an opportunity for employers, though—that is the purpose of it—and schemes can and do extract surplus now, often when they enter a buy-out with an insurer.

It does need guardrails, and the Bill includes the provision that it has to be signed off by an actuary and it is the trustees’ decision. That is important, but there is a related challenge about the interaction of the surplus and superfunds. Each of those is okay: you can extract a surplus, for the reasons that we have discussed, and you can go into a superfund if you cannot afford a buy-out. The problem is, if a scheme could afford buy-out, extracts a surplus and then no longer can, and then it enters a superfund, the scheme members are in a weaker position than they would otherwise be. There are a couple of things that could be done about that: either leave the threshold for extracting surplus where it is—which is buy-out level, rather than low dependency—or change the Bill so that the combination of surplus and superfund cannot be gamed to get around that. In any case, as you say, it is important to monitor the market, and for the regulators to be alive to potential conflicts of interest.

Zoe Alexander: Pensions UK is content with the idea of using the low dependency threshold for surplus release. We think the protections are sufficient. Providing that the actuarial certification is in place, the sponsoring employer is in a strong financial position and a strong employer covenant is in place, we think there are real benefits to be had from surplus release. We highlight the fact that some employers and trustees will be looking to move benefits from DB to DC using surplus release, or even to a collective defined-contribution scheme. We are interested in the potential of that to bolster the benefits of those types of scheme, and we would like Government to look at the 25% tax penalty that applies when doing that, because if those funds are kept within the pensions system, that is to the benefit of savers, so perhaps that tax charge need not apply.

[John Milne (Horsham) (LD)]

Q Do you think that the proposed value for money framework could have the unintended effect of causing excess caution or short-termism in investment decisions? If so, what mitigations would you suggest?

Zoe Alexander: There will of course be metrics in the value for money framework that look at the longer term, and looking at longer time horizons is really welcome. One concern at Pensions UK is about the intermediate rankings in the value for money framework meaning that schemes cannot accept new business. That may well result in schemes doing everything they can, at any cost, to ensure they do not drop from the top rating to the intermediate rating. That could cause damaging behaviours in terms of herding. We want to ensure that people in the intermediate ranking, whether that is within a couple of intermediate rankings—perhaps you have a top one and then a bottom one, but somewhere within that intermediate scale—you can continue to take on new business, and the regulator will perhaps put you on a time limit to get back into the green, back into the excellent rating. We think that if it is so binary that as soon as you drop into intermediate, you cannot take on new business, that will heighten the potential downside risks of investment behaviours that you are describing.

Rob Yuille: I agree with that. I strongly support the value for money framework—I think both our organisations do—and the intent to shift the culture away from just focusing on cost and to value for money more generally, but yes, there is that risk. There are multiple trade-offs here: it is about transparency and how much you disclose, versus unintended consequences of that. We want high performers but, for high performance, you need to take risks.

As well as what Zoe says, which we might build on, we do not want a one-year metric. One year is too short a period; pensions are a long-term business. There should be a forward-looking metric, so that firms can say how they expect to perform over the longer term and then regulators and the market can scrutinise it.

On the points that were raised about intermediate ratings, this is another area where there is a potential combination of two bits of the Bill. There is provision for multiple intermediate ratings. It was originally conceived as a traffic light system, so there would be three ratings. If there were four, it would be okay to say to schemes, “You are not performing; you need to close to new employers,” but if there are three, firms will do everything they can to play it safe and make sure they get the green. So the interaction of those is really important.

[John Grady (Glasgow East) (Lab)]

Q This question is for Ms Alexander. A lot of my constituents are driven mad by small pots; they have worked in different jobs and have no idea how much money they have saved for a pension, so please could you outline the benefits of the small pots reforms to people in my constituency, and the practical steps needed to make the small pots regime work—for example, by way of IT?

Zoe Alexander: The small pots reforms are absolutely critical. The problem of small pots was foreseen by the Pensions Commission years ago. We all knew we would face that problem with automatic enrolment, and I think people would agree that it has taken too long to grasp the nettle. We at Pensions UK are really delighted to see the measures in the Bill to deliver the multi-consolidator model. It is really important that the pot size is kept low, as is proposed in the Bill, at least initially, to solve the problem of the smallest pots in the market. Pensions UK has undertaken a feasibility study, working with Government, to look at how that small pots system might be delivered in practice. That work is publicly available. It gets quite technical quite quickly, so I will not go into the details of it, but we believe there is a feasible model of delivering the small pots solution at low cost—one that should not involve Government in a major IT build.

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[Torsten Bell]

The question to the witness is to expand a bit more on that point. In reality, this provides a “comply or explain” power. In terms of the point Charlotte was just making there, it is absolutely right about the ability of the trustees to say, “This is not in the interest of our members.” It might be worth talking a bit about how when we move forward the consultation will allow us to set out how that would work in practice.

Charlotte Clark: It is an area that we would need to work through in terms of the road map. At the moment, our focus is very much on getting the value for money framework right. How the mandation would work and the process around it—as the Minister says, first, we would consult on it. We would have to have a look to see what information was given and how we would monitor it in the period from now to 2030 or 2035. We would have to work through all of those aspects of the process. We would do that in conjunction with the industry, making sure that what we were asking for was information that it could readily provide and that we felt confident that we could make a good assessment around.

Patrick Coyne: Our engagement with the marketplace so far already shows that many are considering investment strategies that have significant proportions of diversified investments, so the market is already responding based on some of the Mansion House accord commitments.

[John Milne]

Q Do you think that the finance industry has a clear understanding of how to apply its fiduciary duty? Do you think the Bill makes that clearer or muddies the waters, or somewhere in between?

Patrick Coyne: I think that fiduciary duty is a powerful force for good. Across the Bill, this is about giving those trustees the tools for the job. I think there are a number of areas where that is true. Within the value for money framework, at the moment, it is very difficult for employers or schemes to effectively compare performance. As an anecdote, I was speaking to a provider recently. They were pitching for new business. They came in and pitched their investment data, and the employer said, “You’re the third provider today that has shown us they are the top-performing provider.” That cannot be right.

Then, when you are looking across the Bill towards the DB space, because of the funding reality that many schemes are facing at the moment, there is choice in end game options—so, “How do I enhance member outcomes at the same time as securing benefits?” Actually providing a statutory framework for super-funds as another option is a good first step, as is allowing the release of surplus, if it is in the members’ best interests to do so.

[Kirsty Blackman]

Q I have a question about the balance of decision making. Trustees are obviously required to steward and grow assets on behalf of scheme members. This Bill slightly changes the priorities in relation to value for money. There is potential for future mandation, in that it basically allows the Government, or the regulators, more say in what direction trustees are taking. In practice, it is relatively difficult for scheme members to influence decisions that trustees take. My reading of the Bill is that it does not increase scheme members’ power over the direction. For example, if they wanted to disinvest in something, or if they felt strongly about investing more in UK assets, they will not have any more power to do that. Am I correct in my reading of that? Do you feel that some scheme members feel that they should have more influence over what trustees do and the direction of travel?

Charlotte Clark: It is a good question. It is hard to get over the fact that the vast majority of people are very inert in the pension system. Of course, there are some who are not, specifically around ESG—environmental, social, and governance—investments, but most trustees take those things into account, and there has been clarification about how that aligns with things like the fiduciary duty. Obviously, within the contract-based scheme, there frequently are options, if somebody does not like something that is invested in within the default, to have their own investment strategy, if that is what they choose to do. Do I think this Bill changes that? I do not think so. I think what the Bill is essentially trying to do is use the power of scale and collectivism to get better returns and, really, a better service for most savers.

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[David Pinto-Duschinsky (Hendon) (Lab)]

Q I want to build on the questions that the hon. Member for Mid Leicestershire and my hon. Friend the Member for Bristol North East were raising. Obviously, part of the challenge we face is around the proliferation of small pots; certainly, when I talk to my constituents about issues of long-term retirement planning, that is the consistent theme. The Bill obviously sets out a path to try to deal with some of that proliferation that has been caused since the introduction of auto-enrolment. What are your views on the extent to which the Bill provides the right framework for dealing with that kind of proliferation?

Jack Jones: As Zoe said earlier, we should be here already. It has taken us a long time to get to the point where we have an agreed solution. It looks as if the mechanics of it will work. I think we need to let that bed in and prove that it works. The main concern from our perspective is the £1,000 definition of a small pot. Obviously, from a lot of angles, £1,000 is a lot of money—but as a pension pot it really is not. Looking at this once you have proved the concept and you have a system that works and that hoovers up the smallest pots and those most likely to become orphaned is one thing, but I think if you are looking at helping people to avoid accumulating 10 medium-small pots over their career, we need to look at how to increase that over time.

Christopher Brooks: I agree with Jack. I think the Bill is really strong on small pots and the system that is envisaged will really help. I guess my only comment would be that £1,000 is not a huge amount of money, so maybe over time that amount could be raised, and some kind of indication that that is the intention might be helpful.

[John Milne]

Q Do you think there is evidence that fiduciary duties are not interpreted in a way that optimises outcomes for pensions savers? If so, would you support any change in legislation to help?

Christopher Brooks: Yes; I think a lot of schemes do not interpret it broadly, so they probably take things literally regarding financial materiality—that is obviously very important, but they could probably do more. I think there is a very strong case for reform in fiduciary duties, just to make it clear in the law what it actually means. It is more of an enabling tool for providers, I think, rather than anything restrictive. When there needs to be some direction for schemes to invest in particular ways, I think there is sometimes a bit of reticence. That is true of investing in the UK, maybe with some private finance and maybe with regards to climate change. The larger schemes no doubt do understand it, but all schemes need to understand that they can invest in these things and that that is possible.

I am no expert on this, but, as I understand it the fiduciary duty is all over the place in the law, and sort of hinges on bits of case law and bits of very old legislation, so clarifying that would be a really good move.

Jack Jones: I would agree with that. I think there could be statutory guidance to make it very clear to trustees what their fiduciary duty actually involves, and that it does go beyond that kind of narrow interpretation. As I say, you should take into account your members’ quality of life more generally—for example, investing in ways that support the UK, when that is where your members are, is something that is in their wider interests, and managing systemic risks such as climate change is obviously very material financially, but also has an impact on the kind of world they will be retiring into.

As I said before, we do hear fiduciary duty occasionally being used as a reason not to do the hard stuff and not to think through that. There is nothing inherently problematic there, but clarifying and making sure that trustees are fully aware of the breadth of fiduciary duty would be helpful.

[The Chair]

For the last question, I call Rachel Blake.

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[John Milne]

Q From your perspective, what would be the main obstacles or difficulties in fulfilling the value for money requirement in the Bill?

Dale Critchley: From a practical perspective, producing all the data. We need clarity in the regulations and clear definitions, so that everyone is producing the same data in the same way so that it can be compared.

Setting practical considerations aside, one of the risks is that there is a disjoint between the market and value for money. Value for money is looking at value. We still see lots of evidence in the market in terms of looking at price—“We want the cheapest thing possible”—not necessarily the best value. There is a potential tension there.

Longer term, there is the risk we pointed out around herding: if you set benchmarks, that creates a behaviour which, instead of optimising outcomes for members, produces an average. An example of that is in the metrics around service that are currently being thought about. They are what I have described as 20th-century metrics. Rather than metrics that are looking to engage members to drive decisions through electronic engagement, they are measuring, “How long does it take to change someone’s address? Have you got their national insurance number?” We think we could stretch things further, but that creates some challenges for some providers.

Colin Clarke: One of the other things that the industry as a whole needs to consider is around capacity. The value for money framework, if it is managed and regulated effectively, is going to result, ultimately, in members being moved into things that have the potential to deliver better value. All those kinds of projects take a lot of work and a lot of resource, so it would need to be managed carefully to make sure that the industry has actually got the capacity to manage the high volume of traffic that is going to be going through as funds consolidate.

[The Chair]

Mr Bedford, we do have a little time if you wish to ask a question.