Pension Schemes Bill

Lord Davies of Brixton Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

[Lord Davies of Brixton (Lab)]

It is always a pleasure to follow the noble Baroness, Lady Noakes; I still worry on those occasions when I find myself agreeing with what she says. No doubt we will have interesting debates in Committee.

It is a real pleasure to take part in this debate, which is a perfect start to the festive season. I declare my interest as recorded in the register as a fellow of the Institute and Faculty of Actuaries, and I look forward to the maiden speech of the noble Baroness, Lady White of Tufnell Park.

I thank all the individuals and organisations that have written to me about the Bill. They have raised too many issues to deal with them all today, but I and others will seek to raise them in Committee.

I welcome this Bill. It is the first leg of the route to better pensions that was set out in the Government’s pensions road map. It seeks to make existing provision work more effectively and to ensure that people derive the maximum benefit from their pension savings. These objectives are to be welcomed. The second leg of this journey will be the outcome of the Pensions Commission. Part 2 will address the adequacy of retirement incomes and the fairness of a system that currently contains persistent inequalities. I welcome my noble friend the Minister repeating that it will look at state as well as private pensions.

It is worth pointing out, particularly given the welcome presence of the noble Lord, Lord Willetts—though he is not in his place—that this Bill marks the effective end of personal pensions and sets out how we can move to a better system of collective provision, leading to improved, fairer and appropriate outcomes for members.

Taking the various proposals in turn, the Bill takes important steps to remove inefficiencies in the current system. They include the consolidation of small dormant pension pots, contractual overrides for FCA-regulated schemes and the resolution of the issues that have arisen from the Virgin Media judgment through the validation of certain amendments. Each of these changes affects individual member’s rights without their active involvement and therefore must be handled with care, supported by appropriate regulation and professional oversight. These measures will require careful scrutiny in Committee.

Next, the Bill requires defined contribution schemes to offer default retirement arrangements for members. I welcome this initiative and consider it to be the most significant part of the Bill—potentially, as it is still unclear how these arrangements will operate in practice. The Bill provides broad regulation-making powers. We have now had the helpful report from the Delegated Powers and Regulatory Reform Committee, but the details, as the committee emphasises, will depend on what is in the regulations. I therefore hope that we will be able to explore these issues in Committee and identify the main parameters that will apply to these default arrangements.

Turning to the value-for-money proposals, I have some reservations about what they can achieve. Greater and clearer disclosure based on defined parameters is undoubtedly desirable. However, value for money is not a simple or uniform concept. It varies significantly from individual to individual, reflecting different circumstances, attitudes to risk and personal needs. The problem is that there is no simple metric that can adequately capture this diversity. While charges are relatively straightforward to identify and compare, investment returns are inherently uncertain and can be assessed only by reference to the past. Beyond these factors, value for money is also shaped by the quality of the scheme administration, the level of service provided to members and the effectiveness of communication and support. Crucially, it also depends on how benefits are adopted and delivered and whether they meet differing members’ needs. Bringing these factors together, deciding how to weight them and reaching meaningful conclusions of value to members is highly complex. Therefore, while everyone is in favour of the concept of value for money—no one favours its opposite—its practical delivery is far more challenging than the Bill appears to acknowledge. The fear is that the process will simply end as a justification for making higher charges and hence lower benefits.

As a number of previous speakers have explained, the Bill contains provisions relating to pension scheme investments, which the Government consider a central element of the Bill. Other noble Lords have addressed, and will address, this in some detail, but I will make a couple of points.

I have no objection in principle to mandation, unlike other speakers. However, it is very important that the Government understand the implications of directing how members’ money is invested. Doing so carries responsibilities; this is where I found myself agreeing with the noble Baroness, Lady Noakes. I do not think that that aspect has been sufficiently recognised by the Government. I am also concerned, as other Members have mentioned, about the provisions that would be inserted into the Pensions Act 2008 by Clause 40 that refer to specific classes of investment that will be the subject of mandation. I do not believe that this belongs in the Bill.

I have a general concern about the Government in effect providing investment guidance—so much can go wrong—but my particular concern is the appearance of private equity in that clause. Private equity has a mixed performance record and presents significant liquidity and transparency challenges for pension provision. Where members have pension rights, illiquidity raises a question about who ultimately carries the risk that is inevitably involved: is it the member, the scheme or other members? I think the point was made by the noble Lord, Lord Vaux of Harrowden.

There are, of course, other issues that require careful consideration, alongside broader concerns, such as climate and systemic risk. I am sure these will be touched on by other Members.

I turn to my two principal concerns about the provisions in the Bill: first, the provisions relating to the release of surplus, and secondly, the provision for pension increases where no statutory guarantee currently exists. On the release of surplus, ministerial Statements have suggested clearly that members are intended to share where surplus is released—I have a series of quotes, but I am running out of time. If that is the case then this objective should be set out clearly in the Bill. This is particularly important as there is a requirement under the existing legislation that the release of surplus should be for members’ benefits, and that is being removed. The Government justify this on the grounds that trustees’ responsibility to members is sufficient. I am afraid my experience in the industry tells me that that is not correct. It needs to be in the Bill if that is the Government’s intention.

Also, where employers are involved in the process of releasing surplus, it is absolutely right that it should involve the independent recognised trade unions that represent the affected employees. This is established practice elsewhere in pensions legislation, where unions must be notified and, in some cases, consulted before decisions are taken. This should clearly apply. If it applies to benefit and changes, it should apply in the case of surplus release.

I turn to my other area of concern: pension increases. It is important to understand the context. Prior to 1997, there was no general statutory requirement for increases in payment, other than those associated with contracting out. However, by the mid-1990s, particularly after the Scott and the Goode reports, it had become standard practice for pensions in payment to be increased annually by at least a minimum amount. In some schemes, this was set out in the rules; in others, it depended on trustee discretion. Which approach was adopted was largely a matter of chance. Either way these increases were funded, members paid for them during their working lifetime as part of their pension contributions, and they had a reasonable expectation that they would receive increases when they retired.

Although scheme finances have fluctuated since then, in general schemes now have sufficient resources to pay increases. It is therefore reasonable to expect them to provide those increases, whether guaranteed or discretionary. This reflects the reasonable expectation members acquired when they accrued benefits in the 1980s and 1990s. This applies in two overlapping contexts. The first is to benefits provided by the Pension Protection Fund and the Financial Assistance Scheme, where the original legislation in both cases excluded any allowance for pre-1997 increases, regardless of rules or practice. The second aspect is members of active schemes: the scheme is continuing, but they no longer receive the discretionary benefits to which they have a reasonable expectation given their service in the 1980s and 1990s.

I welcome the provisions in the Bill relating to the PPF/FAS. They are clearly a response to the current financial state of the PPF. Without the surpluses in the PPF, I doubt that these measures would have come forward, so they are welcome. However, as I have explained, making a distinction between those for whom the rules say they are going to get increases and those for whom the practice was making discretionary increases is invidious. All affected members should receive the same increases. The benefits from these schemes have never been or been intended to be an exact copy of the benefits that were provided by the schemes that were lost. They were always a broad-brush approach to what is fair to provide.

Given the current financial circumstances, it is absolutely fair that all members should benefit from those surpluses. The Bill provides for employers to share in those surpluses by the suspension of the PPF levy. Employers are sharing in the surplus; members should also, whatever the precise details of their entitlement to past increases. Crucially, none of these members is getting any younger and many, sadly but inevitably, will benefit from the Government’s proposals for only a limited period. For 28 years they have suffered a loss and they are now going to benefit from the change in policy but, for many of them, it will be for far too short a period.

Finally, I turn to the circumstances of defined benefit schemes that are continuing to run. Many are in a healthy financial state but are failing to provide discretionary increases for members’ benefits that were accrued before the statutory requirement was introduced in 1997. I believe that it is now reasonable to expect schemes in general to provide these members with discretionary increases, and we need to investigate ways in which we can make sure that that will happen in Committee. I look forward to hearing my noble friend’s response to these and other points that have been made in the debate.

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Monday 12th January 2026 Grand Committee

[Viscount Younger of Leckie (Con)]

My Lords, it is a privilege to open today’s debate and to begin what I am sure will be five engaging and constructive days of scrutiny on this Bill in Committee. The proposed new purpose clause, in my name and those of my noble friend Lady Stedman-Scott and the noble Baroness, Lady Bowles, is not an attempt to rehearse the arguments advanced at Second Reading. Rather, it is intended to address a specific issue arising from the way in which the Bill has been framed and from the legislative approach that the Government have chosen to adopt.

The debate I seek to initiate is a principled one about legislative clarity and certainty, particularly in the context of what is, by any reasonable definition, a framework Bill. We believe that the Bill, as currently drafted, is light on detail and relies heavily on delegated powers. This has inevitably left your Lordships debating intentions, aspirations and hypothetical outcomes, rather than the Government’s settled policy. In those circumstances, is it not all the more important that Parliament is clear on the face of the legislation about what it actually intends to achieve?

The purpose clause amendment therefore intends to establish an overarching statement of intent, setting out the objectives against which the Bill and the regulations made under it should be understood and scrutinised. Where detailed provision is deferred to secondary legislation, such a statement provides Parliament, regulators and stakeholders with a clear point of reference. Without it, how are we to assess whether the powers being taken are exercised consistently with the will of Parliament, rather than merely within the scope of ministerial discretion?

More broadly, the amendment invites the House to reflect on whether Parliament is being asked to confer wide-ranging powers without sufficient clarity as to how they are intended to be used. At what point does flexibility begin to shade into uncertainty? How can proper legislative certainty be maintained when substantive policy choices are deferred, potentially amended repeatedly and then removed from direct parliamentary scrutiny? If there were an alternative procedural route that allowed the House to engage meaningfully with these questions, we would of course be willing to consider it. However, in the absence of such a mechanism, is it not reasonable to seek to debate these matters through a proposed new purpose clause, which would allow the House to test the Government’s intent within the normal amending stages of the Bill?

This concern is particularly acute in relation to value for money. Much of what this legislation seeks to achieve will ultimately stand or fall on the effectiveness of the value-for-money framework. Yet the provisions before us are thin and largely skeletal, despite the central role that the framework is expected to play. How can Parliament properly assess the merits of this approach when so much turns on detail that has yet to be set out?

I say at the outset that we are supportive of the value-for-money framework in principle, but its success will depend almost entirely on the detail of its design, the consistency of its application across schemes and the robustness of its enforcement. Without greater clarity on these points, how are trustees, regulators and members to understand the standards against which they will be judged?

That leads me to a wider question about the long-term purpose of the Bill. How do the Government envisage the pensions landscape to look like in 10, 15 or even 20 years’ time? Is the objective consolidation, greater scale, improved outcomes for savers or some combination of all three? How will we know whether this legislation has succeeded in delivering that vision?

We wish to engage not only with the immediate legislative mechanisms but with the broader strategic direction that underpins them. We fully accept that legislation must allow Ministers a degree of flexibility to respond to changing circumstances, but flexibility without a clear, articulated destination risks leaving Parliament and the industry uncertain about the direction of travel. Is it unreasonable to ask for the House to be told not only what powers are being taken but to what end they are intended to be used? It is in that spirit that this purpose clause has been tabled and I very much look forward to the debate that I hope it will provoke.

I wish to return briefly to the question of mandation, which, although I have not directly mentioned it, is an underlying issue in the Bill. It illustrates precisely why questions of purpose, process and limitation matter so greatly in the context of a framework Bill of this kind. We will of course turn to this in greater detail later in Committee but, as we are discussing the purpose of the Bill in this clause, it would be remiss of me not to mention it here at the outset as one of the most contentious provisions in the Bill—as we heard, broadly around the House, at Second Reading.

As drafted, the Bill establishes a broad enabling framework but leaves a great deal of substantive policy to be determined later through regulation. That approach inevitably creates uncertainty. It also places a heightened responsibility on Parliament to ensure that any powers taken are clearly bounded, carefully justified and firmly anchored to a stated purpose. In that context, we do not consider there to be a compelling case that asset allocation mandates are necessary to increase productive investment in the United Kingdom. Indeed, mandation risks cutting across the fundamental principle that investment decisions should be taken in the best interests of savers by trustees and providers who are properly accountable for the outcomes. I am sure that we will hear more about these arguments in Committee.

When the Bill itself provides only a skeletal framework, the absence of clarity around how such powers might be used becomes all the more concerning. If any future Government were ever minded to pursue mandation, it is essential that any such power be tightly limited, that savers’ outcomes are clearly protected and that asset allocation decisions are insulated as far as possible from political cycles and short-term pressures. Investment decisions should remain with those charged with fiduciary responsibility and not be directed by Ministers, however well intentioned. Those safeguards cannot simply be assumed; in a framework Bill, they must be explicit.

Moreover, the case for mandation is further weakened by the existence of credible and constructive alternative routes to unlocking greater levels of UK investment. Industry participants, including Phoenix Group, have identified a number of areas where policy reform could make a meaningful difference without recourse to compulsion. Government institutions such as the National Wealth Fund and Great British Energy could play a significant role by aligning guarantee products with insurers’ matching adjustment requirements, by engaging institutional investors earlier so that projects are structured to meet long-term investment needs and by continuing collaboration with the ABI Investment Delivery Forum to deliver investable infrastructure pipelines.

Similarly, the Mansion House Accord, building on the 2023 compact, has already driven tangible industry action. In our view, the priority now should be delivery, rather than the creation of new and potentially far-reaching powers. That includes implementing a robust value-for-money framework with standardised metrics; introducing minimum default fund size requirements, whether £25 billion or £10 billion, with a credible growth plan; and aligning the defined contribution charge cap with the Pensions Regulator’s approach by excluding performance fees where appropriate.

More broadly still, stronger capital markets are essential if the United Kingdom is to attract both domestic and international investment. This includes supporting the work of the Capital Markets Industry Taskforce, exploring measures to foster a stronger home bias in UK equities, considering whether stamp duty on share transactions is acting as a drag on competitiveness, and examining targeted tax incentives for pension fund investment in UK infrastructure. Ultimately, rather than mandating investment, policy should focus on understanding why UK investment has lagged. That requires serious engagement with questions of market structure, regulatory design, the quality of investment pipelines and the underlying risk-return characteristics of UK assets. Mandation risks treating the symptoms rather than addressing the causes.

I look forward to the Minister’s response. I make no apology for laying out certain aspects that I believe fit with the purpose of the Bill. However, as I said at the outset, I hope that we have a productive and interesting Committee. I beg to move.

[Lord Davies of Brixton (Lab)]

It is a pleasure to be here. Although for a while I was feeling a bit lonely, I very much welcome my noble friends; what we do not make up in numbers, I am sure my friends will more than make up for in the quality of their contributions. I declare an interest as a fellow of the Institute and Faculty of Actuaries.

It is worth at this stage spelling out that I have spent a lifetime advising people about pensions. I was the TUC’s pensions officer for a number of years. I was also a partner in a leading firm of consulting actuaries, and I worked for a number of years with a scheme actuaries certificate undertaking scheme valuations. In terms of sheer experience, I can fairly say that this is unique to noble Members of this House. I will not go on at length on future occasions, except when it is directly relevant.

The noble Viscount, Lord Younger of Leckie, declared his intention to avoid repeating a Second Reading speech—it is arguable as to whether he achieved that intention—but, in a sense, I welcome the opportunity to look at the Bill as a whole. While I support the Bill and I support my noble friends—there are some really good measures in here—the text underlying the opposition amendment suggests that we have a pensions system in chronically bad condition.

It suggests that returns are inadequate, that the system is fragmented and that it lacks transparency, with people unable to assess what they are getting. It provides inadequate communications. It is inconsistent across the different forms of provision. It prevents, or makes hard, innovative and flexible solutions to the problems that are faced. It needs to provide greater clarity for employers. It currently does not achieve responsible and innovative use of pension surpluses. To me, this suggests a system at risk of chronic failure.

To be honest, I accept those criticisms because underlying this system is the personal pension revolution introduced by the Conservative Government 40 years ago, which has proved to be unfit for purpose. We are having to make all these changes because of the failure of the system that the Conservative Government introduced. We need these changes because personal pensions did not work out. Collective provision is the answer to decent pension provision, and the Bill supports and develops collective provision and moves across this idea that everyone can have their own pot which they look after for themselves. I oppose the amendment and look forward to further discussions on the individual issues as they arise.

[Lord Fuller (Con)]

My Lords, it is always a pleasure to follow the noble Lord, Lord Davies of Brixton. He reminds me of that old joke about the dinner of actuaries where they are all complaining that everyone is living longer and it is getting worse.

I agree with this purpose clause, although I am surprised that it does not establish the balance between risk and reward, where pensions help people build secure futures by taking appropriate qualified risks. The pensions industry seems obsessed with risk minimisation, but without any form of risk there can be no reward; even cash is at risk from inflation.

The success of this Bill and why we need a purpose clause is to be grounded in how it makes it easier for people to take personal responsibility, to save for their futures, themselves and their families and to make their savings secure while permitting appropriate and manageable returns and providing risk capital to grow the economy. Inspiring people to save for their future is important, and pensions are long-term savings plans. Long-term returns dynamised through dividends, and boosted by employer contributions in many cases, are the best way to set yourselves up for later life.

--- Later in debate ---

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I share some of the concerns that have been expressed. I added my name to Amendment 6, and I could have added it to Amendment 5 as well. Before I go further, as it is an early part of discussing this Bill, I should say that I am a great supporter of the notion that there should be investment in productive assets that support the UK economy. Although I am not that heavy on mandation, if anything I lean in that direction quite a lot. It is obviously done through advisers, and maybe that is one reason for being concerned about advisers—perhaps they have pushed it too much the other way in times past. Noble Lords can take it as background that I am very supportive.

I am concerned about too much forcing of particular kinds of investment, and restricting the routes to those investments or the resistance of the opportunity if the trustees think that it is not the right thing to do. That is why I have some support for Amendments 5 and 6, because I think they may go too far. One of the good things about Clause 2(3) and (4) is that they are optional. However, it still hints at a lot of things that could be done.

I am concerned about any kind of dictation on which advisers can be used, because they have been very powerful. If there is any control over which advisers are used, that is another way of controlling the fund. Given the obligations of trustees to consult advisers, and the liabilities attached to that, they have to remain independent. That is the direction that I am coming from; therefore, I do not want the Bill to give powers that could go too far. That is why I added my name to Amendment 6, and why I have some sort of regard for the content of Amendment 5 around the investment opportunities.

[Lord Davies of Brixton (Lab)]

This group is about asset pools in the Local Government Pension Scheme. I had not intended to intervene on this group, but I want to comment on the remarks made by the noble Viscount, Lord Younger, in introducing this group of amendments on the Local Government Pension Scheme. I am relatively agnostic about asset pools. I am not sure that I am totally convinced by the Government’s line that big is necessarily beautiful, but I am open to that debate.

In introducing this group, the noble Viscount set it in the context of a large group of amendments introduced on much wider issues around the Local Government Pension Scheme than were originally expected—it was really just about investment in the Local Government Pension Scheme—and at a very late stage. It makes no difference to me personally, but fundamental questioning of the structure, running and management of the Local Government Pension Scheme was introduced at such short notice; we found about it only on Thursday or Friday. I can live with that, but I think that it was a little unfair to the people working in and running the scheme suddenly to produce this level of uncertainty. That was unwise. When you want to discuss these things, you start talking to the people involved first, but it is my understanding that it came out of the blue and everyone was totally surprised. Obviously, the issue was always there for discussion, so the fact that it has come up is not a surprise, but doing things at this moment and in this way was unfortunate and is causing problems for those trying to provide the pensions.

I believe that the fundamental premise introduced by the noble Viscount is wrong. The Local Government Pension Scheme is a notable success. Rather than setting up inquiries to discover what went wrong, we should be inquiring about what it got right, because it provides good pensions for a large number of people providing essential services. The average pension in the Local Government Pension Scheme is £5,000; that is because the scheme provides pensions mainly for people on low pay. It provides good pensions for people—often, for women with part-time jobs. It does so in a way whereby, in the forthcoming valuations—as I will expand on and discuss at greater length when we get on to the eighth group of amendments, because that is where the substantive discussion will take place—it faces a better record than private sector occupational pension schemes. We should be looking at its success and not, as the noble Viscount argued, the difficulties and failures.

[Lord Fuller (Con)]

My Lords, once again, I follow the noble Lord, Lord Davies of Brixton. I wish, perhaps uncharacteristically, to associate myself with many of his comments. I support the thrust of Amendment 2, and offer wider support for the other amendments in this group.

My qualifications to speak on this Bill as far as the LGPS elements are concerned is that I led a local authority for 20 years and have been a member of the Norfolk Pension Fund’s Pensions Committee since 2007. I have also been a member of the Local Government Pension Scheme’s advisory board since its inception in 2014. I am a past member of the fire service scheme’s advisory board, as well as a trustee of a number of private schemes. I also benefit from my own SSIP.

Today is about the LGPS. It is different, because not many of the public sector schemes have money put aside for their members’ retirements—although I accept that the scheme for MPs is one of them. In aggregate, the LGPS comprises 89 separate schemes cast throughout the entirety of the four home nations. Collectively, the 2024 scheme census reports a total of 6.7 million members, a third of whom are, directionally speaking, active; a third of whom are deferred; and a third of whom are actually in payment. In 2024, its total assets under management were worth £390 billion; it is much more than that now. These things change but, by whatever measure, the LGPS is the world’s fourth-largest or fifth-largest pension scheme.

When I came on to the Norfolk board in 2007, assets under management were £1.8 billion. They are now more than £6 billion. I echo the comment of the noble Lord, Lord Davies, that if only the UK economy had risen in that proportion. The LGPS delivers significant value. The typical member is a 47 year-old woman earning about £18,000 a year, for whom the pension is, as the noble Lord, Lord Davies, said, about £5,000. It is incredibly efficient. Operational costs are about half those of typical unfunded schemes. In the Norfolk scheme, of which I am a member, the cost per member is less than £20 per head. I accept that other schemes have costs higher than that, but it is an enviable record. We have saved for our future, but you would not know any of this from the thrust of the Bill and its overbearing tinkering.

What is the problem to be solved here? After some difficult times when interest rates were low, most schemes are now fully funded. It is a British success story that will be undermined by fettering the independence of schemes to make the best long-term investment decisions for their members and local taxpayers, muddling accountabilities by divorcing assets from liabilities and introducing new conflicts of interest. That cannot be right. The success has been delivered despite being buffeted by complications such as McCloud, the pre-2015 and post-2015 schemes, GMP, the rule of 75, dashboards, changing rules on inheritance and divorce and all the other things that happen when you have the best interests of 6.7 million workers in mind. The truth is that the LGPS is a million miles away from the fat cattery that the popular newspapers would have you believe.

That brings me on to the substance of Amendment 2. I have the greatest concerns that the fiduciary duty contemplated to members in this Bill, fairness to the taxpayer and ham-fisted interference from a merry-go-round of Local Government Finance Ministers will weaken this jewel in our economic crown. Taken together, subsections (2) to (8) promote the notion that the government nanny knows best, with broad powers down to the level of detail to determine the fine structure of the pooled schemes. This approach has already damaged the scheme for no good reason. The exemplar ACCESS band has been told to disband. It was doing a good job. With nearly £40 billion-worth of assets under management, it rented the best globally viewed FCA-qualified professionals in the City of London, one of the world’s top three financial centres. Now it is being forced to join a pool of other authorities headquartered miles away in the provinces, miles away from the cut and thrust and that leading intellectual property. There is a provision in subsection (7) that these pools should take steps to get FCA accreditation—I suppose we should be grateful for that—but these pools have no business even being on the battlefield until they are FCA qualified. Thus is the muddle of this Bill. In essence, this enforced uniformity means that star strikers have been replaced by subs from the reserve team. A global success story has been weakened with the risk of lower returns for members.

Moving on, this Bill talks about local government members, but the scheme is not about just councils. In the Norfolk scheme, which I know best, there are eight principal councils, but we now have more than 500 sponsoring employers—parish councils, care homes, catering companies, youth and social workers, classroom assistants and charities. Each has different scale, covenant strength and longevity. It is complex. Yet ministerial interference wants to shove them all into a one-size scheme that cannot fit all. In subsection (5) we see touching faith in the judgment of the experts and regulators who forced private schemes into LDIs and ruined them. I do not know why the Pensions Regulator and GAD are not on the Government’s list. I suppose we should be grateful that they are not. This whole Bill promulgates pensions groupthink on the altar of reduced risk and lower returns.

I will deal with Amendment 5 later because it talks about investment and there is a later group for that. I have heard the Minister say that bigger is better. Here again, I align myself with the noble Lord, Lord Davies. It is the thrust and the theme of this Bill more widely. Indeed, I heard the noble Baroness at the Dispatch Box lionise the Ontario teachers’ scheme in the week that it was rinsed for £1 billion in the collapse of Thames Water.

We see in Clause 2 that there will be directions as to what things can be invested in. When they tried that in Sweden, the public schemes lost another £1 billion in the Northvolt disaster, where virtue-signalling political investment directions made the members and taxpayers poorer. The harsh lesson is that the schemes become the plaything of meddlesome Ministers to require or prohibit, or to opine on lofty ideas, but without the responsibility or accountability of paying out. It is wrong.

--- Later in debate ---

The Minister was perfectly correct to say that we will return to this issue on Report. In the meantime, I beg leave to withdraw.

[Lord Davies of Brixton (Lab)]

I am still mystified as to why Amendment 220 is not included in this group. It is left bereft, right at the end of the Marshalled List. Is there a reason?

[Lord Sharkey (LD)]

If the noble Lord is asking why it is there, I am afraid I will have to plead the Public Bill Office.

--- Later in debate ---

Moved by

[Lord Davies of Brixton]

7: Clause 2, page 4, line 23, after “investments” insert “including social housing”
Member’s explanatory statement
This is a probing amendment that seeks to explore how and to what extent LGPS assets might be used to provide social housing as an investment.

[Lord Davies of Brixton (Lab)]

I emphasise that this is not about mandation. Mandation is a big issue, but this is not about that; it is about the possible ways in which Local Government Pension Scheme assets could be invested. It is a probing amendment and I am sure that it is not word perfect in achieving its objective.

It arises under subsection (4) of this clause. It mentions various issues with how the strategy that is set out should be implemented. It is a probing amendment that seeks to explore how, and to what extent, Local Government Pension Scheme assets might be used to provide social housing as an investment. The oddity about this debate is that I am sure we all share the belief—tell me if I am wrong—that housing is an ideal investment for a pension fund. What I want to know from the Government is the extent to which that will be possible within the structure being established by this Bill.

I start with the fund, which is a long-term defined benefit pension scheme with inflation-linked liabilities. Social housing assets provide long-dated stable income streams that closely match this profile, so the sheer logic of these funds investing in local housing is clear. This issue has been debated extensively, within the relevant field, among the think tanks and so on that support local authorities and are interested in the investments of the Local Government Pension Scheme. For example, a think tank called Localis produced a report recommending that council pension assets should be a funding solution to the UK’s affordable housing crisis; that issue is widely discussed and widely supported.

Of course, that has already happened and is already happening. The London CIV has a substantial investment on behalf of the London pool of investments in social housing. I refer to social housing; personally, I have a preference for council housing, but the issue is broader and includes all forms of social housing. For example, the head of real estate at the London CIV says:

“Our UK Housing Fund is designed to help increase the supply of good quality affordable housing while delivering income-driven returns to our Partner Funds”.


Again, in the heart of the industry and the sector, the value of this approach is strongly supported.

More specifically, are funds investing in local housing? They might be investing in housing, but it could be anywhere. However, the synergy with a local fund investing in local housing has a massive attraction in terms of both the councils involved and the members of a scheme seeing how their funds are being invested in the local community. That is a very attractive perspective on how the funds should be decided.

At the same time—this point does not need spelling out—we face a severe housing crisis. There is a need for extensive housebuilding. We have the resources and the need, so why do we not just get on and do it? Council pension funds are, by their nature, patient, long-term investments; that is such a good match for housing delivery. Of course, it is accepted, from the number of funds that have already gone this way, that the fiduciary responsibility is suitable. The committees managing these funds see that investing in housing matches their fiduciary responsibility.

Everyone agrees that there is a great deal of synergy here. Local pension schemes investing in social housing is financially prudent and low-risk, provides a long-term strategy and delivers clear public value. What is there not to like? Can my noble friend the Minister assure the Committee that this synergy will be recognised in the forthcoming regulations and the accompanying statutory guidance?

We are debating this matter in terms of the Bill here, but, as the previous debate made clear, it is the regulations that count. The regulations that will govern how these pools can invest are currently being discussed—an extensive consultation is taking place—but, alongside that, is a closed consultation on the statutory guidance that will accompany the regulations. There may be a debate as to why it is not a public consultation on the statutory guidance, because the two things—the regulations and the guidance—mash together closely.

The problem is that the draft statutory guidance limits the extent to which local funds can set requirements on the actual decisions that will be taken by the pools. I am getting into the detailed structure of how the administering authorities and the investment pools will work together. The point relates generally to all forms of local investment but it is particularly acute in this area, where we are talking about building houses for local people. More specifically, does the proposed pooling framework act as a potential barrier to Local Government Pension Scheme investment in social housing?

There is a broader, more general issue here; I am gear-shifting. The specific issue is whether the pooling arrangements interfere with local investments, particularly in housing, but there is the general issue of whether administering authorities—local councils, in effect, for these purposes—can pass their ESG considerations, for example, on to the pooling arrangements. We need to be clear at this stage. I have raised this issue specifically in relation to housing—it would be good to get a clear answer on that—but there is a wider point around the other ways in which these funds should be investing in the local community. Are the new structures going to stop that happening in practice?

On the other amendments in this group, I think that I agree with Amendment 9, but I will listen to my noble friend the Minister’s response on it. I look forward to hearing the reasons for Amendment 10; I do not understand it, but I shall listen carefully. I do not really understand Amendment 11 either, so, again, I look forward to the explanation from the noble Viscount. In the meantime, I beg to move the amendment standing in my name.

[Baroness Warwick of Undercliffe (Lab)]

My Lords, I have no extant interests to declare—my interest in pension schemes is in the past—but I have considerable sympathy with my noble friend Lord Davies’s Amendment 7.

We suffer from chronic underinvestment in genuinely affordable and social housing, which is undermining the social fabric of this country and limiting the opportunity for the growth that we so badly need. The Government have vowed to build 1.5 million homes by the end of this Parliament, with a longer-term aim of resolving the housing crisis; other Governments have attempted to do the same. The Government have already committed substantial sums towards that aim, but demands on public funding are increasing and more resources will clearly be needed to deliver it.

I had a particular interest in housing associations in the past. These raise private debt to put alongside public grant to fund social housebuilding, and currently have more than £130 billion of debt facilities in place. The social housing sector is a great example of harnessing public and private investment to drive economic growth and build the homes that we need. Net additional dwelling figures for the 2024-25 financial year showed that 208,600 homes were added to England’s stock—well short of the 300,000 homes a year needed to meet the Government’s target of 1.5 million homes by the end of this Parliament. With the right funding, investment and financial capacity in place, social and affordable housing can play a key role in boosting supply and meeting that ambitious homes target.

There is a general recognition of the need to increase institutional investment in the UK and that pension schemes, with their long-term characteristics, could and should be part of that solution. This part of the Bill refers specifically to the LGPS. The Chancellor has already cited the LGPS as a means of achieving that necessary level of investment. In fact, several LGPS funds already have a strong track record of co-investment in affordable housing, and that potential needs to be maximised. I hope that the Government will ensure that all large pension schemes have the right incentives and strategic tools, coupled with an effective regulatory regime, to provide returns to the scheme while protecting scheme members’ interests and ensuring enduring social impact.

--- Later in debate ---

[Lord Katz (Lab)]

I could not have put it better myself. We have to be careful in regarding ESG as fashionable politics, inserting itself into a fashionable investment space. We have to be careful not to throw the baby out with the bathwater and to really appreciate that there are good reasons why certain investments are more popular and investments in other areas are being shunned. There are trends in industry and society as to what products and classes of investment are popular. Sometimes, we can overthink these things.

I am pleased that the noble Viscount, Lord Thurso, popped up because I was just about to address his question about the Bill preventing funds setting targets on local investment, on this theme. I hope this answers his question: they must set a target, but it can be any value that the fund considers appropriate. They retain that element of flexibility, which I hope is helpful.

Regarding Amendment 9, the Government will require some administering authorities to report on their local investments, including the total investment, and on the impact of investments, in their annual reports through guidance. We consider that Amendment 9 would be an unnecessary duplication of a requirement that was already set out in guidance and in regulations. We think that it would not add anything to the Bill, as that regulation is already good practice—it is already there.

Amendment 12, spoken to by noble Baronesses, Lady Bowles and Lady Altmann, seeks to expand the definition of local investments beyond stretching point: it could mean investments for the benefit of persons living or working in any of the administering authorities’ local areas. Our fear here is that the amendment would, in effect, break the definition of local investment, as it could mean any investment in England and Wales. We contend that local investment, as it stands, has a broad definition, as it can refer to investments that have measurable beneficial impact for people living or working in areas local to, or in the region of, the administering authority, or of its pool partner administering authorities. As a consequence, this is broad enough to capture an appropriately wide geographic range while ensuring that there are still benefits for the local area.

To ensure a clear and firm trajectory to consolidation and benefits at scale for the scheme as a whole, along with the assurance I hope I have provided to the noble Lords in discussing these amendments, I respectfully ask my noble friend Lord Davies to withdraw his amendment.

[Lord Davies of Brixton (Lab)]

I thank my noble friend the Minister for his reply. As I made clear, my amendment was not about mandation or compulsion but the ability for local authority funds to invest in ways which are seen as socially beneficial. There was general agreement about the synergy, as I put it, between investing in social housing and the investment needs of local authority funds. The Minister was clear that it should not be a barrier, but, as the regulations are still being discussed, and as the statutory guidance has not been agreed yet, this is a moving feast. I hope that, at some stage, we will be able to get a specific statement on the ability of funds to invest in housing, and in the other ways which have been suggested. I beg leave to withdraw the amendment.

Amendment 7 withdrawn.

--- Later in debate ---

Following on from what the noble Baroness, Lady Bowles, said, before we come to new Section 28C and the specific part of this Bill that deals with it—as well as my own amendments seeking specifically to include it, if that is where we end up—I would be grateful if we recognised that there is a problem here. Perhaps there is a misunderstanding on the part of the Government about how the real estate investment trust industry has reinvented itself in order to offer long-term investors, such as pension funds, diversified access to expertly managed infrastructure investments, alternative energy, real estate and so on—as well as private equity—in a closed-end structure. The industry has done that to give pension funds the option of investing in either type of asset so that the market will not continue to be skewed away from one of Britain’s investment success stories, which we are so proud of and which has served investors extremely well over many years.

[Lord Davies of Brixton (Lab)]

This is really a debate by proxy on Section 40 and new Section 28C; I am sure that we can all look forward to a repeat of this discussion.

I am not against mandation in principle; it is entirely reasonable for a Government to adopt that approach. What worries me here is that, for some reason, they are putting investment classes into statute. That is just wrong. The point here is broader than the one just made by the noble Baronesses. To pick out sectors of investment, the Government are giving their imprimatur to these particular classes of investment; however, they will go wrong at some stage, and the Government will be on the hook for having advocated for them. I am against having any of these references in the Bill. I do not want to see anything added; I want them to be taken out.

[Lord Fuller (Con)]

My Lords, now I am really worried—every time I have followed the noble Lord, Lord Davies of Brixton, I have tried to amplify the points he has made.

I congratulate the noble Baroness, Lady Bowles, on her masterful exposition of a technical piece of detail; she brought it down to the ground and made it alive. She put her finger on it when many of us have not been able to put our finger on what makes us so uncomfortable about the Bill. We know that it is not right. When you get meddlesome Ministers fiddling around in stuff where they do not really know what they are doing, there is not just co-operation but—as the noble Baroness exposed—a connivance and a cartel. She explained how those two things have led to conflicts of interest; there will be a lot of Cs in the words I am about to use. It is anti-competitive, and it has restricted choice.

The noble Baroness has wedged open the door because, later on in the Bill, there are provisions—I will not defer to them too much now—for the existing operators to lock out new entrants. I was instinctively uncomfortable with that but, now, I am worried because there seems to be a guiding hand here to reduce choice, stifle innovation and damage the reputation of the City. I do not think that that was purposeful, but this is what happens when you get a Bill that is so overly complicated and takes people away from saving for their long-term retirement.

I nearly feel sorry for the noble Lord, Lord Katz, because I have never seen such an evisceration. I am sure he is going to defend it and do the best he can. But what the noble Baroness, Lady Bowles, has shown is that it is rather like the Chancellor, who now says she had no idea what was really happening when she put the rates on the pubs. It was a mistake, and she did not have all the information to hand. While I accept that the noble Lord, Lord Davies, has said we will come back to this on another day, I thank the noble Baroness, Lady Bowles, because she has given an opportunity—a breathing space or an air gap—for the Government to now go back to look at this in more detail.

The noble Baroness, Lady Altmann, also laid out the import of this amendment when she said that one-third of all the FTSE 350 is engaged in this. I expect the Minister in winding to say, for a third time, that growth is the number one priority of this Government. Let us hope he does say that because, if he does, he will either accept this amendment here and now, or give an undertaking that, at some stage before we get to this in the main part of the debate, it will be accepted and we can move on.

It is not just casting a shadow over the LGPS and the parts of Yorkshire which are disinvesting; it is accidentally casting a shadow over the City of London, which is the world’s second or third largest financial centre. It must be stopped. I think the noble Baroness, Lady Bowles, has done the Committee and our nation a great service in the last half an hour, and she is to be congratulated for it.

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Wednesday 14th January 2026 Grand Committee

This cannot be viewed in isolation from the Government’s wider approach to local government reform. Rising pension costs, constrained local finances and an already uncertain and poorly executed programme of local government reorganisation only compound the risk. That is why these amendments matter. They do not seek to undermine local government pension schemes or dictate outcomes. They seek clarity of purpose, consistency of interpretation and accountability for decisions that carry significant financial consequences. If we are serious about long-term affordability and giving local government the stability it needs to plan and invest, we must begin by ensuring that the regulatory framework governing contributions is clear, proportionate and aligned with its founding intent. I look forward to the Minister’s response.

[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.

--- Later in debate ---

[Lord Davies of Brixton (Lab)]

There is a phrase, “esprit d’escalier”—is that how you say it?—for when you are walking down the stairs and you suddenly think of the thing you wish you had said in a previous discussion. Well, this group of amendments provides an ideal opportunity to avoid that very problem.

I do not want to delay the Grand Committee unnecessarily but I feel forced to say something. In essence, these amendments are fundamentally misconceived. I do not object to these questions being asked, but have the two previous speakers ever looked at a Local Government Pension Scheme valuation report? All the information for which they are asking and more is set out in those reports, in accordance with the professional standard that all actuaries must meet.

It is worth saying that that professional standard is set not by actuaries but by the Financial Reporting Council, which sets technical standards for the actuarial profession. The profession looks after professional standards but technical standards, and specifically what should appear in a valuation report, are set by the Financial Reporting Council, which is not part of the actuarial profession. Obviously, there is big actuarial input, but the final decision is made by the council, and all the information called for by the noble Viscount and the noble Baroness is in those reports. Of course, there may be cases where it does not appear in those reports, in which case that is a case of technical malpractice and the Financial Reporting Council should be told.

[Baroness Altmann (Non-Afl)]

I apologise for intervening, but I feel that there is a bit of misdescription here. Yes, it is true that Regulation 64, for example, includes this information, but the FRC does not have the authority to insist on these issues being fed through. Indeed, there is non-statutory guidance that seems to override all this. For example, it says that you should not consider changes in contribution rates on the basis of liabilities that have changed due to market changes, so the interest rate environment, which has changed so fundamentally, is supposed not to feed through to the conclusions on contribution rates. That is part of this mindset which, I feel, it is so important for us to try to adjust as we go forward, given the fundamental changes that have happened.

[Lord Davies of Brixton (Lab)]

I apologise, but I do not understand what the noble Baroness is saying. Actuaries have to comply with these professional standards; any valuation report they produce has to meet them—that is not a question for debate. If a report does not meet those standards, it should be pursued on its merits. To claim that this information is not available is simply untrue: it is there in the valuation reports. I always have problems with the word “transparency”, because to me it looks like something you can see through and you cannot see it, but I take it to mean that a full explanation of the degree of prudence, a wide evaluation of the assumptions chosen, what effect different assumptions would have and the outcome in terms of the contribution rate all have to be set out. They are publicly available.

The second point is that actuaries do not decide on the valuation assumptions; the management committee decides, on actuarial advice, what the assumptions should be. The local, democratically elected representatives take the decisions, including about what the contribution rate should be. We are currently in an odd state where lots of information on the situation is becoming available, but that is because we are at the end of a three-year cycle of valuations. By the end of this year, all these issues will have been resolved. Not everyone will be pleased; it is entirely possible that some admitted bodies will find that their contributions go up. Perhaps they had significant changes in their workforce—who knows? But the mere fact that some contribution rates go up while the overall move is a reduction does not in itself mean that the system is broken.

I find it difficult to understand what exactly these amendments intend to achieve. The information is available, the decisions are made by the local government bodies involved, and they take the decisions based on their democratic responsibility. What more could we want?

[Baroness Altmann (Non-Afl)]

Perhaps I could assist the Committee. These amendments are asking for a publicly available report that clarifies and sets out all this information on a basis that council tax payers, for example, whose money is being used, can see with clarity: it is provided to them. With all due respect, they will not read the actuarial report, but having a properly set-out review that explains all this clearly, in language that people can understand, would have huge value.

--- Later in debate ---

[Baroness Noakes (Con)]

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

[Lord Davies of Brixton (Lab)]

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

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

[Lord Fuller (Con)]

In my scheme, and in the one that the noble Lord, Lord Davies of Brixton, talked about, we take pride in what we do—but if only all the schemes did that. The value of these amendments is in taking the best schemes, which set the bar, and making sure that other schemes meet that bar in terms of transparency. Just a few of them doing it is not good enough; we want all of them to be doing it.

--- Later in debate ---

[Lord Fuller (Con)]

I was coming to a conclusion anyway, so I will not detain your Lordships any further. I have made the points that I wanted to make.

[Lord Davies of Brixton (Lab)]

At the risk of receiving a glare from my Whip, I feel I have something to contribute to this group as well.

I will first make a general point. If noble Lords and noble Baronesses are going to quote specific examples, we need chapter and verse in order to understand what is happening. If we are just given figures, we are meant to absorb and draw some conclusion from them, which is not possible; we need to know chapter and verse of any examples that noble Lords quote so we can analyse and see what is really going on in that particular case. I have to say that my assumption is that, with all the examples we have been given, there is a readily available, understandable situation, and somewhere along the line there has been a failure of understanding.

On Amendment 20, my question for the noble Baroness, which she sort of answered, was: why is this amendment required? I think we were told that it is all too difficult, but of course it is not all too difficult. There is a big example: the London Borough of Kensington and Chelsea, which has a Conservative-controlled council, earlier this year made an interim change in its contribution rate to zero because its investment policy had been so successful. It is worth noting that it has a very successful investment policy and it is one of the smallest local government funds—something to bear in mind during the other debates on the Bill.

There is a question: how often should you undertake a valuation? There is a strong argument for three years because that provides some level of stability to the council’s finances. You have to remember that, over the last year or two years, a council may be paying too much or it may be paying too little, but that is not money down the drain; it either goes into the fund or does not, and it will be available or not available at the end of the three-year period. The money does not disappear if contributions are up, and it will be reflected in the future contributions that that council will pay.

I am also concerned that of course an employer will seek a review when it thinks its contribution is going to go down. I bet it will not seek a review if it thinks its contribution is going to go up, which provides exactly the sort of ratchet effect that the noble Baroness said she wanted to avoid. So it would be perfectly practical to do a valuation every year with the strength of the computers we have available now. It a long time since the day when I had to sit at a large square sheet of paper and do all the figures by hand: you just run the computer and there are the figures. I am sure the consulting firms will be happy to get all the additional fee income, but does it actually produce the advantages that we are told will be achieved through this amendment?

I note the points made by the noble Baroness, Lady Scott of Bybrook. I think it is a very valid point. It is a shame that whatever the local government department is called nowadays has not been involved with the Bill; it could have brought some perspective to where we are.

On Amendment 20A and benchmarks, I draw the attention of the noble Baroness, Lady Altmann, to a regular report from a group whose name I shall not get right—but there is a national group of local government pension schemes. Following each valuation, it produces a detailed report providing all the information she asks for. Again, the information is available. She is asking for this information, when it is already easily available online. On my iPad, I can look up all the information which it is being suggested is being hidden away. The importance of the Local Government Pension Scheme is obvious, and obviously there should be transparency, but the idea being promoted that we do not know what is going on in these funds is gravely unfair to the pension schemes concerned.

[Lord Katz (Lab)]

My Lords, I shall now respond to Amendments 20 and 20A. I am grateful to the noble Viscount, Lord Younger of Leckie, and the noble Baronesses, Lady Stedman-Scott and Lady Altmann, for tabling them. Amendment 20 seeks to revise the existing LGPS regulations to make it easier for employers in the scheme to request interim reviews of contribution rates. I welcome the intention to increase flexibility in how surpluses in the LGPS are treated, but it is crucial for any flexibility to be underpinned by robust safeguards to protect the long-term funding position of those funds. It is important, equally, to make the distinction between how surpluses are treated in the LGPS scheme and in other defined benefit schemes. At the risk of repeating my words on the previous group, within other defined benefit schemes, trustees can choose to release surplus where scheme rules allow. Clauses 9 and 10, which we cannot wait to get to, will increase that flexibility.

In the LGPS, the triennial valuation process already ensures that contribution rates are reviewed every three years and enables withdrawal of surplus through reduced contribution rates where it is prudent to do so. The interim review process is available as an additional mechanism to allow scheme employers, particularly those at risk of exiting the scheme, to seek lower contribution rates between valuations. Interim reviews may take place if it appears likely to the administering authority that the liabilities have changed significantly since the last valuation, if there has been significant change in the ability of employers to meet their obligations or if the employer has requested a review.

I welcome the call from noble Lords opposite to make interim reviews easier to understand and more transparent. I agree that regulations on interim reviews require revision, including on these points. Indeed, the department has already stated this in a letter to administering authorities—that was in March 2025. I understand the point that the noble Baroness, Lady Stedman-Scott, was making about the vicissitudes of the market and other changes that occur. Without wishing to be overly sarcastic, we could posit having reviews on an almost continual basis to try to anticipate market movements, changes in demographics or other external shocks. I am not for a minute suggesting that that was the intention behind the amendment, but it proves the point that, if we are going to break up the cycle of valuation, when and how we do it is a question for further debate. That possibly addresses some of the points that the noble Baroness, Lady Scott of Bybrook, was making as well. It is important that any changes to regulations are properly considered and avoid unforeseen consequences.

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

Moved by

[Lord Davies of Brixton]

23: Clause 9, page 10, line 18, leave out “surplus” and insert “assets”

[Lord Davies of Brixton (Lab)]

This group raises important issues about the purpose of these proposed changes to the legislation on pension schemes. I am going to move my Amendment 23 and speak to my Amendments 25, 27, 28, 29 and 30—and I thank the Chairman for the correction. I look forward to the speech of the noble Viscount, Lord Younger, on his Amendment 26, which on the face of it asks a perfectly valid question.

The main amendment in this group, Amendment 25, seeks clarification from my noble friend the Minister about the purpose of Part 1, Chapter 2 of the Bill. This chapter is headed

“Powers to pay surplus to employer”.

Other than that, the Bill and the Explanatory Notes are silent on why the law is being changed. I will come back to that, but first I will address my Amendments 23, 27, 28, 29 and 30, which simply seek a change in the terminology used in the Bill, leaving out the word “surplus” and inserting the word “assets” instead.

I make no apologies for what may appear a pedantic point. Words are important. Later amendments from the noble Baroness, Lady Altmann, would also change the wording, so I think that there is an understanding that words are important, but what do I mean in this specific case? Let us consider the difference from the point of view of a scheme member between being told that their employer has taken some surplus from their pension fund and hearing the statement that their employer has taken some assets from their pension fund. I believe that the latter statement is a much better reflection of what is happening. “Surplus” suggests that the money is not needed, which is never true in a pension scheme; “assets” suggests something far more concrete.

It is worth emphasising that there is no certain meaning of what constitutes a surplus. It is not a technical term in actuarial speak; it was not a word that I ever used when devising pension schemes as a scheme actuary. It is widely used in general conversation—I sometimes use it myself—but it does not appear in the technical actuarial guidance, except as required by a cross-reference to legislation on surpluses. I suggest that using the word “assets” is a much clearer and more honest reflection of what is happening and I urge my noble friend the Minister to accept the change.

Amendment 24 was tabled to make it clear that the intended purpose of releasing assets is to be for the benefit of scheme members as much as for the benefit of scheme sponsors—if not more, in my view. As mentioned, there is no indication in legislation of why scheme assets might be released. What are the purposes for which surplus assets will be released? What is the purpose of the change in legislation and the facilitation of such release? It is left entirely in the hands of scheme trustees exercising their fiduciary duty. Government Ministers during the passage of the Bill have made reference to that on numerous occasions.

However, I believe that this is highly problematic. Experience tells us that we cannot rely on all trustees to interpret the appropriate purposes of the release of assets. It has to be in the Bill. The title of the chapter,

“Powers to pay surplus to employer”,

illustrates the problem. I have been advised by the clerks that it is not possible to amend those parts of the Bill, but it simply reflects the content of that particular chapter. As I said, this illustrates the problem. It only talks about the employer but says nothing about scheme members.

The absence of any reference to scheme members in the Bill contrasts with what Ministers have told us on numerous occasions. There has been a consistent message from Ministers throughout the passage of this Bill that the change will be of benefit to members. On the release of surplus, ministerial statements have suggested consistently that it is intended that members will share in the benefits of releasing assets. For example, my noble friend the Minister said at Second Reading,

“the Bill introduces powers to enable more trustees of well-funded defined benefit, or DB, schemes to share some of the £160 billion of surplus funds to benefit sponsoring employers and members”.

So it is not just about employers. In the Government’s own words, it is about members as well as employers. My noble friend went on to say:

“The measure will allow trustees, working with employers, to decide how surplus can benefit both members and employers, while maintaining security for future pensions ”.—[Official Report, 18/12/25; col. 875.]


Scheme members hearing this must assume that, if the employer benefits from a release of assets, they will as well. But there is nothing in the Bill that will make that happen. The Minister for Pensions made a similar statement many times. He has argued consistently, and rightly, that the release of assets—surpluses, if you will—is not just about employers but about delivering better benefits for scheme members.

Look, for example, at the Government’s road map for pensions. It states under the heading “Surplus flexibilities”:

“We will allow well-funded … pension schemes to safely release some of the £160 billion surplus funds to be reinvested across the UK economy and to improve outcomes for members”.


But there is nothing in the Bill that delivers on that promise. The DWP press statement about the Bill said:

“New freedoms to safely release surplus funding will unlock investments and benefit savers”.


Again, there is nothing in the Bill.

Then we find a statement by the Minister for Pensions on 4 September during Committee on the Bill in the Commons:

“It is crucial that the new surplus flexibilities work for both sponsoring employers and members”.—[Official Report, Commons, Pension Schemes Bill Committee, 4/9/25; col. 130.]


Yet again, there is nothing in the Bill. I could go on—there are plenty of examples—but I hope that I have made the point.

If that is the case and the intention is that members as well as scheme sponsors are expected to benefit when assets are released, this objective should be set out clearly in the Bill. This is particularly important because the Bill, as drafted, removes the existing requirement on trustees only to release surplus where this is in the interests of members. We will come to this again when we reach Amendment 37 in the name of the noble Viscount, Lord Thurso. I will support that amendment, but I think that it would be better to put the requirement for members to benefit as well as employers clearly and unambiguously in Clause 9. A defined benefit scheme is a joint endeavour, involving both employees and employer. They should be treated on an equal basis. I ask my noble friend the Minister to accept the point and bring forward a suitable amendment on Report. I beg to move.

[Lord Kirkhope of Harrogate (Con)]

My Lords, I will briefly intervene because the probing amendments here are important to how we look at the precise nature of surpluses. Clearly, the principle of making it easier to return a genuine pension scheme surplus to employers is worthy of support, particularly given how much has historically been paid by employers into DB schemes, often at the expense of capital investment. But safeguards are absolutely critical—this is the point I want to make about the relationship between employers and trustees in this area. It must be a trustee decision to distribute surplus, and trustees must be required to consider how the surplus has accumulated, as was touched on by the proposer. Was it due to employer contributions, member contributions or strong investment returns?

Under the proposed legislation, employers will no doubt apply immense pressure to steer the distribution towards them and not the members. In exercising their discretion, trustees must be unencumbered, properly advised and protected from the undue and inappropriate pressure that sponsoring employers will no doubt place on them. That is a real concern to me. We must be wary of employers exercising their powers to put in place weak trustees, who will not act in members’ best interests. We must also be wary of making it harder for trustees to distribute surplus to members in favour of employers.

Surplus distributed to members through increased benefits will directly improve the position of the real economy through increased domestic expenditure and of course increased tax receipts. If we are to restrict the use of surplus assets away from scheme memberships to employers, we must ensure that surplus distributed to them is used for reinvestment in the UK economy through capital expenditure. I would like to hear the Minister’s view on that.

On what a surplus is, the changes made by the Pensions Regulator to the DB funding code of practice in November 2024 have codified the requirement for pension scheme trustees to fund DB pension schemes very prudently—I think that those are the words that he used. Further, the investments that trustees are strongly encouraged to hold, through that code of practice, mean that the investment strategies are usually much lower risk than the insurance companies that many pension schemes are now being transferred to en masse under bulk annuity contracts.

In June 2025, the Pensions Regulator issued guidance that suggested that excessive prudence or hoarding of surplus could be considered poor governance by trustees. If we are to make it easier to distribute surplus from pension schemes, the bar for that should not be so low that the security of member benefits is weakened and it should not be so high that it requires schemes to be excessively funded. The current bar of buyout funding is, in my opinion, far too high.

Safeguards are important. It is absolutely critical that trustees are required to take appropriate advice and that actuarial advice is compliant at all times with the relevant technical actuarial standards. Trustees must be able to make informed, evidence-based decisions, unencumbered by the interests of the insurance industry and free from undue employer pressure. That particular relationship concerns me most in our probe into the functions of the surpluses. I hope that the Minister can give reassurances about the position of trustees—how they will be protected and by whom—in this particular contest or area of decision-making.

--- Later in debate ---

[Baroness Sherlock (Lab)]

I am coming on to that, but I am grateful to the noble Lord for pressing me on it. All trustees are bound by duties which will continue to apply when making decisions on sharing surplus. They have to comply with the rules of the scheme and with legal requirements, including a duty to act in the interests of beneficiaries. If trustees breach those requirements, the Pensions Regulator has powers to target individuals who intentionally or knowingly mishandle pension schemes or put workers’ pensions at risk. As the noble Lord knows, that includes powers to issue civil penalties under Section 10 of the Pensions Act 1995 or in some circumstances to prohibit a person from being a trustee.

The key is that the Pensions Regulator will in addition issue guidance on surplus sharing, which will describe how trustees may approach surplus release, and that can be readily updated. That guidance will be developed in consultation with industry, but it will follow the publication of regulations on surplus release and set out matters for trustees to consider around surplus sharing, as well as ways in which members can benefit, including benefit enhancement. That guidance will also be helpful for employers to understand the matters trustees have to take into account in the regulator’s view. I hope that that helps to reassure the noble Lord.

We will come on to some of the detail in later groups around aspects of the way this regulation works, but I hope that, on the first group, that has reassured noble Lords and they feel able not to press their amendments.

[Lord Davies of Brixton (Lab)]

I thank my noble friend the Minister for her reply and other speakers who have contributed to this debate, which I think was worth having. I am pleased that I raised the issue on terminology. I recognise that it is a lost cause, but I have never been afraid, like St Jude, to support lost causes. It is an important point that we need to understand the vagueness of the concept of surpluses and that it is actual assets that disappear from the fund.

On the substantive point, I am afraid that I did not find my noble friend’s response satisfactory. As she said—I made a note of it—trustees remain the heart of decision-making. That exactly is the point. I am afraid that I do not share the Panglossian view of trustees. Many of them—large numbers of them—do a difficult job well, but it is not true of them all.

It is enough of a problem, as I can attest from my own experience of many years in the pensions industry, that we cannot rely on trustees to deliver in all cases. The balance of power between members and trustees is totally unequal. Members, effectively, are not in a position to question trustees’ discretion and responsibilities, and they cannot take it to the ombudsman, because it falls outside the remit.

When my noble friend says that the Government have been clear, that was exactly my point: they have not been sufficiently clear and have frequently given the members a reasonable expectation that they will share in the release of assets. With those words, I beg leave to withdraw my amendment.

Amendment 23 withdrawn.

--- Later in debate ---

[Lord Fuller (Con)]

My Lords, I first became a pension fund trustee in 1997. The trustees at the time knew that there was a turning point, and it was probably just as well to get someone who might be alive 30 years later at least tutored in the principles of pensions at that moment—so it was clearly a moment in time. How right they were, because 30 years later, here I am.

I recall that it was a difficult moment for the scheme of which I was a member, and the private company for which I worked. Since the Barber reviews of 1991, with regard to the benefits payable in the final salary scheme, which was still open, it was the will of the directors that at all costs the final salary scheme should remain open and open to new accruals. Progressively, the benefits were diluted from RPI to RPI capped at 5% to RPI capped at 2.5%. Every step was taken and every sinew strained to keep that scheme open. But in 2003, the actuary reported that, on a scheme with assets of just £5 million, £4 million extra had to be tipped in; that was a sucker punch, and the scheme was inevitably at that stage closed to new members.

It turns out that the assumptions that were made, with the benefit of hindsight, were overly prudent. The deficit was exaggerated. But notwithstanding having put more than £4.41 million—that is the number that sits in my mind—into the scheme, three years later there was another £2.6 million to find as well. My goodness, the company could have made much better use of that capital to grow the business, rather than to fill a hole that history tells us was not there to the extent that it appeared.

We are in a situation where our scheme, which we kept open as long as we could, could not stand it any longer when we got to 2003. There was another turning point in 2006, in “A-day”, but I shall park that to one side. All that money was tipped in—and the suggestion that all the money that has gone into the scheme is some sort of pot to be shared now down the line, equally or in some proportion with the members as well as the company, is a false premise. Without the commitment of these private companies in those darkest days, the schemes would have closed much earlier and members would not have participated for those extra increments that they did.

I listened carefully to the noble Baroness, Lady Altmann, who asked what happens for all those people in the pre-1997 schemes. Well, here is the GMP rub. Astonishingly, I received a payment in the past six months, wholly unexpectedly, from my pre-1997 accrual, for the guaranteed minimum pension. So the suggestion that members are not sharing in any of the benefits of the pre-1997 scheme is a further false premise.

I am no longer a trustee of the scheme, but I know the trustees. The professional and actuarial costs associated with calculating these GMPs have been quite extraordinary. In fact, it would be much better for the trustees to have just made an offer, forget the GMP, and everybody would have been much better off.

The GMP issue illustrates the folly of going down the path that this amendment would lead us. All it is going to do is drive trustees into having more expensive calculations, actuarial adjustments, assessments and consultations, whereas, for the most part, the trustees are minded to make some sort of apportionment and that apportionment needs to be balanced, individual for the scheme in its own circumstances, based on how much excess money was tipped into the scheme for all those years in the post-1997 world. It is about having some sort of fair assessment, a fair apportionment. For the most part, the trustees of private schemes have the benefits and the interests of the members completely at heart and I do not see any circumstance when that does not happen.

This amendment is unnecessary for two reasons. On the one hand, trustees take these things into account. Secondly, that money is truthfully the employers’ money because they went above and beyond, listening in good faith to the professionals, the actuaries and everybody else who had put their oar in on the overly prudent basis, as it now turns out, to make good deficits that were not actually there. I say to noble Lords that for all the pounds that were put in post-1997, when other things happened in the macroeconomy and the Budget—which I will not detain noble Lords with—this country’s pension schemes could have been in a significantly stronger position than they are now had the trustees carried on as they were and not listened to some of the siren voices in government and the so-called professional advisers.

[Lord Davies of Brixton (Lab)]

I strongly support Amendments 26 and 39 from the noble Baroness, Lady Altmann. I have a question on Amendment 39, the proposal that trustees should be able to make one-off enhancements. I understand that there has been some recent change in the tax treatment of such payments, and I wonder if my noble friend could update the Committee on where we are with that.

The noble Lord, Lord Willetts, made the point that we are referring to an issue which will depend on the regulations—one of the problems we face is that this is a skeleton Bill. As I understand it, the question is, in essence: can the trustees use the surplus assets to pay the DC contributions of people who are not in the DB scheme? There is a particular quirk with that. Purely randomly, some schemes established the DC arrangement as part of the DB scheme, and other employers established the DC arrangement as a separate legal entity. It is pure chance which way they went; it depended on their advisers. I have questions about it in idea and principle, but if we are going to admit that, it would be wrong to distinguish between the chance of the particular administrative arrangements that were adapted. I wonder if my noble friend is in a position to comment on that point.

I have significant reservations about the amendment from the noble Lord, Lord Palmer of Childs Hill, for free advice being paid for by surplus. Most members of DB schemes do not need advice—which is the entire point of being in a DB scheme. You just get the benefit. That is what is so wonderful about them. Advice rather than guidance is extremely expensive. The idea that a free, open-ended offer of providing advice should be made needs to be looked at extremely carefully. We have the slight difficulty here in that I am replying to the proposals of the noble Lord, Lord Palmer of Childs Hill, before he has made them, but I have to get my questions in first, and maybe he will comment on that point.

--- Later in debate ---

[Lord Palmer of Childs Hill (LD)]

This seems like a good moment to come in. I first ask the Minister: do the Government agree that a responsible use of surpluses should strengthen confidence in DB schemes and not leave members feeling that prudence has benefited everybody but them? In this, I disagree with the noble Lord, Lord Fuller, because people do feel aggrieved.

I have three amendments here. Amendment 32 is designed to ensure that regulations take account of the particular circumstances of occupational pension schemes established before the Pensions Act 1995. Members of pre-1997 schemes, so often referred to in this debate, are often in a different position to those in later schemes. These schemes were designed under a different legal and regulatory framework. Current legislation does not always reflect those historical realities, creating unintended iniquities.

Amendment 32 would require regulations under Clause 9 to explicitly consider—that is all—these older schemes. It would allow such schemes, with appropriate regulatory oversight, to offer discretionary indexation where funding allowed, so it would provide flexibility while ensuring that safeguards were in place. It would give trustees the ability to improve outcomes for members in a fair and responsible way, and it would help to address the long-standing issue of members missing out on indexation simply because of their scheme’s pre-1997 status. It would also ensure that members could share in scheme strength where resources permitted. Obviously, safeguards are needed, and Amendment 32 would make it clear that discretionary increases would be possible only where schemes were well funded. Oversight by regulators ensures that employer interests and member protections remain balanced.

My Amendment 41 is about advice. When you are as knowledgeable as the noble Lord, Lord Davies, you do not need the advice, but many pensioners are missing it. This amendment would allow a proportion of pension scheme surplus to be allocated towards funding free—

[Lord Davies of Brixton (Lab)]

The amendment talks about surpluses, so it is talking specifically about defined benefit schemes. It is not talking about DC schemes because such schemes do not have surpluses. I just want to be clear.

[Lord Palmer of Childs Hill (LD)]

I thank the noble Lord; it is just that impartial pension advice for members is not always available to everybody. Many savers struggle to navigate pension choices, whether around a consolidation investment strategy or retirement income. Without proper advice, members risk making poor financial decisions that could damage their long-term security. If you are in the business, you have to take the good with the bad, but we would like to give members a bit of advice if the money is available. Free impartial advice is essential to levelling the playing field.

Surpluses in pension schemes should not sit idle or be seen simply as windfall funds. Redirecting a small—I stress “small”—proportion to fund member advice would ensure that surpluses are used in a way that benefits members directly. Amendment 32 would not mandate a fixed share; it would simply give the Secretary of State powers to determine what proportion may be used. This would, I hope, create flexibility and safeguards so that the balance between scheme health and member benefit can be properly managed. Further advice from surpluses reduces the need for members to pay out of pocket and it builds trust that schemes are actively supporting member outcomes beyond the pension pot itself.

Amendment 44, to which my noble friend Lord Thurso referred, would insert a new clause requiring the Secretary of State to publish

“within 12 months … a report on whether the fiduciary duties of trustees of occupational pension schemes should be amended to permit discretionary indexation of pre-1997 accrued rights, where scheme funding allows”.

It aims to explore options for improving outcomes for members of older pension schemes. I maintain that this amendment is needed because many pre-1997 schemes were established before modern indexation rules. Trustees’ current fiduciary duties may limit their ability to avoid discretionary increases, which is what this amendment is about. Members of these schemes may be missing out on pension increases that could be sustainable and beneficial. I will not go on about what the report would do, but there would be many benefits to this new clause. It would provide an evidence-based assessment of whether discretionary indexation can be applied safely; support trustees in making informed decisions for pre-1997 scheme members; and balance members’ interests with financial prudence and regulatory safeguards.

The amendments in this group are clearly going to progress on to Report in some way. Sometime between now and then, we are going to have to try to amalgamate these schemes and take the best bits out of them in order to get, on Report, a final amendment that might have a chance of persuading the Government to take action on these points. Many of the amendments in this group—indeed, all of them—follow the same line, but there needs to be some discipline in trying to get the best out of them all into a final amendment on Report.

--- Later in debate ---

[Baroness Sherlock (Lab)]

I will need to come back to the noble Viscount on that specific point. Obviously, at the moment, a minority of trustees have the power in the scheme rules to release surplus; our changes will broaden that out considerably. If there is a particular subcategory, I will need to come back to the noble Viscount on that. I apologise that I cannot do that now—unless inspiration should hit me in the next few minutes while I am speaking, in which case I will return to the subject when illumination has appeared from somewhere.

It is worth saying a word on trustees because we will keep coming back to this. It was a challenge in the previous group from my noble friend Lord Davies. The starting point is that most trustees are knowledgeable, well equipped and committed to their roles. But there is always room to better support trustees and their capability, especially in a landscape of fewer, larger consolidated pension funds. That is why the Government, on 15 December, issued a consultation on trustees and governance, which, specifically, is asking for feedback on a range of areas to build the evidence base. It wants to look at, for example, how we can get higher technical knowledge and understanding requirements for all trustees; the growth and the use of sole trustees; improving the diversity of trustee boards; how we get members’ voices heard in a world of fewer, bigger schemes; managing conflicts of—

[Lord Davies of Brixton (Lab)]

Sorry. Corporate trustees are a specific issue. Does the consultation include the particular responsibility of single corporate trustees?

--- Later in debate ---

[Viscount Thurso (LD)]

My Lords, I will speak to my Amendments 34 and 37 and will briefly comment on the other amendments. Quickly, before I do that, I seek to assist the Minister with the question I asked her on the last group. I was written to by people who came together as a small group to protest against the failure of a trustee and an employer to award discretionary increases, contrary to their joint policy of matching inflation, originally published in 1989 and repeated in pensions guides and newsletters over the years. For the last four years, the employer has refused consent to modest discretionary increases recommended by the trustee and supported by the independent actuary. That is the situation I am looking at. I hope that is helpful.

I turn to the current group. Let me say, first, in response to the noble Viscount’s amendment and his Clause 10 stand part notice—as he said, both are probing amendments—broadly speaking, I concur with him. If we had had regulations, draft regulations or just something to look at, an awful lot of these questions would not have needed to be put at this stage. As a matter of principle, I am always in favour of the affirmative procedure, rather than the negative one; I shall leave that there.

I know that the noble Lord, Lord Davies, will speak eloquently to his own amendments in a moment, but they are a bit of a variation on the theme of the ones in my name. My Amendment 34 would, in Clause 10 and at line 23,

“after ‘notified’ insert ‘and consulted’”.

What that would do is to say that the trustees would have not only to notify the members but to consult them. My Amendment 37 is very much along the same lines. It would insert, at the end of proposed new subsection (2B), a new paragraph—paragraph (e)—

“requiring that the trustees are satisfied that it is in the interests of the members that the power to pay surplus is exercised in the manner proposed in relation to a payment before it is made”.

Both amendments seek to explore the relationship between the employer, the members and the trustees.

I have listened to the arguments where it has been put forward that the employer has underwritten the surpluses, almost, and is at the mercy of the trustees. The case that I have put forward shows that, actually, there is often a power imbalance between the members—they are probably at the bottom of the pile—the trustees and the employer. I completely concur that the idea of mandating a response is wrong, but it is open to have regulations that require the trustees both to have regard to and to look at that, so that we reach a situation where members’ interests have at least equal value, in the eyes of the trustees, as the requirements of the employer.

I feel that these amendments are very modest. Who knows what might happen later on, but this stage the amendments are designed to reinforce members’ ability to be consulted and know what is going on.

[Lord Davies of Brixton (Lab)]

My amendments address how members’ interests can best be represented whenever a release of assets is under consideration.

As the Bill stands, the first members will know about such proposals is when they are a done deal—that is, when the decision has been made by the trustees, having talked to the employer. That is what the Bill says, and that is clearly wrong. There is also nothing in the Bill about any involvement of members in the process, such as consultation. This is obviously unacceptable; they should be involved fully from the start. I support the amendments in this group in the name of the noble Viscount, Lord Thurso.

I would probably oppose Amendment 42 in the name of the noble Baroness, Lady Noakes, but, obviously, I shall wait to hear what she says before coming to a conclusion—although the noble Baroness’s remarks on the previous group gave me the gist of what is proposed. Finally, I shall await my noble friend the Minister’s response to the questions raised by the amendments in the name of the noble Viscount, Lord Younger of Leckie.

My Amendment 36 is relatively straightforward and, I hope, uncontentious. Members need to be told before, not after, a decision is made by the trustees and agreed by the employer. This is a point of principle. Scheme members are not passive recipients of their employers’ largesse; they should be equal partners in a shared endeavour, and they have the right to be involved.

My other two amendments would bring scheme members’ trade unions into the process. A question has been asked a number of times during the passage of the Bill in the Commons: who represents members when a release of assets is proposed? The answer, of course, is their trade unions. This is a matter of fact. Consultation is inherently collective and there is now extensive and detailed legislation on how members are to be represented collectively. This applies here, as it does to all other terms and conditions of employment. I should emphasise that this is a requirement to consult on the employer, not the trustees. It applies to trade unions recognised for any purpose under the standard provisions of employment law.

Amendment 36 is relatively straightforward. It would simply require the employer to inform recognised trade unions at the same time as scheme members of the proposals that it is considering in discussion with trustees to release scheme assets. Amendment 40 would go further; it would require an employer to consult with those recognised trade unions before reaching any agreement with the trustees. The requirement to consult with trade unions about changes in pension arrangements that they sponsor is not a new provision. I am not proposing anything radical or new. Pension law already requires consultation with trade unions in this particular form; it requires them to take place before major changes in employees’ collective arrangements. My case is simply that the decision to release assets is a major change and hence it should be brought within the consultation requirements that are already set out in legislation.

This is all in accordance with Section 259 of the Pensions Act 2004 and the regulations under the Act. These are the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006, that is SI 349 of 2006. These regulations require employers with at least 50 employees to consult with active and prospective scheme members before making major changes—known as listed changes in the legislation—to their pension arrangements.

The key requirements set out in the legislation includes a mandatory consultation period. First, employers must conduct a consultation lasting at least 60 days before a decision is made. Secondly, there must be a spirit of co-operation. Employers and consultees are under a duty to work in the spirit of co-operation and employers must take the views received into account. Thirdly, the affected parties consultation must include active members, those currently building benefits, and prospective members—eligible employees not yet in the scheme. Deferred and pensioner members are generally excluded, which I have always regarded as a shortcoming in the legislation.

The listed changes that currently trigger statutory consultation are: an increase in the normal pension age; closing the scheme to new members; stopping or reducing the future accrual of benefits; ending or reducing the employer’s liability to make contributions; introducing or increasing member contributions; changing final salary benefits to money purchase benefits; and reducing the rate of revaluation or indexation for benefits. It should be noted that this is not just about changes in benefits; it is about changing the financing of the scheme. A release of assets is a change in the financing of a scheme, and so it should be included in the list in these regulations. My amendment would simply direct that regulations should be laid that will add release of assets to the list of these listed changes.

There are consequences under the legislation for employers that fail to comply with it, but the spirit here is one of setting out a process of working together, in order, as far as possible, to reach changes to the scheme that are accepted to both sides of the employment relationship.

--- Later in debate ---

[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords who have spoken on these amendments to Clause 10. Having previously set out the Government’s policy intent and the context in which these reforms are being brought forward, I start with the clause stand part notice tabled by the noble Viscount, Lord Younger. As he has made clear, it seeks to remove Clause 10 from the Bill as a means of probing the rationale for setting out the conditions attached to surplus release in regulations rather than in the Bill. It is a helpful opportunity to explain the scope and conditions of the powers and why Clause 10 is structured as it is.

The powers in the Bill provide a framework that we think strikes the right balance between scrutiny and practicality, enabling Parliament to oversee policy development while allowing essential regulations to be made in a timely and appropriate way. It clearly sets out the policy decisions and parameters within which the delegated powers must operate. As the noble Viscount has acknowledged, pensions legislation is inherently technical, and much of the practical delivery sits outside government, with schemes, trustees, providers and regulators applying the rules in the real-world conditions. In pensions legislation, it has long been regarded as good lawmaking practice to set clear policy directions and statutory boundaries in primary legislation, while leaving detailed operational rules to regulations, particularly those that can be updated as markets and economic conditions change and scheme structures evolve, so that the system continues to work effectively over time.

In particular, Clause 10 broadly retains the approach taken by the Pensions Act 1995, which sets out overarching conditions for surplus payments in primary legislation while leaving detailed requirements to regulations. New subsection (2B) sets out the requirements that serve to protect members that must be set out in regulations before trustees can pay a surplus to the employer—namely, before a trustee can agree to release surplus, they will be required to receive actuarial certification that the scheme meets a prudent funding threshold, and members must be notified before surplus is released. The funding threshold will be set out in regulations, which we will consult on. We have set out our intention and we have said that we are minded that surplus release will be permitted only where a scheme is fully funded at low dependency. That is a robust and prudent threshold which aligns with the existing rules for scheme funding and aims to ensure that, by the time the scheme is in significant maturity, it is largely independent of the employer.

New subsection (2C) then provides the ability to introduce additional regulations aimed at further enhancing member protection when considered appropriate. Specifically, new subsection (2C)(a) allows flexibility for regulations to be made to introduce further conditions that must be met before making surplus payments. That is intended, for example, if new circumstances arise from unforeseen market conditions. Crucially, as I have said, the Bill ensures that member protection is at the heart of our reforms. Decisions to release surplus remain subject to trustee discretion, taking into account the specific circumstances of the scheme and its employer. Superfunds will be subject to their own regime for profit extraction.

Amendment 37, tabled by the noble Viscount, Lord Thurso, seeks to retain a statutory requirement that any surplus release be in the interests of members. I am glad to have the opportunity to explain our proposed change in this respect. We have heard from a cross-section of industry, including trustees and advisers, that the current legislation, at Section 37(3)(d) of the Pensions Act 1995, requiring that the release of surplus be in the interests of members, is perceived by trustees as a barrier because they are not certain how that test is reconciled with their existing fiduciary duties. We believe that retaining the status quo in the new environment could hamper trustee decision-making. By amending this section, we want to put it beyond doubt for trustees that they are not subject to any additional tests beyond their existing clear duties of acting in the interests of scheme beneficiaries.

I turn to Amendments 31 and 43, which seek to clarify why the power to make regulations governing the release of surplus is affirmative only on first use. As the Committee may know, currently, only the negative procedure applies to the making of surplus regulations. However, in this Bill, the power to make the initial surplus release regulations is affirmative, giving Parliament the opportunity to review and scrutinise the draft regulations before they are made. We believe that this strikes the appropriate balance. The new regime set out in Clause 10 contains new provisions for the core safeguards of the existing statutory regime; these are aligned with the existing legislation while providing greater flexibility to amend the regime in response to changing market, and other, conditions.

Amendments 35 and 36 seek both to prescribe the ways in which members are notified around surplus release and to require that trade unions representing members also be notified. I regret to say that I am about to disappoint my noble friend Lord Davies again, for which I apologise. The Government have been clear: we will maintain a requirement for trustees to notify members of surplus release as a condition of any payment to the employer. We are confident that the current requirement for three months’ notification to members of the intent to release surplus works well.

However, there are different ways in which surplus will be released to employers and members. Stakeholder feedback indicates that some sponsoring employers would be interested in receiving scheme surplus as a one-off lump sum, but others might be interested in receiving surplus in instalments—once a year for 10 years, say. We want to make sure that the requirements in legislation around the notification of members before surplus release work for all types of surplus release. We would want to consider the relative merits of trustees notifying their members of each payment from the scheme, for example, versus trustees notifying their members of a planned schedule of payments from the scheme over several years. Placing the conditions around notification in regulations will provide an opportunity for the Government to consult and take industry feedback into account, to ensure the right balance between protection for members and flexibility for employers.

I understand the reason behind my noble friend Lord Davies’s amendment, which would require representative trade unions to be notified. They can play an important role in helping members to understand pension changes. However, we are not persuaded of the benefit of an additional requirement on schemes. Members—and, indeed, employers—may well engage with trade unions in relation to surplus payments; we just do not feel that a legislative requirement to do so is warranted. The points about the role of trustees, in relation to acting in the interests of members in these decisions, were well made.

Amendment 34 would require member consultation before surplus is released. I understand the desire of the noble Viscount, Lord Thurso, to ensure that members are protected. The Government’s view is that members absolutely need to be notified in advance, but the key to member protection lies in the duty on scheme trustees to act in their interests. Since trustees must take those interests into account when considering surplus release, we do not think that a legislative requirement to consult is proportionate.

[Lord Davies of Brixton (Lab)]

Just to be absolutely clear, the three-month notification period relates to the notice of implementation; it is not three months’ notice of the decision being made.

[Baroness Sherlock (Lab)]

I believe so; if that is not correct, I shall write to my noble friend to correct it. Coming back to his point, the underlying fact is that we believe that the way to protect the interests of members is via the trustees and the statutory protections around trustee decision-making.

I apologise to the noble Viscount, Lord Thurso, as I misunderstood his question in our debate on the previous group. I am really grateful to him for clarifying it; clearly, he could tell that I had misunderstood it. At the moment, when a scheme provides discretionary benefits, the scheme rules will stipulate who makes those decisions. In many cases, that involves both the trustees and the sponsoring employer, as may be the case in what the noble Viscount described.

When considering those discretionary increases, trustees and sponsoring employers have to carefully assess the effect of inflation on members’ benefits. But, as the noble Viscount describes, if it is not agreed, the employer may effectively in some circumstances veto that. We think the big game-changer here is that these changes will give trustees an extra card, because they will then be in a position to be able to put on the table the possibility for surplus being released not to the member via a discretionary increase but to the employer. However, they are the ones who get to decide if that happens, and therefore they are in a position where they suddenly have a card to play. I cannot believe I am following the noble Viscount, Lord Thurso, in using the casino as a metaphor for pensions, which I was determined not to do; I am not sure that that takes us to a good place. But it gives them an extra tool in their toolbox to be able to negotiate with employers, because they are the ones who hold the veto on surplus release. If they do not agree to it, it ain’t going anywhere. So that is what helps in those circumstances.

--- Later in debate ---

Although this is a technical amendment, looking to bring together all these regulators in the national interest, I am told by the industry—I thank John Hamilton, who is the Stagecoach group pension fund chair of trustees; William McGrath, founder of the C-Suite Pension Strategies; and Henry Tapper, chair of AgeWage, for bringing this to my attention—that, if we can get this working right and if this is inserted into the Bill, we will be able to change how trustees look at their responsibilities to members for the long run. We will be able to start to use these pension assets in a positive way to secure better benefits in future for their members and the nation than the current haphazard application of the standards and all the excellent hard work that the actuaries do, which is driving trustees away from one of the most productive futures for this national pool of wealth.

[Lord Davies of Brixton (Lab)]

I find myself in some difficulty in speaking to these amendments. First, although I declared my interests as a fellow of the Institute of Actuaries at the beginning of Committee, it is appropriate, in accordance with practice where there is a specific interest involved in the amendment, to declare it again. I am not a practising actuary at the moment, but I could be, and this would bear directly on my ability to earn money.

I support what I think is behind the proposals being made by the noble Baroness, Lady Altmann. We should consider ways of strengthening trustee consideration of the way forward, whatever it is. More specifically, an automatic response to go to annuitisation is clearly wrong. If trustees do not consider the other options, they are not acting properly and are not discharging their fiduciary responsibility. The suggestion is that this is happening too often at the moment.

Broadly speaking, I agree that there has been a rush to buy out, but that has happened for a wide variety of reasons, of which I would suggest that the presence or absence of particular actuarial advice is only a small part. To overemphasise this part without looking at what else is going on is a problem. Trustees should be supported to make better decisions, and part of that process is the actuarial report that they produce from their scheme actuary.

Just to provide a bit of background, we need to understand that actuarial regulation is just a little confusing. We have two regulators for actuaries. There is the institute itself, which is responsible for professional standards—“you should not bring shame on the profession and you should make sure that you know what you are talking about before you provide advice”. All that side of things is handled by the profession itself. Technical standards, such as what should be in a valuation report, are the responsibility of the Financial Reporting Council, a completely separate body that is not part of the actuarial profession. Although there are actuaries involved in the work of the FRC, it is not an actuarial body but an independent body. I will not go into the history, but, for whatever reason, it was decided to take that technical supervision away from the institute and place it with the Financial Reporting Council.

The particular standard referred to here is the technical actuarial standard, or TAS 300. That does not mean that there has been a previous 299; it starts at 300. There is a 100, and there are other numbered standards that come and go. This is the one that relates to advice to trustees, not just for valuation purposes but for calculating what basis the fund should use to calculate transfer values, commutation rates and so on. So there is this technical standard, set by an independent body.

I understand that that standard is controversial, and the noble Baroness, Lady Altmann, reflected some of that controversy in her speech. It would be fair to say that views differ. It is also important to understand that the current edition of TAS 300 was issued after extensive consultation last July and came into effect only on 1 November last year. It is always open to debate what the standard should say. My concern is that that standard is intended for actuaries, to tell them how they should provide actuarial advice to trustees. Its role is not to tell trustees how to behave. The problem, which I recognise, and which has been suggested as a reason for these amendments, is that trustees are not behaving properly—or it could be that they are being ill-advised by actuaries. That is not something that I am going to endorse but, if that is true, there is a disciplinary process under the Financial Reporting Council. Again, that is not part of the actuarial profession; it is a separate disciplinary process for anyone identified as not complying with the TAS. The issue can be raised with the FRC, and it may well be that it should have been raised more often, because that is really the first port of call if you think that the advice is wrong. It is not to put it into a piece of legislation.

I am very sorry to find myself in contention with the noble Baroness but, if trustees need to be regulated, it is not the job of the Financial Reporting Council to do it. It is not its job to tell trustees how to do their job. That is an issue that I am sure that we could debate extensively. I recognise the problem, but I am not convinced that we have been presented with the correct answer.

[Lord Fuller (Con)]

My Lords, I know that this is a technical amendment, and in the last group I disagreed with the noble Baroness, Lady Altmann, but on this one I totally agree with her analysis, particularly her identification of the groupthink that trustees suffer, bamboozled and pressured by the FCA, TPR and actuaries, and sometimes investment managers, to be overly risk-averse in some of their investments. In particular, there is a drive—it is explained that it is prudential and that the regulations require it, which means that we need to look at the regulations—for pension funds to apply an increasing proportion of their assets to liability-driven investments.

If your scheme happens to be in deficit, these LDIs will anchor you in deficit for the rest of time, because that is how they work. That is wrong, because the trustees have no control over what the interest rate, discount rate or gilt rate might be. They can adjust—plus or minus, in the case of gilts—but, ultimately, liabilities are driven by the gilt rates. They have no control over that, but they do have control over how the assets in their scheme are invested for the greatest return.

However, that is not how their schemes are valued at the triennial, which is valued on the gilt rate. As the noble Baroness, Lady Altmann, said, the value of their assets is depressed by virtue of being in a scheme. As people buy out and are forced to buy out—Amendment 33A contemplates what happens when you approach a buyout—schemes are being mugged. Members are being short-changed by this artificial diminution in the value of the assets, which at the moment pass into the hands of an insurance company, as the noble Baroness, Lady Altmann, said. No longer impeded, weighed down or anchored from being in a scheme, they can be let rip. The uplift happens quickly, and there is an immediate profit to the insurance company.

It is perverse that the entire regulatory advisory industry is mandating schemes to go into overly prudent investment products, almost suckering them down so that they have to pay a premium to be bought out, and all the profits go somewhere else. That is not prudence; it is short-changing the members of the schemes and diverting huge amounts of productive capital for the engine of our economy and the private businesses that generate wealth and pay taxes.

Regarding Amendment 33A, it is really important that trustees have imagination and are encouraged to think as widely as they possibly can, asking, “What does this mean? Are we in the appropriate asset mix? Should we be rammed into LDIs because we are chasing a deficit, or should we be invested in growth to pay benefits for members?” That is the dilemma, and this amendment shines a light on it almost for the first time in the Bill. Trustees in as many schemes as I can think of are being misdirected, ostensibly to reduce risks. But they are not reducing risks; they are reducing the sustainability of their schemes and their ability to pay for today’s members, including, most importantly, the youngest members of their scheme, who have the longest to go to retirement. Following the dismal, dead hand of these regulators is prejudicing the ability of these schemes to pay out for their youngest members in 20, 30 or 40 years’ time.

I notice that the noble Lord, Lord Willetts, is not in his place, but he made this point in a previous group. This is the generational problem that we have, between the eldest and the youngest people in the scheme. We need to strengthen and empower our trustees to play their roles simply and straightforwardly and not as though they are not competent or do not feel confident to resist the so-called advice they are getting from regulators, which are acting in groupthink and not in the scheme’s best interest, or the interests of either members or companies.