Pension Schemes Bill

Lord Sharkey Excerpts

Committee stage
Thursday 22nd January 2026 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I did not expect to lead this group, but due to the diligence of the Public Bill Office in tracking down consequential amendments, my Amendment 90 has come to the top.

My Amendment 110, which is my main amendment in this group and on which I will focus my remarks, seeks to delete new Section 28C of FSMA. At the heart of new Section 28C is the asset allocation definition, which is flawed not because of its aspiration but because it rests on a complete misunderstanding of what investment trusts or listed investment companies actually invest in, and it excludes them.

Last Monday, I explained the anti-competitive and reputational effects of encouraging the flow of investment exclusively via the new LTAF vehicle and excluding the long-standing listed investment company structure. Today I have touched on the role that they play in valuation. Before turning to the wider reasons why this clause is fundamentally flawed, I will dispel another misconception I hear in circulation: “Investment trusts do not do infrastructure”. Well, I do not know what you call the Thames Tideway Tunnel, Sizewell C, utility-scale onshore and offshore wind, schools, hospitals, hydroelectric schemes, solar and nuclear energy, space, communications and satellites—but I call them infrastructure. All are substantially invested in, at the building stage, by investment trusts. Perhaps the Minister would accompany me to see some of these, although maybe not in space.

I also hear the claim that they do not do the big infrastructure projects that the Government are focused on. That is not really true, but there is nothing in the asset list of private equity, private debt, venture capital and interests in land that says, “Only the mega size”, or that stops them being qualified assets when held by another route. Anyway, we all need all scales of infrastructure investment and ongoing funding for expansion.

On Monday this week, our much-vaunted new prospectus rules came into effect; they make it easier, cheaper and faster to raise both IPO and follow-on capital. This applies to listed investment companies, too. What was this for? It was precisely so that companies can grow faster, bigger pools of capital can be raised more efficiently and larger infrastructure projects and bigger funds can be built. What is the point of celebrating our new financial market regulation if the Government then block the very vehicles it was designed to support? Why are some people in charge of investment—yes, some of them are to blame, too—still of the mindset that investment trusts do not do primary investment, at the very moment when rule changes are being made to build on the boom in primary infrastructure investment that has come through this route in recent years?

I come on to mandation more generally. I am not against the underlying intent of encouraging more pension investment in private assets. However, there is already a far greater awareness of the need to do that. The policy argument is won, but we have only just got to setting up LTAFs and the listing rule changes. The Government have not given the financial industry the chance to show what it can do. It is hardly a vote of confidence in our largest industry—financial services. What message does that send to the world? It says, “Go somewhere else; we have to bully to get things done in London”. What does it say about our famous and canny asset management in Edinburgh? If the Government want to add encouragement, use “comply or explain”—or, better still, “always explain”—to add transparency and understanding to the system. My goodness, neither the Government nor parts of the pensions industry seem to know what goes on in the wider asset management industry. Do not just ask the same people who have driven the old pension investment strategies.

Then we come to trustees. I have amendments elsewhere in the Bill aimed at clarifying that they can and should look to wider systemic and economic effects, but they should not be overridden. At their core, members’ interests are paramount for trustees. New Section 28C does not have members’ interests paramount. It threatens deauthorisation and the disruption and cost that that would cause if, in the judgment of trustees and in full knowledge of the characteristics of their members, they consider that a little less infrastructure or private equity is appropriate. What if the phasing of big projects means that there is a dip when investments exit? What if you are still in the J-curve dip? If some things perform badly, or the rush to invest exaggerates prices, do trustees have to keep pumping money in at poor value? No, that is the moment for explanation and perhaps a modification of strategy, not compulsion or deauthorisation.

Let us be clear: a deauthorisation power of this kind is not neutral. It creates a structural pressure towards consolidation. If a scheme risks losing authorisation simply because its trustees judge that a different phasing or balance of assets is appropriate for its members, they get closed down or forced to merge. That is backdoor consolidation, not member-focused governance.

These are some of the reasons why I want to remove new Section 28C entirely. It does nothing but harm. It is economically inept, competitively unfair, legally unprincipled and blind to the regulatory opportunities that have only just come on stream. I beg to move.

[Lord Sharkey (LD)]

My Lords, it is a pleasure to follow—and I did—my noble friend discussing the reserved mandatory powers in the Bill. I will speak to my Amendments 111, 161 and 162. I thank the noble Lord, Lord Vaux, for adding his name to all three and the noble Lord, Lord Sikka, for adding his name to the first.

The purpose of these amendments is to remove the reserve power of mandation from the Bill. The case against these reserve mandatory powers has been set out by a large number of important institutions. Most criticism seems to focus on the issue of conflicts with fiduciary duty. Critics of mandation have argued, correctly in my view, that directing trustees to hold a fixed share of specified assets conflicts with the trustees’ duty to act solely in the interests of their members. Mandation of investment in specific asset classes for policy reasons rather than on a risk/return consideration risks subordinating members’ interests to political objectives.

This also exposes trustees to legal liability for breaching their duty, especially if the investments are seen as politically motivated or fail to deliver competitive returns. The lack of legal clarity around the scope of fiduciary duty, particularly regarding systemic risks or broader economic impacts may well exacerbate trustees’ concerns about litigation and regulatory risk.

I know that the Government are alive to the fiduciary duty issue and have promised to produce statutory guidance to help. At our meeting before Second Reading, I asked the Minister whether this guidance would have binding provisions. The answer was no. The guidance will have, apparently, the same force as the many other “have regards” in our financial services sector. I also asked the Minister whether we could see a draft of this guidance before the end of Committee, but I have not had a reply to date. I therefore ask the Minister again whether we will see draft guidance so that we may scrutinise it before the end of Committee, or at least on Report. It is easy to understand, in these circumstances, why some legal experts and industry groups have called for a statutory clarification of fiduciary duty and argue that only primary legislation can provide the cover that trustees need to invest confidently, as the Government wish, without breaching their duties.

There is also the question of definition. What is the appropriate test for “productive” when applied to mandated assets? What is the appropriate test for “UK investment”, or even “qualifying assets”? Can the Minister say what these tests are and when they are likely to be available to Parliament for examination? There are other significant concerns with mandation. For example, it may produce lower returns and higher costs if it drives crowded trades, pushing schemes into lower-quality or overpriced assets simply to hit targets. As the large DC providers have noted, if there are not enough good-quality opportunities in the mandated classes, schemes may be forced into illiquid or sub-optimal funds. This concern has been made clear as a condition of voluntary participation in the Mansion House Accord. Then there may be a risk in reducing diversification. Concentrating pension assets in restricted geography or restricted asset classes inevitably increases vulnerability to UK-specific economic shocks.

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That is probably all I have time to say. We will come back to many of the details next week, but the Government recognise that the use of this power would be a significant intervention. We also recognise the need to tread cautiously and with scrupulous regard to the impact on savers. This measure has been designed in exactly that spirit. I look forward to discussing all this in more detail, but the powers are an important part of the Government’s overall package and, as such, I respectfully request that noble Lords do not press their amendments.

[Lord Sharkey (LD)]

Can the Minister respond to the point I made about statutory guidance?

[Baroness Sherlock (Lab)]

I will answer that next week, if that is okay, when we discuss the issues of fiduciary duty.