Pension Schemes Bill

Lord Vaux of Harrowden Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

[Lord Vaux of Harrowden (CB)]

My Lords, it is about five years since we last saw a Pension Schemes Bill in this House, and it is good to see so many familiar faces, albeit sitting in different places in the Chamber. It is also good to be welcoming some new faces to our small band of pension enthusiasts, and I am particularly looking forward to hearing the maiden speech of my noble friend Lady White of Tufnell Park.

This is a big Bill, and there is a lot in it, much of which is to be welcomed and is not particularly controversial. I am going to restrict my comments to two areas of the Bill, one of which I think we will hear quite a lot about.

First, I understand and agree with the reasons and the desire to consolidate small dormant pension pots, but I have some concerns about the details. We are all aware of the problem of lost pensions, whereby a person has forgotten about a pension, perhaps from a long-ago short period of employment. This is one of the problems that the much-delayed pensions dashboard is designed to solve. Compulsorily moving a small pot from one provider to another risks increasing that problem: it will be much more difficult to track down a pension that you dimly remember if it has been moved, perhaps with any correspondence having been sent to an out-of-date address.

The definition of “dormant” is also slightly concerning: a pension pot will be considered dormant if no contributions have been made into the pot during the last 12 months and the individual has taken no steps to confirm or alter the way the pension pot is invested. I have a couple of pension pots that would be considered dormant under that definition, but that is simply because I am happy with the choices I made in the past; I would not consider them to be dormant. In the opposite direction, £1,000 seems a rather low definition of small, although I see it can be changed by regulation.

I am not clear when the Secretary of State intends to make the relevant regulations, but to avoid making the problem of lost pensions worse, I would suggest that it should not be done until the first pensions dashboard is fully operational and accessible to the public. As I understand it, that will not be until late 2027. Perhaps the Minister could provide a brief update on that. Also, there should be a clear requirement that any such transfer, carried out in a situation where no response has been received from the individual, should be clearly flagged on the dashboard to help people track them down.

The second issue I want to raise is more important. Here, I fear that a trend is beginning to emerge already—and that, most unusually, I am going to find myself in disagreement with the noble Baroness, Lady Altmann. This is the power for the Government to mandate the asset allocation of a master trust or group personal pension scheme. Pension schemes should be managed for the benefit of the beneficiaries. The trustees have a fiduciary duty to that effect. The Government mandating that a proportion—and there is no limit to this in the Bill—should be directed into types of assets and locations chosen by them rides a coach and horses through that principle. Who will be liable if such investments are not suitable or go badly wrong? I do not see any indemnification of trustees here. What makes the Government think that they know better than a professional qualified pension manager as to what is best for scheme members? The track record of government investing is not stellar, to say the least.

Of course, the reason for this is to push more pension funds into UK assets, often described as “productive assets”. Like the noble Lord, Lord Sharkey, I have that in inverted commas here, but even that makes little sense in this respect. Let us look at the sorts of assets that the Bill refers to. The first is private equity. Now, private equity may be a good place for a pension fund to put some of its money. Over time, returns have generally exceeded public markets and bonds, primarily because of the use of leverage, but I would love to understand why the Government think this would be a good thing for the country.

What private equity does is buy existing assets, then leverage them up with high levels of debt, thereby gearing up the possible returns that can be made on normal levels of growth. That reduces the corporation tax payable by the company because debt interest is tax-deductible, and the debt is often located in overseas low-tax jurisdictions. Typically, then, overheads and costs are reduced as far as they can be to make the company appear more profitable for sale after three to five years, and that often has the effect of reducing investment in the company and often leads to job reductions.

So where is the benefit to the country from this? If noble Lords do not believe me, I give them Thames Water, left underinvested and indebted by Macquarie, which took out billions in the process, or Debenhams, where the three private equity owners collected £1.2 billion of dividends financed by debt and property sales that left the company to go bust. Others we could mention would be Southern Cross Healthcare and Silentnight, where, ironically, pensioners also lost out, and we have the current anti-competitive situation with veterinary practices. Of course, this is a generalisation, and there are exceptions, but the idea that PE generates growth is doubtful at best—venture capital, development capital, growth capital, yes; PE, not so much. Why do the Government think it would be a good idea to force pension funds to invest in private equity?

Amazingly, the Bill does not actually set out that allocations must be made into UK assets. The wording is drafted so widely that the only assets globally that cannot be prescribed are assets listed on a recognised exchange; nor does it set any limits to what percentage should be allocated into the assets the Government prescribe. In theory, 100% could be allocated. The only safeguard in the Bill—contrary to the Minister’s comment that there are many safeguards—is that the Secretary of State must review the effects of any such regulation within five years of the regulations coming into force. We should note that this is not an independent review; it is a review by the Secretary of State, the very person who made the regulations. That does not fill me with huge confidence. Anyway, if things have gone wrong after five years, what can be done? Is the Secretary of State to be liable for the losses that scheme members have incurred because of the Government overriding the fiduciary duty?

We are an outlier in terms of our pension funds investing in their own country’s productive assets, especially when compared with countries such as Canada and Australia, so I understand why the Government wish to change that, but the way to achieve that is first to understand why it is not happening now. I would be interested to hear from the Minister why she thinks that is. I suspect it is down to a number of issues, including demographic issues, the attractiveness of our markets versus others, regulation, taxation—Gordon Brown’s dividend stealth tax has a lot to answer for—and, I am sure, others. The better solution, surely, is to identify and deal with the barriers that exist to make UK productive assets a more attractive investment prospect, not to take the frankly lazy and inefficient route of mandating without addressing the underlying reasons. Neither Canada nor Australia mandates. Rather, they promote domestic investment in infrastructure and projects through collaboration, not by forcing specific allocations. We should learn from those examples.

The Minister has been clear that the Government do not expect to use this mandation power. This raises a wider point of principle, one that the Minister and I have debated in other contexts in the past, which is that the Government should not give themselves powers that they do not intend to use. As the noble Baroness, Lady Stedman-Scott, said, there is a tendency to use them regardless at some point, even if it is another Government who use them. This is becoming a bit of a trend, and one that I feel should be strongly resisted. There are two potential solutions to this part of the Bill. Either we need to clarify the whole fiduciary duty principle and improve safeguards, or we should remove the power altogether, and I must say that I favour the latter.

With that, I look forward to working with Members from all around the House, as ever, and the Minister on the Bill. In the meantime, I wish everyone a very happy Christmas.

Pension Schemes Bill

Lord Vaux of Harrowden Excerpts

Committee stage
Thursday 22nd January 2026 Grand Committee

I look forward to the Minister’s response.

[Lord Vaux of Harrowden (CB)]

My Lords, before I start, I apologise to the Grand Committee for failing to be here to speak a previous amendment. It was unavoidable, unfortunately. I am very grateful to the noble Lord, Lord Palmer, for stepping into the breach. I have had an exciting afternoon moving from R&R to pension schemes. I apologise that I am afraid I am going to be in the same position next week, so it will not be me speaking to my Amendment 119. Anyway, there we go.

I speak in support of Amendments 111, 161 and 162, tabled by the noble Lord, Lord Sharkey, to which I have added my name. To be honest, I support all the amendments in this group that seek to remove the asset allocation mandation powers, which is probably the most controversial part of the Bill. The trustees or managers of pension schemes have an obligation to act in the best interests of scheme members. That is their fiduciary duty. It is not their job to carry out government policy and they should not be forced to act in a way that they may believe is not in the best interests of scheme members. That is the clear implication of mandation. If the assets that the Government wish to mandate are so suitable or attractive for the relevant scheme, the trustees would presumably already be investing in them. If mandation is required to force trustees to invest in such assets, it implies that they have decided that they are not suitable assets for the scheme. That drives a coach and horses through the whole fiduciary principle. As we will come to in a later group, personally I would feel very uncomfortable about taking up a trustee role in such circumstances.

It begs a range of questions. Who will be liable if the mandated assets perform poorly? The Bill is silent on this. Why should scheme members take a hit because of government policy? Are the trustees liable for any below-par performance? Why do the Government feel they know better than professional managers and trustees? I do not see any evidence at all that the Government are a better manager of investments. Who will decide on the asset allocation, and based on what criteria? There is nothing in Bill that sets out the purpose or criteria for the asset allocation: just some examples, including private equity, which the noble Lord, Lord Sharkey, mentioned, which will be looked at in a different group. All the Bill says specifically is that the allocation may not include securities listed on a recognised exchange. How will the impact be measured and reported? The Bill does require the Secretary of State to publish a report setting out the expected impacts on scheme members and UK economic growth, but there are no reporting requirements on the actual outcomes.

Surely it would be better to try to understand why pension schemes are not currently investing in these so-called productive assets. What are the barriers to them doing so? That is not a rhetorical question; I would very much like to hear why the Minister thinks this has not been happening. What is, or has been, stopping the pension schemes investing in those assets they believe are so desirable? Surely, the better answer must be to try to remove those barriers, to make the assets more investable, rather than mandating, perhaps by refining regulation or adjusting tax—Gordon Brown’s dividend tax raid has, I am sure, quite a lot to do with this—or taking whatever other actions may be required to remove or reduce the identified barriers. Mandation is, frankly, the lazy option. We should identify and deal with the root causes if we want a sustainable solution.

The Government say they do not intend to use the mandation powers and, in some ways, that is worse than using them. The powers are there as a stick in the background, to force trustees to invest as they want, but without giving the trustees any of the protections that might exist if they could at least show they were acting as required by law. In any case, as a matter of principle, Governments should never take powers that they have no intention of using. This mandation power drives a coach and horses through the fundamental fiduciary duties of trustees. The Government say they do not intend to use it; it should be removed.

[Baroness Altmann (Non-Afl)]

My Lords, I support all the amendments in this group. I echo the words of noble colleagues in the Committee about the dangers of the Government mandating any particular asset allocation, especially the concerns about mandating what is the highest risk and the highest cost end of the equity spectrum at a time when we are aware that pension schemes have probably been too risk-averse and are trying to row back from that.

What is interesting, in the context of the remarks made by the noble Lord, Lord Vaux, is that I was instrumental in setting up the Myners review in 1999, which reported in 2001, under the then Labour Administration. As Chancellor, Gordon Brown’s particular concern was about why pension funds do not invest much in private equity or venture capital. That was the remit of the review. The conclusions it reached were that we needed to remove the investment barriers, to change legislation, to encourage more asset diversification, to have more transparency and to address the short-term thinking driven by actuarial standards—at the time, it was the minimum funding requirement, which was far weaker than the regime established under the Pensions Regulator in 2004.

So this is not a new issue, but there was no consideration at that time of forcing pension schemes to invest in just this one asset class. The barriers still exist. In an environment where pension schemes have been encouraged, for many years, to think that the right way forward is to invest by reducing or controlling risk and to look for low cost, it is clear that the private equity situation would not fit with those categories. Therefore, I urge the Government to think again about mandating this one area of the investment market, when there are so many other areas that a diversified portfolio could benefit from, leaving the field open for the trustees to decide which area is best for their scheme.

I am particularly concerned that, as has been said in relation to previous groups, private equity and venture capital have had a really good run. We may be driving pension schemes to buy this particular asset class at a time when we know that private equity funds are trying to set up continuation vehicles—or continuation of continuation vehicles—because they cannot sell the underlying investments at reasonable or profitable prices and are desperately looking for pools of assets to support those investments, made some time ago, which would not necessarily be of benefit to members in the long run.