Pension Schemes Bill (Second sitting)

Peter Bedford Excerpts

Committee stage
Tuesday 2nd September 2025 Public Bill Committees

[Damien Egan (Bristol North East) (Lab)]

Q I would like to move us on to the aspects of the Bill that place a duty on schemes to offer members default retirement products. We touched on it a bit this morning. What do you think they could look like?

Sophia Singleton: I might start on this because I think that the Bill should not set out what the product looks like. The policy should set the rules of the game, providers and pension schemes should be allowed to innovate and to develop solutions that meet the needs of their members, and then policy should obviously monitor and oversee product development to ensure that it is effective. When I say “set the rules of the game”, I mean clear guidance around the things that should be considered when developing these solutions. It should consider whether it should deliver an income and consider whether it should provide longevity protection. It should consider those factors, but an income for life might not be the answer for all schemes. It will probably be the answer for many, but not for all, so that is why there needs to be flexibility for providers and schemes to develop solutions.

Helen Forrest Hall: From a PMI perspective, obviously we recognise that with the shift from DB to DC, the choices that are facing people at retirement are growing ever more complicated, and at the moment, they are largely left to their own devices and that is a far from ideal situation so we very strongly support the proposals in the Bill to provide those default pathways, particularly for those who have not made an active choice. Actually, we support the focus on those default options as generating an income because, after all, that is what a pension is for. We do strongly support that.

We have a question around where this sits in the pensions reform road map. We very much share the desire to provide people at that point of retirement with a bit more support, guidance, help and some form of default pathways as soon as possible. But we are concerned that doing so in advance of trying to bring those small pots together and reaching scale in the market puts a burden on schemes, in terms of the number of DC schemes that might not meet the scale test having to put this in place in the meantime, and potentially confuses members. For example, if you have got 11 pots that all happen to be trust based, and you have got 11 different default solutions, that is potentially going to be confusing.

We do not think that nothing should happen in the meantime. Our proposal would be to extend the point at which the mandation requirement would come in, but use engagement from regulators, particularly for large schemes—those that are going to meet scale or be exempt from the scale test—to really start piloting what good looks like in terms of both the guided retirement requirements and the FCA’s proposals for targeted support. There is a really important piece of work to be done thinking about how all of those align into a better, but not perfect, pension saver member journey at the point of retirement. It is not about moving slowly; it is about thinking about the right time that the mandation kicks in so that schemes can plan effectively and things can be tested in the meantime.

Sophia Singleton: Just to add one other element to that point around timescale, I think master trusts are going to be required to comply by 2027. One of the solutions, which might be the right solution for schemes, is the decumulation CDC. We do not expect that the regulations to facilitate that will be in place by 2027. Ensuring that those align so that that option is available to schemes when they are considering their decumulation solution would be beneficial as well. I agree with everything Helen said, but just add that extra element.

[Mr Peter Bedford (Mid Leicestershire) (Con)]

Q I have just a couple of general questions. You have articulated this in your points already, but where do you think the Bill goes too far and may have an adverse impact, and where does it not go far enough to make progress in this space?

Helen Forrest Hall: I will take this opportunity to reiterate that we strongly support the vast majority of the provisions in the Bill: the consolidation, value for money and retirement provisions; finally legislating for DB superfunds, which we warmly welcome; and striking the balance on DB surplus—there was a better balance to be struck. To a certain extent we have already talked about our key issue where the Bill potentially goes too far, which is around the mandation requirement and the reserve power.

On value for money, I think that the Bill is doing the right thing. Value for money is going to be an everchanging set of circumstances, particularly if we build scale in the market. What might be required on day one for value for money—we probably want a core set of metrics that can be easily comparable across schemes—might really mature as the market consolidates into a small number of fairly significant defined contribution funds. You might quite rightly expect regulators and the regulations to ask an awful lot more of those schemes in terms of what they are doing under value for money.

We think it is only right and proper that they sit in secondary. There have occasionally been issues with putting too much in a pensions Bill, and creating problems with the market being able to adapt as we go. So I think that this is actually the right thing to do, albeit that we would welcome further clarity from regulators around the fact that they would like to start small and grow—at the moment there is very little detail on the value for money measurements. We are talking actively with them, but it is useful to get the reassurance that we will start from a principle small basis and move out, rather than potentially creating additional burdens for schemes during what will be, on a number of fronts, quite a busy pensions reform road map.

Sophia Singleton: We very much support almost all the provisions in the Bill; mandation, as we have already talked about, is the exception. Where would we go further? There are two things that we would ask for.

The first is in relation to DB surplus. We have talked about how we were pleased to see that the safeguards were in place—we feel that they are very robust. We would like some clarity in the Bill, though, that that provision overrides any existing restrictions in scheme rules, because as it is currently drafted there are some schemes that might not be able to utilise that provision. We have provided some more details about making it open to all in our submission—making it clear that the provision overrides any existing restrictions, subject to the safeguards being properly used and so on.

The second one is an addition that we would love to see to the Bill: the removal of the admin levy, which pays towards the Pension Protection Fund admin costs. The DWP did a review in 2022 that concluded that it was no longer needed—it is a cost to schemes and therefore to employers. We have prepared a simple draft for the legislation that we have shared with you and the DWP that would remove it, and it is a very easy way to remove a cost on employers.

Helen Forrest Hall: If I could just add one point on the DB surplus, because Sophia’s points reminded me of it, I think there are a couple of areas where there could be further easements. They are not necessarily for a pensions Bill—some of them are more Finance Bill-related—but in giving trustees full flexibility to consider all the beneficiaries of a scheme, it would be useful if there were further easements that enabled them to make, for example, one-off payments to members without being subject to extraneous tax charges and, similarly, that would allow employers to pay some of that surplus as DC contributions into another trust. At the moment, the legislation does not provide for that, and obviously that would be a way to help trustees, and actually employers, who might be looking to enhance their pension provision overall—not just being able to move money around within one legal structure.

--- Later in debate ---

[Mr Bedford]

Q Going back to the consolidation of small pots, have you any thoughts or comments on the timeframes involved in how that would be implemented, particularly in the context of the roll-out of the pensions dashboard, which has taken quite some time to be rolled out in the industry?

Patrick Heath-Lay: The Government have put forward a default consolidator model. We are completely supportive of that; we think it is the right solution to tidy up the 13 million small deferred pots that are out there and those that are being created on a daily basis. That model has been done with extensive consultation with the industry.

To go back to the first question, which was about all the different options that have been considered before, we do think that this is the right approach. A couple of things around it are critical. First, we need to make sure that the technical solutions—the IT capability or infrastructure—should be as efficient as possible. We are contributing to the various pieces of research being done at the moment to evaluate which models are in existence and ready to be utilised. There is no doubt that the dashboard will contain some elements that will be helpful, such as a pension finder, that will be helpful, and I suspect that they will utilise pieces of that technology. But I do think—and I suspect the conclusion will be—that we need something new. Some of the expertise in the industry can be leveraged. I suspect that that is expertise that our organisations can provide. Given that we have already addressed the big pension savings gap for savers, we can help to develop that model.

On whether the solution is doable within the timeframe, 2030 is a big ask, but we should have that target to go after. We should try to be in a position where default consolidators exist in the market, we are developing the solution and we are able to solve the problem, because the number of small pots being created almost daily by the industry is a big problem for savers.

Ian Cornelius: I agree with Patrick. It is a problem that needs fixing. We also support the default consolidator approach. The sequencing is sensible: we want scheme consolidation first and then small pots, because there is no point in going through the complexity of consolidating small pots before consolidating at the scheme level. Dashboards will help, but they will not solve the problem. A solution is required, because this is driving a lot of cost and a lot of complexity. It would be nice if it were sooner than 2030. Given the ambition of the Bill as a whole, I think that that is probably realistic, but it does need to come after scheme consolidation, as I say.

Patrick Heath-Lay: The requirements on those organisations that choose to apply to be default consolidators need to be of a good standard. Our organisations operate a single-pot model. Whenever anyone rejoins from a different employer, their money goes into exactly the same pension pot. That is not a common model across the industry. Things like that should be thought through when defining the requirements for being a consolidator. Those that wish to apply need to hit a good regulatory standard to ensure that value is delivered through those models.

[David Pinto-Duschinsky]

Q Patrick, we have heard loud and clear your message that getting the value for money framework right is at the core of this. The Bill aims to put that on a sound footing. Which elements are required to get it right? How do you think the Bill will help to build them up?

Patrick Heath-Lay: As a package, the Bill brings forward the concept of value for money in a general sense. We need to move the conversation in our industry, particularly the conversation around workplace pensions, to the subject of value. We are all here to deliver value for members. The bit that always gets a lot of conversation is what value really means, but you cannot walk past the three fundamental drivers of a pension proposition, which are the investment return we give our members, what we charge them for it, and how our service shows up for them, probably in those moments of truth when they need us for guidance. Those are the three core elements to value, which we should not walk past.

We see this as an incredibly important area. I certainly believe that we should try to get this right as an industry, as best we can, from day one, because I think that it will be an important measure that we—regulators, Government, everyone—will lean on to understand how these reforms are playing through.

As an organisation, we have led a pound-for-pound initiative that others have joined. We brought in expertise from Australia, which is about 20 years ahead of us, and brought together a group of providers that are effectively going to dry-run some value for money measures and utilise that concept to provide some findings to regulators and Government that will hopefully help the iteration of our value for money framework. We really do see this framework as an important area, and I would like to see those three elements at its core.

Ian Cornelius: The focus on value has to be the right thing for our members. That is what they care about; that is what we are here for. There is some complexity to work through, such as how you measure value and what timeline you measure it over. Quite lot of engagement is required. We are piloting and trialling it; we almost certainly will not get it right the first time. It will be important to make it as practical and simple as possible. As Patrick said, it has real potential, in combination with the rest of the Bill, to shift the focus from cost to value. In the past, there has undoubtedly been too much focus on cost and not enough on value.

--- Later in debate ---

[Steve Darling]

Yes.

Michelle Ostermann: We have several types of levies that support our organisation. If I may, I will just take a step back to help everyone to understand what role they play.

The PPF is not terribly well understood because we are a bit unique in this industry and there are only half a dozen bodies like us in the world. The UK is one of the few countries that have a protection fund such as this. In some ways we back as an insurer in that we collect premiums or levies from the industry from the 5,000 corporate DB schemes and backstop 9 million potential future members that still sit in those schemes. We collect the levies and hold them in reserve much like an insurance company. We are not an insurance company, but we do so much like they would mathematically and with similar models.

At the same time, if a corporation fails, we take its pension scheme, which is usually underfunded, and its orphan members and put them into a pension scheme. We are both a pension manager and an insurer of sorts. When there is a failure and a scheme comes to us with insufficient assets to make good on its pension liabilities, we take some of our reserves almost as a claim, and move them over to the pension fund so that it is fully funded at all times using a largely liability-driven investment-type strategy. The levies that we collect are twofold: first we collect a levy related to the risk of the industry. You may be familiar with our purple book and the industry-wide assessment we do. We monitor the risk of that entire complicated £1 trillion industry to decide how much to set aside as reserves.

Our reserves are often referred to as a surplus, but they are not a surplus; they are reserves sitting there for potential claims in 50, 80 or 100 years. We will be the last man standing in this industry. We are here as an enduring and perpetual solution. As long as there is DB in the industry, we will have to backstop it. We set aside those reserves for the 9 million members and current £1 trillion in case of future market environments that we cannot predict today. Those levies have been collected over 20 years from the constituents of that industry. We have collected just over £10 billion from that levy system and have paid out £9.5 billion of it as claims to the pension fund.

As those levies were coming in over that 20-year period we were investing them in an open DB growth-type strategy. As such, we have built up £14 billion of reserves and so now consider ourselves largely self-funding. We no longer need to collect that levy from the industry now that those reserves are sitting there—in so far as we can best tell with our models today. We prefer to reserve the right to turn it back on should we need it in the case of a market correction event, some unforeseen circumstance or an evolution in the industry. However, right now, those fees are no longer required by us; it is a risk assessment that is suggesting that.

[Mr Bedford]

Q Building on Steve’s question on the levy, some hon. Members have asked about surplus extraction feeding into the overall risk profile in the markets. Clearly, if that was to happen and there was perceived to be an increased risk, it could result in an increase in the levy. The Bill allows for the levy to be reduced to zero. What are your thoughts about that?

Michelle Ostermann: We have thought a fair bit about that. We do not see very many scenarios in which we would need to turn it on, although it is always difficult to predict. As you know, the industry evolves in many ways and over the 20 years we have seen quite an evolution, including the creation of new alternative covenant schemes and commercial consolidators. We will backstop those as well, and we will need to charge a levy for them. There could be an unforeseen market event, similar to that just described, so we need the ability to turn the levy back on—simply to keep it as a lever. Today, the legislation reads that if we were to lower it to 0%, we can only increase it year on year by 25%. However, 25% of zero is zero, so we are a bit cornered. We have asked for a measure that would allow us to increase it by as much as a few hundred million a year. The most we have ever charged in one year was just over £500 million.

As I said, we have collected £10 billion gradually over many years. The new measure allows us to increase it by no more than 25% of the ceiling number every year, which is currently £1.4 billion. That means we could go up as much as £350 million in a single year, if needs be. However, we are a very patient long-term investor. Even though we are taking on closed corporate DB schemes, we run it as if we were an open scheme, because we are open to new members all the time. As such, our investment strategy does most of the heavy lifting for our organisation now.

On our £14 billion reserves, we make over £1 billion a year in gains from that investment strategy, which funds the £1 billion we pay out in the pension scheme to members. We are now a mature organisation that should be able to maintain a steady state. The most we would be able to increase the levy by in one year is £350 million, but we would expect to be patient, wait a few years, and try to ride out the situation not needing it, only turning it back on should we need it. We consult before we turn it on and we take a lot of feedback on this. We are quite thoughtful, as we have always been, and I hope people agree.

[Mr Bedford]

Q I am just interested in examples of recent shocks that have happened, where you had to pay out significant sums and what those sums were.

Michelle Ostermann: The biggest example is a macroeconomic shock that would affect the solvency of corporations. The failure of the corporation itself is more likely to have an impact than just a change in interest rates or equity markets. The change in interest rates can affect the fundedness of a scheme, but many of those schemes, over 75% of them now, are actually really well funded. And they have pretty well locked down their interest rate risk because they have put a good chunk of assets against their liabilities in a fairly tight hedge. Although we saw, as a result of the liquidity crisis a few years ago now, that things can change. The degree of risk, specifically leverage risk inside some of those strategies, does make them fallible. I would say the biggest shocks would be massive interest rate movements that are unforeseen, a very significant macroeconomic environment causing failure in many corporations, and technically, even a significant move in equity markets, but we would usually just ride that out. Markets can go down 20% or 30%. We would only go down 10% or 15% and we would be able to recover that in under five years, historically speaking.

[John Milne]

Q It has been a long-standing battle over pre-1997 compensation rights. Would you agree that this Bill is perhaps an opportunity to at last address that issue, perhaps by a judicious amendment or two? Do you think that that is feasible, and what framework might that take?

Michelle Ostermann: We have been progressing on this quite a bit lately. It is one of the most prevalent discussions, both with our board and with our members. We speak very often with the entirety of the industry. Several are very strong advocates for it as well, a few of which are here today, and we have taken quite a bit of humble feedback. We have worked as best we can with the Work and Pensions Committee to estimate a significantly complex set of potential scenarios for making good on historical indexation needs for pre-’97. They range in price, are quite expensive and would require us to incur or crystallise a liability. They are not cheap. It would be difficult for both us and the Government to be able to afford. The taxpayer would have an implication to some of these, depending on how they are formed, and it is beyond our prerogative to make that decision but we have been facilitating and encouraging it to be made. We would welcome progress on that. I understand, in fact, an amendment was tabled earlier today in that regard, so I was warmed by that.