Pension Schemes Bill (Second sitting)

Rebecca Smith Excerpts

Committee stage
Tuesday 2nd September 2025 Public Bill Committees

[John Milne]

Q The DWP argues that the funds are on the public balance sheet and therefore they object to using them for this purpose. Do you think that is fair, given that the funds were not acquired by the taxpayer?

Michelle Ostermann: To clarify the word “using”, as I think it is important, the PPF is an arm’s length body and those assets are ringfenced. Our board has independence over those. It was set up that way—arm’s length—20 years ago to make sure that it was a dedicated protection fund for that industry. It so happens that we do fall under some of the fiscal measures, so both our assets and liabilities do show. However, there is a bit of a conflict there in that we manage them in the prudent, almost in a trusteed fashion, on behalf of our members and all of our stakeholders. But the use of them would have to be prescribed by the board, legislated, and then approved by the board for its affordability, so as to not put at risk the rest of the industry that we are backstopping.

The ability for us to be able to afford that and the risk to the organisation is the primary, most sacrosanct thing that our board does. We have very complicated actuarial models to figure out the affordability of all the risks that we take on in the entire industry. That is why we have gone through quite a bit of work to build, just recently, a much more sophisticated model to estimate both the asset and liability implication to us and have even started to form a plan for how we might implement it. So we stand at the ready, but it is beyond our responsibility to be able to legislate the necessary change for it.

[Rebecca Smith (South West Devon) (Con)]

Q Given the international experience that both of you have in this realm, I am interested to know whether there is either anything in the Bill that you think is a red flag or anything that you think is a missed opportunity and not in the legislation in front of us today.

Michelle Ostermann: That is fascinating. I came to the UK, and back to the UK, because I have so much enthusiasm for the UK and the pension system. I am very fortunate to be the chair of the global pension industry association, so I study pension systems around the world and am quite familiar with many of them. The UK pension system is the second largest in the world by size if you include underfunded pensions. It is one of the most sophisticated, but it is the second most disaggregated. As I think a few of my peers mentioned before we got up here, it has fallen behind, frankly. I think the motives that are in this Bill are exceptionally important—they are foundational. I love that we are speaking on scale and sophistication. These are absolutely key, in both DB and DC. I want to underscore that; it is really key.

One thing that is not spoken of quite as much is the concept of an asset owner and the importance of governance. In relation to the successful countries that I have seen, which have mastered the art of pensions and the ability to translate pensions into growth, it is not a proven model, but there is a best practice such that countries are able to make growth by leveraging pension systems. I think that right now we are trying to solve a problem of two things: reshaping the pension system and trying to solve the need for a growth initiative. They are one thing in my mind; they really are one thing. It is not a surprise that as we have de-risked the pension system over two decades, it has, I suspect, quite directly, but at least indirectly, affected overall economic growth.

Making members wealthier pensioners in general and less dependent on social services is what many countries are trying to do and use their pension systems for. I see that out of the commission that is being started, so I am most excited about the next phase. I think there is a lot of potential, and we at the PPF are doing quite a bit of research and want to be able to feed some global ideas into that.

Morten Nilsson: I come from Denmark originally and I think, to echo some of what Michelle said, scale just matters in pensions. The Danish pension industry has been fortunate to have few and relatively large schemes. One of the things I saw when I came over to the UK 15 years ago was that the industry here is very fragmented, and that fragmentation means also that there are so many conflicts of interest in the market. That in a way makes it quite hard to get the best outcomes, and that of course leads into the governance models that Michelle talks about. So this Bill is something we very much welcome across what it is covering. I think it is a really good initiative, but I think scale matters, and governance really matters. I would not underestimate how big a change it is, in the defined benefit sector, that we are moving from two decades of worrying about deficit into suddenly worrying about surpluses and having very mature schemes, which is the other thing that is important. Most of the DB schemes are closed.

If I talk about the BT pension scheme, the average age is 71, so they are pretty old members and that means there is a risk level, from an investment perspective, that really matters. We are paying out £2.8 billion a year in member benefits. That means liquidity is really important. It is really important that we have the money to pay the members and that we do not end up being a distressed seller of assets.

So there is quite a lot in that evolution we are on, and when we go into surplus management or excess funds—Michelle was talking about this at macro level; we would be managing at our micro level in each scheme— I think it becomes really critical that we have the right governance to manage what is a new era. I would really recommend that the Pensions Regulator issue guidance as soon as possible on all this, because it will be quite uncomfortable for a lot of trustees. It will be quite difficult also for the advisers in how we manage this new era.

[David Pinto-Duschinsky]

Q I am really glad that you both mentioned governance, because that absolutely stands at the heart of this. You also mentioned conflicts. We have not talked much about the role of consultants and things like that, but it is clear that you think the framework laid out by the Bill will be helpful and a key part of mobilising those things.

Conversations that I have had also flag up the importance of culture among trustees. We can give people the tools, the powers and the permission to invest, and we can be clear in the framework we set up, but, culturally, they may still be very risk averse. Of course, some of that is appropriate because they have to safeguard member benefits, but there is a point about whether they are overly cautious and about how one creates the appropriate culture to go with the change. From your perspective, what is needed to create the right culture to go alongside the right governance?

Michelle Ostermann: I have one small observation from when I first came to the UK. I recognise that there is a very strong savings culture, but not necessarily an investment culture, and there is a distinct difference there. I even notice the difference when we talk about productive finance targets. We speak in terms of private assets, but there is a difference between private equity and private debt, and between infrastructure equity and infrastructure lending. All those lending capabilities are here in this country. I feel that the debt sophistication is strong, but where it lacks is the equity.

I am a Canadian. With one of the largest Canadian schemes, we had no problem coming in and buying up assets here in the UK—you may have noticed. We own a lot of it, and with Australia, most of it. The supply was never an issue for us. We brought the scale and sophistication, but what we did not have was a local British anchor. We did not have an anchor investor. We did not have a home-grown Ontario Teachers, a Canada Pension Plan or even an ATP that we could use as the local one. I see that the PPF, NEST and Brightwell can be that. We are still not megafunds. I know that we are referred to as behemoths and megafunds at £30 billion and £60 billion, but the peers with £100 billion, £200 billion and £500 billion are those that are putting in £0.5 billion or £1 billion in one investment. They are not lending, but investing.

That is the biggest difference I notice: the definition of scale and the degree of sophistication. It is even about sophistication in the governance model, and having a board and a management team with that sophistication. It is about having a management team with some power that you are hiring out of investment, and being a not-for-profit and an arm of the Government that is allowed to put in that sophisticated capability, with a board that can properly oversee it so it is not done without proper consideration.

Morten Nilsson: I think it is quite critical that you have trustee boards that are supported well by regulation and guidance, as we talked about before. It would also be helpful to start to focus on the management teams that are supporting the trustees. Cultural change is always very difficult. We must acknowledge that we are coming out of a situation that was really quite difficult for a lot of trustees and sponsors in terms of finding out how to fix the big deficits that schemes had. We must acknowledge that that is where we are coming from and that is the mentality we have had for decades. Regulation and guidance is still all over the place, and we must work through how we move that forward. I really recommend more guidance from TPR and, sooner rather than later, more guidance on surplus extraction. That would help a lot of trustees to take more risk and think in a more balanced way about risks.

Of course, if we are considering allowing excess funding to go back, we need to ensure that we are doing that on a prudent and well-considered basis. It is an educational challenge more than anything, but it is also about the advisers. The market really needs to get comfortable with investing for the longer term. Within that, it is critical that we move away from being obsessed with a mark-to-market, day-to-day obligation. We measure our liabilities on one day of the year and then we might panic if there is a little swing in the market, but we are actually working through quite a long horizon and therefore we can smooth that out in a different way. We need to think about how we look through some of these blips.