Pension Schemes Bill

Viscount Trenchard Excerpts

Thursday 18th December 2025 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, I too congratulate the noble Baroness, Lady White of Tufnell Park, who is not in her place, on her excellent and well-informed contribution. It is a great pleasure to follow the noble Baroness, Lady Hayman, who just made a most interesting and informative speech.

I thank the Minister for introducing the Bill today. Reforms to the structure of the pension schemes market introduced over the last 14 years have been generally beneficial. In particular, I am sure the Minister will agree that introduction of auto-enrolment into a pension scheme is the principal reason why the number of people saving into such a scheme has increased from 42% of the workforce back in 2011 to 88% today. That is a huge change and one of which the last Government can feel proud. Of course, the 8% of income invested into these schemes is not enough, but it is a start on which we can build.

While current economic conditions necessitate a review of the triple lock, it has been successful in restoring the relative position of pensioners in our society and has lifted 200,000 pensioners out of poverty. As my honourable friend Mark Garnier said at Second Reading in another place,

“the previous Government had turned their attention to two central issues: first, getting the best value for money out of our pension schemes and, secondly, pensions adequacy”.—[Official Report, Commons, 7/7/25; col. 722.]

There are some positive measures in the Bill which I welcome, but I want first to remind the House that it was a Labour Government who did enormous damage to our defined benefit pension system, which was previously a jewel in our financial services crown and the envy of the world.

Shortly after his appointment as Chancellor in 1997, Gordon Brown launched a stealth tax raid on our pensions by abolishing dividend tax credits. The removal of the dividend tax credit has been estimated to have cost occupational pension schemes over £3 billion annually. This led to increased contributions required from employers and employees to maintain pension levels. The consequences of the change were, first, reduced investment in UK companies. Following the abolition, pension funds have been less incentivised to invest in British companies, with their ownership of UK-quoted shares dropping from about 50% in 1997 to just 4% in recent years. This shift is one of the main reasons for the failure of the London Stock Exchange to value new listed companies competitively or to provide the necessary investment to support economic growth.

Secondly, the abolition of the dividend tax credit resulted in the double taxation of corporate earnings, since dividends are paid out of post-tax income whereas loan interest is deductible from corporate tax. This harmful move effectively destroyed many final salary-linked pension schemes by making them too expensive for companies to run. It has been estimated that the tax rate destroyed around £200 billion of the value of the nation’s pensions. Besides the abolition of the dividend tax credit, which was a fatal blow to DB pensions, the continuing restriction of the tax-free allowance for dividends provides an additional disincentive to investment in equities. The dividend allowance was £5,000 per annum in 2016-17 but was reduced to only £500 in 2024-25. Besides that, the income tax rate applied to dividend income has been increased by 2%. A higher rate taxpayer now pays 35.75%.

Take the example of an entrepreneur who has established a successful small business. He does not take a salary but pays himself through dividends when his company can afford it. The company has paid 20% corporation tax, and the 35.75% dividend tax means that the income that the business owner takes out of the business that he has built is now taxed at a rate of 55.75%. Leaving the entrepreneur aside, for years, dividend tax has been a second-tier concern—something that mainly affected company directors and high net-worth investors. That is no longer the case. Dividend tax is now a mainstream issue and hits ordinary people with modest portfolios who have never thought of themselves as investors in the past. If you hold shares outside an ISA, receive dividends from your own company or invest through funds and ETFs, dividend tax now matters.

There have been ongoing discussions about the potential reinstatement of the dividend tax credit to stimulate investment by pension funds into listed equities. That would encourage more domestic investment and help to restore London’s previous status as the best stock market for innovative new technology and other companies to list on. In Australia, as I am sure that the Minister is aware, dividend tax credits have been reintroduced as part of the dividend imputation system. This is designed to prevent double taxation of company profits.

Does the Minister recognise that it is a missed opportunity not to introduce a measure which would be warmly welcomed by the City and would certainly help the London Stock Exchange recover its lost position? Have the Government considered reintroducing dividend tax relief, and if not, why not? Surely this kind of radical measure is exactly what our financial services industry needs. Reintroducing tax credits on dividend payments and cutting stamp duty on UK share purchases are among the 10 recommendations that the Pensions and Lifetime Savings Association has made for using investment and fiscal incentives to encourage pension schemes to allocate more of the nation’s savings to British assets.

I welcome the measures in the Bill which seek to consolidate and build on auto-enrolment and the encouraging progress towards the pensions dashboard, which will greatly assist people’s access to their pension information and help them plan more effectively for their financial future. As the noble Baroness said, larger schemes generally perform better than smaller ones. I believe that the measures enabling the consolidation of small pots and the creation of superfunds are sensible, although regulations must ensure that protection for scheme members is not weakened.

The Association of British Insurers, the Society of Pension Professionals and other industry groups in the main support many of the measures contained in the Bill, including the value for money framework. Will the Minister introduce a requirement that it will be regularly reviewed to ensure that it operates as intended? Referring to the point on the consolidation of small pots, I suggest that the definition of small pots should be revised to £5,000 rather than £1,000, because the latter is too small.

The biggest problem with the Bill, as well explained by my noble friend Lady Stedman-Scott and others, is the proposal to empower the Government to mandate asset allocation within large multi-employer defined contribution schemes. I am not aware that the Government is a well-qualified fund manager with a spectacular track record, and it is absolutely not right to interfere with trustees’ fiduciary duties. It is all the more unacceptable because it applies only to those very large schemes and will therefore affect only pensioners of relatively modest means. This is unfair. This Government are pickpocketing the pensions of poorer people. Fund managers and the trustees who appoint them are under a legal duty to prioritise the financial well-being of savers. Their job is not to obey political whims but to invest prudently, grow pension pots and uphold the trust placed in them by millions of ordinary people. While I hold the noble Lord, Lord Wood of Anfield, in the highest regard, I am afraid I do not agree with his view on this matter. It may be that many pensioners would like to invest in UK assets, even if the returns are low, but they should take action separately to achieve that end.

The fiduciary duty is not a technicality; it is the bedrock of confidence that the entire pension system rests on. Rather than impose new regulations and take powers to do things that they are not qualified to do, I would like to see the Government free up insurers from solvency rules which prevent them owning equity in productive assets. Indeed, following the Mansion House Accord, the pension sector is already moving towards greater investment in productive assets. Seventeen of our largest workplace pension providers have already committed to invest 10% of their main default funds in private assets by 2030. Mandation is not required to achieve this trajectory. To attempt to define and enforce allocation thresholds risks concentrating activity too narrowly, crowding investment into specific asset classes and inadvertently restricting investment in broader activities.

The Government seek to take a power that is unnecessary. Their possible intervention in the market creates operational ambiguity. How schemes and pension providers will prove compliance with requirements lacks clear thresholds and enforcement logic, and creates reputational risk for pension schemes. The clause offering opt-out in cases of material financial detriment is too vague. The best solution to the problem is for the Government to drop this reserve power from the Bill entirely. If the Minister will agree today to do this, it will save us all a lot of time and trouble. I look forward to hearing what the Minister has to say about this.

Concerning local government pension schemes, I welcome the proposal to consolidate the pensions of 86 different authorities, which should contribute to enhanced performance. But, as my noble friend Lady Stedman-Scott explained, surpluses should be used to reduce the burden of contributions going forward, particularly as councils are faced to go through deeply damaging and expensive reorganisation.

Lastly, I am happy that the Bill attempts to find a solution to the problem of defined benefit surpluses. As drafted, it does not provide sufficient safeguards. In this area and others, I look forward to working with noble Lords to improve the Bill in the months ahead. I entirely agree with what my noble friend Lady Noakes had to say on this matter. I look forward especially to hearing the Minister’s winding-up speech.