Pension Schemes Bill

Viscount Younger of Leckie Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

[Lord Palmer of Childs Hill (LD)]

I thank the noble Lord; it is just that impartial pension advice for members is not always available to everybody. Many savers struggle to navigate pension choices, whether around a consolidation investment strategy or retirement income. Without proper advice, members risk making poor financial decisions that could damage their long-term security. If you are in the business, you have to take the good with the bad, but we would like to give members a bit of advice if the money is available. Free impartial advice is essential to levelling the playing field.

Surpluses in pension schemes should not sit idle or be seen simply as windfall funds. Redirecting a small—I stress “small”—proportion to fund member advice would ensure that surpluses are used in a way that benefits members directly. Amendment 32 would not mandate a fixed share; it would simply give the Secretary of State powers to determine what proportion may be used. This would, I hope, create flexibility and safeguards so that the balance between scheme health and member benefit can be properly managed. Further advice from surpluses reduces the need for members to pay out of pocket and it builds trust that schemes are actively supporting member outcomes beyond the pension pot itself.

Amendment 44, to which my noble friend Lord Thurso referred, would insert a new clause requiring the Secretary of State to publish

“within 12 months … a report on whether the fiduciary duties of trustees of occupational pension schemes should be amended to permit discretionary indexation of pre-1997 accrued rights, where scheme funding allows”.

It aims to explore options for improving outcomes for members of older pension schemes. I maintain that this amendment is needed because many pre-1997 schemes were established before modern indexation rules. Trustees’ current fiduciary duties may limit their ability to avoid discretionary increases, which is what this amendment is about. Members of these schemes may be missing out on pension increases that could be sustainable and beneficial. I will not go on about what the report would do, but there would be many benefits to this new clause. It would provide an evidence-based assessment of whether discretionary indexation can be applied safely; support trustees in making informed decisions for pre-1997 scheme members; and balance members’ interests with financial prudence and regulatory safeguards.

The amendments in this group are clearly going to progress on to Report in some way. Sometime between now and then, we are going to have to try to amalgamate these schemes and take the best bits out of them in order to get, on Report, a final amendment that might have a chance of persuading the Government to take action on these points. Many of the amendments in this group—indeed, all of them—follow the same line, but there needs to be some discipline in trying to get the best out of them all into a final amendment on Report.

[Viscount Younger of Leckie (Con)]

My Lords, I thank the noble Baroness, Lady Altmann, and the noble Lord, Lord Palmer, for their amendments in this group. I also thank other noble Lords for all their other contributions in Committee so far this afternoon. Our debate on this group has stimulated a most valuable discussion. Of course, I look forward to the Minister’s responses to the points that have been raised.

I wish to start off by saying that I thought it was helpful that the noble Baroness, Lady Altmann, steered the Committee—my words, not hers—towards a focus on scheme members. The debate went a lot beyond that, but I just wanted to make that point at the outset. I wish also to take this opportunity to set out our stance on indexation, as well as some of the related questions that we for the Opposition have for the Government on this point.

As the noble Baroness, Lady Bowles, said, these amendments raise understandable concerns about fairness, inflation and the use of defined benefit surpluses. But our core line is simple: mandating how trustees and employers use DB surpluses would be overly prescriptive and risks being actively anti-business. Many employers are already using surpluses constructively, improving DC provision for younger workers, supporting intergenerational fairness, strengthening scheme security through contingent assets, SPVs or insurance-backed arrangements, or reducing long-term risk in ways that benefit members as well as sponsors. Employers have also borne DB deficit risk for many years, as we have heard a bit about this afternoon. If they carried the risk in the bad times, it is reasonable that they can share in the benefits in the good times, provided that decisions are taken jointly with trustees.

I will explain this through a simple analogy—I say at the outset that it will not be up to the standard of the buckets analogy utilised previously in Committee by the noble Baroness, Lady Bowles, but here we are. The employer and members walk into the casino together. The bets are placed and the investment strategy, funding assumptions and longevity risk are collective decisions overseen by trustees. If the bet goes wrong, the employer must cover the losses, often over many years, through additional contributions and balance sheet strain. If the bet goes right, however, some argue that the employer should be excluded from any upside and that all gains must automatically be distributed to members.

That is not, we believe, how risk sharing works. In any rational system, the party that underwrites the losses must surely be allowed to share in the gains—I know there are other arguments, but I believe this was the one posed by my noble friend Lady Noakes—otherwise, incentives are distorted, future participation is discouraged and employers become less willing to sponsor schemes at all. The fair outcome is that neither the employer nor the members take everything and that surplus is discussed and allocated jointly by trustees and employers in a way that balances member security, scheme sustainability and the long-term health of the sponsoring employer. I think this was the central argument of the noble Viscount, Lord Thurso, and, in a different way, my noble friend Lord Fuller. Legislation should support that partnership, not override it.

My noble friend Lord Willets made an interesting point. He asked whether it is fair that, in DB schemes, current employees often contribute to enhancing or rescuing the surplus position of pension schemes, making up for past mistakes—or deficits, perhaps—and the potential consequence of that linking to lower remuneration for those current employees. I add one more thing, which is probably a bit unfair because it is slightly hypothetical: if that current employee, having perhaps been paid less, is then made redundant, that is a double whammy for them. The question is whether the surplus should be used for helping current employees or giving them a better deal, as well as, or instead of, looking to help the pre-1997 members. That is the way I look at it.

Against that backdrop, amendments that would make benefit uplifts—whether pre-1997 indexation or lump sum enhancements—a statutory condition of surplus extraction raise real concerns. Automatic uplift would ignore wider economic impacts, including higher employer costs; increased insolvency risk, ultimately borne by the PPF; knock-on effects on wages, investment and employment; and potentially higher PPF levies.

For PPF schemes, mandatory uplift is manageable because the employer covenant has gone and Parliament controls the compensation framework. Imposing similar requirements on live schemes risks destabilising otherwise healthy employers. Uplift should therefore be an option and not an obligation. That said, focusing on choice does not mean ignoring power imbalances. In some schemes, there is genuine deadlock. Trustees may be reluctant to deploy surplus for fear of sponsor reaction or member backlash, so instead sit on it and de-risk further. That may be a rational defensive response, but it is also a deeply inefficient outcome. The Government should be looking at how to enable better use of surplus by agreement, rather than mandating outcomes.

My questions to the Minister are as follows. How do the Government intend to preserve flexibility while avoiding blunt compulsion? How will they support trustee-employer partnership rather than hardwiring outcomes into legislation? What consideration has been given to mechanisms for breaking deadlock—including overprudence, if that is a term that can be used—so that surplus can be used productively rather than simply locked away?

To conclude, these amendments raise important issues. Our concern is not with the objectives but with the method. Choice, partnership and proportionality should remain the guiding principles. I look forward to the responses from the Minister.

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Moved by

[Viscount Younger of Leckie]

31: Clause 10, page 11, leave out lines 11 to 38
Member’s explanatory statement
This is a probing amendment which seeks to determine why the Secretary of State is permitted to change the conditions for paying surplus using the negative procedure after the initial conditions are first set using the affirmative procedure and to question the extent and scope of the Secretary of State’s regulatory power in setting the conditions for surplus release.

[Viscount Younger of Leckie (Con)]

My Lords, we come to another busy group, in which the noble Baroness, Lady Stedman-Scott, and I have amendments. I will speak only to our amendments so that other noble Lords have time to set out their reasoning and questions to the Minister. I look forward to hearing them. Essentially, this group covers surplus release, how it will operate and precisely who will oversee the rules of this. We are also concerned about the very wide delegated powers within this area.

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I am grateful for all noble Lords’ contributions to this debate, but I ask that the amendment is withdrawn and beg to move that Clause 10 stand part of the Bill.

[Viscount Younger of Leckie (Con)]

My Lords, I am very grateful to the Committee for the discussion on this group, which goes to the heart of how Clause 10 is intended to operate in practice. I have a few closing remarks, but I just say at the outset that I think we all realise that it was for the Minister to answer the very concise questions raised by the noble Lord, Lord Davies, the noble Viscount, Lord Thurso, and my noble friend Lady Noakes. Across these amendments and our stand-part notice, our concern has been a consistent one, which is that Clause 10 confers wide powers on the Secretary of State to determine the conditions under which surplus may be paid to an employer and to alter those conditions over time, largely through regulations. That is a significant delegation of authority in an area both technically complex and deeply sensitive for scheme members.

Although we recognise the case for flexibility, that flexibility must be balanced with proper safeguards. When changes to the surplus regime could materially affect member protections or the balance of interests between employers and members, it is not unreasonable for Parliament to expect a meaningful and continuing role in scrutinising those changes, not merely at the point when the framework is first established.

I listened very carefully to the Minister in her responses in terms of the legislative process, and I take note of the fact that she says that the measures are in line with existing legislation. I will reflect on that and read Hansard, and I will look more deeply at her points about the negative procedures having been used in the past, and the fact that she says that this is different and the Government are bringing forward an affirmative procedure before the negative procedure, if your Lordships see what I mean. I shall look at that.

As I said at the outset, our amendments have been probing in nature. They are intended to test the rationale for the proposed approach to parliamentary procedure and seek reassurances that the level of scrutiny will remain commensurate with the importance of the decisions being taken.

Finally, given the nature of the Bill as a framework Bill—a theme that we have been promulgating on the first two days in Committee, and which the Minister herself explained on Monday—I hope that the Minister will anticipate that we and other noble Lords will be bearing these questions in mind on many other parts of the Bill. I hope that in raising this and flagging it, she can continue to respond to these issues in the round, explaining why this structure was adopted in the first place throughout the Bill, what constraints the Government envisage placing on the use of these powers, and how Parliament will be able to satisfy itself that future changes to the surplus regime remain appropriate and proportionate. With that rounding off, I withdraw my amendment.

Amendment 31 withdrawn.

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[Viscount Younger of Leckie (Con)]

My Lords, we understand that these amendments are doing something that is really quite straightforward and, in our view, sensible. The amendments in the name of the noble Baroness, Lady Altmann, would ensure that, before any surplus is extracted, the relevant actuary has confirmed that the work required under the Financial Reporting Council’s technical actuarial standards of risk transfer has been completed. In other words, they would ensure that trustees and sponsors have properly considered the scheme’s credible endgame options, whether that is bulk transfer, run-on or another long-term strategy, rather than looking at surplus in isolation.

I was pleased to listen to this interesting debate, commenced by the noble Baroness, Lady Altmann, with her strong reference to the TAS 300 exercise and the link to insurance. She mentioned the reinsurance market and the subsequent debate, as well as the amount of money potentially in play—£200 million, I think. Surplus extraction ought to sit within a wider assessment of the scheme’s long-term direction, the securities of members’ benefits and the financial implications for both the scheme and the sponsor. Requiring confirmation that this work has been done would help anchor surplus decisions in that broader context.

This has been a very brief speech from me. We see these amendments as a proportionate safeguard, reinforcing good governance and ensuring that surplus payments are considered alongside—not divorced from—the scheme’s long-term endgame strategy. I look forward to the response from the Minister.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Baroness, Lady Altmann, for setting out her amendments. I am also grateful to all noble Lords who have spoken. I must admit that I have learned more about actuaries in the past week than I ever knew hitherto, but it is a blessing.

Three different issues have come up. I would like to try to go through them before I come back to what I have to say on this group. In essence, the noble Baroness, Lady Altmann, has us looking at, first, actuaries: what is their role, what are the standards and how do they do the job? Secondly, what are the right endgame choices—that is, what is out there at the moment? Finally, what should be in the surplus extraction regime? We have ended up with all three issues, although the amendments only really deal with the last of those; they deal with the others by implication. Let me say a few words on each of them, then say why I do not think that they are the right way forward.

We have just finished hearing from the noble Lord, Lord Fuller. Obviously, we are talking about the position now. DB schemes are maturing and, as such, are now prioritising payments to members. Given this context, they are naturally more risk-averse, as they are now seeking funding to match their liabilities. Since the increases in interest rates over the past five years, scheme funding positions have—the noble Lord knows this all too well—improved significantly in line with their corresponding reductions and liabilities.

However, when setting an investment strategy, trustees must consider among other things the suitability of different asset classes to meet future liabilities, the risks involved in different types of investment and the possible returns that may be achieved. The 2024 funding code is scheme-specific and flexible. Even at significant maturity, schemes can still invest in a significant proportion of return-seeking assets, provided that the risk can be supported.

On actuaries, actuarial work is clearly an important part of the process. It helps set out the picture, as well as highlighting the risks, the assumptions and the available options, but it does not determine the outcome. My noble friend Lord Davies is absolutely right on this point. Decisions on how a scheme uses the funds are, and will remain, matters of trustee judgment. The role of the actuary is to support the judgment, not replace it. Trustees are the decision-makers, and they remain accountable for the choices that they make on behalf of their members.

Of course, in providing any certification, actuaries will continue to comply with the TAS standards set by the Financial Reporting Council. I am not going to get into the weeds of exactly how the standards work but, on the broader points made by the noble Baroness, Lady Altmann, we agree that the requirements and the regulations must work together. As my noble friend said, after the funding regime code was laid, the FRC consulted on revisions to TAS 300 covering developments; it has now published the revised TAS. These are complex decisions. Regulators need to work together. We will come back to this issue later on in the Bill, following an amendment from the noble Baroness, Lady Coffey.

In terms of the endgame choices, the independent Pensions Regulator has responsibility for making sure that employers and those running pension schemes comply with their legal duties. Obviously, the Government are aware of the recent transaction that resulted in Aberdeen Asset Management taking over responsibility for the Stagecoach scheme; we are monitoring market developments closely. Although we support innovation, we also need to ensure that members are protected. Following the introduction of TPR’s interim superfund regime and the measures in this Pension Schemes Bill, we understand that new and innovative endgame solutions are looking to enter the DB market and offer employers new ways to manage their DB liabilities. I assure the noble Baroness that we continue to keep the regulatory framework under review to ensure that member benefits are appropriately safeguarded.

Then, the question is: what is the right thing to be in the surplus extraction regime? I know that the noble Baroness, Lady Altmann, is concerned that, following these additional flexibilities to trustees around surplus release, trustees continue to consider surplus release in the context of the wider suite of options available to their scheme, including buyout, transfer to a superfund or other options beyond those. Following these changes, trustees will remain subject to their duty to act in the interests of beneficiaries. As such, we are confident that trustees will continue both to think carefully about the most appropriate endgame solution for their scheme and to act accordingly. For many, that will be buyout or transferring to a superfund, rather than running on.

Let me turn to what would happen with these amendments specifically. Amendment 33 would link the operation of the surplus framework to existing standards on risk transfer conditions in TAS. In essence, it seeks to ensure the scheme trustees have considered a potential buyout or other risk transfer solution before surplus can be released. Amendment 33A has a similar purpose; again, it aims for trustees, before they can release surplus, receiving a report from the scheme actuary assessing endgame options and confirming compliance with TAS.

Although I appreciate the noble Baroness’s intention to ensure that trustees select the right endgame for their scheme, these amendments are not needed because trustees are already required, under the funding and investment regulations, to set a long-term strategy for their scheme and review it at least every three years; that strategy might include a risk transfer arrangement. Furthermore, although I know the noble Baroness has tried to minimise this, hardwiring any current provisional standards into the statutory framework could have unintended consequences, including reducing flexibility for trustees and requiring further legislative or regulatory changes to maintain alignment as these standards evolve over time.

We are back to the fact that, in the end, trustees remain in the driving seat with regard to surplus release. As a matter of course, TPR would expect trustees to take professional advice from their actuarial and legal advisers; to assess the sponsor covenant impact when considering surplus release; and to take into account relevant factors and disregard irrelevant factors, in line with their duties. We are working with the Pensions Regulator regarding how schemes are supported in the consideration of surplus-sharing decisions. The new guidance already considers schemes as part of good governance to develop a policy on surplus. TPR will issue further guidance on surplus sharing following the coming into force of the regulations flowing from the Bill, which will describe how trustees may approach surplus release and can be readily updated as required. Alongside the Pensions Regulator, we will work with the FRC to ensure that TAS stays aligned.

I am grateful for the noble Baroness’s contribution and the wider debate, but I hope that she will feel able to withdraw her amendment.