Pension Schemes Bill
Monday 7th July 2025
(3 months ago)
Commons ChamberPension Schemes Bill 2024-26 Read Hansard Text Watch Debate Read Debate Ministerial Extracts
The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)
I beg to move, That the Bill be now read a Second time.
This Bill aims to deliver fundamental reforms to our pensions landscape, and it is good to see that the prospect of discussing a long, slightly technical pensions Bill has seen so many Members flooding into the Chamber. These are reforms on which there is a broad consensus across the pensions industry. They also build on at least something of a consensus across the House. In its principal focus on higher returns for pension savers, the Bill also responds to specific responsibilities that we hold in the House.
It is because of decisions of Parliament that something significant has happened over the past decade: British workers have got back into the habit of saving for a pension. Today, more than 22 million workers are building up a pension pot. That represents a 10 million increase since 2012, when Parliament introduced the policy of automatically enrolling workers. The rise is largest for women and lower earners. So there is lots to celebrate as more save, but there are no grounds at all for complacency about what they are getting in return.
The private sector final salary pensions that many of today’s pensioners rely on guarantee a particular income in retirement. If those pension schemes do not deliver good investment returns, that is a problem for the employer and not directly for the saver. But most of tomorrow’s retirees with a defined-contribution pension bear all the risk; there is nothing guaranteed. How well the pension scheme that they save into performs matters hugely, and because pensions are a very long game, even small differences in how fast a pension pot grows can make a massive difference over time.
That is the system that the House has chosen, so the onus is on us to ensure that it delivers. But the pension system that we have today is too fragmented, too rarely does it ensure that people’s savings are working hard enough to support them in retirement, and it is too disconnected from the UK economy. That is the case for change and the context for the Bill.
The UK has the second-largest pension system in the world, worth £2 trillion. It is our largest source of domestic capital, underpinning not just the retirement we all look forward—or at least most of us look forward to—but the investment on which our future prosperity depends. But our big pension system has far too few big pension schemes. There are approaching 1,000 defined-contribution schemes and less than 10 providers who currently have £25 billion or more in assets.
A consolidation process is already under way, with the number of DC schemes reducing by about 10% a year. What the Bill does is add wind to the sails of that consolidation. It implements the conclusions of the pensions investment review, creating so-called megafunds. For the DC market, we intend to use the powers provided for in clause 38 to require multi-employer schemes to have at least £25 billion in assets by 2030, or a credible pathway to be there by 2035. Bigger and better pension funds can deliver lower costs, diversified investments and better returns for savers. That supports the work that the industry is already doing to better deliver for savers.
As the House has discussed before, in May, 17 major pension providers managing about 90% of active defined-contribution pensions signed the Mansion House accord. This industry-led initiative saw signatories pledge to invest 10% of their main default funds in private assets such as infrastructure by 2030, with at least 5% in UK assets. That investment could support a better outcome for pension savers and back clean energy developments or fast-growing businesses. To support this industry-led change, the Bill includes a reserve power that would allow the Government to require larger auto-enrolment schemes to invest a set percentage into those wider asset classes. That reflects the reality that the industry has been calling for the shift for some time, but words have been slow to translate into actions.
Dame Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)
I draw the House’s attention to the fact that I am a trustee of the parliamentary contributory pension fund. Consolidation is absolutely the right direction of travel so that pension funds have better experts who are better able to advise. I still have a slight concern, though, about mandation. There will have to be schemes to invest in, and they will need to ensure that they are getting returns. How will the Minister ensure that the Bill actively delivers on both sides of the equation?
Torsten Bell
I thank my hon. Friend for her question and for her oversight of all our pensions, which I think is reassuring. [Laughter.] Sorry; it is reassuring! I will come directly to her point, because I know that is one question that hon. Members on both sides of the House will want to raise. Let me just say that the Bill explicitly recognises the fiduciary duty of trustees towards their members.
Mr Alistair Carmichael (Orkney and Shetland) (LD)
In the last Parliament, a number of us raised concerns about the administration of defined-benefit schemes by, among others, BP, Shell and Hewlett-Packard. It was obvious at that stage—I think this view was held by his right hon. Friend the Minister for Social Security and Disability, who was then the Chair of the Work and Pensions Committee—that one of the root causes of the problem was insufficient independence and oversight by defined-benefit pension trustees. What is there in this Bill that will protect the position of pensioners in their retirement under those schemes?
Torsten Bell
The right hon. Member invites me to skip quite a long way forward in my speech, and it is a long speech.
Torsten Bell
That was not the support I was hoping for from the Chair—understandable, but harsh. I will come to some of the points that the right hon. Member raises. I think he is referring particularly to pre-1997 indexation, which I shall come to.
As I said, the Bill includes a reserved power that will allow the Government to require larger auto-enrolment schemes to invest a set percentage into wider assets. That reflects the wider calls that have been made for this change but have not led to its taking place. What pension providers are saying is that they face a collective action problem, where employers focus too narrowly on the lowest charges, not what matters most to savers: the highest returns. I do not currently intend to use the power in the Bill, but its existence gives clarity to the industry that, this time, change will actually come.
Some argue—I will come to some of the points made by my hon. Friend the Member for Hackney South and Shoreditch (Dame Meg Hillier)—that this somehow undermines the duty that pension providers have to savers. That is simply wrong. First, the Bill includes clear safeguards to prioritise savers’ interests and is entirely consistent with the core principle of trustees’ fiduciary duties. Clause 38 includes an explicit mechanism, which I have discussed with Members from the main three parties in this House, to allow providers to opt out if complying risks material detriment to savers. Secondly—this is the key point that motivates a lot of the Bill—savers are being let down by the status quo. There is a reason major pension schemes across the rest of the world are already investing in this more diverse range of assets.
Fragmentation within the pensions industry happens within providers, not just between them. Some insurers have thousands of legacy funds, so clause 41 extends to contract schemes the ability that trust-based schemes already have to address that. Providers will be able to transfer savers to another arrangement without proactive individual consent if, and only if, it is independently certified as being in the member’s best interest.
Another point that I hope is of common ground across the House is that we need to do more to realise the untapped potential of the local government pension scheme in England and Wales. We need scale to get the most out of the LGPS’s £400 billion-worth of assets. Again, the Bill will turn that consensus into concrete action. It provides for LGPS assets spread across 86 administering authorities to be fully consolidated into six pools. That will ensure that the assets used to provide pensions to its more than 6 million members—predominantly low-paid women—are managed effectively and at scale. Each authority will continue to set its investment strategy, including how much local investment it expects to see. In fact, these reforms will build on the LGPS’s strong track record of investing in local economic growth, requiring pension pools to work with the likes of mayoral combined authorities. In time, bigger and more visible LGPS pools will help to crowd private pension funds and other institutional investors into growth assets across the country.
Our measures will build scale, support investment and deliver for savers, but the Bill does more to ensure that working people get the maximum bang for every buck saved. To reinforce the shift away from an excessively narrow focus on costs, clause 5 provides for a new value-for-money framework. For the first time, we will require pension schemes to prove that they provide value for money, with standardised metrics. That will help savers to compare schemes more easily, and drive schemes themselves to focus on the value that they deliver. For persistently poor performers, regulators will have the power to enforce consolidation. That will protect savers from getting stuck in poorly performing schemes—something that can knock thousands of pounds off their pension pots.
We are also at last addressing the small pension pots issue. I was out door-knocking in Swansea earlier this spring, and a woman in her mid-30s told me that something was really winding her up—and it was not me knocking on the door. [Laughter.] This is a very unsupportive audience. It was trying to keep track of small amounts of pension savings that she had from old jobs; the only thing that was worse was that her husband kept going on about it. There are now 13 million small pension pots that hold £1,000 or less floating around. Another million are being added each year. That increases hassle, which is what she was complaining about, with over £31 billion-worth of pension pots estimated to currently be lost. It costs the pensions industry around £240 million each year to administer. Clause 20 provides powers for those pots to be automatically brought together into one pension scheme that has been certified as delivering good value. Anyone who wants to can of course opt out, but this change alone could boost the pension pot of an average earner by around £1,000.
Of course, once you have a pension pot, the question is: what do you do with it? We often talk about pension freedoms, but there is nothing liberating about the complexity currently involved in turning a pension pot into a retirement income. You have to consolidate those pots, choose between annuities, lump sums, drawdowns or cashing out. You have to analyse different providers and countless products. Choice can be a good thing, but this overwhelming complexity is not—77% of DC savers yet to access their pension have no clear plan about how to do so.
John Glen (Salisbury) (Con)
I agree with a lot of what the Minister is saying. Given what was said last week by the Financial Conduct Authority on targeted support, would he look again at what is being resisted by the Money and Pensions Service? It is not prepared to work with the pension schemes to allow automatic appointments so that pension savers can be guided to better outcomes. I realise that MaPS will say that it is too busy, but this is a key moment. If we could get people to engage at age 50, say, we would see vastly different outcomes for them if they invested properly, and in better ways, with their pensions.
Torsten Bell
I thank the right hon. Member for his question, and for the discussions that we have had on this important topic. He spent years working on this. The priority for MaPS right now is to ensure that we have the system set up to deal with the additional calls that are likely to come when pension dashboards are rolled out, but I will keep in mind the point that he raises. I think he and a number of hon. Members wrote to me about exactly that point. As I promised in my letter, I will keep it under review, but we must not overburden the system, because we need it to be able to deliver when pension dashboards come onstream.
Nick Smith (Blaenau Gwent and Rhymney) (Lab)
Will the Minister update us on when consumers will see the introduction of the pensions dashboard? [Laughter.]
Torsten Bell
I think recent progress on the pensions dashboard means that that deserves a little less laughter. What we are seeing at the moment is success, driving the first connections to the dashboards. Obviously, all schemes and providers are due to be connected by the autumn of 2026, but I will provide good notice of when we can give a firm date for that. My hon. Friend and near neighbour has secured himself early warning of exactly that happening.
We need to make the choices clearer for people as they move from building retirement savings to using them. The Bill gives pension schemes a duty to provide default solutions for savers’ retirement income—yes, with clear opt-outs. As well as reducing complexity and risk for savers, that will support higher returns because providers will be able to invest in assets for longer if they do not need to secure the possibility of having to provide full drawdown at retirement.
Each of these measures to drive up returns will have an impact on their own, but it is their cumulative impact that matters most, especially when it is compounded over the decades that we save for a pension. To give the House a sense of scale, someone on average earnings saving over their career could see their retirement pot boosted by £29,000 thanks to the higher returns that the Bill supports. That is a significant increase for something that should matter to us all.
The reforms that I have set out will transform the DC pensions landscape, but with £1.2 trillion-worth of assets supporting around 9 million people, defined-benefit schemes remain vital—they have already been raised by the right hon. Member for Orkney and Shetland (Mr Carmichael). Their improved funding position is hugely welcome. Around 75% are now in surplus, which has enabled far more schemes to reach buy-out with an insurer. Many more intend to do so, welcoming the security that buy-out can offer. Others may not be able to reach buy-out or may value running on their scheme for at least a time. The Bill provides those trustees with a wider range of options. Clauses 8 and 9 give more trustees the option to safely share surplus funds, which is something that many can already do.
Alan Gemmell (Central Ayrshire) (Lab)
I thank the Minister for giving way and the right hon. Member for Orkney and Shetland (Mr Carmichael) for raising this issue. What will the Bill do for my constituent Patricia Kennedy and the members of the Hewlett Packard Pension Association who are asking for more action on their pre-1997 non-index-linked contributions.
Torsten Bell
My hon. Friend has raised this issue with me on a number of occasions, and he is a powerful advocate for his constituents who have lost out through the discretionary increases that they were hoping to see on their pensions not being delivered. This is the same issue that the right hon. Member for Orkney and Shetland raised. One of the things that surplus release will allow is that trustees may at that point consider how members can benefit from any release that takes place. One thing I would encourage them to prioritise if they are considering a surplus release is the indexation of those that have not received it on their pre-1997 accrual. I hope that provides some clarity to the right hon. Gentleman and my hon. Friend.
Sir Julian Lewis (New Forest East) (Con)
I am extremely grateful to the Minister for taking my intervention and for the very helpful letter he sent me on 30 June about schemes of this sort, and in particular the ExxonMobil pension scheme. His letter encouragingly states:
“Following our reforms, trustees will continue to consider the correct balance of interest between members and the sponsoring employer when making decisions about the release of surplus funds. Trustees will be responsible for determining how members may benefit from any release of surplus…and have a suite of options to choose from—for example, through discretionary benefit increases.”
The trouble is that these pensioners have received a letter from the trustees of the ExxonMobil pension fund stating:
“The power to award discretionary increases is held by Esso Petroleum Company Limited (the “Company”). Whether or not any discretionary increase is provided is for the Company to determine: the Trustee has no power to award discretionary increases itself.”
This may be a loophole that the Minister needs to address. If the trustees cannot award the surplus as benefits and the company says no, that is not going to benefit my constituents.
Torsten Bell
I thank the right hon. Member for raising that specific case. I will look at it in more detail for him as he has kindly raised it here, but he has raised a point that will have more general application, which is that lots of different schemes, particularly DB schemes, will have a wide range of scheme rules. He has raised one of those, which is about discretionary increases. One thing that is consistent across all the schemes, with the legislation we are bringing in today, is that trustees must agree for any surplus to be released. It may be the case that the employer, in the details of those scheme rules, is required to agree to a discretionary increase, but the trustees are perfectly within their rights to request that that is part of an agreement that leads to a surplus release.
Torsten Bell
In any circumstances, the trustees would need to agree to a surplus release, so they are welcome to say to their employer: we are only going to agree to it on the basis of a change to something that the employer holds the cards over. I am happy to discuss that with the right hon. Member further, and there may be other schemes that are in a similar situation.
Lincoln Jopp (Spelthorne) (Con)
The way in which the Minister is talking about insurance buy-out suggests that, in the Government’s mind, insurance buy-out is still in some way a gold standard. Can he reassure the House that he is seeking to flatten the playing field, such that the increased choice available to defined-benefit pension schemes will mean that for perpetuals who run on—such as OMERS, which started off as the Ontario municipal employees retirement system and is now worth 140 billion Canadian dollars—there is as much safety in superfunds as there is in insurance buy-out?
Torsten Bell
I shall come on directly to the question of superfunds, which I know the hon. Member has a long-standing interest in. There is obviously a distinction between closed and open defined-benefit schemes, which I think is relevant to the point he is raising. It is also important for trustees to have a range of options.
Kirsty Blackman (Aberdeen North) (SNP)
Obviously that can happen only where there are surplus funds, and there may not be surplus funds in all circumstances. I just want to give the Minister a heads-up in relation to the questions about employee benefits. It would be useful in Committee to have more information about the Government’s analysis of how many of these surplus releases will directly benefit the employees rather than the employers. I understand that the Government, with their mission for growth, want investment in growing the company as well, but what kind of split does he expect to see? I do not expect an answer to that today.
Torsten Bell
It is nice to sometimes be able to surprise on the upside. I would expect employees to benefit in most cases, because trustees are in the driving seat and I am sure they will want to consider how employers and employees will benefit from any surplus release. Obviously, the exact split between the two will be a matter for the individual cases, but I am sure we will discuss that further in Committee.
I want to reassure the House that this is not about a return to the 1990s free-for-all. DB regulation has been transformed since then, and schemes will have to remain well funded and trustees will remain in the driving seat. They will agree to a release only where it is in members’ interests and, as I said, not all schemes are able to afford to buy out members’ pensions with insurers.
The Bill also introduces the long-awaited permanent legislative regime for DB superfunds, which is an alternative means to consolidate legacy DB liabilities. This supports employers who want to focus on their core business, and, as the superfunds grow, they will have the potential to use their scale to invest in more productive ways. Crucially, trustees will be able to agree to a transfer into a superfund only where buy-out is not available and where it increases savers’ security.
The Pension Protection Fund is, of course, the security backstop for DB members. It celebrates its 20th anniversary this year, and it now secures the pensions of over 290,000 people. The Bill updates its work in three important ways: first, by lifting restrictions on the PPF board so that it can reduce its levy where appropriate, freeing schemes and employers to invest; secondly, by ensuring that PPF and financial assistance scheme information will be displayed on the pensions dashboard as it comes onstream, which my hon. Friend the Member for Blaenau Gwent and Rhymney (Nick Smith), who is now not in his place, is keen to see; and thirdly and most importantly, by making a change to support people going through the toughest of times. As several hon. Members have called for, we are extending the definition of terminal illness from a 6-month to a 12-month prognosis, providing earlier access to compensation for those who need it most.
Pensions are complex beasts, and so are the laws that surround them. That complexity is inevitable, but not to the extent that some recent court cases risk creating. The Bill also legislates to provide clarity that decisions of the Pensions Ombudsman in overpayment cases may be enforced without going to a further court. I have been clear that the Government will also look to introduce legislation to give affected pension schemes the ability to retrospectively obtain written actuarial confirmation that historical benefit changes met the necessary standards at the time.
Governments are like people in one important respect: they can easily put off thinking about pensions until it is too late. I am determined not to do that. We are ramping up the pace of pension reform. The past two decades have delivered a big win, with more people saving for their retirement, but that was only ever half the job. Today, too many are on course for an income in retirement that is less than they deserve and less than they expect. The Bill focuses on securing higher returns for savers and supporting higher income in retirement without asking any more than is necessary of workers’ living standards in the here and now.
The Bill sits within wider pension reforms as we seek to build not just savings pots but a pensions system that delivers comfortable retirements and underpins the country’s future prosperity. Legislation for multi-employer collective defined-contribution schemes will be introduced as soon as possible after the summer recess, and we will shortly launch the next phase of our pensions review to complete the job of building a pensions system that is strong, fair and sustainable. It is time to make sure that pension savings work as hard for all our constituents as our constituents worked to earn them. I commend the Bill to the House.
Mark Garnier (Wyre Forest) (Con)
It is a great pleasure to be here with you, Madam Deputy Speaker, and I welcome the Minister to his place. He has been here a couple of days over a year and is already taking an important Bill through Parliament. It is good to see him, and I very much look forward to working constructively with him as the Bill progresses through the House.
While the Bill is not perfect, the Minister will be pleased to hear that there is cross-party consensus on many of the planned changes. That is because we all want our pension system to be working better. If we rewind back to 2010, we inherited from Labour—dare I say it—a private pension system that was not quite ideal. The move from a defined-benefit pension-dominated market to a defined-contribution system had left millions of people behind. Back in 2011, only 42% of people were saving for a workplace pension. The cornerstone of change was auto-enrolment, which has been an overwhelming success, as I am sure the Minister will agree. Now around 88% of eligible employees are saving into a pension, and the remaining 10% who opt out tend to do so because of sound investment advice.
The Conservatives are proud of our rock-solid support in government for our pensioners. The triple lock ensured that we lifted 200,000 pensioners out of absolute poverty over the course of the last Government. Workers deserve dignity in retirement, not just a safety net in old age. They deserve to look forward to their later years with hope, not anxiety, and with choice, not constraint. That is why before the last election, 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. I will come to pensions adequacy later, but let me start by recognising some of the positive measures contained in the Bill to make our pension funds work better for savers.
When Labour gets pensions policy right, it is often by building on the Conservative legacy, recognising what works and seeking to extend it. That is why we broadly support the measures in the Bill that seek to consolidate and strengthen the gains of auto-enrolment. We also welcome the continued progress towards the pensions dashboard, which will revolutionise the way people access their pension information and plan for their financial future.
For too long, the complexity and fragmentation of pension pots has left savers confused and disengaged, as we have heard. If you are anything like me, Madam Deputy Speaker, and are thinking more actively, dare I say it, about your retirement income—actually not like me; you are a lot younger. [Interruption.] Mr Speaker is like me; he is thinking about his pension. He will have spent countless hours trying to track down old pensions. The dashboard, however, will put power back into the hands of savers, and we will support measures in the Bill to improve its implementation and delivery.
I want to highlight the creation of larger megafunds in both the public and private sectors, as well as the consolidation of the local government pension scheme, as sensible and pragmatic steps. The LGPS is one of the largest pension schemes in the UK, as we have heard. It has 6.7 million members with a capital of £391 billion, yet it is highly fragmented into 86 locally administering authorities. There is a great deal of divergence in the funding positions of those councils, even among geographic neighbours. They range from Kensington and Chelsea, which has a scheme funding level of 207%, to neighbouring local authorities like Waltham Forest, Brent, and Havering, which were underfunded in the 2022 triennial review. While we support the concept of these megafunds, there are legitimate questions that I hope the Minister will address in Committee. We do not want to see constituents from one council area unwittingly funding shortfalls from neighbouring areas.
Like many people in this House, I first cut my teeth in politics as a councillor. Soon after being elected, I was appointed chairman of the finance committee on Forest of Dean district council. One of our tasks was to oversee the performance of our local pension fund. Let me assure the House: the Forest of Dean is a truly wonderful place, but it is not the City of London. Our finance committee was made up of dedicated local councillors, but when it came to scrutinising the pension fund, we were—to put it kindly—out of our depth. Meanwhile, the pension fund managers, with their packed diaries and weary expressions, seemed to treat a trip to rural Gloucestershire as a rare expedition to the outer reaches of the Earth.
One thing struck me about small local government pension funds: they simply did not work. But it is not just in local government, small funds are—albeit with some notable exceptions for bespoke funds—not fit for purpose in a global investment environment, as we heard from the Minister. The creation of larger funds will enable greater scale, better investment efficiency and, ultimately, better value for money for members. It will allow our pension funds to compete on the world stage, to invest more in UK infrastructure and to deliver higher returns for British savers.
There are other areas of the Bill that we support and welcome. The consolidation of small, fragmented pension pots is a long-overdue reform. Bringing those together will reduce administrative costs and prevent the erosion of savings through unnecessary fees. The introduction of a value-for-money framework is essential to ensure that savers are getting the best possible deal, not just on charges, but on investment performance and retirement outcomes. We also welcome the development of guided retirement products. We cannot simply leave savers on their own to navigate complex choices at retirement. Changes to provide greater support for those facing terminal illness will provide comfort to those in extremely challenging circumstances. These are all positive steps, and we will work constructively with the Government to ensure they are delivered effectively.
While there is much to welcome, there are also significant areas where the Bill falls short and areas that require attention if we are to deliver a pensions system that is truly fit for the future. Most fundamentally, the Bill does not address pensions adequacy. The uncomfortable truth is that millions of people in this country are simply not saving enough for their retirement. The amounts people are saving, even with auto-enrolment, are too low to deliver a decent standard of living in old age. Research by Pensions UK shows that more than 50% of savers will fail to meet the retirement income targets set by the 2005 pensions commission. Closing the gap between what people are saving and what they will need must be the pressing concern of this Government. We urgently need the second part of the pensions review to be fast-tracked, with a laser-like focus on pensions adequacy. We need a bold, ambitious plan to ensure that every worker in this country can look forward to a retirement free from poverty and insecurity.
Dame Meg Hillier
The hon. Gentleman is not wrong on this point. In fact, the Public Accounts Committee looked a number of years ago at enrolment in pension schemes and found that a lot of young people were not enrolling because of the cost of living, which his Government have to take responsibility for. There is no easy answer to this, but I would be interested to know if the Conservative party now have policies to resolve this problem.
Mark Garnier
It is an important question, and one that I will come to in due course. Watch this space for a fascinating manifesto in the run-up to the next general election—I am sure everybody looks forward to it.
John Glen
Further to the point made by the hon. Member for Hackney South and Shoreditch (Dame Meg Hillier), in every election we all say that we cherish the triple lock, and we seek to gain electoral advantage from it, but do we not need to come to a settled collective view in society about the combination of the triple lock and the inadequacy of auto-enrolment? The 8% contribution is not enough, as the hon. Gentleman said; we need to get to Australian levels. One speaks to the other. Unless we can take a holistic view of those two elements and the third pillar, we are not being truly honest about some of the trade-offs, given that we are dealing with £70 billion of tax relief at the moment.
Mark Garnier
The former City Minister raises a good and important point. He tries to bring together a number of related but quite disparate issues that we need to think carefully about. I would not want to make Conservative party policy on the hoof at the Dispatch Box, though the Minister urges me to do so. These are important points, and I think my right hon. Friend would understand that I would not want to rush into anything without careful, considered thought. These are issues on which he and I—and the Minister, of course—might get together.
As I said, we need a bold, ambitious plan to ensure that every worker in this country can look forward to a retirement free from poverty and insecurity. That means looking again at contribution rates, the role of employers and how we support those who are excluded from the system.
Another omission in the Bill is the failure to extend the benefits of auto-enrolment to the self-employed. There are over 4 million self-employed people in the UK—people who are driving our economy, creating jobs and taking risks. Too many of them face the prospect of old age in poverty, with little or no private pension provision. Research by the Institute for Fiscal Studies found that only 20% of self-employed workers earning over £10,000 a year save into a private pension. With the self-employed sector continuing to grow, the Bill misses an opportunity to come up with innovative solutions for this underserved group in the workplace.
Kirsty Blackman
On auto-enrolment, the other missing group is those aged under 22. Auto-enrolment seemed to be set up with the view that people would go to university before entering the jobs market, but that is not the case for many people. It is possible that starting auto-enrolment earlier would mean much more adequate pension pots for people, because the earlier they save, the bigger their pot grows by the time they reach retirement.
Mark Garnier
The hon. Member makes an important point. The earlier people start putting money in, the better. As a result of compound interest, over many years they will end up with a bigger pension pot, even if at the beginning the contribution is quite small; the amount aggregates over a long period. We will discuss that in Committee.
We are concerned about the lack of detail in the Bill. Too much is left to the discretion of regulators and to secondary legislation. Parliament deserves to have proper oversight of these reforms. From my discussions with the industry, it seems there is tentative support for many of the reforms in the Bill. However, the message that keeps coming back is that the devil will be in the detail, so I hope that as this Bill makes progress through the House, the Minister will be able to fill in more of the blanks—and I am sure he will; he is a diligent individual.
I move on to the most important thing that this Bill hopes to achieve: growth. We want to support Labour Members on the growth agenda, but too often they go about it in slightly the wrong way. Surpluses in defined-benefit pension schemes are a great example. Interest rates have risen post-covid, and that has pushed many schemes into surplus. In principle, we support greater flexibility when it comes to the extraction of these surpluses, but there need to be robust safeguards; that is certainly the message coming back from the industry.
Under the legislation, there is nothing to stop these surpluses being used for share buy-backs or dividend payments from the host employer, for instance. Neither of these outcomes necessarily help the Government’s growth agenda. We would welcome a strengthening of the Bill to prevent trustees from facing undue pressure from host employers to release funds for non-growth purposes. In addition, to provide stability, the Government should carefully consider whether low dependency, rather than buy-out levels, will future-proof the funds, so that they do not fall back into deficit.
Although the Government are keen to extract surpluses from the private sector, there is not the same gusto shown in the Bill when it comes to local government pensions. The House has discussed in detail the Chancellor’s fiscal rules, not least earlier today. Under the revised rules introduced by the Chancellor, the measure of public debt has shifted from public sector net debt to public sector net financial liabilities. As a consequence, the local government pension scheme’s record £45 billion surplus is now counted as an asset that offsets Government debt. This gives the Chancellor greater headroom to meet her fiscal targets—headroom that, dare I say it, is shrinking week by week. I do not wish to sound cynical, but perhaps that is the reason why the Bill is largely silent on better using these surpluses. This may be a convenient accounting trick for the Chancellor, but the surpluses could have been used, for instance, to give councils pension scheme payment holidays. The Government could make it easier to follow the example set by Kensington and Chelsea, which has suspended employer pension contributions for a year to fund support to victims and survivors of the 2017 Grenfell Tower tragedy. These revenue windfalls could be redirected towards a range of initiatives, from local growth opportunities such as business incubators to improving our high streets. We could even leave more money in council tax payers’ pockets.
I turn to the part of the Bill on which we have our most fundamental disagreement: the provisions on mandation. The Bill reserves the power to mandate pension funds to invest in Government priorities. That not only goes against trustees’ fiduciary duties—although I appreciate and recognise the point the Minister made earlier—but means potentially worse outcomes for savers. Pensions are not just numbers on a spreadsheet; they represent a lifetime of work, sacrifice, and hope for a secure future. The people who manage these funds and their trustees are under a legal duty to prioritise the financial wellbeing 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.
That fiduciary duty is not a technicality; it is the bedrock of confidence that the entire pension system rests on. These pension fund managers find the safest and best investments for our pensions, no matter where in the world they might be. If things go wrong, we can hold them to account. But if this reserve power becomes law, we have to ask the question: if investments go wrong, who carries the can? Will it be the pension fund manager and the trustees, or the Government, who did the mandation?
Likewise, while the reserve power in the Bill focuses on the defined-contribution market, the shift in emphasis has potentially profound impacts across the sector. UK pension funds, along with insurance companies, hold approximately 30% of the UK Government’s debt or gilt market. If mature defined-benefit schemes move from the gilt market to equities, that potentially has a profound impact on the Government’s debt management, or ability to manage debt, and therefore interest rates and mortgage rates. For that reason, we would welcome the Minister confirming whether any concerns have been raised by the Debt Management Office, and possibly the Bank of England. There is widespread opposition from across the industry to this power—I am approaching the end of my speech, you will be pleased to hear, Madam Deputy Speaker. There are better ways for the Government to deliver growth, such as changing obsolete rules and removing restrictions.
In the annuity market, solvency rules prevent insurers from owning equity in productive UK assets. Wind farms, for example, deliver stable returns through contracts for difference and contribute to the Government’s green agenda. They could be an ideal match for long-term annuity investments, while also delivering clean energy. Releasing the limits on the ability of insurers to fully deploy annuity capital has the potential to unlock as much as £700 billion by 2035, according to research by Aviva. Rather than imposing top-down mandates, we want the Government to maximise growth opportunities from our pension industry by turning over every stone and seeking out the unintended consequences of old regulations, not imposing new ones.
I will conclude, Madam Deputy Speaker, as you will be delighted to hear. [Interruption.] Yes, I have taken a lot of interventions. We reaffirm our commitment to working constructively with the Government. Stability in the markets is of paramount importance, and we recognise the need for a collaborative approach as the Bill progresses through the House. We will bring forward amendments where we believe improvements can be made, and we will engage in good faith with Ministers and officials to get the detail right.
We want to go with, not against, the grain of what the Government are seeking to achieve through this Bill, and I look forward to working with the Minister in the weeks and months ahead.
Madam Deputy Speaker (Ms Nusrat Ghani)
I call Chair of the Select Committee, Debbie Abrahams, after whom I will call Steve Darling.
Debbie Abrahams (Oldham East and Saddleworth) (Lab)
I want to make three points. First, we recognise that defined-contribution pension schemes have around £500 billion in assets under management. Around 20% of these assets are invested in the UK. That is down from 50% some 10 years ago. It is very welcome that the Government are focusing on this, so that we can ensure that these assets contribute to our growth.
The Committee received evidence in May from the Finance Innovation Lab, which told us that the UK has had the lowest level of business investment in the G7 for 24 of the last 30 years. The fundamental driver behind that is the fact that the financial system, including pension funds, does not support business investment as much as it should. That again emphasises the point that the Bill is very welcome. It should help us deal with that, particularly as it requires multi-employer DC schemes to have £25 billion in assets under management by 2030. That will give more schemes the advantage of economies of scale.
In a very welcome step, in the May 2025 Mansion House accord—I pay tribute to the Chancellor and her team for achieving this—there was a pledge from the 17 schemes that were part of that accord to invest 10% of their portfolios in assets that will boost the economy by 2030, with at least 5% of these portfolios being ring-fenced for the UK. This is expected to release £25 billion to the UK economy by 2030. None the less, the Bill includes a reserve power that the Government could use to mandate DC schemes to invest more in the UK economy. In evidence on 14 July, the Committee heard concerns that that would interfere with the fiduciary duty of trustees to prioritise investments that they judge will bring the best returns for scheme members.
In May, Yvonne Braun of the ABI told the Committee that it does not think the mandation is “desirable”. Instead, she said that the aim should be for it to be
“a rational choice—that the UK is an attractive environment for investing”.
The pensions industry wants the Government to concentrate on enabling the development of suitable assets for schemes to invest in, for example by improving the planning process and making the regulatory environment more predictable.
Rachel Croft, of the Association of Professional Pension Trustees, said:
“Forcing us to invest solely in the UK may run counter to that primary duty and focus, unless there is a pipeline of suitable investments in a format suitable for pension schemes to invest in. If that is the case, we will invest in them; if not, our primary duty will make us look elsewhere.”
Chris Curry, of the Pensions Policy Institute, thought that it was possible to create more UK investment opportunities and benefit members. He said:
“It still has to work in the interest of members—that is important—but if we are removing the barriers and making it easier to invest, and at the same time, providing more of a pipeline for investment and trying to package it so that it works well with how the pension system can operate, you are creating opportunity.”
He described mandation as “blunt” and “inflexible”, and said that it would be difficult to design a scheme that worked effectively in practice and did not give rise to unintended consequences. For example, he said that there would be a challenge in defining what counts as a UK investment. If the Government decided to mandate that schemes invested a particular percentage in the UK, how would the system respond to market movements that might temporarily reduce the percentage below that level? He wanted the Government to consider the unintended consequences of that. The liability-driven episode in September 2022 showed the potential risk of a lot of pension schemes effectively being asked to do the same thing at the same time.
The Bill includes a sunset clause preventing the use of the mandation power beyond 2035. Pensions UK wants to see that timeframe reduce, saying it should be just for the lifetime of the Parliament. It also wants to see the scope limited, so the investment mandation cannot be prescribed beyond the allocations voluntarily committed to in the Mansion House accord, in other words the 10% of default funds into private markets, of which 5% are in UK-based assets.
On fiduciary duties, Jesse Griffiths of the Finance Innovation Lab said that
“while the fiduciary duty should be paramount for the schemes, the Government has a different and broader mandate, and it needs to look at the collective interests of all pension savers as a whole…In particular, when you think about the deep inequality that is embedded in the system, the ONS estimates that the bottom half of the population holds just 1% of all pension assets and the top 10% holds almost two thirds. If you just focus on growing the financial returns, most people will not benefit from that. I would argue that a system that also supports a stronger economy and the green transition would benefit most people more than a system that is focused on higher returns.”
Will the Minister help us to understand the context for the criteria in which mandation powers might be used? What will be the success criteria, other than the 5% investment from this approach? Should the sunset clause, to prevent the use of this mandation power beyond 2035, be brought forward to the end of this Parliament, as I mentioned? Do the Government guarantee that mandations should go no further than the aims of the Mansion House accord?
Dame Meg Hillier
I share some of my hon. Friend’s concerns about mandation. I am happy that the Minister seems to be listening, and I hope that we will get some answers. I am interested in my hon. Friend’s thoughts about pulling forward the sunset clause. If these changes take place, they will have to happen over a long period of time, as trustees cannot just flip in and out of investments. She has set out the views of her witnesses, but does she have any views on pulling that date forward from 2035? I can see there are arguments both ways, but I am concerned that that might push trustees to make bad decisions.
Debbie Abrahams
I understand what my hon. Friend says. There is always a balance to be found with long-term financial decisions, but this is partly a political decision, so I point to the Pensions Minister to come up with a response.
Do the Government propose to consult on the design of the mandation power and how to mitigate against unintended consequences? Do the Government think that there is a case for changing the law on fiduciary duty to make clear that trustees can take account of wider issues, such as the impact of pension scheme investments on the economy and the environment? What would be the pros and cons of doing that?
Briefly, I would like to touch on the LGPS. I slightly disagree with some of the shadow Pensions Minister’s points. Since 2015, the 86 funds have been formed into eight groups. If the Pensions Minister is proposing to reduce that still further, will he set out the reasons behind that? What is the problem that merging them even further is trying to fix? Will he let me know about that in his closing remarks?
Finally, I would like to touch on the pre-1997 indexation, as the Pensions Minister knew that I would. At the end of March 2024, the Pension Protection Fund had a surplus of £13.2 billion. The PPF has taken steps to reduce the levy from £620 million in 2020 to £100 million in 2025. However, under current rules, if it made the decision to reduce the levy to zero, it would then be unable to increase it again. The 2022 departmental review by the Department for Work and Pensions recommended that the PPF and the DWP work together to introduce changes to the levy, so that the PPF would have more flexibility in reducing and increasing the levy level.
There is another issue, which the Pensions Minister will know about. PPF and financial assistance scheme members, particularly those in their later years, are really struggling. I came across a piece—I think it was in The Daily Telegraph—that said that one of the key supporters of the Pension Action Group and a FAS member, Jacquie Humphrey died a few days ago, just 11 weeks after the death of her husband. They were both employed by Dexion, which folded, and, like hundreds of others, refused to leave it there. Is there any comfort that we can provide? I understand and recognise what the Minister says about the PPF surplus being on the public sector’s balance sheet, but given that these people, who are in their 70s and 80s, are unable to live in dignity, what can we do to provide that for them in their later years?
Madam Deputy Speaker (Ms Nusrat Ghani)
Jennie seems to have captured the mood of the House, but I call the spokesperson for the Liberal Democrat party.
Steve Darling (Torbay) (LD)
As the Liberal Democrat spokesperson, I will not disappoint the Minister: I assure him that broadly agree with an awful lot in the Bill. However, as we touched on in our meeting earlier today, there are some areas where we have concerns that are similar to those expressed by the shadow Minister, the hon. Member for Wyre Forest (Mark Garnier), in more ways than one.
As Liberal Democrats, we want individuals to have confidence and be given the ability to invest in pension schemes that they know all about. We also want businesses to be supported to get their pensions out, supporting their employees. Elements of the Bill are about re-engineering to drive better outcomes for those who have pensions, which is to be very much welcomed, and about investment. We want to ensure that the individuals are front and centre of that support.
As others have said, we know that there are 12 million people who are not saving enough. In my own constituency of Torbay, some people have challenges just to get enough money to put bread on the table and cover their bills, and to save for a pension is beyond their wildest dreams. Reflecting on how we can drive that agenda of supporting people to make those changes around how they can save is absolutely essential.
My father was a haulage contractor—more commonly, a lorry driver—and self-employed. He saw the poverty that his father lived in, and in the 1980s he chose to save for a private pension, as Mrs Thatcher suggested. He put probably more than half of his income at times into savings, but because he was poorly advised, the stock market crashed and he was left with less money than he put in. That was horrific for him. Fortunately, the systems are now more protective of people who put into pensions, but that is a cautionary tale of what can go wrong. Ensuring that we support those individuals is absolutely essential.
As Liberal Democrats, we really welcome the development of larger pots, which will hopefully drive better outcomes for individuals. We know that in our more complex world of employment, many people will have small pots. While we welcome the idea of drawing these together in certain pots, we are not convinced that the pots should follow the pensioner rather than having certain pots that the Government would manage, but that is to be discussed elsewhere as part of the proposals before us.
The final area I will explore is investing in our economy, because growth is clearly absolutely essential. If our pension industry can be part of what oils the wheels of growth, that is to be welcomed. As Liberal Democrats, ensuring that we drive the social rented housing that is desperately needed and our high streets and see if those can be areas that benefit from investment is absolutely essential. However, we have concerns around mandation—colleagues have already raised this point, and I agree with them. The Minister has said positive things around mandation, and we look forward to unpicking that in Committee with him, but we believe that part of that is about ensuring transparency. As Liberal Democrats, we would like to ensure that there is clear evidence of how pensions are helping us to prepare for and tackle climate change in a positive way.
As Liberal Democrats, we want to ensure that the pensioner themselves is front and centre. We welcome the reorganisation, but driving that positive growth in our economy is absolutely essential as part of these proposals. We look forward to working with the Minister and his colleagues in getting this positive legislation through.
Sarah Edwards (Tamworth) (Lab)
I am delighted to speak in this debate. In a former life, I was a trustee of a pension scheme and sat on its investment sub-committee. In my new incarnation, I am the chair of the all-party parliamentary group on pensions and growth.
Pensions sound boring to many, and they sound far away to the young. It might be easier to engage people if we talk about income in retirement. People are not saving enough; it is typically hard to think about, and it is a scenario that could be 30 years away for some. Albert Einstein said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Paying into a pension pot from an early age exponentially increases the pension pot. That is one of the reasons why I am passionate about people understanding pensions—or, rather, their retirement income—and what we can do as a Government to boost them. The sooner we start, the wealthier we can all be in retirement.
The Pension Schemes Bill aims to strengthen pension investment by supporting around 20 million people who could benefit from the reforms through better outcomes and greater value in private sector pension schemes, increasing the amount available to them. I support the aim of the Bill to enable the reforms of investment management in the local government pension scheme in England and Wales. The aim of these reforms is to ensure that the management of LGPS investments delivers the full benefits of scale, including greater expertise, better value for money and improved resilience.
One of the key engines of growth will be unlocking the potential in our local authority pension funds to direct investment towards the UK and, in particular, local regional development. It is vital that investment reaches beyond those areas that fall under mayoral control. I therefore encourage the Minister, in taking the Bill forward, to foster emerging ideas on how local authority pension pools can help to review potential local investment opportunities to achieve the best outcomes.
Matt Rodda (Reading Central) (Lab)
My hon. Friend is making an excellent speech. She has convened a very powerful group—indeed, the former City Minister played an active part in its most recent meeting. Does she agree that this Bill is particularly important for our high streets and many other entrepreneurs in our local communities, to try to find new forms of investment to help them boost business?
Sarah Edwards
I thank my hon. Friend for that contribution. It is absolutely essential that we ensure that investment is getting to our high streets and towns, not just our cities, and that people see that change when they walk around.
I urge the Minister to take a supportive approach towards pools that are currently in transition, since they cannot necessarily reallocate assets while they are not members of the new pool that they are going to join. Their investment strategies are therefore effectively on hold until they join the new pool. I also ask him to liaise closely with colleagues in the Ministry of Housing, Communities and Local Government during the process of local government reorganisation. Whatever the new framework is for local government in Staffordshire, the pension fund will still be there. Local authority workers in my Tamworth constituency are part of the Staffordshire LGPS. It is one of eight authorities that are jointly own LGPS Central, which last year reported £29.9 billion in assets under management. The sheer scale of such funds is what underlines the link between pensions and growth.
The British growth partnership, announced in October 2024 by the Chancellor of the Exchequer and the Secretary of State for Business and Trade, sits alongside the British Business Bank, and its primary goal is to stimulate investment from UK pension funds into high-growth, innovative companies, thereby supporting the UK economy and creating new jobs. The partnership aims to raise hundreds of millions of pounds from institutional investors, including pension funds, to invest in UK venture capital. That will be supported by a cornerstone investment from the Government. Investments will be made on a long-term, fully commercial basis, independent of Government influence, leveraging the expertise and market access of the British Business Bank to identify potential companies. That will offer pension funds fruitful investment opportunities that deliver for their members as well as for the British economy.
By unlocking domestic investment, the partnership seeks to enhance the UK’s competitiveness in future industries, particularly in the technology and innovation sectors. I am fortunate that in my constituency I have an innovative technology company called PI-KEM, which has grown its business and workforce over the past 34 years. By linking pension funds to growth, it will be possible to have more such companies creating opportunities for skilled employment that sees Britain at the forefront of markets.
However, there is one area of caution: a trend towards Government finances being pooled into funds of which there is limited parliamentary oversight. While I understand and recognise the power of the larger funding pools, I must raise my concerns over how the funds will be reported on and how we will ensure that both taxpayer and pension member money is stewarded appropriately through the British growth partnership.
As the chair of the all-party parliamentary group on pensions and growth, it has been a great pleasure to meet with colleagues and hear from a variety of industry sectors about where they see the strengths and challenges in these proposals. I take this opportunity to thank the Minister for agreeing to attend a meeting of the APPG to assist us in gaining a greater understanding of the approach that he is taking in the next stages of the discussion of the Bill. I also take this opportunity to invite colleagues to come along and join us on Wednesday.
Chapter 2 in part 1 of the Bill reforms the regime governing trustee payments of surplus to employers and enables surplus to be paid out of more defined-benefit schemes. It is stated that trustee oversight and the regulatory framework will ensure the responsible and secure sharing of surplus funds.
The triennial revaluation of a scheme may determine that there is a deficit or a surplus, but despite being calculated by highly skilled actuaries, both are only a snapshot in time. For example, a scheme being evaluated this spring would have reflected the moment at which the US President’s decision to introduce tariffs hit asset prices. An alternative set of circumstances could have created an apparent surplus. I have been through this process as a trustee, and I have put on record—and must put on record again—my scepticism about whether the potential figure is the true one when it comes to the surplus. I ask the Minister to reassure my constituents, and pension scheme members in general, that he recognises that the interests of scheme members must always be the priority. It would also be welcome to understand how “surplus” is to be defined and calculated, as I have received at least four different versions by canvassing the pensions industry.
In chapter 4 of part 2, provision is made for providers of automatic enrolment and pension schemes regulated by the Financial Conduct Authority to change the way in which a pension pot is invested, to transfer a pot to a different pension scheme with the same provider, or to transfer a pot to another provider without individual member consent where it would be in the best interests of members, taken as a whole. I welcome the fact that the Bill states that a range of safeguards and procedures must be followed before an override or transfer can occur, as sadly, it is often difficult to engage members in the details of their pension. That is particularly true where a number of small pots are accrued early in a working life, which has become the norm in many communities with the rise of insecure work.
As such, I also welcome the efforts that this Government are making to create fair and secure work, because when that is coupled with a well-funded pension, working people are protected not just at work but when they sit on their retirement beach, thinking about how their working career contributed to that welcome rest. Will the Minister ensure that the safeguards are clear and given real prominence in discussion? There is a real need for such fallback powers, but there also needs to be a positive narrative about encouraging engagement.
Chapter 1 of part 2 confers powers on the Secretary of State to make regulations to evaluate and promote the provision of value for money by pension schemes. It will enable defined-contribution occupational schemes to be compared based on the value they provide, rather than just their cost. There is an argument that too high a focus on cost—management fees, for example—has had a detrimental effect on investment by pension funds. This stems from an approach that says that if the employer chooses a fund simply based on cost, the fund may look to minimise that cost, and may achieve that through the tracker funds that have come to characterise much of the market. That is potentially why little investment has occurred in the UK so far. Therefore, by pushing forward on the value for money agenda, the Minister can encourage more investment in the UK, strengthen competition in the sector, and ultimately offer better returns to members.
Chapter 3 of part 2 will require multi-employer DC pension schemes to participate in a default fund of at least £25 billion if they are to be used for automatic enrolment purposes. The aim is to encourage smaller funds to merge into larger ones that are more likely to invest in the productive finances of the UK. I suggest to the Minister that there are two issues here, the first of which relates to the market for assets. In any market, the price of a good rises if there is a shortage of that good. In this instance, the Government are being innovative and asking the pensions industry to invest in productive assets, which can include infrastructure and regeneration schemes that are vital to the places where people live. It is therefore vital that we balance the pace and scale of the development of new profitable investment opportunities with the use of any regulations to push investors in a particular direction.
To use an analogy, the Tamworth is a rare breed of pig. Unless an appropriate opportunity were available to expand supply first, any ministerial direction to buy stock of the Tamworth pig would just result in a spike in its price and poor returns for investors.
Matt Rodda
My hon. Friend is making a wonderful speech. May I also say that there is a wonderful pig from Berkshire as well, which has distinctive markings? However, moving away from animals, perhaps my hon. Friend wishes to say a little more about the success of the type of legislation she describes in Canada and Australia. It has delivered real value in those countries’ economies and real value for pension savers.
Sarah Edwards
Absolutely. There have been some really interesting changes arising from those countries’ reviews of their pensions markets, and I will be very interested to hear what the Minister has to say about what he has learned from those changes. Certainly, in the meetings that we have attended, we have learned a lot about some of the various initiatives that are driving real growth and real change in those countries.
I urge the Minister to focus on the process of expanding the pipeline of suitable projects, while building on the Chancellor’s success—and, I am sure, his own—in creating a voluntary framework for industry and Government through the Mansion House accord.
Dame Meg Hillier
My hon. Friend has referred to good opportunities. I think it was Islington council’s pension scheme that invested in social housing in its area. That gives a good return because, by and large, people pay their rent—it is a steady return over a long period of time. Given the desperate need for housing in this country, does my hon. Friend agree that that would be a real opportunity for these funds as they get bigger?
Sarah Edwards
I absolutely agree. It is incredibly important that we make sure those investments are being driven towards the things that are going to change lives, and building houses will change lives. The other thing that my hon. Friend will be very aware of is the fact that the state pension is calculated on the basis that people are going to own a house in retirement. As we know, we are heading to a point at which many people will not own a home and their income in retirement may therefore not be enough, so we need to be alive to that situation.
In conclusion, this Bill offers a great deal to my constituents, with the prospect of better pensions through investing for the future so that living standards are higher. For younger generations, there is a real need for investment now in the long-term future of the British economy, so that they can eventually retire with an appropriate income to sustain them. There is also a need to channel that investment beyond our major cities and mayoral authorities to our shire districts, in order to deliver the change that lies at the heart of this Government’s mandate, and the Bill offers an opportunity to do that. I believe that it offers lots of positive opportunities, but as always there will be challenges. Like a good pension fund trustee, I ask the Minister to take the Bill forward with a listening ear as he seeks to link pensions and growth for the long-term benefit of us all.
Kit Malthouse (North West Hampshire) (Con)
I congratulate the hon. Member for Tamworth (Sarah Edwards) on her speech. I am afraid, however, that you, Madam Deputy Speaker, will have to forgive me for puncturing the air of bonhomie and positivity about the Bill, because I am really not content with it.
Frankly, I feel it is my duty as an Opposition Back Bencher to be suspicious of consensus, particularly when the City of London is conspiring with a Labour Government to muck about with our pensions. We have seen that before. I am old enough to remember Gordon Brown’s so-called reforms in 1997, which struck a hammer blow to the British people’s pension funds. You will remember, Madam Deputy Speaker, that the late, great Frank Field—who was then the Pensions Minister—later called those changes a spectacular mistake that struck a hammer blow to the solvency of British pension funds and drove a dagger deep into the heart of the defined-benefit landscape, resulting in its extinction.
As such, I am afraid that must rise to raise some very significant reservations about this bit of legislation—and not just its technical execution, but the political instinct that it betrays. While the Bill is wrapped in the warm words of reform and modernisation, what it actually does is centralise control, unsettle previously settled rights, and risk disenfranchising precisely those people whom it purports to help.
To begin with the Bill’s technical aspects, I reiterate my point of order. I am a member of the local government pension scheme through my membership of the London Pension Funds Authority, and I am uniquely affected by this legislation, as are 6.5 million other former and current public sector workers. My view is that, under this Bill, those people’s rights are being denied, and that through the hybrid legislation process, they or their representatives should have the right to petition the Bill Committee and explain why they feel they are affected by investment pooling, the changes to fiduciary delegation and the asset consolidation. They are uniquely affected by this Bill, which strikes profoundly at the governance of the pension funds they have paid into in a way that it does not for other pension funds in this country. That is the definition of hybridity—if that is a word—so if we are going to stick to the rules in this House, we really should stick to them. I look forward to getting the letter that you promised me, Madam Deputy Speaker, and I know that you have asked me not to refer to procedure in the other place, but this is not the only Chamber that will be looking at this legislation.
The hon. Member for Oldham East and Saddleworth (Debbie Abrahams), who is just about to leave—I am sorry to detain her but will be brief—asked the Minister what the problem is. I repeat her question, but in relation to the local government pension scheme, I also ask what it has to do with him. It is my money, not his, and it is for scheme members to make decisions about how they wish their money to be used. It is not taxpayers’ money; it is my money. It is a defined-contribution and benefit scheme, and we have all paid into it. He is the second Minister in the space of 18 months to try to interfere with the local government pension scheme, and I stood in this Chamber and opposed Michael Gove, now Lord Gove in the other place, when he attempted to manipulate the local government pension scheme for political reasons. I urge the Minister to think twice before he does so.
Secondly, I believe that this Bill is conceptually flawed. If we are being generous—[Interruption.] By all means, the hon. Member for Oldham East and Saddleworth is free to go—I will not be mentioning her again. She was hesitantly rising to leave. If I am being generous, the ambition behind this Bill is to unlock capital that can be invested for the purposes of growth, but the methods it proposes are chillingly dirigiste and make the dangerous assumption that Whitehall knows best and that central direction by the Government can outperform the dispersed judgment of hundreds of experienced trustees managing diverse funds in varied contexts. Essentially, with this Bill the Minister is turning the pension fund industry into an element of Government procurement by the back door.
There are three further points that I want to put on the radar on Second Reading. I understand that the Bill will go through, but I hope the Minister will take them into account. First, it is simply not true that megafunds perform better. There is plenty of academic and empirical evidence that the picture is much more mixed. Often, smaller funds with better governance and a more focused investment strategy can perform better. These supertanker monopoly funds lose agility, lack accountability and become distant from pensioners and members of the fund. Their investment discretion and their ability to move quickly on investment decisions becomes sclerotic and bureaucratic. In particular, it is true that these megafunds specifically underperform when they invest in exactly the kind of illiquid assets that the Government are hoping to push them into: infrastructure and private equity. I urge the Government and the Minister please to examine carefully the evidence from the United States and elsewhere that shows that these very large funds do not necessarily produce better returns for investors. They may well be able to reduce costs because of scale, but I am afraid that the evidence is just not there on fundamental investment returns.
My second point is on the danger of politicisation. We have seen elsewhere in the world where pension funds have been pushed into the Government’s priorities to their own detriment. In Canada, large pension funds have come under significant Government pressure to invest in state infrastructure. In France, pension fund surpluses have been directed into Government bond-buying programmes effectively against their will. Once those assets become controlled and directed into state-favoured investment vehicles, which is what the Government are proposing through this Bill, the temptation for Ministers—not necessarily this Minister, but future Ministers—is to go further and push funds into politically convenient infrastructure projects that may prove to be financially disastrous. If that power had been available to the political team that decided to instigate the frankly financially disastrous HS2, and my pension fund had been put in it, where would I be now? I urge the Minister to think carefully about the responsibility for my retirement and my future. By me, I am referring to myself as a member of the local government pension fund. I am everyman for these purposes.
I am afraid that essentially what has happened in France and in Canada, and what may happen under this legislation in the UK, is that the pension fund system effectively becomes a tool of Government fiscal policy. Effectively, absent capital spending available directly from the taxpayer, the Government direct capital spending from pension funds—from private money—and plug holes that they create by writing cheques that they cannot fulfil. I would be interested in the Minister’s response to that.
Lincoln Jopp
I was just googling “dirigiste” and my right hon. Friend’s everyman quote. Will he comment on the fact that OMERS, which he would probably agree is one of these megafunds that he thinks are slow and unwieldy and invest in infrastructure and illiquids, returned a 7.1% net return over the last 10 years and the London Pensions Fund Authority returned a 7% return over the last 10 years?
Kit Malthouse
As I said, the evidence about performance across the population of funds is mixed. Some smaller funds do extremely well, because they have strong governance and a focused and nimble investment strategy. Some megafunds do reasonably well, because they can spread their risk across a variety of asset classes, but it is not a given that a big fund will perform better than a smaller fund. In fact, in certain circumstances smaller funds, because they have better accountability and can have a more focused investment strategy, may well perform better.
Frankly, and this speaks to my hon. Friend’s point, it is for me as a member of the pension fund to decide what I want to do, performance or otherwise, because it is my money. Given that I have contracted with this pension fund under circumstances made clear to me when I contracted with it as part of my employment or otherwise, it is not necessarily for the Government to steam in and tell me what I should or should not do with my own money. That means I carry a certain element of risk—absolutely—but unless we are going full-throated for the total financial infantilisation of the British people, I cannot see that we have any other way to preserve our financial freedom and autonomy.
Debbie Abrahams
Does the right hon. Member accept that he might be atypical among scheme members?
Kit Malthouse
That may well be true, but that is a different question. There is a question about financial education and the ability of large numbers of our fellow citizens to understand these financial complexities. We have a large and professional independent financial adviser community, and all pension funds are required to have pension advisers who can speak to members, tell them what is going on and explain the decisions before them. I do think that over the years, such steps have disenfranchised the British people from their financial decisions, yet we hold them responsible for their debts, their mortgages and their future. There is a larger question for us in this House about how much we have subtracted from the autonomy of the British people, and therefore how much blame attaches to us as politicians when their financial circumstances are not what they expect.
Torsten Bell
The right hon. Member is giving a lucid speech, as he always does—he speaks very well—but I am failing to understand exactly the point he is making. He is talking about a local government pension scheme, which is guaranteeing him an income in retirement, as if it is a defined-contribution scheme where he is the one at risk from changes in the investment performance. It is local taxpayers with their employer contribution who ultimately bear the risk in the scheme he is talking about. It is our job to make sure that those taxpayers have the best possible chance of not having bad returns, leading to bad outcomes for them. He is not at risk in the way he is talking about.
Kit Malthouse
Yes, I have. I paid contributions through my employment at City Hall, as did my employer. Admittedly, it was a scheme based on a defined benefit, rather than a defined contribution, but that was the deal done with me on a settled contract, saying that this was what I would be provided for from my contribution. Every year, I review my pension benefit forecast. I am consulted by the fund about how it should conduct its affairs. I am asked to turn up to my pensioners’ conference to discuss with trustees how they are looking after my future. The point is that the Government are steaming in with absolutely no consultation with me as a pensioner and I have no right to be represented, although I am uniquely affected, beyond other pension schemes. I consider that to be high-handed and, as the hon. Member for Oldham East and Saddleworth said, to be solving a problem that does not exist.
My third point was also raised by my hon. Friend the Member for Wyre Forest (Mark Garnier): who carries the can? What happens when the Minister tells my private pension scheme or the parliamentary pension scheme that it must invest in, for instance, HS2 and it turns out to be a disaster? What happens when whichever ministerial pet project rises to the top of the priority list for pension allocation—what rough beast, its hour come round at last, slouches towards Whitehall to get its finance—and it all goes horribly wrong? I am sorry to quote Yeats to the Minister, but who will pay when that happens? When there is a deficit in defined-contribution pension funds that have been so directed by the Minister, who will pay for that deficit?
Kit Malthouse
I have already given way to the Minister. He said that the Bill contained an opt-out for pension funds, but that is not strictly accurate. It does not create an opt-out for trustees; it creates an opportunity for them to request the ability to opt out from the regulator, with whom the discretion to opt out lies. It also reverses the burden of proof. Even if it is on their own judgment, the trustees must prove, empirically, that investing as the Minister so directs will be to the detriment of their fund. That is not a true opt-out. It is not at the discretion of the trustees. All they can do is request, and all they can do is try to offer whatever evidence they may have. We must reflect on the fact that an awful lot of investment decisions are made by trustees on their judgment—yes, on advice, but on their judgment—and that is a very hard thing to disprove.
I am afraid I feel that the Bill is bulldozing into an area of highly sensitive financial structure, and is not taking care of the interests of those whom it purports to protect. It is reclassifying risk, it is recentralising power, and it is rewriting contracts that have hitherto been extant for many years. It is too important to my future, and the future of millions of pensioners, for us to rush into this consensus-driven Bill without proper examination in Committee, with pensioners and pension funds themselves able to petition, as they should be, under a hybrid Bill structure.
Callum Anderson (Buckingham and Bletchley) (Lab)
I am probably a parliamentary oddity, given that I have been looking forward hugely to rising to support the Bill—and what luck to follow such a colourful and interesting speech from the right hon. Member for North West Hampshire (Kit Malthouse).
I believe that this landmark piece of legislation, which builds on the progress made by the last Administration, has the potential to fundamentally reshape the trajectory of British capitalism by addressing one of the most important long-term challenges facing our country, namely how we can unlock and unleash the full potential of British savings to support growth and prosperity here at home. It is a challenge that we must overcome if we are to tackle a number of deep-rooted structural weaknesses in our economy: low productivity, low business investment and regional inequalities, as well as the financial insecurity that pervades the lives of too many of our older citizens, especially those who do not own their homes.
Before I go any further, I must pay tribute to my hon. Friend the Minister—the Bill bears the hallmarks of his serious and determined leadership—and also commend my hon. Friend the Member for Tamworth (Sarah Edwards) for her very interesting speech.
The Bill seeks to address the lack of alignment between our nation’s vast pool of domestic savings and the long-term investment needs of our economy. Over recent decades, that growing misalignment has become all too evident in communities across the United Kingdom. During that time, our domestic pension funds, which now amount to about £.3 trillion, have steadily retreated from investment in the UK, although the trend has not been replicated in other comparable developed economies. Despite taxpayer support amounting to more than £60 billion a year—or £70 billion, according to the right hon. Member for Salisbury (John Glen)—too little capital is finding its way into British companies, infrastructure and innovation.
Data from the Capital Markets Industry Taskforce—I must disclose the fact that I once worked for one of its member firms before entering this place—lays bare the scale of the problem. The data focuses primarily on public equity markets, but when we look at the largest pension schemes and funds in other countries and compare the size of their total equity allocations relative to their domestic equity markets, we see that Canada’s pensions are 2.5 times overweighting their home market, while France’s are nine times overweight, Italy’s 10 times overweight, Australia’s 27 times overweight, and South Korea’s are 30 times overweight. The UK is, massively, an international anomaly. Our domestic pension funds are underweighting our equity market by about 40%. That, I think, represents a structural weakness, with direct consequences for the global competitiveness of our economy, the vitality of our industries and, ultimately, our national economic resilience. If we are unwilling to invest in ourselves, we hold back our growth prospects.
The UK has long needed catalysts for a modern economic renaissance. The Government have taken important first steps through their industrial and infrastructure strategies, the artificial intelligence opportunities action plan and the reforms of our planning system, but the common ingredient that is required to ensure their success is a reliable source of long-term capital. Even a modest rebalancing of that £3 trillion could unlock billions in investment for domestic growth. In real currency that our constituents can understand, that means investment in digital, physical and social infrastructure, and it means greater opportunities for entrepreneurs to not only start up businesses but scale them into something globally consequential, providing better jobs and higher incomes for families throughout the country.
These investments are not just good for local economies. If we get the broader fundamentals right, they can also deliver stronger returns for tomorrow’s growing cohort of retirees, so the Government are right to propose tackling fragmentation across the UK pensions system. In particular, the private defined-contribution market and the local government pension scheme remain too fragmented. I must gently disagree with the right hon. Member for North West Hampshire: I think that there are too many small, sub-scale schemes that have not only driven up costs and created market inefficiencies, but resulted overall in suboptimal investment outcomes. I think that larger funds can manage risk better, and can invest in opportunities that can deliver higher returns for savers.
Kit Malthouse
I do not dispute the fact that there are too many small funds that are suboptimal; my question is whether it should be the Government who correct that. If, for example, I am a member of a small suboptimal pension fund and the Government, through the Bill, consolidate it with another pension fund, and it turns out that this reduces my return, who carries the can?
Callum Anderson
As I have said, I think that larger funds can manage risk better and deliver better outcomes for savers, which means that they can take greater ownership of how they spend their retirement years. I also think that the £25 billion threshold for megafunds in the defined-contribution market is the right level to deliver the objective. Other jurisdictions, especially Australia, Canada, and the Netherlands, have demonstrated that scale drives better governance, lower fees and stronger returns.
I welcome consolidation and the path towards the professionalisation of the local government pension scheme. I disclose that before I entered this place, I chaired a local authority pension fund, so I know at first hand the potential of pooling, and share many experiences of pension fund meetings with the shadow Minister. I fully acknowledge that there will be resistance to pooling in some quarters.
Matt Rodda
My hon. Friend is making an excellent speech. Does he agree that there is a growing consensus in the pensions industry? Indeed, some of the trade bodies have been heavily involved in promoting the idea of consolidation for some time, and perhaps what he is describing is a growing body of opinion in the pensions industry.
Callum Anderson
My hon. Friend is absolutely right. Stakeholders and firms that I have spoken to—in the local government pension sector, the private sector and the City of London—are unanimous that scale is very much an economic imperative. Have the Government considered what role fiscal incentives can play in helping to accelerate the consolidation of private DC funds, and whether there is scope to reduce the number of LGPS pools in the year ahead?
I particularly welcome the Bill’s proposal for a comprehensive value-for-money framework to guide DC consolidation, which my hon. Friend the Member for Tamworth (Sarah Edwards) mentioned. This correctly tackles head-on the trustee cost mindset, which too often prioritises the cheapest over the most appropriate asset allocation. That approach has frequently been tried and tested, and it delivers poorer returns for savers and missed opportunities for the wider economy, so I very much hope that DC consolidation can be implemented as soon as possible.
Finally, I want to address the issue of mandation, which, to be honest, probably warrants a debate all by itself. I appreciate the concerns that have been raised by Members from across the House, and by people in the investment industry. My hon. Friend the Member for Hackney South and Shoreditch (Dame Meg Hillier) referred to the parliamentary fund, and I note non-facetiously that the parliamentary fund, of which we are all ultimately beneficiaries, allocates barely 1% of its assets to UK companies.
Alex Brewer (North East Hampshire) (LD)
In Hampshire, we have a super-ageing population, so pension and post-retirement financial concerns are frequently raised in my North East Hampshire constituency casework. One of my constituents wrote to me to say:
“I want my pension to be put to work delivering sustainable, long-term growth and prosperity that allows every community in the UK to thrive.”
This Bill should require full transparency from pension schemes to empower people to support sustainable, long-term growth in their communities. Does the hon. Member agree that requiring transparency would be the most effective way of incentivising investment?
Callum Anderson
In all aspects of our financial system and our financial markets, and when it comes to either public activities or private markets, transparency is very much the best way to derive the most effective outcomes for those who benefit from pension schemes.
Initiatives such as the Mansion House accord, which has been referred to a number of times in this debate, have been welcome steps. When it comes to asset allocation, private sector leadership should always be preferable where possible, but we need to be candid about the fact that the challenge we face in the UK is stark and immediate. I now consider it necessary for the Government to signal to the markets that they will not ignore the reality that allocations by UK institutions to UK assets have fallen sharply over my lifetime, and certainly over the last 40 or 50 years, and that they are prepared to exercise a degree of agency, if required.
Ideally, any reserve power will not be required. If the Government succeed with their broader economic strategy, there will be a wealth of investable opportunities that will attract capital without the need for compulsion. Although the Government will need to exercise any reserve power in the most judicious and careful way, and in close consultation with the industry, we simply cannot stand by and allow our domestic markets to be hollowed out. I understand that not everyone is in favour of the state intervening in markets, and I am sure that the Minister, who worked at the Treasury, will remember that not everyone in the City wanted the Government to step in and rescue Lloyds Banking Group or the Royal Bank of Scotland, but sometimes the Government have to act decisively in the country’s long-term economic interests.
The Bill is a welcome and necessary step towards answering the question of how we inject greater confidence into our companies, our markets and our economy, while also providing people with a safe and secure retirement. That is why I am pleased to support it tonight.
Kirsty Blackman (Aberdeen North) (SNP)
I start with an apology to the Minister, because I had a bit of a giggle when the timeline for pensions dashboards was mentioned. I have been here quite a long time, and I feel like we have been talking about pensions dashboards for that entire time. It has been suggested that they are just around the corner for most of the last 10 years. It feels like this is something that we rehash on a regular basis. It would be great if they really were just around the corner; I look forward to seeing them.
The right hon. Member for North West Hampshire (Kit Malthouse) will not be surprised to hear that our political ideologies are slightly different when it comes to interventionism and what the Government should or should not do. It is completely acceptable for the Government to give some direction on the largest assets, but I am specifically not talking about the LGPS, because it does not exist in Scotland. That part of the Bill does not apply to my constituents, so I will not touch too much on that.
Kit Malthouse
I understand where the hon. Lady is coming from. She is keen on Government intervention in our pensions, but does she recognise that that represents a fairly significant transfer of investment risk, and that the Government should underwrite that risk in all fairness to pensioners, who may lose money as a result?
Kirsty Blackman
Auto-enrolment was a fairly substantial intervention by the Government in pensions. Since 1997, pensions have had to increase in line with inflation, and that was an intervention by the Government. There has been a long trail of interventions by the Government in how assets are managed and where they are held, but pension trustees are still required to get a return. I agree with the right hon. Gentleman about specific projects, and I would be particularly concerned if we were looking at specific projects, but the mandation relates to UK assets, and the funds in which they could be invested.
I would love to see much more investment of pension funds in social housing, for example, where the trustees can get a pretty great return, but they will still have a fiduciary duty and responsibility. For defined-benefit schemes, the member will always get what they have been promised they will get. No matter how the fund is managed, they have a defined benefit from the scheme, unlike in a defined-contribution scheme, where it depends on the size of the pot as it grows—but I am going to carry on, because I have a lot to cover that is not to do with mandation, and as I say, the LGPS does not apply in Scotland.
On value for money, I think the Bill is good, because comparing pension schemes is difficult. Comparing any financial schemes is difficult because they are all laid out in different ways and the fees are calculated in different ways, so it does not make sense to most people. Some of stuff on requiring the publication of information on value for money in certain ways is important, and the surveys are also important. I have slight concerns about the chapter on value for money because, in comparison with the small pots consolidation section, there is no requirement to publish the regulations in draft before they actually become regulations. There is a requirement for consultation, as there is in both those chapters, but not a requirement for publication in draft. I think it is important for those to be published, so the widest possible range of views can come forward, because value for money is so important for such a wide range of people, whereas some of the other stuff in the Bill is much more technical and will have an impact on far fewer people. The point about publishing the regulations in draft is important.
I am disappointed that the Government have not made more moves on adequacy, but given where we are in the cost of living crisis, I can understand why it may be difficult to get cross-party political consensus on the creation of adequacy provisions. This Bill could have taken more of a look at pensions in general, rather than being about pensions specifically, because in a lot of ways the Bill is seeking to do is improve every individual’s pension pot’s potential for growth. That is an admirable aim, but some of the larger picture could have been included—for example, in relation to auto-enrolment, the under-22s and people earning small amounts of money who do not qualify.
The right hon. Member for Salisbury (John Glen) alluded to the mid-life MOT, which I have previously shouted about. I agree that people should be sent an appointment for a mid-life MOT, in the same way as they are asked to get their bowel cancer screening sent through the post. It should be exactly the same with a mid-life MOT, which is so important, but so many people duck and dive about it. Millennials are coming up to reaching this point, but millennials are a generation particularly averse to thinking about retirement, because we do not think it will happen to us. We think we will die before we get there, because there is an incredible amount of cynicism among millennials. We tend to avoid thinking about it because we are not going to reach that point, so forcing millennials—in the nicest possible way—by giving them such an appointment and making it for them means they are much more likely to undertake it.
On guided retirement, again I think the Bill tackles the issue pretty well by ensuring that people have more information. I am particularly concerned about the people who draw down the 25% tax-free sum of money, and then do not have a plan for the rest of it. How many of them have just thought about the 25%, and have not thought about the rest of it, or about how complicated and unpredictable annuities can be depending on the year? I am thinking about somebody I know who does not smoke or drink and runs 10 km a couple of times a week, but they will get a smaller annuity than somebody who does the opposite. Do people know how unpredictable it is—how much they will get and the fact that they cannot tell from what the pot looks like the actual outcome to cover their living expenses? Any kind of understanding people can be given about that is really important. I do still have concerns about some of the issues with freedoms and how financially disadvantageous it can be for a significant number of people.
I agree with some of the stuff on the consolidation of small pots. I have a concern about the fact that the Secretary of State or the Minister can make changes to the definition of small pots by looking at some consultation and then bringing a statutory instrument to the House. I would appreciate some clarification, and agreement that the Minister will consult pretty widely before taking a decision about changing the definition of small pots in secondary legislation.
On surplus release, I would disagree with a chunk of the Conservative Members who would use it for slightly different things. I press the Minister on the balance between the economic growth mission and what employees will get as a result of surplus release. I am pleased to hear that trustees will have some flexibility, but I am concerned that that creates a system with a number of tiers, because it depends on how passionate the trustees are about helping the employees or helping the Government’s growth mission. I would ask for some guidance from the Government about what they expect. When they are making that deal with employers, they have to agree with the employer where that money will go—how much of the money will go to increasing the pension pots and how much into people’s salaries. There will need to be a significant amount of guidance for trustees on where the Government expect money to go. It would be appreciated if we could be involved in the creation of that guidance, or at least be consulted on what it is supposed to look like.
On megafunds, there is a bit of a “wait and see” on what megafunds, both master trusts and the superfunds, will look like and how they will pan out. I can understand looking at other places the Government consider to be successful in how pension funds are managed and the very large investments that could be created as a result of huge funds. I appreciate that overheads can be reduced and that funds can be run more efficiently as a result, and that investments can be made into very large, long-term patient capital projects if the fund is significant.
My specific question on superfunds is about new entrants to the market. The Bill states that there is an ability for transitions. Organisations likely to meet superfund status at some point, given a certain amount of time, will be given slack until they can reach that status, which is utterly sensible. But then it talks about new entrants coming in to become a superfund. There is a pathway and the ability to get approval to do that, but only if they are innovative. I am slightly concerned about what innovative means, because it is not defined—I think it will be defined in secondary legislation. Why should they be innovative? Surely, if a new entrant is excellent, that should be enough? Innovative concerns me. I do not really understand what it means, or why it is in the rules for new entrants. Anything the Government can say to explain what they think that is supposed to mean, and what they intend it to mean in the secondary legislation, would be helpful.
On the whole, the SNP is cautiously optimistic about the Bill. We believe there need to be some changes and we have specific questions in various areas, such as: on the rationale in relation to mandating; on the rules on value for money and how they will impact individuals; and on the consolidation of small pots and how they will ensure individuals have better outcomes. It is not in the Bill, but ensuring the pension dashboard happens so that people can see the consolidation of small pots happening in real time would be incredibly helpful. The best outcome we can get is for everybody to have an adequate pension when they reach retirement. We will not get that if people cannot see and cannot understand what they have in their pensions and if those small pots are not consolidated.
Several hon. Members rose—
Madam Deputy Speaker (Caroline Nokes)
Order. Before I call the next speaker, I just want to be clear that it will be about an hour before the wind-ups. Nine Members are bobbing, so perhaps you can all reflect on that in your contributions so that I do not have to put on a time limit.
John Grady (Glasgow East) (Lab)
I rise to speak in favour of the Bill. On a policy basis, the Bill addresses a number of very important challenges.
The first is ensuring that the pension system delivers good outcomes for the millions of pension savers in Britain. That is absolutely critical. In my lifetime, the risk of pension savings has shifted from the employer to the employee—in other words, to our constituents. At the heart of the reforms is one essential fact: investment in a diverse set of assets leads to better returns and better outcomes than investment in a narrow set of assets. We need to move away from a focus on cost in the industry and on to a focus on overall value and the outcomes that savers get, so they have comfortable retirements. I am determined that the working people in Glasgow East have comfortable retirements and are properly rewarded for their hard work. Therefore, the Bill’s objective of ensuring that savers in Glasgow East and across the United Kingdom ultimately have access to a wider pool of investments, which have historically been restricted, is a good outcome and a good policy.
The second challenge the Bill seeks to address is growth. People in Glasgow East are very ambitious, as I know they are in Aberdeen North and in Hampshire. As I knocked on doors ahead of last year’s election, people would say to me, “Britain has lost its way.” And many people said that they felt their children would be better off working abroad, or that there were more opportunities for their children abroad. That is the challenge the Bill plays a part in addressing. We do not invest enough in our productive capacity so we have lower, sclerotic economic growth.
Pension savings are an essential source of finance for British industry and infrastructure. In that regard, the Bill includes, in chapter 3 of part 2, something that seems to be causing anxiety: the backstop mandation of investment by defined-contribution pension funds into private asset classes linked to the United Kingdom. Private non-listed shares and debt are now central to investment in a way that they were not when I started off as a junior lawyer many years ago. Growth companies in areas such as medicine, AI, technology and, of course, space remain in private hands for much longer, and list on public markets much later, if at all. The mandation power must be viewed in that context. If UK pension funds do not invest in those classes of domestic assets, working people may miss out on significant returns, and we risk losing the opportunity of growth and of developing the great innovations from our fantastic universities, including the University of Strathclyde.
Kit Malthouse
The hon. Gentleman is making a good point, but does he accept that illiquid investments, by their very nature, tend to be more volatile, and that from a risk-adjusted point of view they therefore represent much higher risk for investors? He mentioned investment in life sciences companies; he will be aware of the collapse a couple of years ago of the fund led by Neil Woodford, which was a significant investor in illiquid private sector life sciences companies and, because of that illiquidity, collapsed. The point is that if we are mandated to do that stuff—I ask the same question as I asked the Minister—who will pay? Who carries the can?
John Grady
I hope the right hon. Gentleman would accept that diversification is critical here. Of course, illiquid private assets are not something that one holds for a couple of years and then sells, but the funds are designed to be large enough to bear the risk from diversification. That is the critical point.
Pension funds are a statutory arrangement, with significant taxation and other legal benefits. That creates a business opportunity for pension providers—and quite right, too. Against that background, it is right that the Government review whether, under the existing arrangements, savers are getting a fair return from that special statutory and legal arrangement. Given the tax breaks, it is not unreasonable to address the question of whether there is sufficient investment in the United Kingdom.
Let me turn to our attitude to risk in the UK, on which the success of pension arrangements turns, as does our desire for more economic growth. We will not get more economic growth unless we take more reasonable risks, as the Chancellor of the Exchequer and others have made clear. It is essential for banks and fund managers to consider whether they take enough risk.
The chief executive of the National Wealth Fund, John Flint, made the point last Tuesday at the Treasury Committee, when he said,
“I would encourage the stewards of private capital to go back and challenge themselves on their risk appetite…the country’s growth outcomes are, for me, largely consistent with the country’s risk appetite generally.”
I venture to say that our great fund managers and banks need to turn their minds to whether they are taking enough risk, because that drives economic growth and drives successful outcomes for savers.
Another aspect of pensions reform and risk taking is the individual savers, as was brought home to me in a quite different context, when I was on a football history tour organised by Football’s Square Mile, which promotes the history of football in Glasgow East. As we stood mainly in Glasgow East—I must admit that some of it was in Glasgow South—the guides explained to us that when Queen’s Park decided to organise the first international football match between Scotland and England in 1872, the club had just over £7. It had a choice: the low risk was to hold the match at a rugby club, free of charge; the higher risk was to hold the match at the West of Scotland cricket club at Partick, an old, closed ground where tickets could be sold and there was potential revenue. The problem was that the West of Scotland cricket club wanted more by way of rent than the Queen’s Park had—much more than £7. The guides put the choice to us all as we stood just in Glasgow South constituency, and just outside my constituency. The vast majority of people on the tour picked the low-risk option: an indication, at the end of the week, of how risk-averse we have become in Britain.
Encouraging sensible risk taking is critical to pension saving and if we want more economic growth. In fact, Queen’s Park took the higher-risk option: it rented the cricket ground and made a huge profit. The game transformed the profile of football and was the foundation for Queen’s Park’s building the first international football stadium in the world, which opened a year later in 1873 in my constituency. Queen’s Park took a risk that was pivotal to the development of modern football, and modern football contributes billions to the Exchequer. My point is that risk is essential to economic activity, as Mr Flint explained and as was illustrated later in the week.
The Bill is critical for economic growth. It takes active steps to ensure that money flows to the entrepreneurs and risk takers who will create wealth across Britain. It ensures that working people have access to better pensions. On that basis, I support the Bill.
Lincoln Jopp (Spelthorne) (Con)
I regret that the Pensions Minister, the hon. Member for Swansea West (Torsten Bell), is no longer in his place; I wanted to pay him something of a compliment for getting the Bill here today with typical ambition and enthusiasm. I should, however, remind him of my grandmother’s favourite saying: an ounce of experience is worth a ton of enthusiasm.
I stand here to talk about part 3 of the Bill on the basis of about four years’ experience as a director of the first pensions superfund, having attempted to get it through the Pensions Regulator and the interim regime put up under the last Government. That was ultimately unsuccessful; part of the reason why we are going to need the Pensions Minister’s enthusiasm and ambition is that he will come up against a series of vested interests. When we attempted—[Interruption.] I welcome the Pensions Minister back to his place and am grateful that he is here to listen to this.
When we attempted to launch the pensions superfund, we were bombarded by people who wanted to strangle the superfund industry at birth: the Association of British Insurers; an extraordinary intervention by the Governor of the Bank of England—I am not sure whether the Minister has had a chance to reprogramme the Governor of the Bank of England recently, but I hope he is more enthusiastic about the Minister’s proposal than he was about the last Government’s—and lastly, the Pensions Regulator itself.
I think the Minister wants to create a thriving market in superfunds. However, under the current interim guidance, capital requirements for superfunds are about twice those for insurers providing buy-outs, so it is hardly surprising that we have seen a number of recent new entrants to the insurance market but no new superfunds. The Solvency II regime—apologies for the slightly technical language, but the Minister will appreciate it—that applies to insurers works off a one-year 99.5% confidence level, but over time the industry has been allowed to apply a number of important adjustments, including diversification, matching adjustments and deferred tax credits. All have had the effect of effectively reducing the capital requirement for insurers. In combination, that means that the capital buffer for a buy-out provider is approximately half that of a superfund under the current interim regime, even taking into account the fact that superfunds are proposed to have a one-year 99% confidence level.
The Bill must address that inherent unfairness if, as the Minister wants, the superfund market is to grow. At the moment, it is the proverbial baby who refuses to put on weight. Can the Minister assure me that the Bill will address the problem and create a more level playing field that will allow superfunds to offer the 10% to 15% pricing discount to insurers that his Department has said it is seeking? As the Minister knows, there are a number of techniques for achieving that. He might consider: specifying that superfunds should apply a 98% one-year confidence threshold; the creation of a rule similar to the matching adjustment that applies to insurers; extending a VAT exemption to superfunds for essential pension services, such as admin, actuarial and investment, including scheme origination and transfers of the scheme to superfunds; or—I suppose this is an “and/or”—allowing superfunds to use structured capital instruments such as subordinated debt and preferred shares to lower the cost of capital and enhance investment flexibility, without compromising quality.
Lastly, I turn to the Pensions Regulator’s process of assessing superfunds and giving them a licence to operate—this is the bit where I have the scars on my back. Will the Minister take a close personal interest in this and change the way that the Pensions Regulator works, so that there are stricter and shorter time limits for assessing suitability—shorter than the limits currently in the Bill, which are six months as a default and nine months as a stretch? In the case of the pensions superfund, we had three applications and a similar timescale was used. One can just imagine why the investors’ patience finally ran out and the whole thing was wound up.
I do not want the Minister to be in the position of his predecessor, Guy Opperman, who stood in this place and said that greenlighting superfunds was his greatest achievement during lockdown, yet as a result of a combination of the regulatory environment that was put in place and the vested interests of those who argued against the birth of superfunds, the whole concept was strangled at birth. I want the Minister to avoid that, so I encourage him to look back at the first efforts to produce superfunds and tell the Pensions Regulator a great deal more about how it should do its business.
The reason why the Pensions Regulator became risk averse was because the last Government refused to cover superfunds in their Pension Schemes Bill, now the Pension Schemes Act 2021. The Pensions Regulator did not see why it should take any additional risk if politicians were not going to. I encourage the Minister to have the strength of his convictions to use primarily legislation to tell the Pensions Regulator the market that he wants it to regulate. Then he will give pension superfunds a fighting chance of coming into existence and consolidating. Notwithstanding some of the concerns that others have had, 5,100 of anything is not a working marketplace; it is ripe for consolidation—it was then and it is now.
Rachel Hopkins (Luton South and South Bedfordshire) (Lab)
First, I want to declare an interest. I subscribe to my current parliamentary pension, have preserved benefits in previous occupational pensions and, like the right hon. Member for North West Hampshire (Kit Malthouse), I too have preserved benefits in the local government pension scheme, though I do not propose to say much about that element of the Bill. I suppose that as a worker with a variety of pensions, I am going to benefit from the Bill.
I welcome the Government’s proposals under the Bill, as too many people have their hard-earned cash scattered across pension pots that deliver poor returns on their savings and leave them confused about their future and worse off in retirement. The Bill will deliver more money for savers by making pensions simpler to understand and easier to manage, and they will return better value over the long term. The new rules will bring together defined-contribution small pension pots, to cut costs for savers and industry and help people to view their full pension picture easily. That will protect them from getting stuck in underperforming schemes for years.
The Bill has been welcomed by the pensions industry, as it sets out a long-term plan to create bigger and better pension funds that will boost returns for savers and drive long-term investment across the country. As we have heard, in the UK pensions system there are more small pension pots than there are pensioners. Currently there are 13 million small pots holding £1,000 or less, with the number increasing by around 1 million every year. Small pots are costly for savers and industry, who can lose money through flat-rate charges or administrative costs, and they deliver poor returns because they are not big enough to invest in high-yielding productive assets.
The Bill will introduce a new value-for-money system to improve outcomes for savers. It will assess the DC schemes and the arrangements that they operate, based on cost, investment performance and service quality. This will identify and address poor-performing schemes or arrangements, encourage consolidation and improve member outcomes while promoting investment in a wider range of productive assets. It will also protect savers from getting stuck in underperforming schemes for years.
The Bill’s proposals will also help to unlock about £50 billion for investment in the UK economy. Easing the rules around surplus funds could help unlock billions for employers to invest in their businesses and deliver for scheme members. For many businesses, that may be the financial lifeline they need to free up capital for investment or debt reduction, although it is important to flag that pension scheme trustees working with employers will decide whether to release surpluses and act in the interest of scheme beneficiaries, and trustees will be required to maintain a strong funding position so that they can pay members’ future pensions when they fall due. Will Ministers ensure that member or worker representation on trustee boards is part of the plans?
Like many people, I bring lived experience to this space; I am speaking as someone who worked in human resources. I was often asked questions by employees about their pensions, and I always had to say, “I am not providing advice; this is solely information,” as I dished out their annual pension benefit statements. So I am very aware that most employees just want to understand more about their pensions: what their contributions are and how those will benefit them in the future. I therefore very much welcome the introduction of the long-awaited pensions dashboard, which will provide savers with their whole pensions picture—workplace and state pensions —securely and all in one place online. We hope that it will finally be with us next year. I commend the Bill to the House.
Manuela Perteghella (Stratford-on-Avon) (LD)
Although this Bill aims to strengthen pension investment, improve resilience and boost pension pots, many of my constituents are among the large number of individuals who face serious pension injustices right now. I welcome some of the reforms that the Government are introducing through the Bill, including the terminal illness and life expectancy measure. However, I am concerned that it does not go far enough to protect vulnerable pensioners in the UK now and tomorrow, or to ensure that we will not have future pension scandals.
I recently raised in the House the immoral Midland bank—now HSBC—pension scheme clawback, whereby long-serving employees are unfairly deprived of large portions of their DB pensions through a misleadingly labelled “state deduction”. The Government’s response was that the clawback is a legal process and they are powerless to assist former HSBC employees who have been financially impacted by those deductions. A disproportionate number of them are women.
Experts from Exeter University have put together a number of recommendations for the Government that would ensure that pension injustices such as the HSBC clawback scheme would no longer be able to operate. If the Government do not legislate against such injustices now, they are wilfully keeping pensioners—my constituents —in poverty.
The same can be said for the widows and widowers and partners of former policemen and women upon their remarriage or cohabitation, despite the fact that in Northern Ireland and Scotland, and for widows and widowers of armed forces personnel, survivors’ pensions are upheld regardless of remarriage or cohabitation. A court ruling in 2023 decided that was not to be the case for widows or widowers of policemen and women. Police force pensioners deserve consistency throughout the UK.
The most high-profile pension injustice is the one affecting the WASPI women—Women Against State Pension Equality Campaign—who saw rapid and steep increases to their state pension age without adequate notice, and for whom the Government have failed to provide adequate compensation despite the instruction of the ombudsman to do so. What is the point of re-establishing the ombudsman’s legal powers and restoring them as a pension court if the Government refuse to listen to such judgments? That is by no means an exhaustive list; many other pension scandals need addressing.
It is worrying that we do not see an explicit commitment in the Bill to support the divestment of pension funds from planet-wrecking industries. For example, local authorities invest about £10 billion in direct or indirect fossil fuel industries through their local government pension scheme funds. We must act now to protect pensioners and deliver prosperity for our future generations while protecting our planet.
Neil Duncan-Jordan (Poole) (Lab)
The Bill represents a timely attempt to create a system whereby fewer and bigger pension funds can provide better value for members and do more to support the UK economy. Key to this, though, will be ensuring that pensioners get a decent income in retirement, alongside creating the conditions that allow pension funds to invest in ways that benefit the UK, support good jobs and finance a just transition to a low-carbon economy.
The Bill needs to acknowledge, in the direction it takes, the scale of the task that we face. One in six pensioners today lives in poverty. Only 62% of pensioners receive an occupational pension of any kind, and those who do get an average of just £210 a week. Half of defined-contribution savers—around 14 million people—are not on track for the income they expect, and the 2017 auto-enrolment review recommendations have still not been implemented. Those challenges need to be addressed, along with the unfairness of the current rules around tax relief, which benefit higher earners and need reform.
As has been mentioned this evening, the Bill does not consider the specific issue of adequacy, and how the state pension interacts with defined-benefit and defined-contribution schemes. Given that the aim of a pension is to provide an income in retirement, it is vital that we look at pensions in the round, not just those associated with occupational or private schemes. A statutory review into retirement incomes every five years would give this and future Governments the oversight needed to regularly assess the adequacy of our pension system, including the opportunity to look at contribution rates for employers and employees. I am aware that the second stage of the pensions review will consider those points, but I would be grateful if the Minister gave a little more clarity on when that is likely to begin.
The Bill needs to be strengthened on the issue of climate change and the destruction of nature. UK pension schemes continue to hold around £88 billion in fossil fuel companies, including those involved in new coal, oil and gas exploration, and have investments in companies linked to deforestation around the globe. Over 85% of leading schemes lack a credible climate action plan. Consolidating smaller pension pots into larger megafunds provides the ability to invest in long-term infrastructure projects, but that must not be at the expense of the environment.
Caroline Voaden (South Devon) (LD)
Does the hon. Member agree that there is an opportunity here to do something transformational for our local communities by enabling funds, particularly local government pension funds, to invest in much-needed infrastructure like care homes, special schools or even our high streets, which would provide a secure long-term return and could be transformational for local communities that need investment?
Neil Duncan-Jordan
I think that what the hon. Member raises is the creativity that we need on this issue, so that we look beyond the obvious investments towards some that perhaps have more social worth. I hope that the Bill will allow for that.
For pension savers to have a secure future, we will need to phase out investments in fossil fuels. As the Chancellor has recognised, all financial sector regulation and legislation should integrate climate and nature. I would be grateful if the Minister could therefore address whether there will be legislative action, not just voluntary commitments, to phase out the destructive environmental investments that pension funds currently make, and to introduce an element of the Bill that acknowledges the connection between green investments, environmental protection and decent pensions.
Turning to the local government pension scheme, governance structures vary widely across the existing pools, and reporting has been inconsistent. Pooling arrangements have not always provided the power to influence investments, which is why the TUC, for example, is calling for a thorough review of the performance of existing pools to identify best practice in the relationship between funds and pools, as well as in governance arrangements, and for the introduction of clear and consistent reporting requirements before any acceleration and further consolidation takes place.
It is also important to point to the democratic deficit that exists within the scheme as a whole. While the role of member representatives within the LGPS is a great strength, they are largely absent from pool governance structures at present, and this legislation does not specify a role for those people. Given that pension funds are the deferred wages of the workforce, we must ensure that there is greater member engagement and democratic oversight by those involved in the scheme. Not only should this stretch to having guaranteed places on boards with full voting rights, but it must ensure that scheme members can have their say as to where their money is invested. There will undoubtedly be occasions when members are concerned about investments in particular industries, or, I would add, in particular countries, and they should have a mechanism by which those views can be expressed.
Jayne Kirkham (Truro and Falmouth) (Lab/Co-op)
Does my hon. Friend agree that it is good that, in the local government pension scheme, representatives of both employers and employees can sit on the pension committees, and that we often have trade union representatives on the committees as well?
Neil Duncan-Jordan
My hon. Friend is quite right. Trade unions do sit on many of the LGPS committees. I was making the point that it is on the pools where there is less representation for those member voices to be heard, and that is extremely important.
Finally, I want to talk about the pre-1997 pensioners. We know that those who have seen the biggest drop in income are those who built up pensions before 1997. They have not received an annual inflation-linked increase to their pension and, over time, particularly when inflation is high, the value of their pension is eroded. Some 80,000 Pension Protection Fund members, mostly older people and disproportionately women, including some of my constituents, find themselves in this position. I hope the Government will therefore consider legislating to provide inflation protection on pre-1997 benefits, and to give the PPF greater flexibility to use its surplus to give discretionary improvements to members.
In conclusion, the idea that workers’ pension funds can be used to build much-needed social housing and invest in green technology and jobs is something that a progressive Labour Government should be proud of, and I hope we can ensure that the Bill delivers a win for pensioners, a win for our environment and a win for society as a whole.
Mr Peter Bedford (Mid Leicestershire) (Con)
Cross-party working is essential to ensuring that there is public confidence in a system we will all need to use in our twilight years. That is why Conservative Members are ready to work constructively to improve this legislation and, where necessary, to provide a “critical friend” approach and challenge the Government’s thinking. When it comes to pensions and the long-term financial security of our constituents, we should not play party politics. It is in this spirit that I raise my own concerns with the Bill.
The Bill does not focus enough on increasing the amount of money flowing into people’s pension pots—something we literally cannot afford to ignore. I am proud that it was the last Conservative Government that led the introduction of auto-enrolment—a significant pensions reform that dramatically improved individuals’ financial wellbeing in later life. The 8% contribution was a game changer. Yes, the system relies on inertia, but for the first time, millions of workers began saving for their retirement. We must now confront an uncomfortable truth: the contribution rate looks less adequate by the day. Too many of our constituents are heading towards retirement without the income they will need. For example, the Pensions Policy Institute has highlighted that 9 million UK adults are currently under-pensioned.
Inaction is not an option. We are allowing people to sleepwalk into a retirement crisis. The level of auto-enrolment contribution was never intended to be a silver bullet. Instead, it was conceived as a foundation or starting point for pension savings. Importantly, that foundation was once supported by two key pillars: defined-benefit schemes, which offered guaranteed incomes to many, and higher levels of home ownership, which provided an asset to fall back on in later life. Both have eroded significantly over the last two decades. The 8% auto-enrolment rate on its own is woefully inadequate, and many workers will not realise that in respect of their own financial circumstances until it is too late.
It would be all too easy to simply raise the auto-enrolment rate to some arbitrary level, but we would find ourselves back here in 15 years’ time having the same conversation about a system where inertia and disengagement continue. If we truly want lasting change, we cannot focus solely on the percentage; we need to dramatically improve how people engage with their savings. That starts with improving financial education. As the sponsor of a private Member’s Bill on this precise topic and as a chartered accountant by background, this is a cause on which I place great importance. Shockingly, though perhaps unsurprisingly, Standard Life has highlighted that three in four people do not know how much they have in pension savings. That needs to change through increased engagement, but also by allowing savers increased control over their own savings. People should be able to easily view all their pots in one place, which is why it is frustrating to have seen delays to the roll-out of the pensions dashboard, which many hon. Members have mentioned.
The pensions dashboard will encourage individuals to make active choices, to understand their options and to assess whether their current savings are enough for their desired lifestyle in retirement.
Kirsty Blackman
On that note, does the hon. Member agree that we should also make it easier for people to understand what a defined-contribution scheme pot actually means for them in retirement—that is, how much income it will get them on a monthly or annual basis, rather than just, “This is the value of the pot”?
Mr Bedford
The hon. Member makes an important point. That goes back to financial education and ensuring that people truly understand their pensions and savings.
Increasing savings is important, but we need to ensure that it is driven by individuals who understand and can shape their own financial futures. Other countries have looked at increasing incentives for saving. South Africa and the US have schemes that enable people to draw from their pension pots in tightly defined circumstances, such as for emergencies or investment opportunities. Such flexibility would increase confidence in pension savings and help address the other concerning fact that 21% of UK adults have less than £1,000 set aside for emergencies, leaving them susceptible to economic shocks outside of their control and, in turn, less likely to prioritise savings in their pensions.
Poor pensions adequacy does not just harm retirees; it has serious implications for the state. As our life expectancy continues to rise, the state’s pension bill will continue to increase. Benefits like pension credit will increase exponentially as the lack of adequate private provision leaves more and more relying on the state. As we saw just last week, it is often incredibly hard to reform welfare. As a Conservative, I believe that the answer lies in personal responsibility and in encouraging and helping people to build up their own private pension provision for the benefit of themselves, their family and, ultimately, the rest of society.
Kit Malthouse
My hon. Friend is making a strong speech and some strong points. Does he agree that the alarm bells he is ringing about financial education, the under-provision of pensions and longevity are even more stark and alarming next to the demographic change that means that over the next 30 years, we will see the number of workers per pensioner plummet? We will go from about 3.6 workers per pensioner at the moment to well under three by 2070, which means that even if pensions are not enough, the country will not be able to afford to plug the gap as it does at the moment?
Mr Bedford
My right hon. Friend makes a compelling case. As I said in my speech, this goes back to financial education and ensuring that we all understand the implications of pensions adequacy.
My concern about adequacy does not mean that the Bill does not have its merits. The continuation of Conservative policy, the small pots consolidation and the creation of megafunds are sensible reforms that will increase individuals’ pension pots by reducing dormant pots and increasing economies of scale. However, this is a missed opportunity for a Government with a large majority. They could have acted more boldly, moved faster and improved pension adequacy throughout the United Kingdom.
I would like a clear commitment from the Government that they are actively looking at improving pensions adequacy. The Labour party has long professed to be the party of workers, yet some who look at the Bill will sense that it does not go far enough in preventing the UK from declining into being a society funded by welfare in retirement. Let us encourage people to strive, work hard and save more for a better future. I very much hope that the Government will work collegiately and cross party with His Majesty’s Opposition in Committee to ensure that our constituents do not sleepwalk into a retirement crisis.
Jayne Kirkham (Truro and Falmouth) (Lab/Co-op)
Having been lucky enough to chair a local government pension scheme committee and sit on a pool oversight board—purely because I was the only person left on the committee after the election, I think—I would like to talk about the Bill’s impact on local government pension schemes.
The Bill would consolidate LGPS funds into six pools, on the basis that that would be effective in achieving scale, diversification of assets and cost savings. LGPSs were recently merged into eight pools by the last Government, of course. Cornwall’s pool contained nine LGPSs from the south-west and the Environment Agency. It took a number of years to set up and transfer the funds over to the pool. Setting-up costs meant that the consolidation savings from acting at scale are starting to show only now, a few years later. Hiring an extra tier of staff on top of the LGPS staff, who were still needed to administer the fund, correspond with members and employers, and manage the investments, was expensive. Closing down our current pool and joining another is likely to be the same. There are also concerns, which I would like the Minister to address, that going to a larger pool may affect that local link. We have a strong south-west pool at present, and removing that link and scattering us across the country could impact the effectiveness of our pool at making local investments. That is what I want to talk about next.
Bringing schemes together enables them to invest in bigger local projects, from infrastructure to clean energy. That boosts returns for savers and helps communities. Cornwall was very good at that. We used our £2.3 billion, which is not a huge fund when we think about the size of the pools that we are talking about now, to do precisely that kind of thing.
Other Members have talked about responsible investment. We had a very strong responsible investment policy, and our carbon-neutral target date was earlier than that of the rest of the pool. We were able to maintain those policies and our environment, social and governance focus by having a strong presence on the oversight board. That enabled us to influence the pool. I hope that this influence will continue, so that pools are not dragged down to the lowest common denominator when it comes to ESG matters and responsible investment, but will instead be raised up.
Our local social impact fund was, in the end, 7.5% of our investments. We were able to channel our LGPS investment into affordable private rental housing and local renewables in Cornwall, as well as renewables more widely around the UK. Will local government pension schemes still be able to set their own targets in the pool in this way and do their own thing? Although we worked closely with the pool to ensure that pooling delivered scale advantages, we wanted to make sure that our local impact portfolio, as part of our social impact allocation, enabled us to combine our fiduciary responsibilities to our members with delivering that social and environmental positive change in Cornwall, where we were, and where our members worked and lived. That had a massive impact on how the funds were viewed locally. We hoped that it would provide a framework for others to follow, but within our pool of 10, we were the only ones who did it. Will the Minister confirm that local LGPSs will be able to set their own targets in a bigger pool, even if the area is geographically disparate?
I want to mention the measures that require regulations for the LGPS to include a duty for administering authorities to work with strategic authorities in their area to identify opportunities for investment. When we ran our social impact fund, it was difficult to organise that at arm’s length. Members who were part of the local authority wanted to direct where all investments went, but that had to be done at arm’s length through investment fund managers, who have little connection to the area. It was hard to stand back and watch them do that. How will the fiduciary duty allow local government pension scheme administration authorities to work with the strategic authorities in their area, particularly if, as in Cornwall, they are one and the same? Cornwall unitary authority was exactly the same size and had the same authority as the administrating authority of the LGPS.
To conclude, the scheme worked well in Cornwall and provided good results. I still drive past the houses in Camborne that were built by our local government pension scheme; local people live in them, doing local jobs. The good results were mainly down to good officers, to be honest, and a flexible pool that allowed us to do our own thing and take our own route. I hope that that freedom will remain under the Bill.
Blake Stephenson (Mid Bedfordshire) (Con)
We all share in the ambition to ensure the sustainability of pensions, and to provide the best possible income for all our constituents in retirement. Given the time, I will keep my comments reasonably short, but having come to this place from the City—though I did not work in the pensions industry—and as an officer of the all-party parliamentary group for pensions and growth, I look forward to providing more detailed scrutiny of the Bill as it progresses through the House.
I rise to share concerns about the Bill, some of which have been shared with me by City institutions. First, I am concerned that this Bill demonstrates a broader problem with this Government’s approach to the economy. Rather than seeking to support free enterprise and entrepreneurship in order to grow our economy, the Government seek state-led interventions, and want to direct funding to Government-approved investments. That is the wrong approach, as many hon. Members have said this evening.
On scale and asset allocation reforms, I am concerned that the Government seem to believe that they, and regulators, should direct how pension funds invest, rather than schemes acting in the best interests of their members—a matter raised by my right hon. Friend the Member for North West Hampshire (Kit Malthouse). Trustees who are directed to invest in assets by the Government or regulators may need to be protected by safe harbour provisions in the event that their investments perform less well than alternatives that they may have chosen. Has any consideration been given to such safe harbours in the Bill? It is not clear why these reforms are necessary. In his closing remarks, will the Minister say why, given that policies such as the value-for-money tests and small pots consolidation are already in progress, he feels that these additional requirements are needed?
I am also concerned to find that Ministers propose making it a statutory requirement for schemes to follow a specific route when considering transferring into a superfund. Trustees have a fiduciary duty to their members—we have heard a lot about that in the debate—and this direction from Ministers runs counter to that duty. Will the Minister provide assurance to the House on those points?
Turning to the sustainability of UK pensions, I would welcome further clarity from Ministers on their proposals for powers to pay a surplus to an employer. How confident is the Minister that the thresholds set for the release of surplus are sufficient to protect member benefits? That is particularly important, given that scheme surpluses have emerged only recently. Does the Minister plan to specify the authorised uses for surplus return? For example, will surplus be protected from being paid to overseas parent companies?
I welcome the Government’s desire to ensure that our pensions system is sustainable and contributes to UK economic growth. I am just not as enthusiastic about some of the Government’s instincts to deliver Government-led investment, at the expense of market-led growth. I look forward to scrutinising the Bill further as it progresses.
Jim Shannon (Strangford) (DUP)
It is a real pleasure to speak on this Bill. Pensions and the regulation of private pensions are increasingly of national interest. I believe that regulation is needed, so I welcome the Bill. Obviously the small print will become more apparent during its passage, but it is good that we are introducing the Bill.
The Government’s intention of ensuring that people have a private pension to supplement their income when they eventually reach retirement is increasingly being realised. By and large, most young people—22 million, I understand—have a pension. The Minister will remember the story I told him about when I was 18. I think I am right in saying that I am the oldest person in this Chamber, so that was not yesterday. The fact is that pension advisers were almost unheard of then. I will tell hon. Members who the best pension adviser I ever had was: my mum. When I was 18, she took me down to the pension man in Ballywalter. She said, “You need a pension.” I said, “Mum, I’m only 18. What do I need a pension for?” She said, “You’re getting a pension.” We know how it is: our mum tells to do something, and we just do it, so I got a pension on her advice.
I ended up with four pensions over my working life, which were all beneficial. I did not understand the value of them until I came to the stage at which I was going to cash some of them in—I realised the value of them then. Today, we have an opportunity to advise young people of the need for a pension. When it comes to pensions, not everybody has my mum, but everybody has somebody, or an equivalent through Government.
Let me give a quick story about my office staff. I employ six ladies and one young fella. They are in their 20s, 30s, 40s, 50s and 60s. I will not get into trouble by naming the staff in each bracket, but their approach to their pension varies by age bracket, and that is a fact; they see it differently. Listening to their discussion highlighted to me the need to educate people on the importance of paying into their pension, because it is so important that we get this right. That is why the Bill is important: it is an opportunity to advise people.
One member of my staff has two children at primary school. She highlighted that she was paying an additional 5% into her pension on the advice of her older colleague, only to find that the tax on her savings this year meant that she actually had less money in her account each month compared with last year. The first thing to go was not the kids’ piano lessons or hockey camp—she said that those experiences shaped her children’s memories. The first reduction was scaling back on her pension additions. People might say, “My goodness me! That was not necessary,” but actually it was, if she wanted to preserve that lifestyle for her children. It seems that the tax on savings means that one mum has made the choice to stop supplementing her pension, and to instead sow the money into her children’s lives just now. That is not the aim of the Government or the Minister, but there is only so much that we can tax the middle class before they make cuts that are not in their best interests.
Apart from a number of clauses, this legislation does not directly affect Northern Ireland, but it should be noted that accompanying legislation and a number of legislative consent motions—statutory instruments—will come to this Chamber that will change the pension schemes in Northern Ireland. Ultimately, what we discuss here and what happens through this Bill will come to us in Northern Ireland, and the Northern Ireland Assembly will bring provisions in Northern Ireland in line with those here. I have therefore considered carefully the aims of this legislation, and whether I believe it will be effective in achieving those aims. The Minister has said that this Bill will fundamentally
“prioritise higher rates of return for pension savers, putting more money into people’s pockets in a host of different ways. For the first time we will require pension schemes to prove they are value for money, focusing their mindset on returns over costs and protecting savers from getting stuck in underperforming schemes for years on end.”
When we look at the issues, we understand the necessity for the Bill.
In his introduction, the Minister referred to 13 million small pension pots floating about in the UK pension system, with £1,000 in each. It seems logical to have a better pension system for people—I think it does, anyway, and maybe we all do. It is essential that the opt-out is iron-clad, and I will give a reason why. One of my office staff members would not be comfortable with her pension paying into any companies that test on animals, for example. Another has said that she wants the highest return, full stop, so we must ensure that the Bill enables people to follow their moral obligations as well as get a return on their work. I am concerned that consumers will be tied down and face difficulty in leaving pots, which is something that must be addressed. With that in mind, I welcome this Bill to regulate the pension market, but we must ensure that it does not become a mechanism for Government to control the private pension industry and direct pension pots into Government investment. We must ensure that this Bill simply protects pensioners, and I very much look forward to watching its progress.
Rebecca Smith (South West Devon) (Con)
It has been a privilege to hear so many well-informed and considered speeches this evening. I am sure we would all agree that there is clearly significant expertise in the Chamber.
The heart of this Bill is people doing the right thing by preparing for their future and saving into their pension pots. With auto-enrolment having been introduced by the Conservatives in 2012, there are now over 20 million employees saving into a workplace pension. That is 88% of eligible employees saving into a pension and preparing for later in life, which is a great achievement that I hope everyone in this House can celebrate. However, while the number of people who are saving has increased significantly, engagement has remained low, as we have heard this evening. Less than half of savers have reviewed how much their pension is worth in the past 12 months, while over 94% of pension savers are invested in a pension scheme’s default investment strategy. With people taking the right steps and starting to save for their retirement early thanks to our action, we must now ensure that the pensions market is working for them, so that they get the best returns on their savings and ultimately have the comfortable and secure retirement for which they were planning.
We have heard many contributions this evening. I will briefly mention the hon. Member for Tamworth (Sarah Edwards) and my right hon. Friend the Member for North West Hampshire (Kit Malthouse), both of whom gave us lengthy and very detailed speeches presenting both sides of the argument. [Interruption.] They were very enjoyable speeches—that was not a criticism, just an observation of the way things have gone this evening. Both the hon. Member and my right hon. Friend clearly showed the expertise that they garnered earlier on in their careers and expressed some legitimate concerns, particularly about the consensus that there has perhaps been in the Chamber this evening. Some points have been made showing that that consensus is not entirely guaranteed, certainly among Conservative Members. We support the principles behind the Bill—indeed, much of what we have heard builds on the work that the Conservatives were doing while we were in government. We want to ensure that poorly performing pension schemes are challenged, excessive administration costs are removed, and savers receive the best returns on their investments. Ultimately, that is how we will ensure more people have a comfortable retirement.
However, we have concerns about some specific measures in the Bill, which we will scrutinise further as it progresses. In particular, we have significant concerns about the reserve powers that allow the Government to set percentage targets for asset allocation in core defaults offered by defined-contribution providers. In other words, a future Government could tell pension schemes where they must invest their funds, regardless of whether it delivers good returns for savers. This potentially conflicts with their fiduciary duty to act in the best interests of their members. While I know the Minister will stress that the Government do not intend to use those reserve powers, that neither addresses concerns about what a different future Government could do nor explains why those powers are being brought in. It could be asked why the reserve powers are being created at all.
We want to see more investment in the UK market. While this country is one of the largest pension markets in the world, only around 20% of DC assets are invested in the UK. However, the solution should be to make domestic investment more attractive—to create opportunities that deliver better returns for savers—not simply to mandate investment in assets that deliver lower returns. During our last term in office, we worked with the industry to introduce the Mansion House reforms as a voluntary agreement to boost investment in the UK, but this Bill goes further—it could mandate such investment against the wishes of the industry. Similarly, the local government pension scheme will have a new duty to invest in the local economy. While that is understandable at face value, it raises concerns about returns on investments if there are not suitable local opportunities.
We also have questions about some of the Government’s assumptions, and would like to understand more about how they were reached and the evidence used. For example, why is the minimum value for megafunds just £25 billion? Why is having fewer and larger pension providers better? We recognise the benefits of economies of scale, but what about competition and innovation? It has also been raised by the industry that a significant number of details are unknown, as they will come later in the form of regulations. Can the Minister set out some more details on when the various sets of regulations will be published, and whether that will be before the Bill has passed through Parliament?
Finally, the Bill fails to cover a number of areas, and we would like to understand why. Concerns about pension adequacy have been touched on this evening and whether people are saving enough to have the security and dignity in retirement they deserve. Auto-enrolment was a good start, but it will not be the only solution. Indeed, lots of people are still not eligible. When we passed the Pensions (Extension of Automatic Enrolment) Act 2023, the then Conservative Government confirmed their intention to reduce the lower age limit to 18, as has been mentioned this evening. As yet, the current Labour Government have not done so. Auto-enrolment does not apply to self-employed people, despite just 16% of self-employed people actively saving into a workplace or personal pension. The Bill does not look at whether people are saving enough and early enough, and I would be grateful if the Minister could set out whether that is deliberate and whether further action will be taken.
I briefly draw the House’s attention to my declaration in the Register of Members’ Financial Interests as a serving councillor, but I hasten to add that unfortunately I am not a member of the local government pension scheme. Sadly, I was elected after that provision was scrapped, but an entire chapter is given over to the local government pension scheme in this Bill. Indeed, it is a key element, enabling local authorities to use pension schemes to invest in their local economy. However, as with much of the legislation being taken through Parliament at the moment, the who, what and when remain unanswered. Without the English devolution Bill before us, for example, we are not entirely clear on what form local government will take, nor entirely clear on how compatible this Bill is with that forthcoming local government legislation.
We are in effect being asked to legislate on a moveable feast. Indeed, there is likely to be a considerable transition timetable for local government changes, which all raises questions about how the local government reorganisation transition fits in with the plans in the Bill. Following on from the comments of the hon. Member for Truro and Falmouth (Jayne Kirkham), how will asset pools work under local government reorganisation? Who gets the potential investment benefits or spending power, and where does all that investment take place?
The Bill also fails to mention any reforms to the local government pension scheme, which reached a record surplus of £45 billion in June 2024. One reason for that might be that it is being used to offset Government debt under the Chancellor’s current fiscal rule, which uses public sector net financial liabilities to measure that debt. That is a huge amount of money in local government terms, and it is not going towards local services, business support or regional projects. Can the Minister confirm whether the Government intend to reform the local government pension scheme beyond the measures outlined in the Bill? Finally on the local government pension scheme, I look forward to seeing more detail as to how newly created asset pools will work in practice with the local government pension scheme.
Local government treasury management over recent years has seen local authorities taking advantage of the investment opportunities available to them to acquire properties and the like, but often some distance from their local authority. That is something to tease out in Committee, but when the Government state that they wish local authorities to have finance available to invest locally to bring economic growth, what does “local” look like?
Finally, can the Minister confirm that fiduciary rules regarding investments and how they are assessed will prevail going forward? Overall, we will support a Bill that reduces administration costs, removes complexity for savers and maximises value for members, ultimately helping people who took the right action to save for their retirement to live in comfort and dignity. While this Bill makes the start, there is more to do to get it right, and we look forward to working with the Government to achieve that. There is plenty of food for thought for amendments to take us forward.
The Parliamentary Under-Secretary of State for Work and Pensions (Andrew Western)
At the outset, I take the opportunity to declare my own interest. Unlike the hon. Member for South West Devon (Rebecca Smith), I was elected prior to Lord Cameron ejecting councillors from the local government pension scheme. As a former member of Trafford metropolitan borough council, I also have savings in the local government pension scheme. I am therefore set to benefit from the improved governance of the LGPS initiated by the Bill.
These measures are testament to our dedication to building a resilient, efficient and fair pension system, galvanising and creating the potential to boost our economy at every opportunity. It is our aim to build a future in which every saver can look forward to a secure and prosperous retirement.
I welcome the broad, if not entirely universal, support for the Bill. The open discussion in which we have engaged today is important because, as a responsible Government, we want the House to be assured that the new powers in the Bill come with appropriate mitigations. We understand that Members will have questions, and I have listened carefully to those that have been raised. I remind everyone that the highly fragmented pensions framework has not served savers well, and there is a need for improvement as both the industry and savers demand a better service. The Bill goes to the core of what is needed, providing big solutions to the big problems that are undermining so much potential for savers and the economy.
Let me now turn to some of the comments and queries that have arisen throughout the debate. I thank my hon. Friends the Members for Tamworth (Sarah Edwards), for Luton South and South Bedfordshire (Rachel Hopkins), for Buckingham and Bletchley (Callum Anderson), for Poole (Neil Duncan-Jordan), for Truro and Falmouth (Jayne Kirkham) and for Glasgow East (John Grady) for speaking in favour of some elements in the Bill, and for their recognition of the investment and growth opportunities that it can unleash.
I am grateful for the constructive support and consensus that we heard from both the hon. Member for Wyre Forest (Mark Garnier), who opened the debate for the Opposition, and the hon. Member for South West Devon, who closed it. They were right to mention the specular success of automatic enrolment, but that was half the job, as pointed out by the Pensions Minister, and I think the hon. Member for South West Devon acknowledged that we now need to move on to the pressing task of dealing with pension adequacy, which will be taken forward by the pensions review. They were also right to refer to the complexity and fragmentation of pension pots.
I welcomed the support from the hon. Member for Wyre Forest for the long-awaited pensions dashboard, and was particularly pleased to hear of his support for changes in the local government pension scheme, although he expressed concern about certain parts of the Bill and the potential for propping up a failing scheme that arises from those changes. Let me reassure him that no cross-subsidising between administering authorities would be caused by any changes made by the Bill. As for the question of safeguards in respect of surplus release, we cannot stop share buy-backs and the like, but we have confidence in the ability of trustees to adhere to their fiduciary duties.
I understand that mandation has given rise to the fundamental objection of not just the hon. Gentleman but a number of other speakers, but I do not believe that it undermines fiduciary duties, and I do not agree with that analysis. The Bill contains clear safeguards that are consistent with those duties, not least in clause 38, which refers to an opt-out in the event of material detriment to members of a fund. The hon. Gentleman also raised questions relating to gilts; we believe that nothing in the Bill would undermine a well-functioning gilt market. However, as I have said, I welcome the broad support for the Bill, particularly with regard to value for money, small pots, guided retirement products and terminal illness changes.
Kit Malthouse
I want to be clear—so that the House is clear—about the opt-out to which both Ministers have referred. Is it a correct interpretation to say that it is not an opt-out at the discretion of the trustees of the fund, and that the Bill requires them to apply to the regulator with evidence for the regulator to make a decision to grant them the ability to opt out? The idea that trustees are somehow free to make a decision in the interests of the fund is not actually correct, is it?
Andrew Western
The right hon. Gentleman is correct in his interpretation, although I do not entirely agree with his characterisation. It is, I think, perfectly reasonable that we would ask trustees to explain how they feel that what is proposed would be to the detriment of their scheme members.
I welcomed the support of the Liberal Democrat spokesperson, the hon. Member for Torbay (Steve Darling), for many of the general proposals in the Bill. I entirely agreed with his comments about the need to give savers the best possible advice and protections. I also agreed with what he said about the opportunities to deliver further investment in our economy. As for social housing, which others also raised, he will know that many pension schemes already make such investments, and I certainly support their continuing to do so.
We then heard an excellent speech from my hon. Friend the Member for Tamworth. I particularly welcome her comments on the value-for-money changes, and she is absolutely correct to highlight the importance of looking at schemes in the round, not just on cost. On the pipeline of investments that she set out, I hope she is reassured by some of the steps that the Government are taking—for instance, through the Planning and Infrastructure Bill—to ensure that there are a range of exciting major projects, such a reservoirs and houses, that people will be able to invest in.
The right hon. Member for North West Hampshire (Kit Malthouse) is certainly correct to say that he punctured the air of consensus in outlining his reservations. I know that my hon. Friend the Pensions Minister has agreed to have a conversation with the right hon. Member next week, and I hope that he will find that incredibly helpful. Clearly, it is not for me to comment on whether this should be a hybrid Bill. On the question of megafunds, he is right that not all large schemes provide a better return, but the evidence shows that while that is not always the case, they do see better returns on average. That is an important point.
The hon. Member for Aberdeen North (Kirsty Blackman) was correct to raise how long we have been waiting for the pensions dashboard, and I am similarly excited and anticipate its arrival. I promise that it will be worth the wait when it finally arrives. On her point about the scope of the Bill, the pensions review will take forward a number of the issues on which she and other Members said the Bill could have gone further. The pensions review is under way, and we will say more about that incredibly soon.
Kirsty Blackman
On the pensions review, there is a massive cross-party consensus that there is an issue with its adequacy, and we want to see it tackled. Will Ministers agree to take this forward in as cross-party a way as possible? We all care strongly about it.
Andrew Western
This matter is important to everybody in this House, because it is important to the constituents of everybody in this House. I would be very open to ensuring that Members of this House are able to feed as much as possible into the pensions review. It is an incredibly important piece of work.
I return to the question of my age. As a millennial, I am terrified of admitting that I have now reached an age when I should be thinking about my pension, having just turned 40. In any event, some of the work around the consolidation of small pots and so forth will help people.
A number of Members have asked about the balance of the distribution of any surplus release, and it is ultimately for trustees to decide on that balance. On the point made by the hon. Member for Aberdeen North about potential guidance coming forward—the hon. Member for Mid Bedfordshire (Blake Stephenson) touched on this as well—that is something that I will discuss with the Minister for Pensions. It may well be teased out in Committee.
I hope that the hon. Member for Spelthorne (Lincoln Jopp) will be a member of the Bill Committee and continue the dialogue with the Minister for Pensions. I am always keen to find volunteers, and I hope that he will put himself forward. On the question of regulatory decision making, I hope that the Pensions Regulator has heard what he said about pace.
On the issue of divestment from funds that invest in fossil fuels and so forth, it is a matter for trustees. Individual flexibility on investments is a cornerstone of the system, but we are consulting on UK sustainability reporting standards and on transition plans.
Finally, we heard from the hon. Member for Strangford (Jim Shannon)—we always save the best for last. I am very grateful for his support for the Bill. If he was not 18 yesterday, I am sure it was the day before. None the less, I wish that everybody had a mum like his. We may not have had some of the challenges with the adequacy of people’s pensions had they all received such superb advice from their parents at the age of 18.
Today we embark on a transformative journey with this Pension Schemes Bill. This legislation underscores our readiness to deliver fundamental changes to the pensions landscape, an endeavour that is not only urgent, but essential for driving a future in which savers and, indeed, our economy can derive the benefits of a better organised, less fragmented and easier to navigate pension system, and I am pleased by the widespread support for the Bill across the House.
Question put and agreed to.
Bill accordingly read a Second time.
Pension Schemes Bill (Programme)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the Pension Schemes Bill:
Committal
(1) The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
(2) Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 23 October 2025.
(3) The Public Bill Committee shall have leave to sit twice on the first day on which it meets.
Consideration and Third Reading
(4) Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which those proceedings are commenced.
(5) Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
(6) Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.
Other proceedings
(7) Any other proceedings on the Bill may be programmed.—(Andrew Western.)
Question agreed to.
Pension Schemes Bill (Money)
King’s recommendation signified.
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purposes of any Act resulting from the Pension Schemes Bill, it is expedient to authorise the payment out of money provided by Parliament of—
(a) any expenditure incurred under or by virtue of the Act by the Secretary of State, and
(b) any increase attributable to the Act in the sums payable under or by virtue of any other Act out of money so provided.—(Andrew Western.)
Question agreed to.
Pension Schemes Bill (Ways and Means)
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purposes of any Act resulting from the Pension Schemes Bill, it is expedient to authorise—
(a) the levying of charges under the Pension Schemes Act 1993 for the purpose of meeting any increase in the expenditure of the Pensions Regulator attributable to the Act;
(b) the amendment of section 177(5) of the Pensions Act 2004 so as to increase the limit in that provision on the amount that may be raised by pension protection levies imposed by the Board of the Pension Protection Fund.—(Andrew Western.)
Question agreed to.
Pension Schemes Bill (First sitting)
Tuesday 2nd September 2025
(1 month ago)
Public Bill CommitteesPension Schemes Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 2 September 2025 - (2 Sep 2025)
The Chair
We are now sitting in public and the proceedings are being broadcast. I remind Members to switch electronic devices to silent. Tea and coffee are not allowed to be drunk during sittings. We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication and a motion to allow us to deliberate in private about our questions before the oral evidence session begins. In view of the time available, I hope we can take these matters formally and without debate. Time Witness Until no later than 9.55 am Association of British Insurers; Pensions UK Until no later than 10.25 am The Pensions Regulator; Financial Conduct Authority Until no later than 10.55 am Age UK; TUC Until no later than 11.25 am Legal and General; Aviva Until no later than 2.30 pm Local Government Pension Scheme Advisory Board; Hymans Robertson Until no later than 3.00 pm Pensions Management Institute; Society of Pension Professionals Until no later than 3.30 pm People’s Partnership; Nest Corporation Until no later than 3.45 pm Phoenix Group Until no later than 4.15 pm Pension Protection Fund; Brightwell Until no later than 4.45 pm Pensions Policy Institute; New Financial Until no later than 5.15 pm Deprived Pensioners Association; Pensions Action Group Until no later than 5.30 pm Border to Coast Pensions Partnership Until no later than 5.50 pm Department for Work and Pensions
Ordered,
That—
(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 2 September) meet—
(a) at 2.00 pm on Tuesday 2 September;
(b) at 11.30 am and 2.00 pm on Thursday 4 September;
(c) at 9.25 am and 2.00 pm on Tuesday 9 September;
(d) at 11.30 am and 2.00 pm on Thursday 11 September;
(e) at 9.25 am and 2.00 pm on Tuesday 14 October;
(f) at 11.30 am and 2.00 pm on Thursday 16 October;
(g) at 9.25 am and 2.00 pm on Tuesday 21 October;
(h) at 11.30 am and 2.00 pm on Thursday 23 October;
(2) the Committee shall hear oral evidence on Tuesday 2 September in accordance with the following table:
(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clauses 1 to 97; the Schedule; new Clauses; new Schedules; Clauses 98 to 102; remaining proceedings on the Bill;
(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 23 October.—(Torsten Bell.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Torsten Bell.)
Resolved,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Torsten Bell.)
The Chair
Before we hear from witnesses, does any Member wish to make a declaration of interest in connection with the Bill?
Kirsty Blackman (Aberdeen North) (SNP)
If the Government amendments in relation to the local government pension scheme go through, I have an interest as I am a deferred member of a local government pension scheme in Scotland.
Rachel Blake (Cities of London and Westminster) (Lab/Co-op)
I also wish to declare such an interest.
The Chair
We will now hear oral evidence from Rob Yuille, assistant director and head of long-term savings at the Association of British Insurers, and Zoe Alexander, director of policy and advocacy at Pensions UK. We must stick to the timings in the programme motion that the Committee has agreed. For this panel, we have until 9.55 am. Will the witnesses briefly introduce themselves for the record?
Rob Yuille: Hello. I am Rob Yuille. I am head of long-term savings policy at the ABI. We represent several of the largest defined-contribution workplace providers across group personal pensions and master trusts, insurers in the pension risk transfer market and retail pension providers. Between them, they serve tens of millions of customers and manage hundreds of billions of pounds in assets.
Zoe Alexander: My name is Zoe Alexander. I am director of policy and advocacy at Pensions UK. We are a not-for-profit organisation run for the benefit of our members. Our members serve 30 million savers, who invest more than £2 trillion in the UK and abroad.
Mark Garnier
Q
I will start with the most controversial point: the mandation of local government pension schemes when it comes to amalgamation and being forced to go into assets. There are two parts to my question. First, is it fundamentally right to entrust trustees with looking after the interests of the members of pension schemes and then, separately, to tell them how they should be investing that money? Secondly, are there any guardrails to protect pension fund members from being forced to invest in unwise investments?
Zoe Alexander: We are concerned about the precedent set by the reserve power in the Bill. We realise that it might not be used, and we hope that that will be the case. We hope that the work the industry has done to create the Mansion House accord and get DC schemes on track to invest more in the UK will fulfil its promise. The presence of the power creates a series of risks, and certainly enacting it would create a series of risks for savers in terms of its impact on investments, on price and, ultimately, on the value that is accrued to savers in the market.
We are looking for more guardrails on the power. We would like it to be constrained to apply specifically to the commitments in the Mansion House accord, and no more than that. We think that is appropriate, because the market and the Government have together set out what “good” looks like. If we agree on that, let us put that in the Bill and make it clear that that is the extent of the power.
We would also like the sunset clause on the power to be brought forward from 2035 to 2032. That would give more than enough time for the industry to deliver on the commitments in the Mansion House accord, and for the Government to assess progress and whether the power is required. We feel that keeping it on the statute book until 2035 would introduce undue political risk.
Mark Garnier
Q
Zoe Alexander: We absolutely support the general direction of the policy. Our members are very committed to investing more in the UK and they are doing a huge amount of work on that. They have already invested heavily in the UK, with huge investments from schemes such as the local government pension scheme. On the DC side, schemes are maturing; they need time to get to the scale of investment of schemes such as the LGPS, but they are on the journey and they are committed to doing that. We do not take this position because we do not agree that schemes should be investing more in the UK; it is to do with trustee discretion to make the decisions about where to invest.
Mark Garnier
Q
Rob Yuille: Yes, there are better ways. The specific point that you mentioned about prudential regulation rules are not for this Bill, but other measures that could be taken, essentially to make the UK an attractive place to invest, are the kind of things that the Government are trying to do. Along with the Mansion House accord, which we were delighted to take forward with Pensions UK and the City of London Corporation, we agree with the Government’s assessment that use of the reserve power should not be necessary and will not be necessary.
Firms are already investing in the UK. The Pensions Policy Institute’s latest statistics show that 23% of DC assets are in the UK, and annuity providers say that it is around two thirds, so we are talking about hundreds of billions of pounds in the UK. There is the appetite to invest in the home market, because they know it best, in the kind of projects that the Government are trying to drive forward and provide policy certainty about. We share the concern about the precedent it sets and the potential impact on scheme members, and we would propose another guardrail.
There is already provision for a review, were this power to be used, of the impact on scheme members, which is right, and the impact on the economy, which is also fair enough, but they should also look at the impact on the pensions market and the market for the assets that would be mandated, because there is a risk that it would bid up prices in those assets, and that it would create a bubble in them. There are guardrails, but more important, there are other measures, including things that the Government are already doing, that make this power unnecessary.
Mark Garnier
Q
Zoe Alexander: That is right, but often those things are consistent, and our members would agree with that. Those things are not inconsistent.
Rob Yuille: I agree.
Sarah Edwards
Q
Rob Yuille: The challenge is aligning it with scheme members’ interests so that they are not put at risk. If a surplus turns to a deficit, which it can do because it is by no means guaranteed, and if an employer then fails, there is actual detriment to those scheme members. As we know, economic conditions can change. It is an opportunity for employers, though—that is the purpose of it—and schemes can and do extract surplus now, often when they enter a buy-out with an insurer.
It does need guardrails, and the Bill includes the provision that it has to be signed off by an actuary and it is the trustees’ decision. That is important, but there is a related challenge about the interaction of the surplus and superfunds. Each of those is okay: you can extract a surplus, for the reasons that we have discussed, and you can go into a superfund if you cannot afford a buy-out. The problem is, if a scheme could afford buy-out, extracts a surplus and then no longer can, and then it enters a superfund, the scheme members are in a weaker position than they would otherwise be. There are a couple of things that could be done about that: either leave the threshold for extracting surplus where it is—which is buy-out level, rather than low dependency—or change the Bill so that the combination of surplus and superfund cannot be gamed to get around that. In any case, as you say, it is important to monitor the market, and for the regulators to be alive to potential conflicts of interest.
Zoe Alexander: Pensions UK is content with the idea of using the low dependency threshold for surplus release. We think the protections are sufficient. Providing that the actuarial certification is in place, the sponsoring employer is in a strong financial position and a strong employer covenant is in place, we think there are real benefits to be had from surplus release. We highlight the fact that some employers and trustees will be looking to move benefits from DB to DC using surplus release, or even to a collective defined-contribution scheme. We are interested in the potential of that to bolster the benefits of those types of scheme, and we would like Government to look at the 25% tax penalty that applies when doing that, because if those funds are kept within the pensions system, that is to the benefit of savers, so perhaps that tax charge need not apply.
John Milne (Horsham) (LD)
Q
Zoe Alexander: There will of course be metrics in the value for money framework that look at the longer term, and looking at longer time horizons is really welcome. One concern at Pensions UK is about the intermediate rankings in the value for money framework meaning that schemes cannot accept new business. That may well result in schemes doing everything they can, at any cost, to ensure they do not drop from the top rating to the intermediate rating. That could cause damaging behaviours in terms of herding. We want to ensure that people in the intermediate ranking, whether that is within a couple of intermediate rankings—perhaps you have a top one and then a bottom one, but somewhere within that intermediate scale—you can continue to take on new business, and the regulator will perhaps put you on a time limit to get back into the green, back into the excellent rating. We think that if it is so binary that as soon as you drop into intermediate, you cannot take on new business, that will heighten the potential downside risks of investment behaviours that you are describing.
Rob Yuille: I agree with that. I strongly support the value for money framework—I think both our organisations do—and the intent to shift the culture away from just focusing on cost and to value for money more generally, but yes, there is that risk. There are multiple trade-offs here: it is about transparency and how much you disclose, versus unintended consequences of that. We want high performers but, for high performance, you need to take risks.
As well as what Zoe says, which we might build on, we do not want a one-year metric. One year is too short a period; pensions are a long-term business. There should be a forward-looking metric, so that firms can say how they expect to perform over the longer term and then regulators and the market can scrutinise it.
On the points that were raised about intermediate ratings, this is another area where there is a potential combination of two bits of the Bill. There is provision for multiple intermediate ratings. It was originally conceived as a traffic light system, so there would be three ratings. If there were four, it would be okay to say to schemes, “You are not performing; you need to close to new employers,” but if there are three, firms will do everything they can to play it safe and make sure they get the green. So the interaction of those is really important.
John Grady (Glasgow East) (Lab)
Q
Zoe Alexander: The small pots reforms are absolutely critical. The problem of small pots was foreseen by the Pensions Commission years ago. We all knew we would face that problem with automatic enrolment, and I think people would agree that it has taken too long to grasp the nettle. We at Pensions UK are really delighted to see the measures in the Bill to deliver the multi-consolidator model. It is really important that the pot size is kept low, as is proposed in the Bill, at least initially, to solve the problem of the smallest pots in the market. Pensions UK has undertaken a feasibility study, working with Government, to look at how that small pots system might be delivered in practice. That work is publicly available. It gets quite technical quite quickly, so I will not go into the details of it, but we believe there is a feasible model of delivering the small pots solution at low cost—one that should not involve Government in a major IT build.
Steve Darling (Torbay) (LD)
Q
Rob Yuille: We have both mentioned the Mansion House accord already. In addition to the ambition to which providers committed, there were a series of critical enablers. Several of those are in the Bill already—thank you for that—including value for money and the drive to consolidation. But there were other things in there as well, including the need for alignment by the Department for Work and Pensions and the Financial Conduct Authority of their rules and guidance in relation to the charge cap pipeline of infrastructure projects, which I know the Government are proceeding with separately; and the need to ensure that the whole market buys into the value-for-money framework. In the pension investment review, Government did not take forward regulation of intermediaries—employee benefit consultants and so on—and we think that they could keep that under review.
The Government are seeking to take other steps that will evolve over time, such as crowding in investments. There are examples such as the British Growth Partnership and the LIFTS scheme, where the Government are either convening or investing alongside providers, which we would like to see more of. Outside of DC, as has been mentioned already, it is about working with annuity providers on eligibility for certain assets.
Kirsty Blackman
Q
Rob Yuille: The most important thing is that trustees do have the power that is in the Bill—that power should stay there. Conflicts of interest were mentioned earlier; it is interesting what surplus release could do to make occupational schemes more like commercial schemes. With master trusts, commercial schemes and superfunds, if pension schemes could be run for the benefit of the employer by taking surplus, that gives rise to a different relationship and potential conflicts. The Pensions Regulator needs to be alive to that. In any case, TPR is becoming more like the FCA and the Prudential Regulation Authority as a regulator, and I think that needs to continue.
Mr Peter Bedford (Mid Leicestershire) (Con)
Q
Zoe Alexander: I would probably lean towards talking about the local government pension scheme in that context. There are some parts of the Bill where we feel powers are being taken that may not be required; one is around requiring funds to choose a particular pool, and one is requiring particular pools to merge. We think that the LGPS is moving in a very positive direction. Obviously two pools have been closed, and funds are merging with other pools already. We are not sure that those powers are actually required. We think that the direction of travel is set and that the LGPS understands that, so we feel that those powers might be overstepping the mark.
Rob Yuille: I have no view on local government. I think what I am about to say should have cross-party support, or at least cross-party interest. It is a macro Bill about how the market and the system work, but it is also about people and the decisions that they need to make. We are glad to see the small pots provision in the Bill, but it is on an opt-out basis, similar to the default pension benefits solutions. People have decisions to make, such as whether to stay in or not, and they need to be supported in the decision making. We are proposing a textbook amendment that would enable schemes to communicate electronically in a way they currently cannot and in a more positive way—even where people did not have a chance to opt in to that kind of communication, which is seen and regulated as direct marketing. We know that there is cross-party interest in the ability to communicate more clearly with customers, specifically in relation to those provisions.
Rachel Blake
Q
Zoe Alexander: If you put yourself in the position of pension scheme trustees, having the presence of the reserve power, which may or may not be exercised, to direct the way that you invest does not necessarily feel like a comfortable position to be in. We understand why the Government are taking that power. We understand the imperative to get more investment in the UK and we support that. Clearly, the longer the power abides on the statute book, the longer there is that risk hanging over those trustees. They may be required to invest in particular ways. We do not know where we will be politically in 2035. We do not know what Government will be in place. It pushes us potentially into another Government, another Parliament—it is the unpredictability. So we did talk with many of our members about this, and had lively debates about whether it should be 2030, 2032 or 2035. There was a really strong consensus around bringing it forward to 2032. We do not want it too early because it might pre-empt a decision that need not be taken. But 2035 felt too far away.
Rachel Blake
Q
Zoe Alexander: I think the trustees we have spoken to, of the schemes in our membership, would disagree. It is a significant point to them, which they have asked us to pass on.
Rachel Blake
Q
Rob Yuille: I am not sure there is, first of all. Canadian and Australian schemes have a big presence here, but I am not sure that they invest more, especially compared with our bigger schemes or in percentage terms. But will the Bill help that? Yes, it will. Driving scale and consolidation, which was happening anyway but which the Bill will accelerate, will open up different types of investment opportunities for those firms. They will be more likely to have in-house asset capability and bargaining power to invest in those kinds of assets. One caveat, however, is that they will be able to invest globally—the same as Canadians and Australians—so it is not a given that they will invest more in the UK. The UK still needs to work hard to be an attractive place to invest.
Callum Anderson (Buckingham and Bletchley) (Lab)
Q
Zoe Alexander: I am pleased to talk on this point. We are supportive of consolidation and we absolutely see the benefits of scale, but we are concerned that there are a very small number of very high value schemes in the market that are already adversely affected by the presence of the scale provisions in the Bill. EBCs are not sending business their way because they are under £25 billion or cannot necessarily show those that they are on a path to that number. It is really critical that the transition pathway is in place as early as it possibly can be, and also that EBCs are encouraged to understand the way that the market dynamics will work here. What we do not want is for really high-value schemes that are delivering great investment returns, that are really innovative and that may be investing very heavily in the UK to fail simply because of the scale test. We want those schemes to provide and to grow, in the interests of members.
Rob Yuille: I agree with that, but I would like to make a wider, related point about the route to 2030 and the importance of getting the sequencing right for—
The Chair
Order. That brings us to the end of time allotted for the Committee to ask questions. On behalf of the Committee, I thank our witnesses for their evidence. I apologise for having had to cut you off.
Examination of Witnesses
Patrick Coyne and Charlotte Clark gave evidence.
The Chair
We will now hear oral evidence from Patrick Coyne, director of policy and public affairs at the Pensions Regulator, and Charlotte Clark, director of cross-cutting policy and strategy at the Financial Conduct Authority. Again, we must stick to the timings in the programme order, which the Committee has already agreed. For this session, we have until 10.25 am. Would the witnesses please briefly introduce themselves for the record?
Patrick Coyne: Hello, everyone. My name is Patrick Coyne. I am the director with responsibility for pensions reform at the workplace Pensions Regulator. I am pleased to be here today to talk about the Bill, which we believe is a once-in-a-generation opportunity to make the system work for savers.
Charlotte Clark: I am Charlotte Clark. I am the director of cross-cutting policy and strategy at the FCA, where I have lead responsibility for pensions.
Mark Garnier
Q
Patrick Coyne: I think that question is more relevant to me. The reforms across the Bill could be good for savers, but they could also be good for the UK economy. What you are pointing to is a wider, systemic issue in the marketplace, where we have a patchwork quilt of regulation that has built up because the pension system is idiosyncratic, and in some cases 70 years old. The Bill is trying to give trustees the tools for the job. On surplus release, it is trying to give them a statutory override, to look across the piece and say, “When I am a well-run, well-funded pension scheme, is it right that I can extract surplus if it is safe to do so?” We think that is a really important principle.
Mark Garnier
Q
Patrick Coyne: Another important part of the Bill is making sure that we get implementation right. There will be a period now when we can consult, and all of us—Government, industry and the regulators—have a role to play to make sure that that happens. I would say that the Bill will actually prompt a discussion that might not have been had by many trustee boards over the last few years. If you look at the amount of surplus that has been released in recent years, it is in the tens of millions, not the billions. We now estimate that three quarters of schemes are in surplus on a low-dependency basis, which is an actuarial calculation of self-sufficiency. That means there could be up to £130 billion across the market. We think it is right that well-funded, well-governed schemes can consider releasing that surplus, if it is in the interest of members to do so.
Mark Garnier
Q
Patrick Coyne: I think it is highly unlikely that that scenario would happen. Our engagement with the marketplace tends to show that firms considering a different endgame option, which might include running on and releasing surplus, tend to be doing so on a basis where they have hedged their assets, so that they can manage economic volatility, and they are using growth assets above that limit to consider surplus release.
Mark Garnier
Q
Patrick Coyne: It is important that we have a regulatory framework that can cope with different economic conditions. Over a number of years, Parliament has introduced a number of pensions Acts to ensure that defined benefit schemes, which are mostly mature—mostly closed—are secure.
There is a real opportunity in the Bill to build on the fantastic success that we have had in creating a nation of savers—11 million more people putting something away for retirement—and turn that system into something that can provide an adequate income in older life. That means turning the focus of the DC system on to value for money. That is where I believe the real potential is.
Mark Garnier
Q
Charlotte Clark: It is not in this Bill, but there is a very large work programme going on at the moment around the advice guidance boundary review. As Patrick said, as pensions have changed—there have been big changes in the market over the last 10 years or so—more and more people have come to need support, particularly at the point of retirement, but also in thinking about how you build assets in pensions and more generally. All the targeted support work we are doing is about how you help people more to make these difficult decisions. This Bill is very much about, “How do you get the market right?” but at the same time, we want to make sure that savers have the right support to make the right decisions at the point of retirement or before.
Mark Garnier
Or, indeed, when they first start to work. As somebody once said, compound interest is the eighth wonder of the world.
The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)
Q
Patrick Coyne: Over a number of years, we have worked closely with the Financial Conduct Authority to ensure that when we deliver interventions within the pensions landscape, the outcomes are consistent. One way we have done that is through an update to a joint strategy. We also have almost daily calls with one another to ensure that when we consider interventions and how to enable the system to provide value for money and support people at retirement, we do so in a coherent and comprehensive way. We must really understand the different constituents of our marketplace, whether they be workplace versus non-workplace pensions, or, in the People’s Pension space, pensions analogous to the master trust offer.
Charlotte Clark: To add to Patrick’s point, we meet fairly regularly. There are various different forums and working groups. As you say, Minister, there is that sense that it does not matter where you save. Most people are probably saving in both the contract-based side and the master trust side, given that people have pots in lots of different places. It is important not that people understand where the regulation is, but that the regulation is consistent and there is no arbitrage between the two systems.
Steve Darling
Q
Charlotte Clark: I will talk a little about the value for money framework and then specifically about your concern on risk. The value for money framework, which is an area we are working on very closely, will have three aspects to it. One is costs. One is, as you say, investment performance and investment allocation, and one is service. All of those will be important aspects of getting the value for money assessment right.
On the investment side, I hear the opposite charge, actually, rather than dumbing down. There is a sense that a scheme could take too much risk so that it looked like value for money, but there is a trade-off between risk and return. If you are going to do that, and if you have high-risk assets in a downturn, there is a possibility of volatility. Within all these schemes, you still have trustees, independent governance committees and professional advisers who make sure that the investment allocation is right for the saver. That is almost the first part before you get to the value for money assessment. I do not think there should be a dumbing down of investment.
One of the other challenges, which links to the move into private assets that has been raised a couple of times, is the possibility of pension schemes getting more involved in things such as infrastructure. One thing that the industry has asked us to consider is whether, when you invest in those sorts of assets, there is a J-curve in terms of the returns; there might be a suppression at the beginning as projects get up and running. We have been looking at the Australian examples and we do not really see that happening in their data, but it is something we are considering and we are talking to the industry about how to get it right. We do not want the value for money assessment to stop people being able to invest in those sorts of assets.
Patrick Coyne: Just to add that the competitive pressure on the marketplace at the moment is on cost, and cost is not value. To illustrate that point, for the average saver, a 1% increase annually in investment returns would generate a pot that is 20% bigger at the end of a lifetime of saving. We have to move the competitive dynamic, but implementation, as Charlotte said, is critical.
Steve Darling
Q
Patrick Coyne: I think bringing consistent comparable metrics that matter to the marketplace in a format that people can trust can start to drive competitive pressures on what matters, which is holistic value. Trustees—and across the Bill—want to do the right thing. They want to act in members’ best interests, but they do not have the tools for the job. The starting point is to provide them with quality information to act on that intent.
John Grady
Q
Charlotte Clark: It is important to say that most people who are saving in a pension are probably saving in the default. When you say that they are choosing their investment, most of them are not. Whether it is the trustees of that scheme or whether it is the independent governance committee of that scheme, most people are going into that default, so the importance of the default is really crucial. While it is important to really think about engagement and talk about the advice guidance boundary review and some of the work that is happening there, it is also important that some people will not want to make those decisions. It is only people like us who seem to care about these sorts of things. Getting other people engaged in their investment is quite a challenge.
You are right that we are doing quite a lot of work, largely around the ISA area and the at-retirement area. One of the challenges at the moment is people taking money out of their pension and then putting it in cash. That may seem like a really wise decision if you are 55, but if you do not need that money for 20 years, it may keep track with inflation but you are going to miss out on asset returns, equity returns or other aspects of investment. So, we are really thinking about how we engage with people about those sorts of discussions. How can we make sure they are getting the right support? It comes back to the targeted support programme, which goes live in spring next year. So, working with providers at the moment on how they can support people when they are making these sorts of decisions, and just think about whether, if it is not full financial advice—I understand that can be very, very costly—are there other areas where we can give people help that is not as kind of extreme as that but allows people to think about those decisions in the round?
Patrick Coyne: I would just add that one of the reforms in the Bill around guided retirement is reflective of that default conundrum we face. We have a brilliant system—11 million more savers—but nobody making an active choice. That means that when people approach retirement, only one in five has a plan to access and when they do, as Charlotte said, half are taking it as cash. That cannot be the right outcome. Within the Bill, introducing a guided retirement duty enables those institutional investors to start to guide individuals or cohorts of members into the right kind of products for them, with clear opt-outs for them to choose a different way. As Charlotte said, the type of support and new form of regulated advice could really help inform savers and make good choices at that point.
Rebecca Smith (South West Devon) (Con)
Q
Charlotte Clark: Following on from Zoe and Rob—I think they have articulated this issue really well—I do not think anybody disagrees with the direction of travel: trying to get more assets into private markets and higher return markets, and making sure there is more diversity within portfolios and that the scale of pension funds in the UK are using that in an effective way on investment. The issue of whether mandation is the right tool to use is ultimately one for you and the Government. There are obviously challenges, which Rob and Zoe have articulated, around how you do that, when you have a trustee in place whose responsibility is to the member, and making sure that is paramount in the system?
Patrick Coyne: I agree with that. I think it is fair to say that there is a degree of consensus in the marketplace, among Government, industry and regulators, that we need to make structural reforms to the marketplace and put value for money at the heart of the system. A big part of that is a move towards fewer, larger pension schemes, because of some of the factors that Charlotte just outlined—the ability to in-house your investments; the ability to consider a broader range of investments, which can sometimes be quite complex; and broader governance standards. Mandation is of course a matter for Parliament, but clearly structural reform is needed within the marketplace.
Rebecca Smith
Q
As a supplementary question, do you think trustees and scheme managers should be provided with a safe harbour if they are required to invest in assets that underperform? I think that is probably what a lot of the public would be interested in as well. You do not want somebody to be mandated to put money into something that is doing worse than it was doing before it was moved.
Charlotte Clark: There is an exemption in the Bill, though, that basically says that if you are a trustee and you do not believe it is the right thing for your members then you should not put that money in. That is just going to be a very tricky assessment for the trustees or the scheme manager, and then for the regulators, at the point of addressing why they did not meet those levels. If they believe that it is not in the interests of the member, the Bill allows for that.
Rebecca Smith
Q
Charlotte Clark: The level of that process would be something that we would put into secondary legislation and rules. We would really have to think through what that process looks like.
Patrick Coyne: Yes, absolutely. Implementation is critical here. This will be something that is done with wide consultation with the industry.
Torsten Bell
Q
Torsten Bell
The question to the witness is to expand a bit more on that point. In reality, this provides a “comply or explain” power. In terms of the point Charlotte was just making there, it is absolutely right about the ability of the trustees to say, “This is not in the interest of our members.” It might be worth talking a bit about how when we move forward the consultation will allow us to set out how that would work in practice.
Charlotte Clark: It is an area that we would need to work through in terms of the road map. At the moment, our focus is very much on getting the value for money framework right. How the mandation would work and the process around it—as the Minister says, first, we would consult on it. We would have to have a look to see what information was given and how we would monitor it in the period from now to 2030 or 2035. We would have to work through all of those aspects of the process. We would do that in conjunction with the industry, making sure that what we were asking for was information that it could readily provide and that we felt confident that we could make a good assessment around.
Patrick Coyne: Our engagement with the marketplace so far already shows that many are considering investment strategies that have significant proportions of diversified investments, so the market is already responding based on some of the Mansion House accord commitments.
John Milne
Q
Patrick Coyne: I think that fiduciary duty is a powerful force for good. Across the Bill, this is about giving those trustees the tools for the job. I think there are a number of areas where that is true. Within the value for money framework, at the moment, it is very difficult for employers or schemes to effectively compare performance. As an anecdote, I was speaking to a provider recently. They were pitching for new business. They came in and pitched their investment data, and the employer said, “You’re the third provider today that has shown us they are the top-performing provider.” That cannot be right.
Then, when you are looking across the Bill towards the DB space, because of the funding reality that many schemes are facing at the moment, there is choice in end game options—so, “How do I enhance member outcomes at the same time as securing benefits?” Actually providing a statutory framework for super-funds as another option is a good first step, as is allowing the release of surplus, if it is in the members’ best interests to do so.
Kirsty Blackman
Q
Charlotte Clark: It is a good question. It is hard to get over the fact that the vast majority of people are very inert in the pension system. Of course, there are some who are not, specifically around ESG—environmental, social, and governance—investments, but most trustees take those things into account, and there has been clarification about how that aligns with things like the fiduciary duty. Obviously, within the contract-based scheme, there frequently are options, if somebody does not like something that is invested in within the default, to have their own investment strategy, if that is what they choose to do. Do I think this Bill changes that? I do not think so. I think what the Bill is essentially trying to do is use the power of scale and collectivism to get better returns and, really, a better service for most savers.
Kirsty Blackman
Q
Charlotte Clark: Almost certainly.
Luke Murphy (Basingstoke) (Lab)
Q
Patrick Coyne: TPR’s responsibility is not for the asset pools, which are FCA-regulated entities, but we do have responsibility for governance across public sector schemes, including LGPS funds. It is really important to recognise the member voice within good decision-making, as Ms Blackman’s question indicated, but there are a number of ways to do that within standardised corporate governance boards and reporting functions, and that is something that we would look to explore over the coming months. With the LGPS boards, like the rest of the Bill, there is the ability, through greater scale, to start hiring better colleagues, introduce better systems and processes, and put in place better governance practices, and we would expect to see that come to pass.
Sarah Edwards
Q
Charlotte Clark: As Rob says, sometimes it is slightly overplayed. There is a lot of investment from UK pension schemes, whether they are DB or DC, within the UK. Why does Canada look like it invests a lot? It is a very mature system. We have two systems—one is in decline and one is in the ascendancy—whereas the Canadian system has been established for 40 years. The auto-enrolment system is essentially 10 years old, so they have a much more mature system. You see within those schemes that they have scale—they are very large and very mature schemes—and, in terms of things such as their investment approach, it is frequently internalised. They have been looking at private assets for longer than we have, particularly in the DC master trusts, auto—
The Chair
Order. That brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank our witnesses for their evidence and apologise to hon. Members whom I am afraid time did not allow me to call.
Examination of Witnesses
Christopher Brooks and Jack Jones gave evidence.
The Chair
We will now take oral evidence from Christopher Brooks, head of policy at Age UK, and Jack Jones, pensions officer at the TUC. Once again, we must stick rigidly to the timings in the programme motion, as the Committee has previously agreed. For this session, we have until 10.55 am. Could the witnesses please briefly introduce themselves for the record?
Christopher Brooks: I am Christopher Brooks, head of policy at Age UK. We are the national charity for older people.
Jack Jones: I am Jack Jones, pensions policy lead at the Trades Union Congress.
Mark Garnier
Q
Jack Jones: I believe that was aimed specifically at the LGPS requirements, but yes, I would certainly agree with that, and it probably extends to some other areas of the Bill as well. Unison is not alone; all the unions involved in the LGPS scheme would agree that the pooling structures mostly have a clear lack of member representation on their governance boards. There is a real mishmash of governance arrangements and of reporting and transparency arrangements across the different pools at the moment.
We have some examples of quite good practice—there are pools with a meaningful number of member representatives on them, but they are few and far between. Many have no representatives or only have observers that do not have any voting powers. Member representation has an important role in the LGPS, with a long history of ensuring that members’ interests are represented when investment decisions are made. Moving away from that has taken something away from the scheme.
It is particularly important when looking at measures that will make investment decisions more remote from members by pooling into larger geographical areas and larger funds, and by requiring—or expecting—them to invest in more complicated assets with higher up-front fees. That is the point at which it becomes even more important to have oversight, to give reassurance that members’ interests are at the heart of all those decisions.
Mark Garnier
Q
Jack Jones: That is a good question, and it is a wider issue. Member representatives are there to ensure that people with skin in the game are around the table when decisions are made. They are there to reassure members that people like them—those who will be relying on the scheme for their retirement income—are involved in those decisions. Yes, they cannot represent the full range of any large scheme’s membership. A lot of interesting work could be done around how you find out what members think about how their money should be invested and how we then take that into account in decision making.
That is one area where, at the moment, there is potentially a little bit of a gap. The trustees have clear guidance that they can take into account non-financially-material ESG factors, but we hear a lot from unions that there is a very high level of wariness from schemes about actually doing that. They quite often point to their fiduciary duty and say, “Actually, our primary responsibility is towards the financially material factors.” They quite often ignore the guidance that says they can take into account other factors where they know it is in their members’ interest. Work needs to be done on what the best mechanism is to find out what Members think, but there is also a job to make sure that trustees know that they can and potentially should act on that.
Mark Garnier
Q
Jack Jones: Well, it is the members’ money that is being invested. You have to make a balancing decision, but where you have clear evidence that the majority of members have these ethical beliefs that they want to see reflected in how their money is invested, you need to take that into account.
Mark Garnier
Q
Jack Jones: Clearly that risk is there, and it would have to be managed very carefully.
Mark Garnier
Q
Jack Jones: I think it puts a lot of responsibility on trustees to make that assessment. I think it is fair enough to set out the criteria under which trustees might consider surplus release—that is where you have sustained and high surpluses on quite a prudent basis. Whether you actually make that decision to release that surplus and whether you think that is in the members’ best interests relies a lot on trustees making that decision.
One particular weakness at the moment is around potentially allowing sole trustees to make that decision. This is usually where you have a closed DB scheme that, instead of having a fully constituted board with member representation, will have a sole corporate trustee appointed by the sponsor. There, the conflicts seem too great to possibly manage for that corporate trustee to make a decision on behalf of the members and say, “Yes, we think it is appropriate for surplus to be released.”
It would also be really useful for guidance to lay out the ways in which any kind of surplus release must benefit members as well as the sponsor. There is obviously the argument that if the sponsor then goes and invests that money in, for example, either higher pay or better contributions for DC members or investing in the business, that is in the members’ wider interests, but we need to recognise that although employers suffered quite a lot because of the really high deficits that we saw over a sustained periods by having to put in those employer deficit coverage contributions, members also suffered.
You saw schemes being closed and benefits being cut in various ways. We had reductions to accrual, changes to indexation and that kind of thing. Guidance should probably recognise that and say to the trustees, “If you are going to consider releasing surplus, it needs to be done in ways that both benefit the member directly by improving their benefits in some way.” It is a complex question: what is the best way of doing that? I would not want to prescribe that too much. However, the principle that trustees have to consider is how that money is used to actually improve benefits, as well as potentially to—
Mark Garnier
Q
Christopher Brooks: We do not work on final salary pensions, so I do not take a view on it.
Torsten Bell
Q
Christopher Brooks: I think they all work together, so I would say it is a combination of them, but scale seems to be one of the main drivers. I am thinking about NEST in particular, which has been leading the way in terms of investing in private assets. It is able to negotiate a good deal, because of its scale. If you can drive that with similar outcomes across the marketplace, it will be really beneficial to members.
Torsten Bell
Q
Christopher Brooks: NEST has essentially negotiated with the private finance industry, and is not paying the “two and 20” classic fee structure, so it is not paying the performance fees. It has incorporated it all into its existing charges. If the intention is to drive greater investment in private finance, that is the way to go about it. If that scale is replicated across the industry—across the 15 to 20, or however many, schemes remaining at the end of the consolidation process, which I fully support—then hopefully you would be in a position to replicate those types of outcomes for members across the board, in their DC savings.
Jack Jones: I would say something very similar. As a package, on the DC side, it is scale that potentially has the greatest power. It is probably important to look at the factors that would make sure that the scale results in the changes you want. It is interesting to look at NEST; it has scale, but it also has a business model and governance structure that incentivise it to go and build up its experience in investing in those markets, and to have an understanding of what its fiduciary duty is, which very clearly includes looking at the widest range of assets possible and investing in them. So I think it is scale, as long as you have everything else in place there to make sure that schemes are using that scale in ways that benefit members.
Steve Darling
Q
Christopher Brooks: That is a really good question. I think that first, I would flag the decumulation provisions, which are a really excellent idea. They are exactly what should be happening at the moment. Because it is a new regime, there are lots of challenges around designing and implementing it, which probably need quite a bit of thinking through, just to make sure we can get it right for members.
There are some tensions in that process: if you are defaulted into something at, say, 65, there would be some tensions around the point at which you should do certain things. I think the general consensus is that it will result in people purchasing an annuity further down the line—probably around, say, age 75 or 80. We have seen for many years, pre-freedom and choice, big issues with the annuity market, with people shopping around, or failing to shop around, to get a better deal. If you are encouraging people to do that at age 80, that is potentially a recipe for disaster. First, because people will be taking a decision that they are not familiar with, and it is alien to them. Secondly, at age 80, a number of people are experiencing cognitive decline, so it is going to be even more challenging than it would have been at 65. That kind of thing, exactly how it works, needs thinking through in more detail.
On that point, I still think that ultimately, if you are going to force people into the open market, you probably need some kind of clearing house, so that it removes the risk, because there will be scammers out there, listening to this session, I am sure, and rubbing their hands with glee at the thought of lots of people taking those decisions.
The second point is about the contractual overrides, which are clearly crucial to make the whole system work. I think we need to make sure that the best interests test is working for members. When I read the Bill initially, the thing that stood out most for me was that there seemed to be a lack of consumer protection at that point. When the provider undertakes the best interests test, if they are making an external comparison, they only have to compare with one other situation, one other scenario. That is what it says in the Bill. I do not think it is sufficient. I think the Bill should be amended, at least to say, “Make two comparisons,” or possibly to be a bit vaguer and say, “Make a reasonable number of comparisons,” so that it can be left open-ended and give a bit more scope for flexibility. That seems to be one area.
I think the best interests test needs to consider different classes of members as well. At the moment, it just looks at members as a whole, but there are different people in different situations within any scheme. For example, people approaching retirement are in a completely different position from people in their 20s or 30s, so any decisions about transfers need to make sure that all those interests are considered.
Probably the main point is about the independent assessor, who will then look at the best interests test and how it has been conducted and rubber-stamp it according to some FCA regulations yet to be written. We think quite strongly that the independent assessor should have some kind of fiduciary duty applied to them. I do not think there is any reason why this could not work, but at the moment they do not seem to be fully incentivised to act in the members’ interests or prioritise members’ interests above those of the scheme.
That is another really clear addition to the Bill that we think should take place. I think that would make the system so much more robust. There are potentially some really negative outcomes for members if they are transferred into inferior arrangements. I am sure it is not the intention of the Bill to do that, and it is probably not the intention of most providers, but it could still happen. I think putting some kind of fiduciary duty on the independent person would give this a lot more strength and make it fairly watertight for members.
Damien Egan
Q
Christopher Brooks: How the Bill tackles that is probably through the governance structures that will be put in place. When there is a fiduciary duty, the governance is reasonably strong. I believe it is stronger under a fiduciary duty than under the contract-based system. For example, the trustees are better placed than IGCs—independent governance committees. I think we will see IGCs potentially play a greater role in some of the transfers. That is an opportunity to make sure that IGCs can do their job more effectively and have better access to the necessary data, which was flagged previously by the FCA as not always being the case. Clearly they need to be independent, so it will not be appropriate to have employees of the firm sitting on them any longer. I believe a number of them do at the moment, but I do not think getting employees taken off will be an issue.
Once you are in retirement, you have a separate issue. Because the decumulation part of the Bill leaves a lot to the regulators to decide in the future, it has not been clearly specified how the governance will work, so there is an issue about making sure, when those regulations are written, that it does work well for people. There is clearly going to be a gap around information as well. We recently did some research with Aviva, and one of the recommendations was that we need some kind of intervention for people in their mid-70s about how they look after the rest of their lives and how they manage their pension. That kind of support is going to be crucial if people are expected to take a decision in their late 70s or early 80s with regard to annuitisation or how they draw down the rest of their money. There is a big gap there as well.
Mr Bedford
Q
Christopher Brooks: Providing information takes you so far, and it is really important to do that: there are some really big gaps, as we see with Pension Wise UK, which is a really good and well-liked service, but has a really low take-up. That is just an example, but we need to get more people into a position to access the information. However, they will then still need a lot of support, because pension decisions are really challenging for the vast majority of people.
Mr Bedford
Q
Christopher Brooks: It could lie either with Government and the Money and Pensions Service providing a widespread service, for example. It could lie with charities, or providers could be told to help people with these decisions—they could potentially commission charities. We are working with Aviva to look at running a pilot in the retirement space, which will hopefully go ahead soon and give us some insights into what kind of support people need. People think about their lives holistically, and they are not necessarily thinking about a pension as separate from their current accounts, so we need to think about how it works for people. That is the key thing.
Jack Jones: I think we look at this slightly differently. I am not convinced that any more financial education, guidance, or points at which we need to intervene in the system to ensure that people are equipped to make decisions is the way forward. This Bill recognises that, and the introduction of default retirement products is a recognition that everywhere else in the pension system, it works on the principle of default and generally works quite well. We have seen that that principle is really powerful; if people are defaulted into something, they will stay there, whether that is their contribution rate or the investment options. Defaults are really sticky; we rely on that and make use of it through auto-enrolment, to get people into saving schemes.
More and more, as we find ways in which that does not work, we need to go back and look at fixing the system a little bit so that it works better by default, rather than providing people with more education, because that is pushing against the grain of all of our experience of what works and what is effective. I think that Chris is right that it puts a lot on the governance structures and on the consumer protections there, but I think that is where this Bill has to work. It has to put in place something that will be appropriate for the vast majority of members, and that will work with the minimal amount of engagement—we have to have some kind of engagement on retirement, such as, “This is what I am going to retire and this is where my pension should be paid,” but not beyond that.
David Pinto-Duschinsky (Hendon) (Lab)
Q
Jack Jones: As Zoe said earlier, we should be here already. It has taken us a long time to get to the point where we have an agreed solution. It looks as if the mechanics of it will work. I think we need to let that bed in and prove that it works. The main concern from our perspective is the £1,000 definition of a small pot. Obviously, from a lot of angles, £1,000 is a lot of money—but as a pension pot it really is not. Looking at this once you have proved the concept and you have a system that works and that hoovers up the smallest pots and those most likely to become orphaned is one thing, but I think if you are looking at helping people to avoid accumulating 10 medium-small pots over their career, we need to look at how to increase that over time.
Christopher Brooks: I agree with Jack. I think the Bill is really strong on small pots and the system that is envisaged will really help. I guess my only comment would be that £1,000 is not a huge amount of money, so maybe over time that amount could be raised, and some kind of indication that that is the intention might be helpful.
John Milne
Q
Christopher Brooks: Yes; I think a lot of schemes do not interpret it broadly, so they probably take things literally regarding financial materiality—that is obviously very important, but they could probably do more. I think there is a very strong case for reform in fiduciary duties, just to make it clear in the law what it actually means. It is more of an enabling tool for providers, I think, rather than anything restrictive. When there needs to be some direction for schemes to invest in particular ways, I think there is sometimes a bit of reticence. That is true of investing in the UK, maybe with some private finance and maybe with regards to climate change. The larger schemes no doubt do understand it, but all schemes need to understand that they can invest in these things and that that is possible.
I am no expert on this, but, as I understand it the fiduciary duty is all over the place in the law, and sort of hinges on bits of case law and bits of very old legislation, so clarifying that would be a really good move.
Jack Jones: I would agree with that. I think there could be statutory guidance to make it very clear to trustees what their fiduciary duty actually involves, and that it does go beyond that kind of narrow interpretation. As I say, you should take into account your members’ quality of life more generally—for example, investing in ways that support the UK, when that is where your members are, is something that is in their wider interests, and managing systemic risks such as climate change is obviously very material financially, but also has an impact on the kind of world they will be retiring into.
As I said before, we do hear fiduciary duty occasionally being used as a reason not to do the hard stuff and not to think through that. There is nothing inherently problematic there, but clarifying and making sure that trustees are fully aware of the breadth of fiduciary duty would be helpful.
Rachel Blake
Q
Jack Jones: Like I said, I think the one specific measure is not allowing surplus extraction where you have a sole corporate trustee.
Rachel Blake
Okay, so that is the one specific measure.
Jack Jones: Yes, that is the one specific one. More generally, I think there should be guidance that makes it clear to trustees that they have to weigh up the benefits to members, or to make sure that any kind of surplus extraction benefits members through improved benefits, rather than just through improving the company or returning money to the sponsor in some way, which they may or may not then use to do things that would give the member more security in various ways as an employee. Those are the two areas.
Rachel Blake
Q
Jack Jones: It sounds plausible, but we have not really looked at that yet. However, that is certainly something that we can do, and we will look at including that in our written submission.
The Chair
Order. That brings us to the end of the time allotted. I thank the witnesses for their evidence, and we will move now to the next panel. Thank you very much indeed.
Examination of Witnesses
Colin Clarke and Dale Critchley gave evidence.
The Chair
Q
Please could the witnesses briefly introduce themselves for the record?
Colin Clarke: Good morning, everybody. I am Colin Clarke, and I am head of pensions policy at Legal and General.
Dale Critchley: I am Dale Critchley, and I am policy manager for workplace pensions at Aviva.
Mark Garnier
Q
Colin Clarke: It is a very good question. There are risks that an employer could extract surplus so that it puts the scheme in a position where something might happen in the future that caused them to be underfunded. It is quite key that, although the Bill has some very high-level rule-making powers at the moment, the guidance that comes out alongside that makes very clear the circumstances in which it would be appropriate for trustees to be able to do that.
Scheme rules aside, trustees today are able to extract surplus, and they have to follow fiduciary duty, follow a process and get advice from independent advisers to make sure that what they are doing will not jeopardise the security of members’ benefits. The Bill itself is mainly to override any sort of constraints that trustees have within their rules that might prevent them from doing that. However, trustees would still have to follow the same process they would follow today to make sure that they are in a good position from a funding perspective, that they do not take anything out too hastily and that they look a few years ahead. It is not just a case of being able to extract surplus from an affordability point of view today; they need to be looking ahead to the long-term funding position as well.
Mark Garnier
Q
Dale Critchley: It is a trustee decision to take. I do not necessarily think that the trustees need to take into account what the employer is using the surplus for. They are looking at whether it is appropriate to return the surplus to the employer.
If you look at a case from 2023 that went to the ombudsman, Aviva was involved in the buy-out for a company that subsequently returned £12 million of surplus to the employer. The trustees, the ombudsman found, had acted quite rightly by taking into account the fact that the company had made considerable contributions, including considerable deficit contributions, over the years, and that it was right, in the trustees’ opinion, that once all of the benefits promised to the members had been secured, the excess was delivered back to the employer. I am not sure that that company or those trustees took into account what that company was going to use the money for; they just looked at whether or not it was appropriate to return the surplus to the employer.
Mark Garnier
Q
Dale Critchley: I am not a defined benefit pension scheme trustee, but I would expect the trustees to look at the members first of all: are the benefits secured that were promised to the members? Is there room to reasonably augment those benefits? However, to say, “We will only give you this surplus back if you use it for x” is, I think, overstepping the duty of the trustees.
Mark Garnier
Q
Both of you manage annuity funds. For the record, I have had a chance to meet representatives of your organisations and have had long discussions about this. One of the interesting points that has come out of conversations with many people and organisations in your position is that, while the thrust of the opportunity of this Bill is to bring together pensions and make them more efficient, and another is to be able to unlock opportunity to invest into the UK and into various opportunities, yet there are some rules that are not being addressed. As one of your colleagues mentioned to me, Dale, an annuity fund is not allowed to invest into equities, yet investing into something like a wind farm would be an ideal opportunity to get a predictable return. Do you think the Bill is missing out on some of these measures that could be updated?
Dale Critchley: I do not think it necessarily needs any change incorporating into the Bill. It is a matter for the Prudential Regulation Authority to allow us to make the investments that back our annuities. We would be quite happy to take that up afterwards, but I think that could be achieved through a change to PRA rules rather than incorporation into the Bill.
Mark Garnier
Q
The Chair
Can I ask for short answers now, please, because we need to move on to other Members.
Colin Clarke: It is an interesting question. It is not something I am a huge expert on, to be honest, and it needs careful thought, because there could potentially be some unforeseen consequences that I have not considered. If there were going to be any suggestions to change any rules in that regard, there would have to be evidence gathered to understand what the potential implications of that would be.
Torsten Bell
Q
Dale Critchley: Obviously, this is dependent on regulations, but DWP people have been very open in conversations. That has been really welcome, and we have a good picture of where we are headed. We launched a “flex first, fix later” solution called guided retirement. We are now looking at flexing that guided retirement solution to offer different flavours to fit the different cohorts and the amount of risk people can take in terms of fluctuations in their income, dependent upon guaranteed income from elsewhere, or the level of their fund. At one end, you might have a cohort of people who almost need a guarantee. We could go down the route of an annuity, but we are reluctant to do that, because we think that an immediate annuity purchase might put people off. We need to ease people into the idea of an annuity purchase, and that is where we are going. For those people who want more of a guarantee, it might be lower-risk investments and in a drawdown phase for a shorter amount of time. For people who can take more risk, it may be higher-risk investments in the drawdown phase and in drawdown for longer, with an annuity purchase later. That is where our thinking is at the moment.
Torsten Bell
Q
Dale Critchley: It is the ability to take risk.
Torsten Bell
Your metric for that is just other income sources plus size of pot?
Dale Critchley: It is those main two at the moment. We are also working with a guy called Shlomo Benartzi, who is a behavioural science expert, to look at the whole concept of defaults in retirement. It is one thing defaulting people into taking £120 a month from their salary; it is a very different thing to say, “I am now going to take the biggest amount of money you have ever seen in your life and use that to purchase an income.” That is what we want to test, because if the default is strong and if inertia works, we will get people moving away from the poor solutions they are choosing at the moment, but if people still think, “Well, I do not like the look of that,” they will go on to make the same poor decisions they are making now, and we will not achieve the policy aim. So we think we need to deliver what is right for customers and members, but also what is attractive to them—so looking at their wants as well as their needs.
The Chair
Could we have shorter questions and answers? Does Mr Clarke have anything to add?
Colin Clarke: We have been working a lot on the FCA’s targeted support proposals, which are very supportive of the measures proposed in the Bill. We have been doing a lot of research around member segmentation and looking at the different scenarios and outcomes, so potentially going a little bit further than looking just at age and pot value, and also looking at what sort of questions we need to ask people to ensure that they are guided to the solution that is appropriate for them.
I agree with Dale that decumulation defaults and accumulation defaults are completely different things. In accumulation, there is more of a “one size fits all” approach, because it is all about delivering the best returns for members, whereas when you get to decumulation, it is very personalised, and you do not want to put people into something where they cannot change their mind. It needs to be flexible; people have a wide variety of different needs, and we are doing a lot of research on member needs at the moment.
Steve Darling
Q
Colin Clarke: That is a good question. Both our companies have recently been on various trips, to Australia, in particular, and there are various references in the Bill impact assessment to measures that are being or have been done there. One of the key learnings is around improving adequacy. In the round, there are lots of measures in the Bill that will help achieve that—for example, the introduction of the value for money test and the potential for better returns. One of the learnings we took away was around Australia’s “Your Future, Your Super” test, how they define value for money and how appropriate it is to set certain benchmarks. What are the risks if you do set those benchmarks, like the risk of investment herding and things like that? I think the value for money framework, if it is done right, has the potential to improve outcomes for members.
Contributions, obviously, is one big thing—I know that is not in the Bill. The Pensions Commission is going to be looking at that for adequacy in the round. I think that the measures around performance and value, and ensuring that the focus shifts away from cost to value, are among the key things that the Bill will seek to deliver.
Alice Macdonald (Norwich North) (Lab/Co-op)
Q
Dale Critchley: What we have heard from Australia is that the thing to avoid is regulator-defined targets, which will probably lead to herding, and can lead to schemes avoiding certain investments. For example, in Australia, property includes social housing and commercial property, but there is one benchmark for everything. So pension schemes do not invest in social housing, because they cannot achieve the benchmark through investing in social housing, as the benchmark is common across all property. Those are things to watch out for.
The other piece is that if you have set benchmarks, people will look to achieve the benchmark and not exceed it—they do not want to be the white chicken among all the brown chickens. Those are the things to avoid, in terms of the value for money benchmarks.
Rebecca Smith
Q
Colin Clarke: I think it is right that the Bill, as I understand it, places the responsibility for member education and member communications on the provider, because ultimately the pension provider will be the organisation facilitating these things and making them happen. As was touched on in the previous panel, the availability of Pension Wise and other services like that is valuable, but I think pension providers ourselves have a responsibility to make sure that we deliver the right guidance and support for members.
Dale Critchley: The only thing I would add to that is that, if we start to edge towards guidance, we can come into an issue around marketing. If we sell the benefits of, for example, the default solution, rather than just say, “This is who the default solution is designed for,” and leave it to the customer to join the dots, we may have a better outcome, but it would be marketing, and we cannot do that, because of the privacy and electronic communications regulations. We would need member consent to deliver marketing communications, even though we are trying to help the customer.
Rebecca Smith
Q
Dale Critchley: Yes.
Rebecca Smith
The privacy piece came up earlier this morning as well, so that needs looking at.
Dale Critchley: If we deliver something that looks towards targeted support, where instead of just saying, “This is the solution you will go in if you make no choice,” we say, “This is the solution we think is best for you, and you will go in if you make no choice,” that would edge towards marketing, and we could not say that.
Sarah Edwards
Q
Colin Clarke: I do not think the Bill itself necessarily has the timescales in it, because it will be left to secondary legislation to look at when all these things actually fit together. A very helpful document was published alongside the Bill, with a potential road map. There is a logical order in which certain things have to happen. For example, the value for money test will require movement of members from historical defaults into something that will deliver better value. To achieve that, the contractual override for contract-based schemes would need to be in place in good time before the value for money exercise happens. Otherwise, there will be constraints that might inhibit the ability to do that.
Similarly, with small pots, a lot of the measures will lead to consolidation at scheme level. That will address some, but not all, of the small pots issue. The road map sets out small pots being at the end, and that is a sensible place to put them, because there will be a lot of other activity that happens first that will solve some of the problems. It does not make sense for small pots to be moved before they are moved again—you could see things moving around a couple of times.
On guided retirement, the potential timing of implementation is quite tight if it is going to be 2027 for certain schemes, when we do not have any secondary legislation yet. It is very important that that is consulted on as soon as possible so that we have clarity. Dale mentioned working on various different solutions. We have been doing something similar at L&G, and they may well be the right thing for members, but we know that we will have to fit them around regulations and make some adjustments, so having clarity on those early would be very helpful.
John Milne
Q
Dale Critchley: From a practical perspective, producing all the data. We need clarity in the regulations and clear definitions, so that everyone is producing the same data in the same way so that it can be compared.
Setting practical considerations aside, one of the risks is that there is a disjoint between the market and value for money. Value for money is looking at value. We still see lots of evidence in the market in terms of looking at price—“We want the cheapest thing possible”—not necessarily the best value. There is a potential tension there.
Longer term, there is the risk we pointed out around herding: if you set benchmarks, that creates a behaviour which, instead of optimising outcomes for members, produces an average. An example of that is in the metrics around service that are currently being thought about. They are what I have described as 20th-century metrics. Rather than metrics that are looking to engage members to drive decisions through electronic engagement, they are measuring, “How long does it take to change someone’s address? Have you got their national insurance number?” We think we could stretch things further, but that creates some challenges for some providers.
Colin Clarke: One of the other things that the industry as a whole needs to consider is around capacity. The value for money framework, if it is managed and regulated effectively, is going to result, ultimately, in members being moved into things that have the potential to deliver better value. All those kinds of projects take a lot of work and a lot of resource, so it would need to be managed carefully to make sure that the industry has actually got the capacity to manage the high volume of traffic that is going to be going through as funds consolidate.
Mr Bedford
Q
Colin Clarke: At a high level, the Bill, as it stands, is primarily rule-making powers. A lot of the detail is going to be in the secondary legislation. In terms of rule-making powers, as it stands, I think the Bill has the right provisions in place. The detail is going to be around the actual assessments that you have to follow for determining whether something is delivering value, not delivering, intermediate and so on. For me, getting that detail right in the secondary legislation is going to be quite key, as is having clarity at an early stage on what that is, so that it can go through the proper consultation paper and we can look at the risks and at whether there are any unforeseen consequences. At a high level, we know that the Bill’s rule-making powers set the right framework for that secondary legislation.
The Chair
If there are no further questions from Members, I thank our witnesses for their evidence. That brings us to the end of our morning session. The Committee will meet again at 2 pm in the Boothroyd Room to continue taking oral evidence.
Ordered, That further consideration be now adjourned.—(Gerald Jones.)
Pension Schemes Bill (Second sitting)
Tuesday 2nd September 2025
(1 month ago)
Public Bill CommitteesPension Schemes Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 2 September 2025 - (2 Sep 2025)
The Chair
I remind Members that questions are not limited to what is in the brief, but your questions must be within the scope of the Bill. In line with this morning’s session, for each panel of witnesses I propose to call the shadow Minister first, then the Minister and then the Liberal Democrat spokesperson. I will then go back and forth between the Government and Opposition Benches; anyone who wants to ask a question should catch my eye.
We must stick to the cut-off times specified in the programme motion, so I will have to interrupt questioners if necessary. I remind Members that they must declare any relevant interest both when speaking in Committee and when tabling amendments to the Bill. If there are no further questions, I will call the next set of witnesses.
We will now hear oral evidence from Councillor Roger Phillips, chair of the Local Government Pension Scheme Advisory Board, and Robert McInroy, head of LGPS client consulting at Hymans. We have until 2.30 pm for this panel. Will the witnesses please introduce themselves for the record?
Councillor Phillips: Good afternoon. I am Councillor Roger Phillips. I chair the Local Government Pension Scheme Advisory Board and have done so for the last 10 years. Prior to that, I was on the working party that reformed the pension scheme from final salary to career average.
Robert McInroy: Thanks for inviting me. My name is Robert McInroy and I am the head of LGPS consulting at Hymans Robertson. We provide actuarial, investment and governance services to around 75% of LGPS funds, and it is pleasing to say that we have had some of those partnerships for many decades. In fact, Hymans Robertson was created over 100 years ago to provide services to the LGPS and local government.
Mark Garnier (Wyre Forest) (Con)
Q
Councillor Phillips: I think there is general concern within the sector when language like that is used, because we are talking about a considerable sum of money that belongs to 6.7 million pensioners. You therefore have to treat that with utter respect. You have a fiduciary duty to look after that money and ensure that the investment is wisely made. The fiduciary duty of the funds and pools is there—the funds own the pools—so there will be concern if somebody wants to politicise it. That is a very dangerous road to go down.
When it comes to UK investment, the LGPS is already investing in the UK in a very big way. This is not a case where you use a stick and say, “You’ve got to invest in the United Kingdom.” It is about identifying risk, return and sometimes conflicts of interest. Certainly we should be investing where it is sensible to do so for the benefit of our pensioners and for the least obligation to our employers as well. That should be clearly understood by everyone.
Mark Garnier
Q
Councillor Phillips: Local investment is difficult because, again, I go back to this business of it being our duty to invest wisely, prudently and sensibly. That is important. With local investment, first of all, it depends on your definition of “local”, particularly given the current pooling arrangements. You could have a strategic mayoral authority that has three different pools, because the pools come from all over the geography of England and Wales, so that is a difficulty.
Secondly, it is about return and making sure the pipeline of potential projects is there and that those projects are investable. If LGPS is going to invest in them, surely the rest of the investment industry will also want to invest in them, including the Canadian people.
The other thing I would say, which I surely do not have to tell you as Members of Parliament, is that some local matters are controversial. You may think that a particular local investment is what an area needs, but actually a large part of your people do not. You have to show a little bit of discretion. You may invest in offshore wind, which is very popular, but getting the link to the grid, going across open countryside with massive pylons, is not popular. The LGPS will have to bear that in mind, because sometimes the members, the constituent authorities and the council tax payers will not appreciate it.
Mark Garnier
Q
Councillor Phillips: We go back to the importance of fiduciary duty. You are there to invest for the benefit of your pensioners and to make sure that you do that in a sensible and reliable way. As has been proved to date, the most popular element is probably affordable housing. Cornwall, which you mentioned, has invested very wisely in affordable housing. Together with its relationship with local government as the owners of much land, there is huge potential there, but it only comes right when the return is there. If the return is not there, you are not going to enter into it.
Mark Garnier
Q
Councillor Phillips: If you do not do that, I do not know where you are going with your pension investment.
Mark Garnier
Q
Councillor Phillips: We anticipate that the latest round of valuations will show a very good surplus for all the pensions. That is credit to the investments that have been made to date. That does pose some issues as to what you do with those surpluses, but we live in a very volatile situation, and circumstances can change. You have to be careful, because if you reduce contribution rates considerably, that is a great benefit at this moment in time, but if you then turn around and start to increase them again, that can be very difficult for all employers to deal with, including local government.
Mark Garnier
Q
Robert McInroy: Yes, on the last point about surpluses. I am a fund actuary. We are working through the 2025 valuations, and it is pleasing to see improvements in funding levels across the LGPS. We think that that, in turn, can mean lower contribution rates, particularly for councils—something in the region of 3% to 6% of pay, so that is positive. It is important to realise that the success of the current scheme has perhaps not been picked up in some of the language and assumptions built into the reforms that have been put forward.
Mark Garnier
Q
Robert McInroy: That has been discussed on a fund-by-fund basis—whether the funding target should be increased from something like 100% to 120%, for example. That has been actively discussed.
Mark Garnier
Q
Robert McInroy: I support looking at the range of options, which includes reducing employer contributions and flexing investment strategy, including for some of the areas that we have talked about and will be talking about, that could be available to the LGPS in terms of investments.
Luke Murphy (Basingstoke) (Lab)
Q
Councillor Phillips: Like the local government sector, the local government pension scheme operates in a goldfish bowl: constantly, on a weekly basis, an article is written about you or you receive a freedom of information request. So you are very conscious of the scrutiny, and that helps direct you to manage the investment risks as part of your fiduciary duties. What people do not realise is that there will be particular packages that Government and strategic mayors may think a fine investment that they should be in, but there might be some local problems. To go back to the previous question, it might be better for Northumberland to invest in it rather than Cornwall. That sensitivity has to be there.
Luke Murphy
Q
Councillor Phillips: The fiduciary duty would still be your main concern but in managing your risks you would have to take that into consideration as well.
Luke Murphy
Q
Councillor Phillips: That is problematic, but at the same time you know when there are things it is perhaps best to steer clear of—perhaps a bypass, or something hugely controversial. It goes back to the mandatory business. If you are forced to invest in something that does not go well locally, that is not going to sit right or do the reputation of the scheme any good. Ultimately, as my colleague has said, we are talking about a well-run scheme with good integrity. Our businesses supply pensions to some of the lowest paid people in the public sector.
Luke Murphy
Q
Councillor Phillips: Like a lot of judgments.
The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)
Q
Councillor Phillips: My understanding is that it is a back foot.
Torsten Bell
Q
Councillor Phillips: Right.
John Milne (Horsham) (LD)
Q
Councillor Phillips: The Government have a responsibility to support the strategic authorities in developing the pipeline and the vehicles for investment. Affordable housing is probably one of the best examples to use. The pensioner receiving a pension or paying into a pension from the local government sector would be quite proud of the fact that some of their pension money is being invested in providing homes for the next generation of key workers. That is probably one of the best examples you can ever get of local investment. There is real potential, but I go back to the fact that it has to provide the necessary returns. Just as you have to be careful about some of those controversial ones, there is one that you can absolutely lap up.
John Milne
Q
Councillor Phillips: There is great potential in all the activities that local government can do, but the fiduciary duty is where we need that clearly spelt out and some guardrails put in for that.
Robert McInroy: Where the LGPS can potentially bring an advantage to bear is by tapping into its local connections and local expertise—when it can see local investment opportunities that others potentially cannot. To come back to affordable housing and the fiduciary duty, if you are the asset owner, you have to be looking at the returns, and that is a difficult challenge for LGPS funds, particularly when it is in their local areas. You are talking about, for example, whether you push up rent and potentially displace a family or basically taking a lower return as a result of that. It is a very difficult thing to stack up. It is new to the LGPS. We need to make sure there are guardrails around it. Within the Bill it would be useful to bring fiduciary responsibility into the elements of local investment and how that overrides any of the local considerations.
David Pinto-Duschinsky (Hendon) (Lab)
Q
Councillor Phillips: Let us be quite clear. I think the Government’s frustration, which is shared by many of us, is that we are talking about what is generally accepted to be the sixth largest pension scheme in the world, and it does not punch its weight, which is what it needs to do. That is what pooling, which began in 2016, was meant to address, and to date, it has been successful, but it needs to be better. That is where I see a very big positive of coming together.
David Pinto-Duschinsky
Q
Councillor Phillips: From that point of view, it is very helpful. Because we are a very transparent pension fund, pressure will be put on some of the pools to make sure that their workings are done in a transparent manner. They are now, but there will be even more pressure because lobby groups will go straight to them rather than the funds.
Consolidation with regard to administration is not quite so easy. The last consolidation was between Northumberland and Tyne and Wear, and that was with maximum co-operation on both sides. This is a very well administered scheme, but bringing two administration authorities together is quite challenging. It needs to be done with co-operation and collaboration, never with a big stick behind it.
Certainly in London, there is a case for some rationalisation of the number of funds, and there is always going to be an issue about some of the smaller funds as they deal with it, but pooling is not just about consolidating your investments. It also brings the opportunity for the member funds that own the pools to start working more collaboratively, particularly on things like communications and other areas of work. There is great potential there. One of the things that the scheme advisory board is very keen to do is to make sure we develop and grow those chairs of funds to be the competent leaders that they are, and make them even better.
Robert McInroy: I think you were asking about the challenges of implementation. It is easy to see the direction on this and to think that there is not much change for the LGPS. There is a huge magnitude of change in these reforms. The LGPS funds and the pools already have a very full to-do list. They have stretched resources. They are asked to deliver an awful lot in a short period of time. They are transferring all of the remaining assets from the funds to the pools—there is still about 30% of those assets to come across in a short period of time.
Two pools have been asked to change their operating model to be FCA-regulated. Every pool has been asked to build advisory functions—that is all from scratch, apart from one. They have been asked to build local investment capabilities as well, which is of paramount importance to be able to kick-start and contribute to the UK economy, and to implement some of these governance reforms, and now we know that two of the pools are being asked to wind up, so there is £100 billion of assets to transfer, which is implicated across 21 funds.
That is a huge amount to do under any timescale. Some of what is envisaged in the consultation is that this would be completed in a little over six months’ time. That puts risk on some of these reforms, and I think that should be recognised.
David Pinto-Duschinsky
Q
Robert McInroy: At the moment, there are eight pools across the £400 billion-ish of assets. I believe the plan at the moment is to reduce that to six. You would imagine that that gives a big enough scale. Some of those pools will be £100 billion-plus; that should be able to punch its weight internationally, I would imagine. The LGPS itself is of course open to accrual and to new members joining, so that is just going to grow over time. In some ways, I think these reforms set the plan for the future as the scheme continues to grow.
Kirsty Blackman (Aberdeen North) (SNP)
Q
My question is about consolidation and local concerns that people might have. For example, they may not want a wind farm invested in because they are worried about the infrastructure that goes alongside that. If there is consolidation, will that remove the ability to take account of local concerns and to find great local investment opportunities? Will it dilute the input that people have locally, because it is taking it further away from them, or do you think it will be okay?
Councillor Phillips: As we already know, the establishment of the pools does take it away. There is no denying that. The important thing is to have member representation on pools. The scheme advisory board has always been supportive of that, although you need flexibility in how you do it; I certainly would not go for 50:50, because of the governance and regulatory responsibilities that the administration authorities have. I think Border to Coast particularly has employee representatives on there, and that works very well. In particular funds, you will have representatives on the committee and on the pension board. That is always important.
Getting the right engagement is always going to be a struggle, with all the rest of it, but, particularly with some of the ESG issues, that helps to better understand some of the issues. Of course, elected members that sit there are representatives of their community as well. They are aware as well. They are also aware that when they sit at the table on a pension, they have a responsibility first and foremost to that pension.
Kirsty Blackman
Q
Councillor Phillips: Absolutely. We laid recommendations from the board before Government some time ago. They have now been implemented and rolled out, and that is very much a crucial part of all of this. The headline is all about the pooling, but the Government’s changes, and training and developing your members, are absolutely critical because of the important decisions that they make.
Sarah Edwards (Tamworth) (Lab)
Q
Robert McInroy: It is important to point out that the members are not directly impacted by the scheme returns or cost: their benefits are set in statutes and are guaranteed. However, you can see how that might indirectly implicate them; for example, if there was a higher cost to employers because the scheme was not performing the way we would have liked, that could impact on their business.
Councillor Phillips: We know the deadline has been set for the transfer and it is very much business as usual until that happens. Of course, virtually all the funds have been contributing to their pools anyway, so it is just a case of transferring the rest. There are some sensible discussions going on about where it would cost money to pull out of an investment, and common sense must be the first rule, but the direction of travel is what the Government want to see: that the pool is effectively in charge of delivering that investment strategy, which still remains the responsibility of the fund.
Robert McInroy: Within the 21 impacted funds, there are two pools that are being wound up and they are to find a new home, and they do not know for certain where that will be. There is sometimes a degree of inertia in some of the decisions made: why would you make a new investment when you do not know whether that is going to fit into your new pool? I appreciate that is why there are some short timescales on this; we need to get clarity and move through this quickly, or there will be increased risk, but the short timescales create risk in themselves, so there is a balance to be made and a tension there.
The Chair
If there are no further questions from Members, I thank the witnesses for their evidence today. We will move on to the next panel.
Examination of Witnesses
Helen Forrest Hall and Sophia Singleton gave evidence.
The Chair
The Committee will now hear oral evidence from Helen Forrest Hall, chief strategy officer at the Pensions Management Institute, and Sophia Singleton, president of the Society of Pension Professionals. We have until 3 pm for this panel. Could the witnesses briefly introduce themselves?
Helen Forrest Hall: I am Helen Forrest Hall, chief strategy officer at the Pensions Management Institute. We are the leading professional body for those running pension schemes in the UK. We provide qualifications and training to the sector, as well as continued professional development, and have almost 8,000 individual members.
Sophia Singleton: I am Sophia Singleton, president of the Society of Pension Professionals, and in my day job I am a partner at XPS Group. The society represents providers of advice and services to pension schemes and employers. As such, we represent quite a broad range of the industry, from pensions lawyers and actuaries through to professional trustees, pension providers and administrators.
Mark Garnier
Q
Helen Forrest Hall: I would love to say that. I start by saying that the PMI supports the principle that larger pension funds are likely to lead to better outcomes for members. A great and growing weight of evidence, and obviously an awful lot of international experience, shows that they provide greater economies of scale and greater opportunities to invest in a broader range of assets. Unfortunately, we believe that the reserve power sets a dangerous precedent of political interference with a trustee’s fiduciary duty. The considerations of each individual pension scheme are a matter for the trustees, taking into account their members’ experience and what will drive the best outcomes for those members.
Obviously, significant progress has already been made in terms of pension schemes demonstrating their desire to meet the Government’s eagerness for them to invest in a broader range of assets, and the consolidation elements of the Bill should help with that. But I think that the reserve power provision runs a serious risk of cutting across that well-founded fiduciary duty, as well as creating all sorts of disruption to long-term investment planning—another thing that pension schemes are well set up to do—and creating market distortion.
Sophia Singleton: We are very much aligned with the Government’s objective around investing in these assets. We believe that they can deliver and, as Helen has said, the industry has already made quite a strong move towards investing in them. We are going to get there, and it is really about not forcing that to happen too quickly. Schemes need to deploy capital when the opportunities arise and when the right time is, otherwise we risk distorting the market. That is a real concern, because it could deliver poor outcomes for savers. I am sorry we cannot give you a different answer, but we have three concerns about the mandation. Who is legally accountable if there is underperformance? Underperformance is possible. Is it the Government? Is it trustees? How will it affect the markets? How will it affect public trust? At a time when people need to save more into their pensions, they will worry that their pension scheme is no longer investing for returns as a priority.
Mark Garnier
Q
Helen Forrest Hall: That is the problem with a reserve power. It does not have to be used to influence the decisions that trustees are making about their investment strategies, because they have to consider the instances—and there is not an awful lot of clarity in the Bill about what those instances would be—in which this power might be used. They might suddenly find their long-term, well-considered investment strategy outwith Government legislation. That is a dangerous place to be. Pension schemes, quite rightly, are doing their job when they are thinking about their members and their beneficiaries, and making long-term investment decisions. They have the capacity and the joy of being able to do so, but that means that they have to think about those kind of time horizons. That means that a reserve power with a sunset clause with that kind of short-term time horizon will start impacting decisions that people are making at the moment.
Mark Garnier
Q
Helen Forrest Hall: I am not sure that we would draw a direct correlation, but the point is that it will start to influence investment decisions. Those may be good decisions, or not, and they may be decisions that trustees would have made anyway; the challenge is that the reserve power exists, a good trustee and their legal advisers will be taking account of that at the moment.
Sophia Singleton: We believe that the threat—just the threat—of this power is the worst of all worlds, in a sense, because the lack of clarity about what trustees should do and take into account when investing for the long term makes it very difficult for them to carry out their fiduciary duties.
Mark Garnier
Q
Sophia Singleton: What I would say is that we are already moving in that direction. If you look back a few years ago, it was very difficult operationally for defined contribution schemes to invest in those types of assets. If you look at things now, both on the supply side and the demand side we see factors that are really supporting investment in those assets.
On the demand side, the new value for money framework really incentivised investment into private market assets because of the risk-adjusted metrics included within the framework, and the work that the industry and regulators have done to take away the operational barriers that existed. On the supply side, the Government have committed to help to create that pipeline of investments. Publishing the pipeline that is coming up is very helpful, because people can plan how to employ their capital, and having the British Growth Fund and so on to invest in alongside the private sector is also helpful.
We are already seeing it happen: we are seeing funds recruiting investment experts to help to manage those assets, so they are already gearing up and skilling up to do this, and we are seeing fund managers releasing private market funds suitable for DC schemes on a regular basis. We do due diligence on those funds, and there are more and more that we have to look at. So it is happening.
Mark Garnier
Q
That begs the question that, as the Government at any time is trying to attract foreign direct investment into the UK, not least to try to sort out the current account deficit, you as pension fund managers will find yourselves in competition with, hopefully, foreign investors coming into the UK. What is the hierarchy of offer? Do you think UK pension funds should be offered exciting investment opportunities before foreign direct investors?
Sophia Singleton: I do not think we should be interfering with the market; I think it needs to be a free market and, as trustees of pension schemes, we need to be exercising fiduciary duty to choose the right investments for our members and to give the returns.
Mark Garnier
But you would rather see the opportunities first?
Sophia Singleton: Absolutely—we would love to see the opportunities first.
Helen Forrest Hall: The other dynamic there is that international pension funds, for example, are often looking to invest in the UK for reasons different from the reasons UK pension funds might want to invest. For them, it is often a smaller part of their portfolio, and part of their own need to diversify where their assets are, in order to manage their own volatility risks. There has been a history of going after the same investments, and unfortunately that is the market and that is healthy competition. One of the challenges and one of the market distortions we see with things such as the reserve power is that you will have the same group of people fighting over what, for a short period of time, is inevitably going to be a short pipeline. That will have an impact on things such as the value for money that you are getting for those investments.
Torsten Bell
Q
Given that that is your logic, the question is why that has not happened. If you go and ask actual pension providers why that has not happened, they will tell you they have a collective action problem and an industry focused exclusively on cost and not on returns, and that they struggle to deliver against that. If you have a collective action problem, you need to ask how we resolve that.
You then get to the fact that the Mansion House accord is entirely industry led, with numbers set by them—it is not about distortion to the market; you might want to reflect on that, given the comments you have just made. You also spoke about a lack of clarity, but the Mansion House accord provides clarity about the objectives: everyone can see them and they are set by the industry. When it comes to savers’ interests, you know that the Bill includes a carve-out for trustees to say, “This isn’t in my members’ interests, so we won’t be doing it.” Reflect a bit on the consistency of the argument you have made about the real progress you want to see on investment in a wider range of assets—because it is in savers’ interests and should have happened in the past but did not—and the changes in the Bill. I would gently suggest you might want to think about the consistency of that.
Sophia Singleton: We are not a mature industry—the defined contribution industry—and in the past we have not invested in these assets because there have been operational barriers, including the focus on cost.
Torsten Bell
That is not the view of the whole industry, which points to the collective action problem of an exclusive focus on cost, as much as it is a barrier—
Sophia Singleton: The value for money framework in the Bill is extremely helpful—
Torsten Bell
It is.
Sophia Singleton: —and we have said that we need to move the focus from cost to value, and we are seeing that very much come through in the culture within the industry, to be focusing on value. I have given evidence about funds recruiting investment teams to invest in these assets, because they are not simple to invest in for DC schemes. If you look at the experience in Australia through the covid pandemic, there were some real challenges that those schemes had to face relating to stale pricing, intergenerational fairness and cross-subsidies. They are not simple assets for DC schemes to invest in. The market is moving, going, and will get there. What we are saying is the mandation power is not needed to achieve that, because we are, with your help, getting to the right place.
Torsten Bell
Q
Helen Forrest Hall: Just to give my own perspective, there are a number of structural issues with the development of the sector. Defined benefit has been in run-off, which has driven a particular type of investment strategy. DC has not been at scale, and a number of us in the sector have been calling for consolidation for a long time. I think it goes without saying that we are having this conversation in the context of being very supportive of the vast majority of provisions in this Bill.
Torsten Bell
I was encouraging you to say that; you got there.
Helen Forrest Hall: Apologies; we are very, very supportive of the vast majority. This is basically the one substantive issue from our perspective. As Sophia has said, the value for money and consolidation elements in particular are incredibly helpful in removing some of the barriers that have existed, including for trustees. They technically have the ability to operate within their fiduciary duty, but sometimes the legislation and the structure of the industry get in their way. Things such as value for money and scale will really help with that. This Bill is incredibly enabling in the vast majority of its provisions. There are just a small number—mandation being one of them—where we have a bit of concern.
John Milne
Q
Helen Forrest Hall: From a principles basis, yes, and just to address the funding point, they absolutely can. I know there will be a number of us in the room who have either experienced or been subject to the outcomes of what has happened when those significant events have taken place. In the context of where we are with DB now, a significant proportion of schemes are employing investment strategies that really do protect them against the kind of volatile market movements you might see.
The provisions in the Bill strike the right balance between, as I said earlier, giving trustees greater flexibility to exercise their fiduciary duty in discussion with employers, while also ensuring that they are considering the best interests of the members. One of the key considerations for trustees in that conversation is: how confident are we that our investment strategy would withstand significant market movements at the point when we might release a surplus? That is a key consideration.
We have seen that a number of pension schemes did not benefit from September 2022 in the way that others did, and that was because they had decided to protect themselves against that kind of market movement. There are things that schemes can deploy to give themselves that level of confidence.
Sophia Singleton: We were very pleased to see the stringent funding safeguards that are in the Bill in order to allow a surplus to be released. One thing I would say is that, as Helen says, it is giving the trustees the tools to properly exercise their discretionary power and, in a sense, fiduciary duty, but it has created an opportunity for trustees to negotiate and agree a win-win situation, in a sense. The conversations we are having with schemes is that they are now more likely to be able to feel comfortable in paying, and be able to pay out, discretionary benefits than they would have been before the Bill was in place. It gives schemes the opportunity to run on and for the employer to access the service, but also for members to have more access to discretionary benefits and to additional benefits.
John Grady (Glasgow East) (Lab)
Q
I would like to move on to a slightly different topic: small pots. Ms Singleton, the SPP made supportive comments in its submission about small pots. Would you like to elaborate on why you support the small pots element of the Bill, and are there any practical considerations you would like to draw to the Committee’s attention?
Sophia Singleton: Small pots are a challenge for both the industry and for individuals. You have got a much more mobile workforce, and more and more people have small pots and have lost sight of those pots. Obviously, the dashboard will help them to gain sight of them, but actually bringing them together will help them to manage it. We know that it is much easier for people to manage greater-sized pots of money. For the industry, it is a huge cost to manage lots and lots of very small pots of money. I think it benefits savers and it benefits the industry to have this.
This is a pragmatic solution that is within the Bill, as far as we are concerned. The industry has considered a number of different ways of addressing this problem, and we feel that this is actually a very pragmatic solution. It does rely on a technology platform, so we were pleased to see that it is further down in the timeline for the Government’s road map for implementation, because we all know that introducing technology platforms can take some time and there are a lot of other things that we need to be working through, including consolidation and so on.
We did put forward some small technical suggestions within the Bill. Did you want me to talk to them?
John Grady
No.
Sophia Singleton: Good. We are positive that this will help, and we are also positive about the timeline for it.
Damien Egan (Bristol North East) (Lab)
Q
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
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.
Kirsty Blackman
Q
Helen Forrest Hall: Yes, I think at least one of us has something, but we can certainly provide more details if that would be helpful.
The Chair
If there are no further questions from Members, can I thank the witnesses for their evidence this afternoon? We will move on to the next panel. Thank you very much for your attendance.
Examination of Witnesses
Patrick Heath-Lay and Ian Cornelius gave evidence.
The Chair
We will now hear oral evidence from Patrick Heath-Lay, chief executive officer of People’s Partnership, and Ian Cornelius, CEO of NEST Corporation. We have until 3.30 pm for this panel. Will the witnesses please briefly introduce themselves for the record?
Patrick Heath-Lay: Good afternoon. My name is Patrick Heath-Lay. I am the CEO of People’s Partnership, a large DC master trust with £35 billion of assets under management and about 7 million members. Importantly, we are a not-for-profit organisation. Within that, we are an asset owner, not an investment manager, so our asset ownership activities are solely for the benefit of members and not commercially for ourselves.
Ian Cornelius: I am Ian Cornelius. I have been the CEO of NEST since May last year. I will say a few words about NEST. It was set up by the Government at the inception of auto-enrolment to make sure that every individual has access to a good-quality pension. It has been a great success story. It now looks after over 13 million members, which is a third of the working population, and manages over £53 billion of assets on their behalf. We receive about half a billion pounds of assets every month.
The focus of NEST has been, and will continue to be, on low to moderate earners, so the typical NEST member earns just under £25,000. In many ways, NEST is probably one of the best examples of the sort of megafund that the Bill is looking to create. It has been able to invest in private assets, invest in the UK and deliver good outcomes for members.
Mark Garnier
Q
Ian Cornelius: I do not think that the Bill particularly focuses on that problem, but the question is whether it is a problem. The pensions dashboard will help to provide more visibility of where people’s money is and help them to manage that more effectively. I think it is right to focus on small pots, because they are inefficient. It is much harder for consumers to track lots of small pots, and it is driving costs in the industry, so I think that that is the right initial focus.
Mark Garnier
Q
Ian Cornelius: Customers—members—can already do that if they choose to.
Mark Garnier
Q
Ian Cornelius: I think that is right. It probably goes back to dashboards. They are key to helping to increase visibility. That will get people thinking about the choices they can make, how they want to manage their pension and how they can consolidate their pensions. That will drive that type of activity naturally. At NEST, we have always had one pot per member to make it as easy as possible for our members. Ultimately, it is about member choice.
Mark Garnier
Q
Patrick, could I turn to you? We met and had a very interesting chat. One thing we discussed was the scale of the funds. There is a requirement in the Bill that funds such as yours will need to be valued at £25 billion by 2035. One thing we discussed at the time was whether that creates a barrier to entry for new asset managers, and a lack of competition among asset managers in order to provide the best value for those funds. Would you share some of your thoughts about the £25 billion minimum size?
Patrick Heath-Lay: Yes, of course. We have conducted research. Toby Nangle did some research for us in 2025, and WPI Economics has also looked at the issue of whether scale drives better economies. Generally, aside from all the international comparisons from Canada and Australia, it is proven that scale will drive better economies. You can leverage scale to drive a more efficient administration. If you are asset owners like these two organisations, we get to choose where we invest the money, which managers we use, who will come with the best solutions and who has the best routes and access to market to allow us to invest in a way that benefits and shares the benefit of that investment with the end saver, which for us as an organisation is the sole focus.
I believe that scale, utilised in the right way, does deliver those efficiencies, but this is where the package in the Bill, and particularly a key element like value for money, is critical to establishing that as this market evolves. You want to be reassured that the investment activity at that scale is delivering increasing value for members, which is really the sole purpose of driving that scale. From our own experience and the research that we have done, it is a proven model, but that scale needs to be harnessed in the right way.
Mark Garnier
Q
Patrick Heath-Lay: I do not want to be flippant in my response, but our scale already means that we are over that limit, so I have not really put too much thought into how they will do it. I believe that there is enough, within the business plans of entities that might be affected, to be able to make some reasonable assumptions as to what ongoing contributions will be coming through the door and how they will respond to some of the opportunities that may arise in this market over the next few years, from organisations that are choosing to move because of the extent of change that is coming.
I emphasise that I still think that the package of measures and that scale test is the right thing to instil that movement, because I think savers will be better off, provided that it is harnessed in the right way. That is why I come back to this: value for money is the proof point, and we need to make sure that we centre on that as an industry. Being able to evaluate how these changes have created a more competitive market in key areas going forward is really quite important.
Torsten Bell
Q
Ian Cornelius: It is one of the elements of the Bill that we very much welcome. I think guided retirement solutions are overdue. Certainly, our members have been opted into a retirement savings scheme, and they end up with a pot of money rather than an income. I think their expectation is an income. In fact, in the research we have done with our members, they say that the most important things for them are to have a sustainable income, confidence that it will not run out and an element of flexibility, because their circumstances can change very quickly in retirement. I think the guided retirement solution moves us in that direction.
At NEST, we have been working on this for some time, as we recognise that it is a core issue for our members. We therefore want to introduce a guided retirement solution—it is very much a work in progress—that delivers that sustainable income, but also gives them a guarantee that it will not run out. That will be some sort of deferred annuity, purchased probably when they are 75, to kick in when they are 85. We are actively working on that and will be looking to introduce it in 2027, aligning with the expectation in the Bill.
Patrick Heath-Lay: It is very similar from our perspective. We should not underestimate how much onus the shift from final salary to DC has put on individual savers, in terms of the decision that they have to make, in a very complex world that they really do not understand. Even if you surface a lot of information, your constituents will still struggle to navigate those decision points. We also should not underestimate the onus they have taken on, in terms of the risk of their own fund, when you think about the productive finance agenda and other things here. I think it is absolutely the right move. It is a good development for us to bring about guided retirement journeys in a way that is either “Do it for me” or “Do it with me” for policyholders.
Similarly, we are thinking about drawdown and how we can facilitate or help people to understand the implications of the actions they may take with accessing their funds, and then, when they get to later life, some sort of deferred annuity as an approach. The really important aspect is the guidance and how we can help, but have certain obligations on ourselves, as providers, to make sure that we are accountable for the help that we are giving as we go through the process.
Torsten Bell
Q
Ian Cornelius: It is difficult to speak for the industry, but I can speak for NEST. At NEST, we are very committed to investing in private markets: 18% of our assets are invested in private markets, and 20% of our assets are invested in the UK.
Torsten Bell
And that compares to the Mansion House benchmarks of 10% and 5%.
Ian Cornelius: The Mansion House commitment is 10% into private markets, with half of that into the UK, so we are already well ahead.
Torsten Bell
Q
Ian Cornelius: Absolutely. It is providing attractive returns, it diversifies risk and it also invests in the UK.
Torsten Bell
Q
Ian Cornelius: It is hard to speak for others, but scale is an important factor, as we have talked about. You need scale and sophistication to access these investment opportunities. NEST has that scale and is building that sophistication. It often involves quite innovative solutions and partnering. Partners want to partner with someone who has got scale and assets coming in at pace, and we have those things. There are some unique circumstances that have made it attractive for us. I will let Patrick speak for People’s, but it is on that journey as well.
Patrick Heath-Lay: Yes, we are, although we are much nearer the start of that journey. Again, it comes back to the scale point. Why is £25 billion or £30 billion about the right amount? Because it is about the right part that you can economically start investing in those items.
To answer your question, and to pick up a more general point, it is incredibly important that we work collaboratively on the issue, because, as an industry, there is not much point in us all sailing our own little boats around trying to find the right harbour to invest. There is a degree of collaboration that the industry, together with Government, can do to open up the opportunities where that investment needs to go and how it can be executed in the most efficient manner. The biggest risk with investing in private markets is that they are expensive. If the vehicles that are being used on a commercial basis are not sharing the economics of that investment well enough with savers, it will certainly not be an investment that we are interested in pursuing.
The other point is that putting down the foundations for this to be a pipeline of repeatable investment activity is critical. Because of its scale, NEST has got ahead of where we are today, but that is the phase we are in at People’s at the moment. There is over £1 billion a year from our scheme alone that will be invested in those markets on an ongoing basis. Given the scale that we are both experiencing, in terms of how we are scaling up, that will be an ever-increasing number, so it is important that we have reliable and very cost-effective routes by which we can deploy that capital.
Ian Cornelius: Going back to your original question, I think that the industry is moving in the right direction. The Mansion House accord had 17 signatories and we are seeing the right moves.
Steve Darling (Torbay) (LD)
Q
Ian Cornelius: There is no doubt that there is detail to work through across the whole Bill. One of the really interesting areas will be the interaction of targeted support and default solutions. There is now a consultation on targeted support, being led by the Financial Conduct Authority. That opens up lots of opportunities to provide an enhanced level of support to people who cannot afford to take advice. The fact is that financial advice is only available to about 9% of the population. Nearly all our members cannot afford to take financial advice, so they need that enhanced level of support, either to check that they are making the right choices—“Is the default solution the right one for me?”—or because they might have circumstances that mean that they want to explore something different. Targeted support is very welcome, and we look forward to engaging with the Pensions Regulator and FCA in making that a reality and making it work for low and moderate earners.
Patrick Heath-Lay: I am probably going to sound quite boring, but this is an area in which value for money and making sure the solutions are developed in the right way to support consumers can be really quite effective.
Mr Bedford
Q
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 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.
Kirsty Blackman
Q
Ian Cornelius: It is definitely desirable. One of the challenges with auto-enrolment is—it is a positive and a negative—that people are not engaged. Inertia has worked really well, but you have to work to engage them to make sure they are contributing the right amount, thinking about what they will need in retirement and thinking about their circumstances. For example, at NEST, only 40% of our members are registered with us online, so we have a really big job to play to engage more of them, get them to register, and get them accessing the tools and support that are available to deliver the best outcome for them. It is our fiduciary duty to do that. There is a lot more that we can, need and want to do in that space. Guided retirement is a big step forward. Targeted support would be helpful. There is a big challenge for the whole industry there.
Patrick Heath-Lay: I agree. As this unwinds, we should think a little bit more about how engagement will help. It certainly is a big driver. Both the introduction of these propositions and the guidance and targeted support we can provide through those processes will be important, but we also have to accept that even in the most mature economies’ pension systems, people still do not engage very closely on this. Even when they do, they find it incredibly difficult to interpret what they are being told. How many people can do good compound interest calculations, for example? It is sometimes mind-boggling what we expect people to know. There has to be more onus on us through those processes, as an industry, for the guidance that we provide and the obligation on us to enable effective, accountable support to be there. There is much more, and this Bill goes a long way to enable us to do that.
Kirsty Blackman
Q
Ian Cornelius: Having a strong pipeline of investable assets is key. There is no doubt about that. Patrick touched on this earlier: one other inhibitor has been cost. It is actually quite expensive to invest in private assets. One of the things that NEST does successfully is to drive that cost down, but that is a barrier. The focus on cost rather than value in the past made it harder. The Bill shifts the focus towards value, which will be really helpful. There are a number of challenges that the bigger you are, the easier it is to work through. The Bill as a whole will therefore definitely be helpful, but collaboration with Government and across industry should help to unlock more of those attractive private market opportunities.
Patrick Heath-Lay: I have previously discussed this with the Minister. There is a role for Government to play here. It was even acknowledged within the Mansion House accord that this is for the benefit of savers, and there is a role for all of us to play in finding those efficient routes to deploy that investment through. The problem right now is not whether there is investment to come; there is. The Mansion House accord has created that. There is a wall of capital potentially available. The issue is connecting it in the right way with the investable opportunities—not only the planning and whatever is needed to create those investment opportunities in the first place, but the routes of access and the investment vehicles used. There are further conversations to be had about how we can do that as an industry. Efficient deployment is probably the biggest challenge for us as an asset owner in ensuring that we are sharing that benefit back with members.
John Milne
Q
Ian Cornelius: That is where we welcome the Pensions Commission. It has been set up to actively look at adequacy: what is right, and are people saving enough? There is no doubt that many people are not saving enough and there are a lot of people who are still excluded from retirement savings. There is a big issue and challenge with the self-employed. There is a challenge for the industry and the Government to work on, but the Pensions Commission creates the right environment to do that. Auto-enrolment has been a big success, but it is only a job half done. Completing that job through the Pensions Commission is incumbent upon the Government and industry.
John Milne
Q
Patrick Heath-Lay: I completely agree with what Ian just said. The review is the right way, and we need to look at the interaction between saving rates, state pension and the general economic conditions. One thing that we were concerned about with the Bill is this. There is a lot in here that is trying to create better value in the industry as a result of the transformation, but what we have very much seen over the last few years is the rise of retail consolidators, which encourage people to consolidate their lost pensions towards them and effectively put their pensions on their phone. They have taken control of that future. That is a positive thing in terms of people acting and doing something about the number of small pots they have. The issue is that the Bill ignores the rise of that market.
From our own research, we know people are consistently moving their pensions to these types of vehicles, which are much more expensive and, for an average earner, effectively mean that they will retire three or four years later than they could have done, because the value delivered through those models is not going to be anywhere near the level of the competitive workplace market as it operates today. We would like to see the extension of value for money and those types of issues into that market as soon as possible, as there are some bad outcomes where well-meaning people are trying to do the right things and do not understand the consequences of what they are doing. There is not sufficient obligation on providers in that market to make those people aware of the consequences of their actions.
Ian Cornelius: I wholly welcome the Bill. It will increase and improve standards across the workplace pensions market—but only across the workplace pensions market. The pensions landscape is already pretty complicated with contract-based schemes, trust-based schemes and personal pensions. Consumers do not understand the differences between those—and why should they? The fact that the changes only apply to workplace schemes, and that things such as value for money do not apply across personal pensions, is an issue for consumers. They will be confused and will not necessarily make the right decisions. We need to think about how the landscape can be equalised and made as simple and clear as possible for consumers.
The Chair
Thank you very much. That completes the questions from Members. I thank the witnesses for their attendance and evidence this afternoon.
Examination of Witness
Tim Fassam gave evidence.
The Chair
We will now hear oral evidence from Tim Fassam, director of public affairs at Phoenix Group. We have until 3.45 pm for this panel. Will the witness please briefly introduce himself for the record?
Tim Fassam: I am Tim Fassam from Phoenix Group. We are one of the country’s leading pension and long-term savings providers. We look after about £290 billion for our 12 million customers across a range of brands, most famously for Standard Life. We are a major player in the workplace automatic enrolment market as well as the bulk-purchase annuity market for DB schemes. We are also proud of our history as a consolidator of historical private pensions.
We have been passionate about the investment agenda. Our chairman, Sir Nicholas Lyons, took a year out of being chairman of Phoenix to be Lord Mayor, and the Lord Mayor who co-ordinated the Mansion House compact, which we were supportive of. We were also heavily involved in the development of the Mansion House accord. In order to facilitate that, we worked with the leading asset manager Schroders to create a joint venture called Future Growth Capital to deliver private market investments that are specifically designed for the pension market. We have made an initial commitment of £2.5 billion to that and are looking to invest up to £10 billion over the next five years. This is an agenda that we think is incredibly important, and we are very supportive of the focus that Parliament is giving this Bill.
Mark Garnier
Q
Tim Fassam: The short answer is yes, we are big fans of the value for money framework, but it is worth thinking about why that is. When we are looking at why we have not had the investment that we would necessarily expect, and that we see in other similar countries—so, exposure to private markets and exposure to productive assets—we think there are roughly three groups of reasons. Some are cultural and have been helped by things such as the accord and the compact. Some are regulatory, and that will be a major topic of conversation in this Committee. But some are market, and the market challenges are really around who is the buyer of automatic enrolment pensions. That is usually the employer.
Historically, we have seen most employers focus on the charge, and the charge alone. That means we are now seeing charges well below the price charge cap for automatic enrolment, which is a good thing for consumers, but it is at such a low level that it is very hard to offer more enhanced investment solutions, so that means they tend to be invested in more passive investments and trackers. The value for money framework is important because it should have an impact on those purchasers, making it easier for them to see a more holistic view of the value that they are getting from the pension that is being offered to them, in terms of investment, service and a wider range of metrics. We are not sure it is perfect, as currently developed, but it is certainly in the right direction.
Mark Garnier
Q
Where I begin to get slightly confused is that it then switches to member satisfaction surveys. I am curious as to what the member is. You raised the very good point that the customer is the business, but that is not the same as the member. Who is being asked whether they are investing in the right assets? That is quite a technical question by the time you start looking all of this. Can you see that there are anomalies and Gordian knots within this?
Tim Fassam: There is certainly a lot of detail to be worked through. That will include understanding the impact of all these factors. For example, investment return will be an incredibly important part of the value-for-money framework. It is very hard to do forward-looking investment return analysis, but if you do backward-looking, you cement the best of what we have today. The premise of the Bill is that we want to see a different investment pattern going forward. It will be very hard to, say, model a higher allocation to private markets in a forward-looking metric unless we have some creative thinking. Getting those investment metrics right is absolutely critical.
Service does matter to customers in terms of how easy it is to deal with and how much support they are getting to make good investment decisions. That will have a significant impact. When you combine it with things like the potential for targeted support, that could make a very significant difference in terms of the outcomes that the consumers get. We always think of the end customer being the individual. We have a close and important working relationship with the employer, and they are often working with employee benefit consultants to choose their scheme, but the most important stakeholder in all of this is the end user. We want them to get the best possible result to help them prepare for retirement.
Mark Garnier
Q
Tim Fassam: We are certainly concerned about the intermediate rating and the risk that that could cause a cliff edge if it means that, to get an intermediate rating, you are effectively closed for new business and potentially existing new joiners for a new firm. We think an intermediate rating that aligns with delivering value, but with a warning light that gives the firm a couple of years to get back into high value for money, will stop the perverse consequences. What I mean by perverse consequences is that if the cost of underperformance is significantly higher than the benefit of outperformance, you will see everyone herding in the middle. That will mean that you may well get a better outcome than today, but you will not get the competitive pressure to be the best of the best, which I think will see the better outcome in the longer term.
Mark Garnier
Q
Tim Fassam: Your value for money rating will be published.
Mark Garnier
Q
Tim Fassam: If you see very strong market or regulatory consequences for hitting an intermediate rating, the focus will be on not being intermediate rather than on being the best that you can be. We would like to see a focus on delivering the best value for money that you can.
Luke Murphy
Q
Tim Fassam: That is a very good question. One of the things that makes the Bill powerful but more complex is the number of elements that interact. Eventually, we hope, it makes the whole greater than the sum of its parts, but it does mean it is critical that you get the ordering right. For example, we need the value for money framework and transfer without consent as soon as possible, so that we are able to get in good shape for the 2030 scale test—so those deadlines brought forward. Small pots are part of that scale: we are seeing thousands of new small pots generated every year, so the quicker we can get on with managing small pots, the fewer of them there will be for us to manage going forward.
It is critical to think very carefully about the staging and phasing of the various elements of the Bill. That is the point we are trying to make. On the elements that help the market get to where we hope to get to by 2030, we need to get in as swiftly as possible, with enough time after the detail is in place for the industry to implement. I appreciate it looks like we are asking for things to be slowed down and sped up, but it is just making sure the ordering is correct and we have enough time to get into good shape for that 2030 deadline.
We think the scope should be extended partly because of how supportive we are of the measures. Being a historical consolidator of private pensions, we have millions of customers who are not workplace customers but who could benefit from being transferred into a more modern, larger scale scheme and from going into a consolidator of small pots, for example. We see that value in our own book. We look at the opportunity and think, “We wish we could do that for this group of customers. They would really benefit.”
The pensions market is quite complex, as others have pointed out. It is contract-based and trust-based. You also have workplace and private pensions. The more consistent we can be across all the different types of customer, who often do not think of themselves as being any different from each other, the more coherent a scheme we are likely to get at the end result.
Luke Murphy
Q
Tim Fassam: We see it predominantly as opportunity. We are not saying that the rules necessarily need to change. We are just saying these new opportunities should be extended to a wider group of available schemes, but the infrastructure we are putting in place regarding workplace auto-enrolment savers can be utilised across the piece.
Steve Darling
Q
Tim Fassam: I think eating an elephant is a very good way of putting it. I think £1,000 is certainly a good place to start. This will be an incredibly valuable part of the pensions ecosystem, but it will be complex and getting it right will require a lot of thought and a lot of close working between Government regulators and industry. Having that narrow and focused scope allows us to get it in place and get it working; then it would be perfectly reasonable to look at the level at a later date. For the time being, I think that is a very clear cohort of individuals who are likely to benefit from consolidation, because at the moment they are in uneconomic pools.
Kirsty Blackman
Q
Tim Fassam: That is another very good question. As the previous witnesses said, it is important to ensure that there is a pipeline of assets coming to us. A lot of what the Government are doing with the national wealth fund and the British Business Bank is helping with that. We would like to see—we would say this, wouldn’t we?—a little more focus on insurance versus banks. Banks are a vital form of capital—I am absolutely not suggesting they are not—but there is a skew towards banks. A few more insurance experts in the national wealth fund, and ensuring we have that pipeline of investable assets, could be valuable.
We are very lucky in the UK that we have fantastic start-ups, and amazing universities that are generating brilliant ideas. What we really need is scale-up capital. At the moment, about 70% of firms that need major scale-up capital go overseas for it, and then their head office moves. We need to make sure that we have an attractive environment for those firms to stay in the UK, and that is where scale comes in. A number of witnesses have talked about the benefits of economies of scale and professional asset management capability. That is absolutely right; they are critical benefits. One of the less discussed benefits is if you want to—
The Chair
Order. I apologise for the interruption, but that brings us to the end of the time allotted for the Committee to ask questions of this witness. On behalf of the Committee, I thank the witness for their evidence this afternoon.
Examination of Witnesses
Michelle Ostermann and Morten Nilsson gave evidence.
The Chair
We will now hear evidence from Michelle Ostermann, chief executive officer of the Pension Protection Fund, and Morten Nilsson, executive director and CEO of Brightwell. We have until 4.15 pm for this panel. Will the witnesses please briefly introduce themselves for the record?
Morten Nilsson: I am the CEO of Brightwell. We administer 380,000 members and about £35 billion of assets. Our largest client is the BT pension scheme, which we manage end to end.
Michelle Ostermann: I am the chief executive of the Pension Protection Fund. We were created by legislation in 2004; we have been in existence for 20 years. We manage a little less than Brightwell does, £30 billion. We are effectively a monitor of the entire DB system. We protect and backstop £1 trillion in it, pay compensation to almost half a million members, and enable the industry in general.
Mark Garnier
Q
Morten Nilsson: I see it as a good thing. I think it will change the pension industry quite a bit as a positive innovation. Closed DB schemes, which we focus on, might be seen more as an asset for sponsors, rather than a liability that they would like to get rid of as quickly as possible. I think that it will create quite a lot of innovation, and a lot of good things will come out of that.
Mark Garnier
Q
Morten Nilsson: I see it pretty much as you described. The main duty of the sponsors and the trustees is to ensure that there is enough money in the scheme to pay the benefits that were promised to members. If there are excess funds, it is reasonable that they can be invested back into the economy. In May, we surveyed 100 finance directors who are responsible for schemes with over £500 million of assets: 93% of them said that they would want to access the surplus, 49% said they would reinvest it in their local business, in the UK, to create jobs and do other good things, 44% said they would consider sharing it with members, 42% said they would invest it in their global operations, 40% said they would pay it back to shareholders, and 33% would invest it in DC. That is quite a wide range of uses. I think some of it will be paid back to shareholders, which may be local or abroad, but I expect a lot of it would be invested back into the UK economy in one way or another.
Mark Garnier
Q
Michelle Ostermann: Obviously, just as you describe, because we backstop the entire industry, what we are watching most closely is the fundedness of schemes, combined with the credit quality or the covenant, and the financial stability of the organisation itself. Those two combined are what help us to assess industry-wide risk and determine how much reserve we need to set aside for future claims on the PPF.
There is a spectrum of schemes out there, clearly—some that are very well funded, which you have been speaking of, and several that are not as well funded. On that spectrum, our focus is on the left side tail—the ones that are most underfunded, or nearing the potential to be underfunded. Given the measures that are being discussed for the release of surplus, we at the PPF feel comfortable with it not imposing a material amount of risk to us, as it is currently defined. It seems to find a nice prudent balance between allowing some flexibility for sponsors to use that money in hopefully a productive way, combined with the test to make sure they do not fall below a certain level, which would bring risk upon the industry and the PPF. We have been a constant participant in that conversation, and we would like to suggest that we will continue to play that role as a surveyor of the net residual impact to the industry.
Mark Garnier
Q
Michelle Ostermann: Yes—it is very similar.
Mark Garnier
And you war game it?
Michelle Ostermann: Yes. The biggest variable that we have a hard time predicting in those scenarios is the likelihood of this being used and the manner in which it is used, but we test deep into the tail. We try several scenarios that give us a high probability of it being abused or overused, and the opposite, and we have come out with pretty strong confidence. As it is defined today, we feel comfortable.
Mark Garnier
Q
Michelle Ostermann: Not here in the UK, but as you can tell by my accent, I am not a local. I worked in Canada for most of my career, at two of the largest Canadian “Maple Eight” pension plans, and those are things that we would assess quite regularly. In fact, the open DB schemes here in the UK function very similarly to those in Canada. I joined the PPF in large part because it is a mini-version of the Canadian model. It is exceptionally similar, to me. You will notice that during the liquidity crisis that occurred it was the liability-driven investment strategies, with the degree of leverage, that were most at risk, and it was interest rate-sensitive. Those open DB schemes that were using a more balanced degree of risk, including some equity risk, were unencumbered. It was Railpen, which I worked for when I was here previously. I was phoning back to my peers both there and at the universities superannuation scheme and PPF, and they all withstood that very well.
Mark Garnier
Q
Michelle Ostermann: It is definitely something that was on our radar. When we build the investment strategy for an open DB scheme, such as those I described, it is quite different and less susceptible to that type of risk.
Steve Darling
Q
Michelle Ostermann: I assume you are speaking of our levy?
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
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
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
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.
John Milne
Q
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
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
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.
The Chair
If there are no further questions from Members, I thank the witnesses for their evidence. We will move to the next panel. Thank you very much indeed.
Examination of Witnesses
Chris Curry and William Wright gave evidence.
The Chair
We will now hear oral evidence from Chris Curry, director of the Pensions Policy Institute, and William Wright, managing director of New Financial. We have until 4.45 pm for this panel. Would the witnesses kindly introduce themselves?
Chris Curry: Good afternoon. My name is Chris Curry, and I am director of the Pensions Policy Institute. The PPI is the leading UK research organisation working in pensions and retirement income, with a remit to provide an evidence base, analysis and data across all pensions issues.
William Wright: Good afternoon. Thank you for the opportunity to be with you today. My name is William Wright. I am the founder and managing director of New Financial, a think-tank that makes the case for bigger and—crucially—better capital markets across the UK and Europe.
Mark Garnier
Q
Chris Curry: We heard a little about that from the previous witness, who I think also has first-hand experience of the Canadian investment models, but there are a number of different reasons. First, there is the aggregation in the system that was talked about; the UK has a very fragmented pensions system. There are a number of different large sectors, but each large sector is not large internationally speaking. Scheme maturity, scheme size and scale generally are a factor. Very few individual schemes have the scale and the amount of assets to invest large-scale in some of the UK opportunities in the way that Canadian schemes have invested on a large scale—as has been said. Half a billion pounds to £1 billion in a single investment is very large by UK standards, compared with the size of schemes.
There is also, because of that lack of scale, a lack of development of the expertise required by some of those specialists—sophistication has also been mentioned—across some of the different individual schemes that we have in the UK. If you are larger, you can afford to have those specialist management teams or specialists on the board. It is not such a proportionate cost as it would be to a relatively small scheme.
Cost is another factor. As we heard from previous witnesses, in the UK a lot of focus on schemes has been on the cost of providing a scheme; in the workplace especially, by default a lot of competition is based on cost. With some of the opportunities we are talking about, especially in productive finance, in the UK space, investing in the UK would come at a high cost, so there is less scope for that cost to be absorbed in an overall larger fund. A lot of the things that the Bill is trying to address are probably some of the reasons why we have not seen that UK investment up until this point.
Mark Garnier
Q
William Wright: Certainly on the derisking side, while we are blessed to have the second or third largest pool of pensions assets in the world, the structure of our pensions system—the fact that so many DB schemes have closed or are running off—means that the overall risk appetite simply is not there. There is a danger in this debate of comparing the outcomes that we see in different types of pension fund systems around the world and thinking, “We like the look of that. Can we have a bit of that, please?” I am simplifying here, but we tend not to be too keen on looking at the inputs and the decisions, often taken 20, 30 or 40 years ago in different markets around the world, that have helped to lead to the development of those systems as they are today. The Canadian public sector defined-benefit model did not happen overnight. Michelle knows the history of it better than I do, but it goes well back into the 1980s. That is why so many of the aspects of the Bill should be welcomed. They look at the fundamental drivers of what will help to define pension fund outcomes for members and the structure of our system in 10, 20 or 30 years’ time.
On how other systems think about pension systems in relation to growth and economic wellbeing in their domestic markets, one of the things that we found particularly striking is that when you compare DC pensions in the UK with DC systems in other countries, or public sector DB in the UK with public sector DB in other countries, there tends to be, for DC pensions in other countries, a higher domestic bias. There tends to be more investment, whichever way you look at it, in their domestic equity market than we see from UK DC pensions in the UK equity market. You also see, almost universally, higher levels of investment in private markets. So much of that comes back to scale. Scale is a threshold—it is not enough on its own—and then there is the sophistication, governance and skillset that needs to be built over many years on top of that.
Mark Garnier
Q
William Wright: Yes. As a number of witnesses have mentioned today, because of the structure of the UK pension fund industry, there are many different perspectives, often not entirely aligned, shall we say, with each other. Every participant in the industry has responded perfectly rationally to the incentives in front of them and the regulation behind them in their investment behaviour and risk profile. International accounting standards, rather than just UK standards, have helped to drive that in the private sector. We have seen similar derisking in other corporate DB pension systems around the world. It has been an entirely rational response. It is really interesting to see which elements of which markets around the world seem to have found a more positive response. Canadian public sector DB, the closest comparison to LGPS in this country, is one example. Others are Australian DC or some of the Nordic models—the Swedish and Danish DC models.
Mark Garnier
Q
Chris Curry: First, I agree that we have seen lots of positive response to the value for money framework. Looking across international examples—Australia, in particular—it seems as if it will be very welcome in trying to ensure that, as part of the consolidation and what is potentially coming with the next Pensions Commission, with more investment going into UK pensions, that investment is going into a place that is actually going to work on behalf of the members who are investing their money. That is really important in what we are doing. I would also echo some of the views we heard earlier that it is really important in moving away from just a cost-based analysis of pensions and into value, and in looking at the whole range of different factors that are going to determine whether you get a good outcome rather than just at how much the investment costs.
There are challenges. What we have seen in particular, which Tim mentioned earlier and echoes what we have seen in Australia, is that where you have a very hard measure over a relatively short period of time, that will affect investment behaviour. Because there is such a penalty for falling behind over a short space of time, you do everything you can to avoid falling behind, and there is fairly conclusive evidence that that has led to herding of investments in Australia. That is not to say that a framework, or even an intermediate marker, necessarily has to lead to that; I think that depends on the parameters you set and whether you are looking at the returns over one year, three years or five years, and how that works.
Ideally, recognising that pensions are a long-term investment, you would not want to be looking too much at what happens over a short period of time in investment markets; you would want to be looking over a much longer period and at how the underlying strategy is performing. That is always very difficult, and one of the challenges is trying to get the balance right between what you can measure objectively and what you can measure subjectively. Where you are looking at things like an intermediate report, you tend to be looking at something that is objective, and it is quite difficult to do that over a long period of time. There is always a balance to be struck as part of this, and it would be good to investigate that more as we get further through this process, to work out the best way of doing it in order to achieve the best outcome for members.
Mark Garnier
If I remember rightly, the Bill allows for the detail to come in afterwards, so we will have a bit of work to do when this is all over. Thank you very much.
Torsten Bell
Q
Chris Curry: I listened with interest to some of the earlier witnesses talk about dashboards, and there certainly are some lessons that we can learn from the pensions dashboards programme, as it has been evolving over the past few years, for small pots in particular.
There are two issues that I would pull out. The first is on the technology front. I think someone suggested that the next five years or so could be quite a tight timetable to build a technological solution and get it in place. You have to be very careful—you cannot underestimate just how much complexity there is and how long it takes to do these things—but I would say that the work that we have done on pensions dashboards is giving us a bit of a head start. That is not to say that we necessarily need to build on or use parts of the system that we have already built, but it has helped us understand a lot about, for example, how you can find pensions—the way you can use integrated service providers rather than having to go direct to all the schemes, and use a syndicated model to find where people might have their pensions.
It has helped the industry get a long way down the path to where it needs to be, as well. One of the big challenges for pensions dashboards is the quality of data. Enabling individuals to find their pensions means data quality: it needs not only to exist and be there; it needs to be accurate and it needs to be up to date. When you are thinking about an automatic consolidator or default consolidator for small pots, that is even more important. You are not just transferring information, but transferring money, so it is really important that the data is high quality. The work that is being done on pensions dashboards will get people in the industry a long way to having part of that in place as well.
There are definitely lessons that can be learned from how we progressed on the pensions dashboards programme. It has got us much closer to where we would be if we had had a completely blank page to start from, but there is still a reasonable amount of work to do, because it is working in a slightly different way.
John Milne
Q
William Wright: I think it is a mix of both. It very much depends on what sort of assets we are talking about. For example, if we are thinking about the UK stock market or domestic equity markets, we tend to see that markets such as Canada and the Netherlands have an even lower allocation to domestic equities, whichever way you look at it, than comparable UK pensions have to the UK market.
Ultimately, this comes down to what you might call the accidental design of the UK system. It has evolved over 20, 30 or 40 years, whereas the systems with which we like to compare the UK system, or large parts of them, were actively designed anything from 30 or 40 to 50 or 60 years ago. We are now seeing the benefits of that active design in those systems. Their focus on scale enables them to invest in a far broader range of assets at a lower unit cost.
Going back to the value for money point, UK pensions have ended up in the worst of both worlds. Fee pressure, particularly in terms of winning and transferring new business between providers, is driving down fees, but the average fees on DC pensions today are very middle of the pack: 45 to 50 basis points a year. That is much higher than much larger schemes in Canada, such as the Canada Pension Plan Investment Board, the big Canadian reserve fund, and much higher than large UK schemes, such as the universities superannuation scheme, but they are stuck in the middle: they are actually paying higher fees, but because of the fee pressure they have a very vanilla, almost simple asset allocation. As Tim Fassam from Phoenix pointed out, that tends to steer people towards the lowest cost investment option. Active design, focusing on scale and sophistication, enables pension schemes to take a much longer term and much broader view of what they should invest in and where they should invest in it, whereas in the UK we have tended to accidentally move from one system to another.
John Milne
Q
William Wright: Absolutely. One of the huge challenges in the UK pensions debate over the past 25 or 30 years has been that we sort of knew what was not working and where corporate DB pensions were going to go, and then there was a hiatus and no real active design of what was going to replace them. Auto-enrolment did not start to kick in for a couple of decades, and now we are beginning to see the benefits of that, but the opportunity to actively redesign the structure of the defined-contribution pensions system in this country, and the structure of public sector DB, is long overdue.
The Chair
If there are no further questions, I thank the witnesses very much for their evidence this afternoon. Given that the Committee has been sitting for a couple of hours non-stop, I will suspend the sitting for a brief period.
The Chair
We will now hear oral evidence from Roger Sainsbury, founder member and pensions partner of the Deprived Pensioners Association, and Terry Monk, a member of the Pensions Action Group. We have until 5.15 pm for this panel. Will the witnesses kindly briefly introduce themselves for the record?
Roger Sainsbury: As the Chair said, I am a founding member and the lead organiser of the Deprived Pensioners Association, which was set up for the purpose of fighting for what we loosely know as pre-1997 indexation for Pension Protection Fund members.
Terry Monk: My name is Terry Monk. I have worn various hats over my almost 70 years in the industry. I am probably—with respect to Roger—one of the oldest people in the room. I have been a financial adviser, and I ran a financial services company that was part of Lloyd’s broking group. That group did the first compromise deal to try to save the group and therefore left a lot of its employees, including myself, with hardly any pension. My pension went down from 100% expectation when I was 59 or 60 to just 10% afterwards. Through the restructuring of Bradstock, I joined Independent Trustee Services, part of the Jardine Lloyd Thompson Group—the company that probably saved my life in many ways, and gave me a future. Through that, I became involved with companies that became insolvent.
I then began to work very closely with my colleague Alan Marnes—who is sitting behind me—in the Pensions Action Group, trying to fight for some kind of protection to reverse the disasters that ourselves and our families were facing. That included demonstrations. People ask about the history of the financial assistance scheme and how long FAS has been there. Well, I have brought a picture of my granddaughter when she was young—she is now 22—at one of our demonstrations in Whitehall. FAS started the thing. Alan, John Benson, Phil Jones and the like started the campaign—in Downing Street, on College green and at party conferences—to bring about the compensation that was needed to stop this happening to anybody else.
My take from today is that you guys are all doing what you are doing to make the future work. I am concerned for the people I work with and represent, and I want to make sure that their past is not forgotten, that their pension becomes secure—not one of the future, but one of the past—and that they can rely upon the past. I am afraid I will get emotional at this point— I apologise that I am not doing my introduction; I am doing a speech—because 5,343 FAS members have died since Richard Nicholl and myself gave a presentation to the Work and Pensions Committee. I said to someone just now that my tie is loose because I do not wear ties these days, but I have worn a tie twice in two months at the funerals of founder members of the Pensions Action Group. It just has to stop. I am sorry—I will keep quiet now.
The Chair
Thank you very much indeed. I will go immediately to the shadow Minister, Mark Garnier.
Mark Garnier
Q
Roger Sainsbury: In the light of Terry’s extended life history, I will just add that I am a fellow of the Royal Academy of Engineering and a former president of the Institution of Civil Engineers.
Before I come to your important question, I would like to feel sure that everybody in this room really understands the huge seriousness of the issue we are considering. This business of removing indexation from people who had pensionable service prior to 1997 has been going on for 20 years. Many of the people involved have seen the value of their payments eroded by maybe even more than 50% in that time. It is really very serious.
The second thing I would like to mention is that the scale of the problem is actually greater than the Post Office managers scandal. Of course, I am not suggesting for a moment that any of our claimants is suffering in the appalling way the postmasters did, but the numbers of our people are so huge compared with the postmasters that the actual amount of money at stake is greater. We have 140,000 PPF members who are affected by this bizarre clause of limiting the indexation, 60,000 of whom are 80 and have zero indexation, so it is a truly serious thing.
I would also like to mention one other dimension, which is timing. In our written submission to the Committee, we did not even bother to press the basic argument for why indexation should be awarded; we just focused on timing, because time is absolutely not on our side at all. Our claimants are dying, on average, at the rate of 15 a week—it is probably three while we have been holding this meeting this afternoon—or 5,500 a year. We have been told by the Department that the necessary amendment to the Pensions Act 2004 cannot be made by statutory instrument. There would have to be a new Bill and a new Act, and goodness knows how many years that might take or how many more thousands of people would have died. That is why we are pressing to get an amendment to this Bill to give a more timely answer.
Now I come to your question: what are the main arguments for and against using the reserves to benefit the members? Well, the first argument is simple, but really rather powerful: it is the only purpose that, legally, the PPF is allowed to spend its money on. The Act is very clear: unless some legal judgment was made against them, which is not on the horizon at all at the moment, the only way they are allowed to spend money is either on their own overheads or on giving benefits to members, such as the indexation that we are now talking about.
That is reason No. 1; reason No. 2, in my mind, is that expectations have not been met and promises have not been fulfilled. I go back to the Secretary of State who introduced the Second Reading debate on the 2004 Bill. He pledged that pension promises made, by the original schemes that people were in, must be met—that is, met by the PPF, which is the reason why the PPF was to be, by that Act, created. Yet that has not happened because, somehow, into schedule 7 to the Act came these dreadful words that have had the effect of not permitting the PPF to pay any indexation at all to people for time worked prior to 1997.
The third reason—ultimately, this is the important reason—is that the 140,000 people need this money. They desperately do, some of them. I mean, obviously not everybody’s condition is the same, but a lot of people will be suffering real misery and hardship. They need this money. I ask myself: “Were this Government elected on promises of governing with humanity and compassion? Are this Government going to meet that need? Or are they going to walk by on the other side?” I do not myself believe that they are; I believe that they will come up to the mark and find a way through the perceived difficulties that they have.
I think those are probably sufficient reasons to be going on with; as to the reasons against granting this, frankly, I cannot see any.
Mark Garnier
Q
Roger Sainsbury: Well, if—
Terry Monk: Can I have a go? Alan, who is sitting behind me, and all of us say that we did the right thing at the right time to secure our futures. There was no risk—we were guaranteed there was no risk. The minimum funding requirement was seriously flawed post-Maxwell. That changed it. We were told our pensions were safe. They were no longer safe—I found out to my cost, and many others did, that our pensions were not safe.
If I try to use the argument to our members that are still alive, “We can’t give you these increases because of the national accounts,” they will say, “Hang on, I did the right thing. I was told my pension was safe. I did the right thing all the way along in my life, and I saved for my future—for my comfortable retirement. I did not want to depend upon the state. I wanted to do it for myself. That is what I was proud to do.” To use the argument that the national accounts do not allow these people to get their benefits? I could not use that argument, whatever the reasons might be behind it.
Roger Sainsbury: May I try to answer your question more specifically? I think that indexation would have an impact upon Government finances. The impact would be that cash would flow into the Treasury, because if indexation is permitted and starts to be paid, there will be income tax paid on that money. The money will be going out from the private funds of the PPF, but the income tax and subsequently the VAT on expenditures will be coming into the Treasury coffers. I have yet to meet anybody, other than people in government, who can comprehend how it can be that when the PPF, from its private funds, meets an obligation, which has the incidental effect of bringing cash into the Government coffers, that can at the same time lead to a failure to meet the fiscal rules.
The fiscal rules, incidentally, are set up for a period of four years, when the unravelling of the indexation obligation will take many decades. We have been told in ministerial letters that it has been set up this way with a view to improving transparency. Well, I am sure you have all heard of the fog of war, but I think we are now up against the fog of transparency. I do not think it is real money that the Government are talking about. Even in their own letters, they say it is a statistical way of handling the figures.
The recent Government line on this is that it is the fault—I do not want to put blame on anybody—or the responsibility of the Office for National Statistics, because it was the Office for National Statistics that decreed that the assets and liabilities of the Pension Protection Fund should be counted as part of the public sector national financial liabilities, rather than as part of the public sector net debt, but that decision was made in 2019. We are therefore more inclined to hold responsible the present Chancellor, who, in her Budget of last October, made the decision that, for the Government financial rules, the metric should no longer be the public sector net debt, but the public sector net financial liabilities. It was that that brought the PPF, as it were, on to this part of the playing field.
Mark Garnier
That is very helpful, thank you. I am very conscious that other Members will almost certainly have questions, but I must say that I entirely agree with you that a sum of money set aside for compensation should not be brought into the Government’s balance sheet.
Steve Darling
Q
Terry Monk: We have looked at all sorts of scenarios. I do not know whether Michelle is still here, but the problem is that, although the PPF has done all sorts of “what if” calculations about all sorts of “what ifs”—we have had copies, and the Work and Pensions Committee has had copies—we do know what the “what if” is. We know what our members have lost, but we will not know, until such time as we hear from the Government, what they are proposing. We have offered time and again to meet not just the current Pensions Minister, but previous Pensions Ministers—I have to say that a few of them would not even meet us. This Minister has met us, and he knows the issues, but we do not know what is in the mind of the DWP or the Treasury in dealing with this issue. Once we know that, we will know whether we are fighting or we are working together, and what the answer will be. To answer your question, there is a net effect benefit of paying that amount, but we are in the dark—we do not know how long the bit of string is.
Roger Sainsbury: Incidentally, one of the benefits of the cash coming in, supposing we do get indexation, is that it would at least make a contribution if the Government had decided they were also going to pay money to the FAS members. It would be a contribution to help offset the Treasury payments that would have to be made for the FAS.
Terry has referred to the situation, but I think the key thing is that in 2023 the Select Committee asked the PPF to provide financial estimates for what it would cost to do indexation. The PPF then produced some really excellent tables that showed a number of different hypothetical systems for delivering indexation. It was a bit like a restaurant menu. There was a possibility to have a scheme that would not be hugely beneficial, but that would not cost all that much money to administer, right through the range to a Rolls-Royce scheme, which would obviously cost a lot more money.
We have been asking for RIPA. Just to be absolutely clear, we are not asking for the grim reaper; we have had enough of him already, with people dying. This the bountiful RIPA—retrospective indexation plus arrears. We are pressing for that, but we did not invent it. It was not invented by the DPA. It was part of the menu that the PPF produced, and we merely picked it from the menu. RIPA is reasonably high up the menu, but it is not at the very top. There are other things that we are not asking for that we might have asked for, so we are not being greedy.
With respect to Terry, we are not bothering too much about what is in the PPF’s mind or in the Government’s mind. We are much more concerned with what we are trying to put into their mind. When we decided to go for pushing for RIPA, it was because RIPA is the minimum scheme of indexation that would have the effect of doing away with what is presently a two-tier membership within the PPF. There are two classes of membership: those with indexation and those without. There is nothing in the Bill making any provision for that. It is grossly unfair and it needs to be done away with, and it just happens that the RIPA option is the minimum way of getting rid of that deplorable two-tier membership. I think that gives you perhaps a fuller answer about the situation.
Terry Monk: Are we virtually out of time?
The Chair
We are not quite out of time, but I am going to call other Members to ask questions of the panel. I call Kirsty Blackman.
Kirsty Blackman
Q
Roger Sainsbury: I have to say that there is a great range.
Terry Monk: I cannot remember what it is, but the average FAS member’s pension is something in the order of £4,000 or £5,000 a year, and if you look at the steelworkers, because they are our example, it is those sorts of guys. I worked in the City. I had a different job, but the majority of the people in the scheme had good benefits and good salaries but their pensions were important and they reflected the role they had in their life. I am not sure off the top of my head, but I think the average of the FAS pension is £4,500—some more, some less, obviously.
I want to make a point that I think Roger mentioned: at one stage, we were not at the table to talk as part of the pensions Bill. We lobbied hard. I know some of you have definitely put forward amendments to the pensions Bill to ensure that pre-1997 becomes part of the pensions Bill, which is why we are here today, but we had to work hard just to get that.
Sarah Edwards
Q
Terry Monk: FAS stopped when PPF opened its doors in 2005, so most of the people in FAS did not have much opportunity to accrue any increasing benefits post 1997. The majority of them are old—the average age of the FAS member is now 73, which is much younger than I am. It is that age group of people who would really benefit, and their widows and their spouses—let us not forget them—and they would therefore spend money that they currently do not have to spend. They can afford their council tax. They can afford their heating. It would change their lives, in terms of feeling that they have achieved this success on their behalf and on behalf of the members.
Roger Sainsbury: I would like to talk a bit about the concept of an amendment. We have observed that one amendment has already been offered: new clause 18 suggested by Ann Davies MP. Our team and I have had a bit of a look at that in the last couple of days. While we very much appreciate her good intention in putting the amendment forward, it actually does not do the job in a number of respects. I do not know how many of you have ever grappled with the obscure and complex language of schedule 7 to the Act, but it is mighty complicated. Some time ago, I and my team spent several days trying to work out what an amendment should be to deliver what we wanted. I have got some first class people on the team, but in the end we decided we actually could not do it, and would have to leave it to the expert drafters in the Department.
That is yet another reason why—I mentioned it in the written evidence—at a meeting I have already asked the Minister if he would himself table the requisite amendment. When you come up against the sheer complexity that Ann Davies has obviously already come up against, this is another reason why we think that would be a very good idea. It is slightly unusual for a Minister to table an amendment to his own Bill, but it is permitted, as the Minister said when I was talking to him about it. In a complex situation like this, it would absolutely be the best way of getting straight to the desired answer, so I plead with all of you to join me in urging the Minister to take this on.
John Milne
I think you have answered all my questions already. We have tabled an amendment, and I would really appreciate your input on whether we could improve it or argue around it between now and when it is raised in Committee.
Roger Sainsbury: Thank you.
Rachel Blake
Q
Roger Sainsbury: That is a very timely question, because for the past couple of years, we have been working on the basis that the RIPA scheme would cost £5.5 billion. That was the estimate given to us by the PPF. Now—I might almost say hallelujah!—about three days ago, the PPF notified us that they had redone the calculation using a much superior methodology. I think it is a phenomenally difficult calculation to do, but they have redone it, and the answer now is not £5.5 billion, but £3.9 billion, or possibly a bit less. Whereas for two years we have been arguing that £5.5 billion is eminently affordable, £3.5 billion, for example, is obviously even more affordable. We do not get that much good news, but that was definitely a bit of good news we recently received. I am pleased to be able to share it with you, if you did not know it.
Rachel Blake (Cities of London and Westminster) (Lab/Co-op)
Q
Roger Sainsbury: We would not have any ability to do that calculation at all. It all depends on the statistics held by the PPF of the age of all the members, the amount they have all been receiving and so on. It is way beyond us to make that calculation.
Terry Monk: I worked with FAS before FAS even came about—at the conception, rather than the birth, of FAS. The PPF and I have worked closely with them for over 20 years. I have immense trust and faith in what they do, how they do it, and what they deliver. Whenever we ask them for help, they give it to us as far as they are able.
Roger Sainsbury: I would support that. The PPF have been very helpful and I have had a good working relationship with them. I have to say, that was not always so—about three years ago, it looked as if we would be fighting a continual battle against them, but over time we have got to a really good working relationship, and they have been very helpful. In a question of challenging or doubting their ability to do this sort of calculation, when you look at the asset returns that they are getting, boy, they have got some people that know how to handle numbers, haven’t they?
The Chair
If there are no further questions from Members, can I thank the witnesses for their evidence this afternoon? I will move now to the next panel of witnesses.
Examination of Witnesses
Rachel Elwell gave evidence.
The Chair
We will now hear oral evidence from Rachel Elwell, Chief Executive Officer of the Border to Coast Pensions Partnership. We have until 5.30 pm for this panel. Would you kindly introduce yourself for the record?
Rachel Elwell: Thank you, Chair, and thank you, everyone, for your time today. My name is Rachel Elwell, and I am chief executive of Border to Coast Pensions Partnership, which is responsible for the assets of 11 of the local government pension schemes, although with due care and attention to governance, that may well become 18 LGPS funds and over £100 billion by April next year.
I would like to give a little bit of background to explain to the Committee why I feel so passionately about both the local government pension scheme thriving in the future, and pensions more generally in the UK. I am a pensions actuary by background, and I have worked in the industry now for 30 years. I took this role in Leeds for three reasons. One was because it is Leeds—you probably know that most people from Yorkshire will tell you that within five minutes of meeting them, so there you go: I am from Yorkshire—and Yorkshire has a fantastic financial services region, but we were missing asset management. For me, this was a fantastic opportunity to strengthen that, levelling up, and over the last eight years since I took on the role we have built the largest asset manager outside London and Edinburgh.
I am also passionate about learning and creating new opportunities. Again, this is something that the LGPS has built from scratch since the original policy intent of pooling was introduced about a decade ago. Finally, having worked in many different areas of the financial services industry over the last 30 years, for me the sense of being able to give something back, and doing that for a purpose, is really important. The LGPS, as I am sure you have already heard, has 7 million members—some of the lowest-paid people in the UK. It provides an important policy intent around low-paid earners, as well as potentially having the opportunity to provide real investment drive into the UK. So I am happy to answer any questions and to contribute to your thinking.
Mark Garnier
Q
Rachel Elwell: The LGPS is already investing significantly in the UK, as you have probably already heard. We invest more than 25% of the assets we look after on behalf of pension funds in the UK, and there is a very good reason for that, which I can explore a bit further if you would find it helpful.
To answer the specific question, I am not concerned that the power will instruct the LGPS to invest in specific things. I think there is a real intent; it would be helpful if the Bill were clear that it would not be against fiduciary duty and would not interfere with the FCA regulations that we are also subject to.
I am very thoughtful about how we carefully manage the weight of capital that might come into the market if there is mandation for the wider industry to move quickly into investing in the UK. Work will need to be done on the supply side as well as the capital side, to ensure that the UK can invest well the capital that should be being invested into the UK. So it is important that any use of mandation is very carefully considered, and that the laws of unintended consequences are really thought through.
Mark Garnier
Q
Rachel Elwell: I can understand why the Government would want to have a backstop power to direct pools, because the LGPS is significant—it is one of the top 10 globally by size. It has an impact on council tax, and on the economy more generally. If you have a pool that is not delivering and all the other mechanisms available to their stakeholders have failed, I can understand why that power would exist. But it is important that we clear the scenarios in which it is envisaged that it might be used.
Mark Garnier
Q
Rachel Elwell: History does not necessarily repeat itself, but it is important that we learn from that. The LGPS, and pensions more generally in the UK, have had many, many decades—including through the ’90s, having to manage the fact that there were contribution holidays taken that were using surpluses very quickly. Actuaries have the ability to work with all employers, including those in the LGPS, to smooth out that experience. Where you have a surplus, some of that could absolutely be used to help manage the costs over the long term, and when you have a deficit, you do not try to pay that all off very quickly, so I think there is an opportunity. I am not worried about it because I can see that the LGPS is a very well run, well governed scheme. It has good advice from its actuaries and is well used to making sure that both surpluses and deficits are smoothed over time.
Mark Garnier
Q
Rachel Elwell: I do think there is a fantastic opportunity for us to harness the benefits of scale that come from being one of the top 10 globally by size, but it is important, as we do that, that we maintain the link to local people who are the members of this.
Mark Garnier
Q
Rachel Elwell: Border to Coast, if we do have those 18, will stretch from the Scottish border to the southern coast. Even today, we have partner funds who are right across England, which is brilliant because those are people who have actively chosen to come together, form a partnership and work together.
Time permitting, if it is of interest to the Committee, we could talk a bit more about local investment and the way of getting investment that is truly local for each individual fund but also a way of crowding investment from other people into the slightly larger opportunities that might be in a region. Every investment we make is local—it impacts local people.
You do not need to only have, for example, Durham council investing in Durham. You want all of the LGPS and all asset owners to feel that they can do that. Some of the ways that we are working through doing local investment with our partner funds have really got an eye to the different ways in which you can crowd in versus something very specific that needs to be addressed in the region or locality.
Torsten Bell
Q
Rachel Elwell: Again, for all of us working in the LGPS, that sense of purpose is really important. I know my partner funds do a huge amount to make sure they are engaging directly with members, running events, as well as the importance of member representation on the pensions committees and on the pension boards, whether that is through union representation, pensioner representation or other scheme member representation.
We also have two fantastic scheme member representatives on our joint committee, which is the body that comes together across all of the partner funds to oversee and engage with what we are doing on their behalf. They are really bringing that voice into our considerations as a board and the wider organisation—the wider partnership.
Torsten Bell
Q
Rachel Elwell: This is before I was employed to bring it to life. This is a decision our partner funds made really early, because they recognised the real benefits that can come from being FCA regulated. This is really important. We will hopefully be managing over £100 billion on behalf of the LGPS, and a good proportion of that is managed directly within my team. We are managing that for, hopefully, 18 different customers—effectively, investors and our owners. We need to have those disciplines in place, and we need to make sure that we are following those regulations. We do not need another regulatory set. There are already some very good, strong regulations that exist, so we, as a partnership and as a company, think that is the right thing to do.
Steve Darling
Q
Rachel Elwell: There are some fantastic provisions in the Bill, particularly around implementing the good governance review, and the clarity of roles and responsibilities between the different parties within the LGPS. About five or six years ago, we, along with some of the other pools, commissioned some work looking at good practice internationally, so talking to about 15 others—from Australia, the Canadians, the Dutch, the Norwegians—and looking at the journey they had been on with this. They are about 15 years ahead of us, really, with that policy. We wanted to learn from what they had done.
There were various success factors, some of which Michelle shared with you earlier, but one of those was real clarity about the Government’s policy intent, and I think the Bill really does help with that. That will help us, in turn, engage with our pensions committees and partner funds to make sure that we are providing a holistic joined-up view. There are some areas in the Bill where, particularly for the LGPS, the detail will be in the regulations. I would just make a plea, given the timelines we are working towards, that we see the regulations sooner rather than later, please. I have already said that I think it would be helpful to maybe get a bit more clarity on the circumstances in which we may be directed by the Secretary of State.
Rachel Blake
Q
Rachel Elwell: The primary focus of the Bill is the consolidation of the assets in pools, but there are provisions, particularly when we see some of the wider things that are happening in policy such as local government reorganisation, where that might lead to closer working between funds and potentially merger. I am fortunate enough—I think Roger Phillips mentioned this earlier—that Tyne and Wear and Northumberland are part of the Border to Coast pool, so I was there and living that experience with them personally. They were working very hard together, with very joined-up thinking and close relationships, and it was still fairly hard work.
I suppose from that perspective, like any merger of entities, it comes down to relationships and people. Administration in the LGPS is complex, and many funds have been facing recruitment challenges. What we are seeing already is funds working closely together. For example, again within Border to Coast, Tyne and Wear has recently taken on the administration for Teesside, bringing it in-house. It was previously an outsourced arrangement. There are benefits from that, but it needs to be done very carefully and thoughtfully—it is not something we should rush at.
The Chair
If there are no further questions from Members, I thank the witness for their evidence, and we will move on to the next panel.
Examination of Witness
Torsten Bell gave evidence.
The Chair
We will now hear oral evidence from Torsten Bell, who is the Minister for Pensions at the Department for Work and Pensions. We know who you are, but for the record and for those in the Public Gallery and watching the broadcast, would you kindly introduce yourself?
Torsten Bell: I am Torsten Bell, and I am the Pensions Minister.
Mark Garnier
Q
Torsten Bell: No, obviously. The change that you are referring to is a 2019 change under the last Government. It was taken not by the last Government but by the Office for National Statistics, and it refers not just to the PPF but to funded public sector pension schemes. The same issues apply to the LGPS in the same way. It is a 2019 change made by the statistics body following international guidance on accounting. The changes you are talking about have affected public sector borrowing since then.
Mark Garnier
Q
Torsten Bell: In stark contrast to lots of my predecessors, I have to say, I have spent a lot of time meeting members of both the PPF and the FAS who have been affected by the issue of pre-1997 accruals. If I am honest, the issue has been a real one since then, but it is a significantly bigger one because of the recent phase of high inflation, which made the pace of inflation eating into the real value of those pensions significantly faster. As I said on Second Reading—this was raised then by a number of colleagues on the Committee—we are considering the issue, but it needs to be considered in the round because of the wider public finance implications. That applies to other issues in this space as well; you will have seen that in other pension schemes where the Government have a role.
Mark Garnier
Q
Torsten Bell: To be clear, that is just wrong—it is not. The 2004 Act is very clear about the purposes for which the board’s assets can be used, and there is no question about that. The Office for National Statistics does not get to countermand Acts of Parliament on the use of resources—the 2004 Act is very clear on that. It is nothing to do with that.
If you look at the public sector finances in the round, there are all kinds of different forms of funds that are classified in different ways. The classification within the public finances is not determining the use to which funds can be put. The same applies to whether things are classified as taxes or not. They do their job, and obviously those classifications exist for an important reason, which is that we need to have clarity about the public finances. We use those for discipline in terms of making sure that Government objectives in fiscal policy have metrics that they can be tied to. It is totally reasonable for different parties to take different positions on what those metrics should be. There have been different choices made on that by lots of different parties in recent years, but I think everybody in this room probably accepts that you need to have those metrics. When you accept that, you will be in a situation where classifications by the Office for National Statistics impact on those.
Mark Garnier
Q
We heard some interesting evidence from Phoenix, who referred to clause 15 and the consequences of an intermediate performance rating. While we are going to have big arguments about mandation—that is something we fundamentally disagree on—one thing I hope we can both agree on, as we progress this, is that certain elements of the Bill could have unintended consequences. It seems that this one, the intermediate rating, could have the effect of maintaining the derisking of pension funds, because you are trying to avoid getting an intermediate rating and therefore you will avoid doing the slightly more progressed growth. Sorry; I am being incredibly inarticulate after rather a long day, but you know the point I am trying to make.
Torsten Bell: I definitely get the point you are making. Let me say one thing about the big picture, and then I will talk about the specifics you raise with the intermediate rating. On the big picture, I absolutely agree that one thing we have done badly in the last 30 years is to think about how changes we make to our pension system, which exists to provide income in retirement for the vast majority of the population, also underpin our capitalism. That is a lesson we have learned painfully.
On the substance of risk reduction, I would put it slightly differently, because you have different things going on in the DB and DC landscapes. In the DC landscape, we have been building up a new system. Understandably, because it was starting from small scale, we did not jump to trying to solve all the problems that came with that system, not least getting it to scale, not least what happens in retirement, and not least small pots and the rest. I see this Bill as doing that—taking the next step forward and saying, “Right, we are building this new system. We made big progress in the last 15 years with that, but now is the time to put the change in place.”
On scale and on value for money, that will support the wider range of investments more broadly, not just in the UK, but with a wider range of assets. That is absolutely the right thing, in savers’ interests, to do. I also completely endorse your point on unintended consequences, and that is exactly why scrutiny of the Bill is important to make sure that we pick those up as we go. The last 40 years, not just in this country but in others, shows that that can be the case, for good and ill.
Specifically on your point about the intermediate rating, we are very much aware of the issue. We are not aiming to replicate a hard metric: “fall one side of this line, and suddenly you are de-authorised from taking auto-enrolment contributions”. That is exactly what we need to avoid, which is what we will be doing. There is a reason behind the provision for more than one level of intermediate ranking, and my view would be that you would not expect people who fall into some of those levels being banned from taking further contributions. It is absolutely right that you do not want an absolute binary—just one metric, one division. The consultations that the FCA and TPR have taken forward are all about making sure that we have worked all those issues through. There are lessons, for example, from what happened in Australia.
Mark Garnier
Q
Torsten Bell: I understand the point you are making. I think you have to step back to the big picture, which is a consensus right across the industry that savers’ interests would be better served by change. It does not make sense that the UK industry is a complete outlier compared with other pensions systems around the world when it comes to exposure to wider ranges of assets. What comes with that exposure to a wider range of assets? The nature of assets, where you are likely to see a larger home bias in that more of them would be in the UK.
There is a wider point: is there a good reason why the UK DC pension landscape has a particularly large exposure to equities rather than to a wider range of assets that we see around the rest of the world? No. That is why you have seen the Mansion House accord coming forward—because it is in savers’ interests to change how we are operating. The scale and value-for-money measures, and a lot of the other approaches that we are taking, will facilitate that, but the industry is saying that that is in savers’ interests, and it is right to do so.
Ultimately, we have to step back and say that we are not in the business of just making individual random decisions about the pensions system. The question is: what is there a consensus on about the world we need to move to that has a better equilibrium? One of the strong elements of that, along with larger scale, is investing in a wider range of assets because that is in savers’ interests. That is why there is a voluntary Mansion House accord, setting that out as the objective, with relatively low levels of target, particularly on domestic investment, compared with what we see in other countries. That is what is going on.
What we are saying is that when you speak to the industry, particularly in private, it is very clear that there is a risk of a collective action problem. Under previous Conservative Chancellors, it signed up to commitments that it has not been delivering. Why has it not been delivering? Because of the collective action problem—the risk of being undercut by somebody else who is not making that change because of the nature of a market that is too focused on cost and not focused enough on returns.
I make only one vaguely political point. It is easy to join people in being anxious, but we have to ask ourselves something. There is a reason why the first Mansion House compact was not delivered. Do we want to be here in 15 years saying, “Actually, we all signed up to it and said it needed to happen, but it hasn’t”? No—I am not prepared to do that. Change is going to come. Everybody says that change needs to come because it is in members’ interests. All the reserve power does is to say that it is going to happen.
Steve Darling
Q
The other area that I want to ask about relates to the information that we heard from Nest: only 40% of its members had signed up online. That demonstrates that the issue is about getting positive engagement from those who are perhaps less financially secure. Are you confident that we are doing all we can through the Bill to help those who are most financially challenged? How are you going to hold yourself to account as we proceed to ensure that that is the case?
Torsten Bell: Those are great questions. On regulations, you are absolutely right. This pensions Bill, like most recent ones—although there have been exceptions that have come with unintended side effects, to go back to what was just mentioned—does rely heavily on secondary legislation. My view is that that is the right thing to do and is almost in the nature of pension schemes. That is partly because the detail should rightly be consulted on and partly because things will change in the context.
You are right that there is a large reliance on secondary legislation. Yes, in some areas, as we go through the detail, clause by clause, we will be able to set out to you where our thinking is up to. In lots of cases you will already see consultations by the FCA and TPR, starting to develop the work that will then feed into the regulations—that is particularly true, for example, on value for money, which we have just been discussing. I also think that it is important for us to provide clarity on when we will bring forward those regulations and when we will consult on the input to them, so that people know that. That was why, when we published the pensions reform road map, and when we published the Bill itself, I set out when we anticipate bringing forward those regulations so that everyone in the industry and in the House can see when that will happen. Page 17 of the road map sets out how we envisage that happening, and it is absolutely right. When we come to the clause-by-clause discussion, there will certainly be things where we will not be able to say, “This is exactly what will happen,” and rightly, because there needs to be further consultation with the industry on those things.
On the broader question of engagement with people, particularly those with smaller pensions—there is a very heavy correlation between the chance of someone being engaged with their pension and the size of that pension pot, partly for obvious reasons, but for wider context reasons, too—the pensions dashboard that Chris Curry mentioned earlier is a large part of facilitating that engagement. Lots of countries have had versions of the dashboard; it does make a material effect. One of the lessons from Australia is that the average size of DC pots, as they start to build rapidly—as that becomes the default system in an auto-enrolment world—does have a material effect.
I was with someone who runs one of the big supers recently; her view was that they hit a tipping point when there was suddenly this huge engagement where people were looking at the app provided by the super every week. There are pros and cons to that, by the way. Remember that there is a reason why we default people into pension savings. There are good and bad ways to engage with your pension. We do not want people on an app, in the face of a short-term stock market downturn, making drastic decisions to do with their investments that have long-lasting consequences. It needs to be done right; that is exactly why, when it comes to the dashboard, we are user testing it extensively.
Kirsty Blackman
Q
Torsten Bell: I am happy to take that away. Obviously, the monitoring will need to be different for different parts of the Bill, which are on different timelines.
Kirsty Blackman
Q
Torsten Bell: Let me address that in two minutes before the Chair cuts us off. I definitely recognise that there is a large number of amendments. It is not unprecedented—the Procurement Act 2023 had 350 Government amendments, and 155 on Report.
Kirsty Blackman
I was on that one as well.
Torsten Bell: We have all made life choices. The thing that I am trying to avoid—and the reason why there are so many at this stage—is what has happened with other Bills, such as the Data Protection and Digital Information Bill in the last Parliament. I do not want to table loads of amendments on Report, after the line by line. That is the alternative. This is a very large Bill. The number of amendments, in part, reflects the fact that everyone has signed up to a Bill that is complicated and very large. My judgment was that it is right to get as many of those amendments down now, so that you have them for line by line. Also, I have gone out of my way over the last 24 hours to spell out to you all where the major changes are. The substance and the purpose of the Bill have not changed. In almost all cases, the amendments are relatively minor and technical.
Luke Murphy
Q
Torsten Bell: I understand why people say that but, as I say, it is for trustees. We are not going to legislate to change the offer made in scheme rules to savers, because that would be to fundamentally change the system. But trustees will want to consider that, and they will be in a very strong position to take a strong view about that when discussing with employers what happens with the surplus release situation.
The Chair
Thank you. That brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank all our witnesses, including the Minister.
Ordered, That further consideration be now adjourned.—(Gerald Jones.)
Pension Schemes Bill (Third sitting)
Thursday 4th September 2025
(1 month ago)
Public Bill CommitteesPension Schemes Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 4 September 2025 - (4 Sep 2025)
The Committee divided: - Ayes: 6 / Noes: 11 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 12 - Question accordingly negatived.
The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)
I beg to move amendment 7, in clause 1, page 1, line 6, leave out “for England and Wales”.
The amendment would secure that Clause 1 applies to a pension scheme for local government workers for Scotland, as well as a scheme for local government workers in England and Wales. Clause 1 does not extend to Northern Ireland (see Clause 100).
The Chair
With this it will be convenient to discuss Government amendments 8, 10 to 12 and 16 to 24.
Torsten Bell
Before I turn to the amendments, I should briefly outline the reform of the local government pension scheme, for which chapter 1 provides the legislative underpinning. The LGPS is the largest pension scheme in the UK, with £400 billion of assets under management, projected to rise to almost £1 trillion by 2040. However, I think it is a matter of cross-party consensus that the LGPS has not realised its full potential, not least because it is too fragmented.
The first chapter of the Bill sets out the legislative basis for reform to modernise the LGPS’s investment framework and governance arrangements, setting robust new standards that all pools must meet, including Financial Conduct Authority authorisation, the capacity and expertise to manage 100% of their partner authorities’ assets, and the ability to deliver on local investment mandates. As part of the reforms, the LGPS will move from eight pools to six. We have set a deadline for the new pool partnerships to be agreed in principle by the end of this month, with new shareholder arrangements in place by March 2026.
The clauses in chapter 1 would mean that by this time next year we will see a world-class LGPS, made up of large pools of professionally managed capital, held to account by authorities who have confidence in robust and transparent governance structures, and who together are delivering the best value for members. I remind the Committee that LGPS members’ benefits are guaranteed in statute, and nothing that we discuss today will affect any of those benefits.
These amendments will extend the LGPS provisions to Scotland. There is a wide range of amendments, but they all have the same objective: to take the matters relating to England and Wales and ensure that those are provided for in the case of Scotland. The Government are making this provision following a formal request from the Scottish Government, and I have written again to the Scottish Government this morning for the legislative consent motion that they will need to put in train to go alongside it. Amendments will be needed in respect of clauses 1, 2, 4 and 7 to give effect to that objective, and that is what the Government amendments in this group do. I commend them to the Committee.
Mark Garnier (Wyre Forest) (Con)
It is great to be starting what I hope will be quite a quick canter through today’s work, Sir Christopher. The Opposition welcome the broad grain of this entire Bill; it seeks to do a lot of very useful things in the pension industry across the UK. We have some contentious points, but those will not come up today.
Regarding clause 1, we welcome the creation of asset pool companies. These are sensible and pragmatic steps towards modernising the local government pension scheme, and much of the work had already been done under the previous Government. Consolidating funds represents a responsible approach that should deliver more effective management and investment of pension assets. The LGPS, as we have heard, is among the largest pension schemes in the UK, with 6.7 million members and £391 billion of capital. Before pooling, of course, it was 86 separate local authorities, which caused huge inefficiency, inequality of opportunities and, in some cases, poorer outcomes for pension beneficiaries.
I should mention at this point, Sir Christopher, that I am a member of the LGPS and also that, as a councillor on Forest of Dean district council, I was responsible for looking after some of this activity in terms of pension management. It was not an efficient way of doing things, so pooling is an incredibly good idea. We welcome the Government’s continuing our work to make these pension funds work more efficiently and deliver better returns for members, and ultimately we all want to see improved returns and lower employer contributions. Small funds, whether in local government or elsewhere, are rarely fit for purpose in the global investment environment.
We have some concerns. The broad framing of the powers contained in chapter 1, clause 1 could allow for the mandation of certain investments by Government. Pools should be investing in line with the investment approach set out by their underlying asset owners in order to deliver against the fiduciary duties of LGPS funds. Governments should not take powers that would erode fiduciary duty.
There are concerns about the costs of the Government’s decision to reduce the number of asset pools from eight to six. This is an administrative cost. We have heard from one council, Wiltshire, which is one of 21 LGPS funds in England now looking for a new pooling partner. Jennifer Devine, head of the Wiltshire pension fund, has said that the cost of closing its asset pool could come to as much as £100 million. There will be some costs incurred, but, none the less, the general thrust of the whole process is one that we support and we certainly would not stand in the way of these amendments.
Steve Darling (Torbay) (LD)
As the Liberal Democrat spokesperson, and echoing the hon. Member for Wyre Forest, I broadly welcome the thrust of the Bill. We heard in evidence that a lot of the industry is playing catch-up and is about 15 years behind those who are best in class. As Liberal Democrats, we are keen to make sure that we are supporting particularly those who are more challenged in being able to save or to make the right decisions, and that we use what levers we can to tackle issues such as climate change and cleaning up our environment. We look forward to working with colleagues on this Committee.
On the local government pension schemes and the pots, we welcome the direction of travel. However, for us it is about making sure that we keep local links to communities, and driving positive change through that investment in our local communities is absolutely essential. I look forward to the debates over the next few weeks.
Kirsty Blackman (Aberdeen North) (SNP)
I declare an interest as a holder of deferred membership of a local government pension scheme in Scotland, which will come into scope should the Government amendments go through, as I imagine they will. First, I thank the Government for working with the Scottish Government to make these changes and for taking the decision to agree with the Scottish Government’s request for these changes to be made. It is appreciated.
While I am on thank yous, the people who manage local government pension schemes are managing an incredibly significant amount of money and are ensuring that benefits are provided to many millions of people in those schemes. The hard work they do to steward those funds appropriately cannot be overestimated, so I say thank you to all the trustees who take that action on behalf of so many of us. Those working in the public sector tend to get a lower salary than they would in the private sector, but they often get access to a defined-benefit pension scheme or a career-average pension scheme, which is better than many people in the private sector get. There is a bit of give and take there.
On Tuesday, we heard from the Local Government Pension Scheme Advisory Board and also from one of the pension schemes. There was a commitment that came forward in the evidence to ensuring trustees are appropriately trained—I am not for a second saying that they are not appropriately trained right now, but we must ensure that level of training is provided when they have many other competing demands on their time. It is important that the Government ensure the correct monitoring, evaluation and also support of those organisations, so that if new training is required—for example, if environmental, social and governance provisions change, or decisions about where it is best to invest funds change—the Government commit to ensuring that trustees are given all the training they need. I believe that all pension trustees have a difficult job, but particularly those managing local government pension schemes, who are often local councillors—a task that, I know, is not a part-time job and is incredibly busy.
The other concern raised on Tuesday, and which was just mentioned by my Liberal Democrat colleague, the hon. Member for Torbay, is about the locality of the decisions made. It is important that the pooling of resources means more investment in important and key projects than would result from a smaller organisation. Hopefully, the reduction in administrative costs will ensure that those schemes are significantly more efficient, but I am keen that we do not lose the local voice within the pension schemes that we have now.
The case was made very eloquently on Tuesday that, while pension schemes take into account value for money—what we would have called best value in local government in Scotland—in decision making, they should ensure that they are not supporting projects that the community are absolutely up in arms about, because so many of their members will live in that community. Scheme members need that guaranteed return, but they also need their communities to be nice places for them to live.
I am slightly concerned that, with pooling, the ability for local projects to be put forward could potentially be lost. Although I am not asking for any specific changes, I would ask that the Government keep an eye on that. Should there be significant numbers of smaller projects that are not being supported because of the changes that previously might have been supported, the Government should consider whether they need to take action to ensure that those voices are better heard and that those smaller projects still have the opportunity for investment.
Thank you very much for allowing me to speak on this, Chair. I am assuming that we have also spoken on the clause stand part and are unlikely to debate that again at the end; I have therefore made most of my general comments here rather than particularly specific ones on the amendments.
Torsten Bell
I thank everyone who has spoken. I am grateful for the welcome for the Bill as a whole, for this chapter and for the amendments that particularly relate to Scotland. As the hon. Member for Wyre Forest pointed out, this Bill builds on progress that was put in train over the last decade, and I am glad to see that. It is only because of that progress that we are now able to accelerate quite significantly.
Questions were raised about mandation. I want to be absolutely clear that questions about asset strategy will sit directly with the administering authorities, as they do today. It is for them to set out those asset allocation decisions, which are, in the end, the biggest driver of returns for members. The investment decisions sit with pools, never with Governments. We will provide clarification, if we come on to one of the amendments later, to make clear that the Government will not be directing individual investment decisions of pools; that was never the intention.
Questions were raised about the administrative costs of transition. Those do exist, as they have in previous moves towards pooling, and will obviously need to be managed sensibly, but I think we all agree that those costs are small relative to the very large savings that will come from a much less fragmented system.
Points about the importance of trustees were powerfully made, and I absolutely agree. Stronger governance reforms have already been put in place for the LGPS trustees in England and Wales, and these reforms build on that through stronger governance more generally.
I also hear the argument about local voice. As I said, the administering authorities are responsible for setting the strategy in relation to local investments. Strategic authorities, because of a Bill that was passed earlier this week, will have a requirement to collaborate with the LGPS on those local investments. I take the points that were made, and I think there is consensus on these amendments.
Amendment 7 agreed to.
Amendment made: 8, in clause 1, page 1, line 12, leave out “Secretary of State” and insert “responsible authority”. —(Torsten Bell.)
This amendment and Amendments 10 and 11 are consequential on Amendment 7. References in Clause 1 to the Secretary of State are changed to “the responsible authority”. That term is defined by Amendment 24 to refer either to the Secretary of State (as regards England and Wales) or to the Scottish Ministers (as regards Scotland).
Torsten Bell
I beg to move amendment 9, in clause 1, page 1, line 16, at end insert—
“(ba) enabling the responsible authority, in prescribed circumstances, to give a direction to an asset pool company specified in the direction, or to all or any of its participating scheme managers, requiring the company or scheme managers concerned—
(i) to take any steps specified in the direction with a view to enabling or securing compliance by a scheme manager with a direction requiring it to participate in, or to cease to participate in, the company (see paragraph (b)), and
(ii) to take any other steps necessary to enable or secure compliance with such a direction;”.
The amendment makes clear that scheme regulations can provide for directions to be given to prevent a direction of the kind mentioned in clause 1(2)(b) (requiring a scheme manager to participate in, or to leave, a particular asset pool company) being frustrated by a failure by the company or its participating scheme managers to take steps necessary to enable or secure compliance with its terms.
Torsten Bell
We turn now to three technical amendments concerning the powers to direct asset pools, which I mentioned in my previous speech.
Amendment 9 ensures that a pool must comply with the use of the power to direct administering authorities to join a particular asset pool, matching powers brought forward in clause 1 of the Pensions Bill. These are powers of last resort. Amendment 13 responds to feedback and removes the power to issue directions to asset pool companies relating to specific investment management decisions. It was never the Government’s intention to intervene in those decisions by pools, so we are removing that sub-paragraph to provide clarity. Amendment 14 adds a duty for Ministers to consult the affected parties before issuing directions more generally. I commend the amendments to the Committee.
Mark Garnier
In the interest of speed, I will not speak to these amendments, other than to say that we have no objection to them.
Torsten Bell
I beg to move amendment 15, in clause 1, page 2, line 34, leave out from “company” to end of line 40 and insert
“limited by shares and registered in the United Kingdom which is established for purposes consisting of or including—
(i) managing funds or other assets for which its participating scheme managers are responsible, and
(ii) making and managing investments on behalf of those scheme managers (whether directly or through one or more collective investment vehicles),
and whose shareholders consist only of scheme managers, and”.
The amendment revises the definition of asset pool company to clarify (a) that the company should be limited by shares held by scheme managers only and registered in any part of the UK and (b) that the mandatory main purposes described in sub-paragraphs (i) and (ii) need not be the only purposes of the company.
The amendment revises the definition of an asset pool company to clarify that they can be established anywhere in the UK and that only LGPS administering authorities can be shareholders of those pools. The amendment also removes limits on the purposes of an asset pool company, making it clear that asset pool companies are free to provide advisory services and perform other functions in addition to their primary purpose of providing management services. The Government do not want to stifle innovation from asset pool companies as they continue to evolve from strength to strength. The amendment makes sure that that is not the case. I commend the amendment to the Committee.
Mark Garnier
I have just one question for the Minister. How are the shareholdings to be decided? Will they be determined based on the size of the investment, and how will the Government decide between councils having shareholders or contracting with asset pool companies? That is my only comment.
Torsten Bell
It is for those forming the pooling companies to agree their own arrangements. The hon. Member rightly raises the question whether people are shareholders or clients of a pool. There is only one current administering authority that is a client rather than a shareholder of a pool, so in the overwhelming majority of circumstances we are talking about shareholders. However, the legislative basis for the pooling allows for that in future, if for some reason that was the way forward that some administering authorities and pools chose. Broadly, the same picture applies to most questions in this space: we expect administering authorities and pools to work together to agree their governance arrangements, and that is what they are doing.
Amendment 15 agreed to.
Clause 1, as amended, ordered to stand part of the Bill.
Clause 2
Asset management
Amendments made: 16, in clause 2, page 3, line 5, leave out “for England and Wales”.
The amendment would secure that Clause 2 applies to scheme regulations relating to pension scheme for local government workers for Scotland, as well as scheme regulations relating to a scheme for local government workers in England and Wales. Clause 1 does not extend to Northern Ireland (see Clause 100).
Amendment 17, in clause 2, page 3, line 23, at beginning insert
“in the case of a scheme for local government workers for England and Wales,”.—(Torsten Bell.)
The amendment would secure that, despite the general extension of the scope of application of Clause 2 to Scotland (see Amendment 16), subsection (2)(c) will remain of relevance only to scheme regulations relating to England and Wales.
Mark Garnier
I beg to move amendment 246, in clause 2, page 3, line 33, at end insert—
“(4A) Scheme managers must publish a report annually on the local investments within their asset pool company.
(4B) A report published under section (4A) must include—
(a) the extent, and
(b) financial performance,
of these investments.”
This amendment provides for scheme managers to report back on the financial performance of any local investments that they might make.
Clause 2 places important requirements on pension scheme managers regarding how they manage pension funds for local government workers, requiring formulation, publication and review of investment strategies. The Bill encourages investment through asset pool companies and emphasises local investments. However, the Opposition’s key concern is that the primary purpose must remain the delivery of strong financial returns for pension funds. Those returns ultimately belong to the pension fund members, but council tax payers also have a responsibility, as they support these schemes. Investment decisions must prioritise financial performance that ensures sustainable pensions while safeguarding public funds.
Although we acknowledge that local investments can bring benefits to local communities and local economies, they should only be a secondary focus and should not compromise returns. Local investment should be considered as an additional benefit, but the overriding duty of scheme managers is to act prudently and in the best financial interests of the scheme members and taxpayers. We caution against overweighing local investment priorities if that risks undermining the long-term financial health of these pension funds. In short, financial returns must come first; local investments can follow, but must not take precedence.
Pensions UK has questioned the need for these new powers and believes that they are too far-reaching. LGPS reform is already progressing at pace, and pools and funds are collaborating in line with the direction set by the Government. Pensions UK would like to understand what specific risks the Government are seeking to manage through the introduction of these powers, and it is seeking amendments to the Bill to ensure that if these powers remain in the Bill, they will only be exercised after other avenues have been exhausted, to guard against adverse outcomes for the pools, funds and scheme members.
The Pensions Management Institute has highlighted that the administering authorities will be required to take their principal advice on their investment strategies from the pool. Given that an administering authority is required to invest all of its assets via the pool, this is a major conflict of interest and puts a significant burden on the administering authority or scheme manager to ensure that the pool is performing effectively, with no independent checks and balances.
The Bill makes it clear that co-operation with strategic authorities, such as regional combined authorities, on appropriate investments will be required. However, there is a risk of investment decisions being influenced by political and local interests. The fiduciary duty should always prevail when local investments are considered. We do not oppose the clause, but we call on scheme managers to maintain discipline in prioritising sustainable returns, with local investments as a welcome but secondary consideration.
We are considering three amendments with this clause. There is uncertainty about what qualifies as a local investment for LGPS funds, how such investments are defined and what assets or projects will meet the requirements under the new rules. In addition, we do not want to shift the focus away from the fiduciary duty of trustees to local investments that might not deliver the best-value returns on schemes. Amendment 246 provides for scheme managers to report back clearly on the financial performance of any local investments that they might make. Scheme managers at local councils should charge the asset pool companies with finding the best value.
Although we are not opposed to local investment, the focus of trustees must clearly remain on achieving best value, and the better performance of a pension fund means that local councils can already use their powers under regulations 64 and 64A of the Local Government Pension Scheme Regulations 2013. Consequently, we can argue that LGPS megafunds with a focus on best returns can lead to more a fully funded council and therefore to employer contribution holidays.
Sir Christopher, would it be helpful for me to speak to the other amendments?
Mark Garnier
That is fine. It has been a few months since I last participated in a Bill Committee, Sir Christopher, so thank you for your advice.
We are not proposing to press this amendment to a vote, but I would be very grateful if the Minister could respond to my points and undertake to take them away and consider how advice can be given to these pool managers to ensure that the issues I have mentioned are taken into account.
The Chair
I refer Members to the Chair’s provisional selection and grouping of amendments, which should give them a guide as to which amendments are grouped and which are not.
Mr Peter Bedford (Mid Leicestershire) (Con)
It is a pleasure to serve under your chairmanship, Sir Christopher. I hope that the Government consider amendment 246, which would require annual reporting by LGPS asset pools on the financial performance of local investments. This is not bureaucratic red tape; it is a necessary safeguard that would help trustees in upholding their fiduciary duties and responsibilities and protect the interests of scheme members and the people whose pensions are at stake. It would be a sensible addition to the Bill, especially when we consider the fact that the Government’s impact assessment offers very little on LGPS consolidation. There is no reference to the impact that the de facto mandation of local investment will have on the trustees’ fiduciary duty or on members’ outcomes. I urge the Government to consider the amendment, not only for those reasons but because it would give consolidated asset pools greater clarity over whether their investments are best placed.
Steve Darling
I start by wishing the Minister a happy birthday. [Hon. Members: “Hear, Hear.”] I am sure that for all of his life he has wanted to be sitting on a pensions Bill Committee on his birthday.
More seriously, when we were in desperate measures in my time as a local authority councillor in Torbay, we borrowed to invest and make money for the local authority—that was once upon a time, because it is no longer possible—so I know from experience that authorities often have to invest elsewhere in the country to get the best financial returns. Our experience in Torbay was that a lot of our investments in the south of England got in the money that we needed to keep the local authority ticking over.
I would therefore welcome the Minister’s thoughts on how we get the balance right. Clearly, investors would want to invest in the local area to drive economic development, but there is a need to balance that with getting positive outcomes for the pension fund. Some guidance from the Minister on how he sees that balance being struck, as the hon. Members for Wyre Forest and for Mid Leicestershire have alluded to, would be helpful.
Kirsty Blackman
I want to ask the Minister about the comments made on Tuesday in relation to the transparency already required of local government pension schemes. My understanding is that local government pension schemes are already pretty transparent, and that they are required to publish significant amounts of information.
On the amendment and the requirement for annual reporting, the case was made on Tuesday—I forget by who—that a particular moment in time may not give a true picture of what is going on. Investments may not provide an immediate return. In fact, pension funds are not necessarily looking for an immediate return; they are looking for a longer-term return so they can pay out to tomorrow’s pensioners as well as today’s. Pension schemes are one of the best vehicles for the patient capital that we need to be invested in the economy for it to grow, so I am little concerned that a requirement for annual reporting on specific investments may encourage short-term thinking. Can the Minister confirm what transparency regulations there are in relation to local government pension schemes and how they compare with those for other pension schemes?
Rebecca Smith (South West Devon) (Con)
I want to build on what the hon. Member for Torbay asked. As a former local councillor myself—I am not part of the pension scheme, I hasten to add, so I do not have an interest to declare—the bit from the evidence session that came out for me, thinking through this bit of the Bill, relates to the equivalent in treasury management. As a council, we often borrowed from the Public Works Loan Board to invest in, for example, a shopping centre to get the income from rent, business rates and so on. What safeguards or requirements will be put in place to ensure that any money spent from a pension fund goes on capital rather than revenue? I appreciate that council tax revenue increases could be used for that, but are there any safeguards to ensure that the money is not just spent and then does not exist anymore?
Torsten Bell
I will try to confine my remarks to the amendment and the points made about it; I am not going to encourage us to focus on the grouping provided. I thank the hon. Member for Wyre Forest for the amendment. I agree with him on many points he made, including that the LGPS is a success story for local investment, with authorities and pools already playing a major role in their communities. We are committed to ensuring that continues, but we also need to ensure it is done in the right way, delivering the right returns for each scheme.
As I said, every LGPS authority will be required to set out its approach to local investment in its investment strategy, providing some of the transparency that the hon. Member for Aberdeen North just set out, including their target allocation. They will need to have regard to existing local plans and priorities. I want to offer the hon. Member for Wyre Forest some reassurance—this goes directly to the point made by the hon. Member for Aberdeen North—that via regulations and guidance, we will already require each pool to report annually on local investments made on behalf of their authorities. The intention of the amendment will be delivered via those regulations and that guidance. On that basis, I am glad that he intends to withdraw his amendment, but I recognise his point.
On the wider question of pool advice, and whether there is a risk of pressure from strategic authorities to make investment decisions that are not consistent with their fiduciary duty, the hon. Member for Wyre Forest should see these reforms as supporting in that respect. Remember that these pools will now all be FCA-authorised. There are significantly improved governance arrangements. If anything, this should provide certainty. It should already not be the case legally, anyway, but the stronger governance arrangements will support that.
The hon. Member for Torbay rightly asked about how administering authorities and pools will think about the balance, weighing the impact on their local economy. As he will be aware, the fiduciary duties are clear about what the objective is, and the Bill is clear on the respective roles, both of the administering authorities in setting their strategic asset allocation, including to local investments, and of the pools in making those decisions, taking into account the available returns. I think that provides much of the balance that he rightly pointed out is an inevitable issue within this. I should also be clear that the LGPS will invest not just across the whole of the UK—rather than just in individual areas—as the hon. Member for Torbay talked about, but also around the world. That is what the LGPS does today and will continue to do.
Mark Garnier
I am reassured by the Minister’s comments. I beg to ask to leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mark Garnier
I beg to move amendment 245, in clause 2, page 3, line 39, leave out from first “in” to end of line 39.
This amendment changes the definition of local investment to remove the reference to the benefit of persons living or working.
This amendment runs closely with amendment 246. Amendment 245 changes the definition of local investment to remove ambiguous reference to the benefit of persons living or working in the area. It is a small, technical amendment, but it is about giving more focus on the key need to members of the fund.
Mr Bedford
At present, the Bill arguably lacks a clear definition of how the priorities of the asset pools must follow, particularly on what qualifies as local investments. Our amendment seeks to address that gap by simplifying this. Put simply, we believe that local should mean local. These asset pools should prioritise investment in large-scale projects, actively promote local growth or make tangible improvements in local infrastructure—improvements that directly benefit the people in that local area.
Where no such opportunities exist, other investment options should be considered, but we cannot allow a situation where, for example, an LGPS fund raised in the midlands is continuously redirected elsewhere in the country. Unfortunately, the Bill appears to suggest that the other areas included in the consolidated LGPS schemes could benefit disproportionately. My constituents may ask me, “Why aren’t these funds being used locally by investing in local opportunities, rather than being gifted to councils in other areas of the country, assisting in the same way?” I believe the amendment will add clarity on that to the Bill, and I would welcome the Minister’s comments on it.
Kirsty Blackman
I was thinking about how the amendment would work in practice in my local area. I live in the Aberdeen city council area. We are landlocked. We are surrounded by the Aberdeenshire council area. If those local authorities were in separate local government pension schemes, the effect of the amendment would be that Aberdeenshire council could not class an investment in Aberdeen as a local investment despite the fact that its local authority headquarters are in Aberdeen. That is the only sensible place for them because Aberdeenshire goes all around Aberdeen, and it is the only place to which someone can reasonably get transport from all the areas in Aberdeenshire.
Although I understand what the hon. Members for Wyre Forest and for Mid Leicestershire are saying about the classification of local investments, I am not uncomfortable with the fact that the clause includes
“for the benefit of persons living or working in”
the area. If, for example, people in Aberdeenshire invested in a new swimming pool in Aberdeen city, I imagine that it would be used by a significant number of people in Aberdeenshire, and would absolutely be for their benefit.
We should remember that the local government pension schemes will have to prove that the thing they are investing in is for the benefit of local people living or working within the scheme area, although it may be slightly outside it. For example, if they invested in a small renewable energy project providing renewable energy to local people across a border, they would fall foul of this. It would not be classed as a local investment despite the fact that it would be very much for the benefit of people living or working within the scheme area.
The level of flexibility in the clause, and the fact that the schemes will have to justify their investments anyway, is more sensible than what the amendment suggests. I understand the drive to ensure that provision is made for local investment in local areas, but because of the nature of some of those boundaries, it makes more sense to keep the clause the way that the Government have written it.
Torsten Bell
I will give a very short speech because the hon. Member for Aberdeen North has just made every single point that I was going to make. I understand the motivation behind the amendment, but we do not support it because it would prevent investments that straddle boundaries—for example, investments in transport and infrastructure that would benefit people living in both Wales and neighbouring English counties. We have heard other examples as well. It would be wrong to limit authorities in where they could invest in this way. I ask the hon. Member for Wyre Forest to withdraw the amendment as it unnecessarily limits the remit of local investment.
Mark Garnier
I thank the Minister and wish him many happy returns. I hope that he has a happy birthday. We are satisfied with the Minister’s comments. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause, as amended, stand part of the Bill.
The Chair
With this it will be convenient to discuss new clause 31— Guidance on utilising surpluses—
“(1) The Secretary of State must publish guidance on the utilisation of surpluses within the Local Government Pension Scheme.
(2) Guidance must include—
(a) information about maintaining scheme members’ financial security;
(b) how the surplus can best support local fiscal needs.”.
This new clause requires Secretary of State to publish guidance on how surpluses can be deployed to balance member security with local fiscal needs.
Torsten Bell
Clause 2 sets out how assets will be managed in the LGPS under the reformed system of asset pooling. It requires that asset-pooling regulations introduced under clause 1 include requirements for all LGPS assets to be managed by pool companies. The clause would therefore introduce a statutory requirement to consolidate all LGPS assets into those pools, delivering the significant benefits that I know all hon. Members present agree on.
The clause also sets out that the regulations must require administering authorities to formulate, publish and keep under review an investment strategy for their authority’s assets. It also stipulates that regulations may set out from whom administering authorities can take advice on their investment strategy, a point raised by the hon. Member for Wyre Forest. The Government intend to use regulations to require that the pool be the primary source of advice. That will ensure that advice is provided on a consistent basis and free from competing interests, given that pools exist solely to serve their administering authorities. That is an important wider point to remember: the administering authorities are the shareholders of pools and are working together to deliver for members; they are not competing interests.
Regulations must also require administering authorities to co-operate with strategic authorities to identify and develop appropriate investment opportunities. This requirement will soon see the LGPS involved at an earlier stage on local investment opportunities. For the purposes of this provision, for England the definition of strategic authorities matches that in the English Devolution and Community Empowerment Bill, while for Wales it includes corporate joint committees. Members may wish to note that there is a reciprocal duty on strategic authorities in the English Devolution and Community Empowerment Bill.
In summary, the Government are introducing the provisions to finalise the consolidation of assets into pools, and to codify the role of the administering authorities in setting investment strategies and how that engagement with strategic authorities will happen.
I thank the hon. Member for Wyre Forest for tabling new clause 31, which would require the Government to publish guidance on how LGPS surpluses—of which there are now more, which is welcome—can be deployed to address financial needs in local authorities. I recognise that the hon. Member seeks to support local authorities in considering their financial positions against potential funding surpluses.
Decisions on employer contribution rates in the LGPS are rightly taken locally, not by central Government. Contribution rates for employers are set every three years as part of a valuation process—which hon. Members will know is approaching shortly—in which administering authorities will work with their actuaries and employers, including local authorities, to determine a contribution rate that is sustainable for employers and will allow the fund to pay out pensions in the future. As part of that process, a local authority is able to utilise a surplus in its funding position by reducing employer contribution rates. The LGPS is currently in a healthy funding position, as I said, and it is expected that some employers will follow that path. But crucially, again, that is a decision to be made locally on the basis of each employer’s needs.
The existing statutory guidance says that funds should set out in their funding strategy their approach to employer contributions, including a reduction of contributions where appropriate, and should carefully identify and manage conflicts of interest, including conflicts between the role of the particular administering authority and other local authorities that are participants.
Kirsty Blackman
This is a genuine question that I do not know the answer to. Is reducing the contribution made by employers the only way that the funds can currently utilise a surplus, or are there other methods by which they can spend it?
Torsten Bell
That is the only way that I have seen taken up by local authorities, and it is the main one that local authorities are discussing, although, as I have said, that is a decision for them. I hope that at least partially answers the hon. Lady’s question. I commend clause 2 to the Committee, and ask the hon. Member for Wyre Forest to withdraw his new clause.
Mark Garnier
On new clause 31, as we have heard, the local government pension scheme in England and Wales has reached a record surplus of some £45 billion, which is 112% of funding levels, as of June 2024, with some estimating that it will rise to more than 125% by the end of 2025. Despite that strong funding position, no measures have been introduced to make it easier to allow councils or employers to reduce contributions or take contribution holidays. The surplus could be used to create contribution holidays for local authorities, as we have heard, or potentially to reduce council tax or increase the money available for spending on local services.
The current Government focus remains on asset pooling and local investment strategies, rather than enabling the more immediate and flexible use of surplus funds. Councils can already reduce employer contributions under regulations 64 and 64A of the Local Government Pension Scheme Regulations 2013. The problem is that, in practice, actuaries and administering authorities hold the cards, and the guidance has been used to shut down reviews even when funding levels are strong.
The Minister needs to consider issuing better guidance to councils to make the process more transparent, to rebalance the power between councils and funds, and to ensure that actuaries properly consider reductions when the funding position justifies it. The mechanisms that are currently in place mean that the assumptions are overly prudent, reviews come only in cycles, and councils have no leverage in disputes.
New clause 31 seeks to introduce provisions to allow employers within the local government pension scheme to take contribution holidays or reduce employer contributions when surplus funding is confirmed, with actuarial valuations, subject to maintaining the security of member benefits. It would also require the Secretary of State to issue guidance on how surpluses could be prudently deployed to balance member security with local fiscal needs. That would enable councils to better manage budgets, support local services and stimulate local economies without compromising pension schemes.
However, the Minister seems to be working with the Opposition on trying to find ways to move all this forward, so for the sake of brevity we will seek to withdraw new clause 31.
Steve Darling
The Minister spoke of a couple of opportunities for regulation in this area, and we heard oral evidence about how an awful lot of this Bill is to be drawn out in secondary legislation. Will he give us timelines for when he plans to share the regulations, or at least begin the consultation on them, and say what he sees as the key elements of those regulations that will break cover in due course?
Question put and agreed to.
Clause 2, as amended, accordingly ordered to stand part of the Bill.
The Chair
For the avoidance of doubt, new clause 31 will be put to the vote much later on. At that stage, the hon. Member for Wyre Forest will be able to withdraw it if he so chooses.
Clause 3
Exemption from public procurement rules
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss Government new clause 21—Exemption from public procurement rules.
Torsten Bell
Clause 3 concerns how procurement law relates to the LGPS. New clause 21 is intended to replace clause 3, and I will endeavour to explain why it is a technical but valuable amendment. The existing clause and the replacing new clause are identical in their purpose and desired outcome. The reason for the change is technical: rather than stating in the Bill how procurement law affects the LGPS, new clause 21 will instead move the LGPS exemption directly into schedule 2 to the Procurement Act 2023, thereby future-proofing it against changes to the Procurement Act itself.
The amended clause has two aims. First, to broaden the scope of cross-pool collaboration, and secondly, to put client authorities, of the kind mentioned by the hon. Member for Wyre Forest, on the same footing as share- holders. That is necessary because the Procurement Act effectively caps the potential for collaboration through joint ventures between pools, as the vertical exemption in schedule 2 to that Act requires demonstration that no more than 20% of a pool’s turnover can be generated on behalf of anyone other than that pool’s shareholders. That may limit the collaboration between pools that we expect to see more of.
Legislation should not act as a barrier to collaboration. The clause addresses that by exempting LGPS pools from the 20% limit, such that the relevant procurement rules are satisfied so long as a pool is acting in the interests of any LGPS authority. Furthermore, given that LGPS authorities can choose to participate in their pool as a contracting client or as a shareholder, the clause also enables all LGPS authorities to benefit from the exemption, regardless of whether they are a client only or a shareholder. This means that LGPS pools will be able to specialise as centres of excellence for particular asset classes and for other pools to access those services, thereby reducing duplication and enabling the investments at scale that we heard so much about in the evidence session.
I ask that clause 3 does not stand part of the Bill, but commend to the Committee new clause 21, which replaces clause 3.
Kirsty Blackman
The Government have requested to withdraw clause 3 and replace it with new clause 21. I am slightly confused as to how we got to the point where the Government did not make this decision in the first place, and how the Bill we discussed on Second Reading did not include the change being made to the Procurement Act, instead of the change being made directly in the Bill. Have the Government done significant consultation over the summer, or received input from various organisations that has made it clear that the new way they are now proposing is better than the original?
I can understand that there are two different ways and that there may be a toss-up about which one is best, but why have the Government come down on the side of changing the Procurement Act rather than making the change in primary legislation in the Bill? The Minister has made a little bit of that case, but if he could expand on why the Government have chosen to change their approach, it would be incredibly helpful.
Torsten Bell
I will be very straight with the hon. Lady, in answer to her fair question. It would obviously be preferable if the clause were not changing between Second Reading and Report, so it is a completely reasonable question to ask. The straight answer is that it is both because of consultation responses, or people’s feedback, and because the legal advice is that this is a more foolproof way to make sure that the intent of the Bill on Second Reading is put into effect.
As I set out earlier, the key change is that other changes to the Procurement Act will not have unintended consequences for the LGPS in future. I hope the hon. Lady understands that that is the motivation. There is nothing else going on here. The change has happened over that period because that is when comments came in and when legal advice was received.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill.
The Chair
I put the Question that clause 3 stand part of the Bill and some people shouted aye and nobody shouted no—so that is it. I suggest that Members will have to deal with this on Report. The only way we learn how to conduct procedure in this House is through experience, and I am sure the Minister and the Government Whip will not forget this experience.
Clause 4
Scheme manager governance reviews
Amendments made: 18, in clause 4, page 4, line 35, leave out “for England and Wales”.
The amendment would secure that Clause 4 applies to scheme regulations relating to a pension scheme for local government workers for Scotland, as well as scheme regulations relating to a scheme for local government workers in England and Wales. Clause 1 does not extend to Northern Ireland (see Clause 100).
Amendment 19, in clause 4, page 4, line 40, leave out “Secretary of State” and insert “responsible authority”.
The amendment and Amendments 20, 21, 22 and 23 are consequential on Amendment 18. References in Clause 4 to the Secretary of State are changed to “the responsible authority”. That term is defined by Amendment 24 to refer either to the Secretary of State (as regards England and Wales) or to the Scottish Ministers (as regards Scotland).
Amendment 20, in clause 4, page 5, line 1, leave out “Secretary of State” and insert “responsible authority”.
See the explanatory statement for Amendment 19.
Amendment 21, in clause 4, page 5, line 19, leave out “Secretary of State” and insert “responsible authority”.
See the explanatory statement for Amendment 19.
Amendment 22, in clause 4, page 5, line 33, leave out “Secretary of State” and insert “responsible authority”.
See the explanatory statement for Amendment 19.
Amendment 23, in clause 4, page 5, line 38, leave out “Secretary of State” and insert “responsible authority”.—(Torsten Bell.)
See the explanatory statement for Amendment 19.
Question proposed, That the clause, as amended, stand part of the Bill.
The Chair
With this it will be convenient to discuss Government new clause 22—Additional powers for certain scheme managers.
Torsten Bell
Thank you for the learning, Sir Christopher.
Clause 4 enables the Government to make regulations that require LGPS administering authorities to undertake and publish an independent review of their governance arrangements at least once every three years. I am sure that Committee members will agree that good governance is critical to the healthy functioning of a pensions scheme. The clause will ensure that authorities face external scrutiny of their governance processes. Many authorities already carry out governance reviews of this form and this measure will merely ensure consistent high standards.
The clause also enables the Secretary of State to direct an authority to undertake an ad hoc governance review if they are concerned by significant weaknesses in an authority’s governance or suspect that an authority is not complying with regulations. As a result of the amendments we have already discussed, the power can also be exercised by Scottish Ministers in relation to the LGPS in Scotland.
New clause 22 enables the Secretary of State to give specified LGPS administering authorities certain additional powers, which most administering authorities will already have by virtue of being local authorities. The new clause allows the powers to be extended to administering authorities that are not local authorities, such as the Environment Agency. The new clause will simply create a level playing field for all administering authorities in England and Wales.
Kirsty Blackman
What is the Government’s rationale for not including Scotland in new clause 22? Is it because the Scottish Government looked at the original Bill and had not seen the amendments? Or is it because the differential structures between Scotland and the rest of the UK mean that it would not help in the Scottish situation? If the Minister is not clear on the answer, will he please commit to ask the Scottish Government whether they want to be included in the new clause and the relevant changes to be made so that it applies in Scotland? If the regulatory systems are the same, it seems sensible that a level playing field apply. It would be incredibly helpful if the Minister could make the commitment to check whether the Scottish Government want to be included.
Torsten Bell
I am happy to give that commitment. I am not aware of any administering authorities in Scotland that would be affected, but I am happy to take that point away.
Question put and agreed to.
Clause 4, as amended, accordingly ordered to stand part of the Bill.
Clause 5
Mergers of funds
Mark Garnier
I beg to move amendment 244, in clause 5, page 6, line 6, at end insert—
“(2) In the case of merger of schemes for local government workers, the Secretary of State must consider the geography of scheme areas and ensure these areas align with strategic authority boundaries before implementing the merger.”
This amendment requires the Government to explicitly consider the geography of new LGPS areas in any reorganisation.
The amendment would amend the Public Service Pensions Act 2013 to explicitly empower the Secretary of State to make regulations if there was a merger, including a compulsory merger, of two or more LGPS-funded schemes. The change in clause 5 would support flexibility for structural consolidation to enhance fund management and efficiencies; however, there is uncertainty about how the Government will confirm geographical boundaries for the local government pension scheme asset pools amid local government reorganisation.
Currently, LGPS reform aims to consolidate assets and strengthen local investment, but concerns remain about the implementation timescales and risks of disruption. Stakeholders highlight the need for clarity on new geographical boundary definitions and on alignment with new or existing local authority boundaries. Potential challenges exist in meeting asset-pooling and Government deadlines if changes coincide with wider local government changes.
Amendment 244 would require the Secretary of State to explicitly consider, for any LGPS scheme merger, the geography of scheme areas, and ensure alignment with strategic authority boundaries. This would help to provide clarity, promote smoother transitions and reduce disruption from concurrent local government reorganisations. The amendment emphasises the importance of integrating pension scheme boundaries with local government structures to support effective government and investment strategies. We hope the Government will reflect on this issue as the Bill progresses through the House.
Steve Darling
As the Lib Dem spokesman for this part of the Bill, I welcome the direction of travel.
Kirsty Blackman
If the hon. Member for Wyre Forest can confirm that he does not intend the change to apply in Scotland, because we do not have strategic authorities, I am quite happy not to vote for or against it and to leave it to those who do have strategic authorities.
Torsten Bell
I thank the hon. Member for Wyre Forest for the amendment and for the points he raised. Amendment 244 would amend clause 5 to allow fund mergers only if the two funds are in the same strategic authority, so it would be a highly constraining power. I recognise the logic, but our view is that it is far too constraining.
I emphasise to Members that the Government do not have any plans to require the mergers of LGPS funds, and that our strong preference is that when mergers take place, that happens by agreement between the administering authorities. The Government would use the power to require a merger of pension funds only as a last resort, if local decision making failed to deliver satisfactory arrangements.
I reassure Members that during the reform process Ministers and officials have looked carefully at how local government reorganisation, which is ongoing and very important, as the hon. Member for Wyre Forest rightly pointed out, maps on to the existing LGPS geography, and we will continue to do so. There should not be any friction between the emerging unitary structures and the LGPS. I reassure the Opposition that the administering authorities that were in the Brunel and Access pools are already carefully considering their choice of a new pool in the light of local government reorganisation.
In summary, it is important that local government pension funds and Ministers retain flexibility in their decision making so that decisions can be taken in the best interests of the relevant scheme. I ask the hon. Member to withdraw amendment 244.
Mark Garnier
I am reassured by the Minister’s comments and appreciate that he wishes to make the measure work in the interests, geographically, of local government or local authorities as they undergo a transition through the reorganisation of local authorities. Obviously, this provision needs to work concurrently with that process, but I appreciate that it is up to the authorities in the first instance. We wanted to be reassured, and the Minister has made the point that there will be no or little Government interference unless they really do disagree with themselves. I am reassured.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Torsten Bell
Schedule 3 to the Public Service Pensions Act 2013 has already conferred powers on the Secretary of State to make regulations about the administration, management and winding up of any pension funds. Clause 5 amends the 2013 Act to clarify and provide certainty that, in the case of the LGPS, the Secretary of State already has existing powers to make regulations about the merger of two or more LGPS pension funds. That includes compulsory merger. The purpose of the clause is simply to ensure that it is put beyond doubt that sufficient powers are in place to facilitate the merger of pension funds if needed—for example, as a consequence of local government reorganisation.
The power could also be used in the unlikely event that an independent governance review finds particularly grave issues with an administering authority’s governance of its pension fund. Members will note that, as I have just pointed out, the Government do not have any plans to require the merger of funds at present, and our strong preference is that when mergers happen, that is done on the basis of agreement between the administering authorities. These powers can also be exercised by Scottish Ministers in relation to the LGPS in Scotland. I urge that clause 5 stand part of the Bill.
Question put and agreed to.
Clause 5 accordingly ordered to stand part of the Bill.
Clause 6
Amendments of 2013 Act relating to scheme regulations
Question proposed, That the clause stand part of the Bill.
Torsten Bell
The powers and duties to make local government pension scheme regulations under this chapter of the Bill are exercisable under the 2013 Act. Clause 6 sets out the amendments required to that Act to ensure that these powers operate effectively. Subsection (2) clarifies that the power to make scheme regulations under the Act is subject to the Bill’s provisions, and it ensures that scheme regulations can include any consequential, supplementary, incidental or transitional provision that is necessary as a result of the Bill. Subsection (3) further clarifies that the requirement to consult on scheme regulations made under provisions in the Bill, which must be satisfied before the regulations can be made under section 21 of the 2013 Act, can be satisfied by consultation carried out before or after the Bill comes into force. Just to spell this out, that is to say that consultation taking place before Royal Assent could contribute to the consultation required.
I hope that clause 7 provides a useful interpretation of the terms and definitions in chapter 1 as they relate to local government pension schemes. I urge that clauses 6 and 7 stand part of the Bill.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7
Interpretation of Chapter 1
Amendment made: 24, in clause 7, page 7, line 7, at end insert—
“‘the responsible authority’ means (in relation to a scheme for local government workers in England and Wales or Scotland)—
(a) the Secretary of State, in or as regards England and Wales, or
(b) the Scottish Ministers, in or as regards Scotland.”—(Torsten Bell.)
The amendment defines the term “responsible authority” for the purposes of clauses in Chapter 1 of Part 1.
Clause 7, as amended, ordered to stand part of the Bill.
Clause 8
Power to modify scheme to allow for payment of surplus to employer
Torsten Bell
I beg to move amendment 25, in clause 8, page 8, line 2, leave out paragraph (b).
This amendment is consequential on Amendment 27. It removes the power to disapply the section in prescribed cases, as this is now contained in new subsection (5A).
The Chair
With this it will be convenient to discuss the following:
Government amendments 26 and 27.
Clause stand part.
Torsten Bell
Thank you, Sir Christopher, for the progress through the local government pension schemes part of the Bill. We now move on to the defined-benefit clauses. Clause 8, which amends the Pensions Act 1995, enables trustees of private sector defined-benefit schemes to modify their schemes to safely share surplus funds with the sponsoring employer. Through that change, trustees will also be better placed to negotiate with sponsoring employers to get additional benefits from surplus for scheme members.
I know that Members here—that is, hon. Members rather than scheme members—are keen to ensure that the security of pensions is not impacted by these changes. We have consulted on this point and several restrictions are in place that are outlined in clause 9. I will outline the core protections.
First, trustees will remain in the driver’s seat, deciding whether to modify scheme rules to allow surplus release from their individual schemes in line with their duty to the interests of the beneficiaries. Secondly, a prudent funding threshold for surplus release will be set out in regulations, on which we will consult. Surplus will be released only where a scheme is fully funded at a low dependency, which means that the scheme funding is sufficiently high to allow trustees to meet future liabilities with a very low risk of future employer contributions. Thirdly, trustees must obtain actuarial certification to demonstrate that the scheme meets these funding requirements and members must be notified before surplus funds are released.
The amendments clarify two points. First, the treatment of particular cases, such as sectionalised schemes—schemes that have multiple parts to them—is usually set out in regulations. Amendment 27 enables regulations to specify how the new powers to modify by resolution will apply in such cases—for example, to ensure that each section in a sectionalised scheme is treated as a scheme in its own right for the purposes of this power specifically.
Secondly, the power in the clause is not intended to affect schemes in wind up where the majority of schemes will have existing rules about how surplus should be distributed at the point of wind up. The amendment clarifies that when trustees consider the exercise of the power to modify, any separate power to repay surplus on winding up is disregarded. Equally, the new power in clause 8 cannot be used to introduce a power or to modify an existing power to release surplus on winding up.
Mark Garnier
I thank the Minister for his comments. We agree that the law needs to be updated to reflect current circumstances, and it makes sense to ensure that companies that have not made pre-2016 resolutions are not unfairly penalised. We broadly support the update to the law because it corrects an important imbalance. However, it is crucial, as we move forward, that we maintain the necessary guardrails and uphold the independence of trustees to protect scheme members’ interests. These important aspects will be further discussed in relation to clause 9.
I will raise a couple of points made by people we have been engaging with while looking at the Bill. First, the Pensions Management Institute highlighted its disappointment that the Government did not take the opportunity of this legislation, which broadly talks about defined-benefit funds, to make it easier and more tax efficient for employers and schemes to use scheme surpluses to fund contributions under defined-contribution arrangements, including those not held in the same trust. That would have opened up possibilities for many entities that have long since moved their ongoing DC provisions to a master trust or contract-based arrangement.
The Phoenix Group also highlighted an issue. To protect funding levels after surplus release, schemes may adopt more cautious investment strategies, reducing allocations to private and productive assets. That could undermine the Government’s growth objectives. Aside from those points, we are happy with the clause.
Steve Darling
I very much echo what the hon. Member for Wyre Forest said. Clearly, surpluses have built up over a number of years since the last crash. There has been a level of overcaution. It is important for our economy that those surpluses are appropriately released, which could drive economic growth. I am sure that all of us in the room want to see that.
Kirsty Blackman
Perhaps it reflects my ideological position that I am much more comfortable seeing this happen with local authorities than I am here, and I am looking for more guardrails. In fact, there are more guardrails around how local government pension schemes do this. It can be done pretty much only if it is to reduce employer contributions, which increases the amount of money that local authorities have for either reducing council tax, as the hon. Member for Wyre Forest said, or for spending on whatever it is that they want to spend money on a day-to-day basis.
I would like to see more power go to trustees. I am concerned—this was raised previously—about the level of employer pressure that could come to bear on trustees about releasing surplus, when it may not be in the best interests of all the scheme members but the employer might be really keen to use the money. I am also concerned that we have had quite a lot of different ideas about what the surpluses could be used for. The Liberal Democrat spokesperson, the hon. Member for Torbay, made the same point as the Government about ensuring that employers could invest more to grow the economy, whether that is in bits of tech that make the company more productive or workplace benefits for those who are scheme members.
Why did the Government decide not to strengthen the powers of trustees in relation to the surplus release? Could the Government look in future at tightening what surplus release could be used for? Trustees have a fiduciary duty to ensure that members’ pensions grow as promised, and that they get the benefits that they were promised or that their defined-contribution scheme in other circumstances grows at the right level. However, if the fiduciary duty applies, why is there not a similar application in terms of surplus release? Why is there not a similar requirement on trustees to ensure that that surplus release goes the way that we think it should go?
On Second Reading, I said that there had not been enough clarity from the Government about how they want that surplus to be released. Are they encouraging or instructing trustees to release surplus to employers if it will be invested in the business, or if it is being done to invest in workplace training schemes? I am not convinced that there is enough clarity on this issue.
Given the Government’s drive to ensure that more people are working and that there is a reduction in the amount of economic inactivity, they could say, “Actually, if you are going to use this to improve access to work, to ensure that you can employ more disabled people, we will absolutely sign off a surplus release, provided that you have met all the other criteria.” The Government could encourage trustees to do that. I feel as though there are more levers that the Government could use and that they are not taking this opportunity.
I have not tabled any amendments on this issue, but I raised it on Second Reading. It would be great if the Government gave me some comfort that they are considering whether—in the future with the Bill or, down the line, in the guidance that is given to trustees—to strengthen the hand of trustees, so that they can direct employers better and so they do not come under pressure from employers; or whether the Government will take policy decisions or directions, and point them out to trustees so that they are encouraged to go in a certain direction to ensure that there is growth in the economy, which is apparently the Government’s first mission.
Torsten Bell
I welcome the broad consensus about the direction of travel from everyone who has spoken. I will come first to the remarks from the hon. Member for Aberdeen North, who made some key points. She understandably makes the direct comparison with the LGPS. To a large respect, that reflects the fact that the LGPS is an open scheme where the ongoing contributions are much more of a live question, but I take her point.
I will make a few remarks on her more controversial points about the role of trustees and what funds are used for. The powers of trustees are very strong. Trustees have an absolute veto on any surplus release under the clause, as they do currently, and they have fiduciary duties about how they should use their powers. That is stronger than was implied in some of the remarks that we have heard.
As for the wider point about pressure on trustees from employers, that can affect lots of issues and is not specific to the one we are discussing today. That is what the fiduciary duties of the trust system exist to protect against and what the regulatory work of the Pensions Regulator ensures does not happen. If there was inappropriate pressure on trustees, it would be a very serious issue. That is not specific to the surplus question—that applies to trustees just doing their job. My strong impression with every trustee I talk to is that they take that duty very seriously indeed. I agree that we should always keep that under review.
Kirsty Blackman
There is an absolute veto power—a yes or no—but it is also about the power for trustees to be able to say to employers, “This is how we would like you to use the money.” There is less flexibility for trustees there. Once the money is handed over to the employers, there is no comeback for trustees if employers do not use it as suggested.
Torsten Bell
That is a factually accurate description of the situation. The hon. Lady is not the first person to have raised that point with me, and I understand the wish for greater certainty about how funds will be used. My view is that looking for that certainty through legislation is wishful thinking. Funding sitting within companies is fungible. The monitoring and enforcement of those things would not be practical in any sense. I am sure that part of the discussion between trustees and firms will be about exactly the kind of points that the hon. Lady is raising, particularly for open schemes, where there is a large overlap between employees and scheme. Members will be part of the discussion, but I do not think that that is practical for legislation. I am liberal enough, although I am certainly not a Liberal Democrat, to think that that is quite hard for legislation to manage, and that it is the role of trustees and employers to work through that.
On the hon. Lady’s wider point, I offer her some reassurance that the Pensions Regulator is taking very seriously its job of providing guidance for trustees about how they think about the questions of surpluses. I think that will offer her quite a lot of reassurance, particularly about how members benefit—she has focused on how employers benefit—from release.
Amendment 25 agreed to.
Amendments made: 26, in clause 8, page 8, line 2, at end insert—
“(4A) Any power to distribute assets to the employer on a winding up is to be disregarded for the purposes of subsections (2) and (3); and a resolution under subsection (2) may not confer such a power.”.
This amendment ensures that the scope of section 36B is confined to powers to pay surplus otherwise than on the winding up of the scheme.
Amendment 27, in clause 8, page 8, line 6, at end insert—
“(5A) Regulations may provide that this section does not apply, or applies with prescribed modifications, in prescribed circumstances or to schemes of a prescribed description.”—(Torsten Bell.)
This amendment, which inserts provision corresponding to section 37(8), allows for the application of section 36B to be modified in particular cases (for example, in the case of sectionalised schemes).
Clause 8, as amended, ordered to stand part of the Bill.
Clause 9
Restrictions on exercise of power to pay surplus
John Milne (Horsham) (LD)
I beg to move amendment 5, in clause 9, page 8, line 18, at end insert—
“(2AA) Without prejudice to the generality of subsection (2A), regulations made under that subsection must include provision that takes into account the particular circumstances of occupational pension schemes established before the coming into force of the Pensions Act 1995 which, prior to that Act, possessed or were understood to possess a power to pay surplus to an employer.”.
This amendment would allow schemes where people are affected by pre-97 to offer discretionary indexation where funding allows, with appropriate regulatory oversight.
The Chair
With this it will be convenient to discuss amendment 6, in clause 9, page 8, line 23, at end insert—
“(aa) prohibiting the making of a payment until annual increases to payments in line with Consumer Prices Index inflation have been awarded to members,”.
This amendment requires that payments in line with CPI inflation are awarded to members before all other considerations.
John Milne
The purpose of amendment 5 is to ensure that regulations take account of the particular circumstances of occupational pension schemes that were established before the Pensions Act 1995. There is effective discrimination against certain pre-1997 pension holders. That is a long-standing grievance and has remained unresolved for far too long. This has been reflected considerably in my postbag, as I am sure it has been for pretty much every MP.
In the evidence session on Tuesday, we heard moving testimony from Roger Sainsbury of the Deprived Pensioners Association and Terry Monk of the Pensions Action Group. As they told us, many of those affected are, literally, dying without ever seeing satisfaction. Many of these pensioners are receiving a fraction of what they are entitled to and what somebody who paid the exact same sums is currently receiving. It is causing genuine hardship.
Members of the pre-’97 schemes are often in a different position to those in later schemes. These schemes were designed under a different legal and regulatory framework. Current legislation does not always reflect those historical realities, which creates unintended inequities.
The amendment would require regulations under clause 9 to explicitly consider these older schemes. It would allow such schemes, with appropriate regulatory oversight, to offer discretionary indexation where funding allows. The key impacts would be to provide flexibility while ensuring safeguards are in place, give trustees the ability to improve outcomes for members in a fair and responsible way, and help to address the long-standing issue of members who miss out on indexation simply because of the scheme’s pre-’97 status. It also ensures that members can share in scheme strength where resources permit.
Clearly, safeguards are needed, and the amendment makes it clear that discretionary increases would be possible only where schemes are well funded. Oversight by regulators ensures that employer interests and member protections remain balanced. The intention behind the amendment is to bring fairness and flexibility into the treatment of pre-’97 scheme members and to modernise the system so that it works for today’s savers without undermining scheme stability.
Mark Garnier
I will not take up too much of the Committee’s time, but suffice it to say that we all heard the evidence that was presented on Tuesday, and we in the Conservative party agree with the Liberal Democrats’ amendment. We will support it.
Kirsty Blackman
I will not say much just now. I would like to hear what the Minister says, and I might bob again after that, Sir Christopher.
Torsten Bell
I thank the hon. Members for Torbay and for Horsham for their amendments and for giving us the opportunity to discuss the matter of defined-benefit members and pre-1997 accruals. I should be clear that clause 9 and the related amendments refer to defined-benefit schemes, not to the questions of the Pension Protection Fund and financial assistance scheme compensation, which were discussed at such length—and, as several hon. Members have said, powerfully—at the evidence session on Tuesday.
The Government understand the intent behind the amendments. It is crucial that the new surplus flexibilities work for both sponsoring employers and members, for example through discretionary benefit increases where appropriate. That point was raised several times on Second Reading before the summer recess.
On pre-1997 indexation, it is important to be clear that most schemes—as I said, these schemes are not in the PPF or receiving FAS compensation—pay some pre-1997 indexation. Analysis published last year by the Pensions Regulator shows that only 17% of members of private sector defined-benefit pension schemes do not receive any pre-1997 indexation on their benefits, because different scheme rules specify whether someone receives that indexation.
Under the Bill, decisions to enable the scheme to release a surplus will always rest with trustees, who have a duty to act in the interests of scheme beneficiaries. Trustees, working with the sponsoring employer, will be responsible for determining how members should benefit from any surplus release, which may include discretionary indexation. My personal view is that, in lots of cases, it should, but that is where the discussion takes place. The Government are clear that trustees’ discretion is key to this policy. Trustees are best placed to determine the correct use of the surplus for their members, not least because that will involve making some trade-offs between different groups, particularly of members, and it is trustees who are in the position to do so.
It would not be appropriate for the Government to mandate that schemes provide uncapped indexation, in line with the consumer prices index, to all members prior to the making of a surplus payment. Where trustees plan to award discretionary increases, they are best placed to identify what increase is affordable and proportionate for the scheme and its members.
Although scheme rules may require an employer to agree to a discretionary increase—this point was made by several Members who were anxious about it on Second Reading—the trustees will have the final say when deciding to release surplus, and they are perfectly within their rights to request such an increase as part of any agreement that leads to a surplus release. That is a powerful power for trustees to hold on to.
The Pensions Regulator will publish guidance for trustees, as I previously mentioned, and for their advisers, noting factors to consider when releasing surplus and ways in which trustees can ensure that members and employees can benefit. That will happen following the passage of the Bill. These measures already give trustees the opportunity to secure the best outcomes for their members, which could include discretionary increases. I am grateful for the contribution from the hon. Member for Horsham, but on those grounds, I ask him to withdraw the amendment.
Kirsty Blackman
As I said, I wanted to hear from the Minister. I agree that trustees should be the ones making the decision on how to spend any surplus and whether to make an uprating. However, as some schemes are barred by their scheme rules from making such an uprating, my concern is about allowing them the flexibility to make it in any circumstances if they decide that that is the best thing to do. It is not about tying their hands and saying that they have to make an uprating; it is about allowing every single scheme the flexibility to make it if they decide that that is the best thing to do.
Where there are employer blockers or other issues in the scheme rules, can anything be done, in the Bill or anywhere else, to remove those blockers so that we can ensure that trustees have an element of choice and remove some of the unfairness that we heard about on Tuesday?
Torsten Bell
I think I can offer the hon. Lady some reassurance. It is true that within some scheme rules it will be clear that discretionary increases of the kind that we are debating would require employer agreement. I know that that has worried some hon. Members who think that that could be a veto against such releases in a surplus release situation.
My view—and the guidance to be released by the TPR will make this very clear—is as follows. It may formally be for the employer to agree to those discretionary increases. The scheme rules may apply to that, although in some schemes the trustees may be able to make that decision on their own—that will be a distinction that will depend on the scheme rules. However, even when the scheme rules say that the employers must agree, they will have a strong incentive to agree with the trustees if they are asking the trustees to release. That is why I say that the process of surplus release will change the dynamic of those discussions, which I recognise are currently not proceeding in some cases because employers are saying a blanket no to discretionary increases. We do not need legislative change to make that happen.
Kirsty Blackman
Would the Minister encourage those schemes that find that they want to release the surplus in relation to the uplift, but are struggling to get that process across the line, to go to the TPR, look at the guidance that is coming out and ask for assistance with making those discretionary uplifts?
Torsten Bell
I absolutely would. I have been making exactly those points to anyone who will listen.
John Milne
I thank the Minister for his comments. Over the coming weeks, as he will be aware, we will be discussing several amendments that relate to the same issue. It will be interesting to see whether we can reach a satisfactory solution. In the meantime, we will press our amendment to a vote, because we feel that the issue has remained unresolved for such a long time that it needs everything we can give it to get it across the line, but we hope that in the next couple of weeks of debate we can find the best possible solution.
Question put, That the amendment be made.
Mark Garnier
I beg to move amendment 247, in clause 9, page 8, line 23, at end insert—
“(aa) prohibiting the making of a payment unless the scheme’s assets have exceeded a buyout valuation,”.
This amendment requires that surplus extraction is only permitted once buyout funding levels are achieved.
The Chair
With this it will be convenient to discuss the following:
Amendment 260, in clause 9, page 8, line 30, at end insert—
“(e) requiring the trustees to provide a prescribed notification, as set out in (f) below, with the members of the scheme (or their representatives) not less than 60 days before making any payment under this section;
(f) the prescribed notification should include—
(i) the proposed amount of surplus to be paid to the employer,
(ii) the reasons for the proposed payment,
(iii) the impact on member benefits,
(iv) the scheme's funding position after the proposed payment, and
(v) how members may make representations regarding the proposal;
(g) requiring the trustees to have regard to any representations made by members or their representatives having received the prescribed notification.”
This amendment would require trustees to notify members at least 60 days before making surplus payments to employers. It ensures members receive full information about proposed surplus payments, enabling informed participation.
Amendment 265, in clause 9, page 8, line 30, at end insert——
“(e) requiring the trustees to provide a prescribed notification to members of the scheme, or members’ representatives, not less than 60 days before making any payment under this section,
(f) requiring the prescribed notification under subsection (e) include—
(i) the proposed amount of surplus to be paid to the employer,
(ii) the reasons for the proposed payment,
(iii) the impact on member benefits,
(iv) the scheme's funding position after the proposed payment,
(v) how members may make representations regarding the proposal, and
(g) requiring the trustees to have regard to any representations made by members or their representatives having received the prescribed notification under subsection (e).”
This amendment would require trustees to notify members at least 60 days before making surplus payments to employers.
Amendment 267, in clause 9, page 8, line 30, at end insert—
“(e) requiring that, where the scheme actuary certifies under subsection (a) that the scheme’s assets exceed the cost of securing each member’s accrued rights with an authorised insurer for a continuous period of at least six months, the trustees must first secure a full buy-out of those rights before any payment of surplus may be made to the employer or any other person, and
(f) requiring that subsection (e) does not apply if the scheme actuary certifies that any surplus extraction would, after the extraction, still leave the scheme’s assets exceeding the cost of securing each member’s accrued rights with an authorised insurer.”
This amendment inserts a requirement to ensure that surplus extraction prior to a buyout does not adversely impact the scheme’s ability to reach buyout.
Amendment 261, in clause 9, page 8, line 36, at end insert
“and including confirmation that the proposed payment (surplus access) will not adversely impact members' benefits and that the prescribed notification has been completed in accordance with regulations made under subsection (2A).”
This amendment would aim to strengthen an actuary's role and oversight of schemes accessing surplus, by requiring confirmation that member notification has occurred before certifying surplus payments.
Mark Garnier
Any decision to release surplus funds from defined-benefit pension schemes should rest firmly, as we have discussed, with the trustees. It is important to emphasise that trustees bear the ultimate responsibility for such decisions. We believe that surplus repayments to employers should be permitted only when members’ benefits are fully protected and robust safeguards are in place to maintain the security and sustainability of the scheme.
The Bill notes that the detailed criteria for surplus payments will be set out in forthcoming regulations, and those regulations must be subject to close scrutiny with a primary focus on safeguarding members’ benefits before any funds can be released. There remain important unanswered questions regarding what appropriate guardrails for surplus release should look like. One firm belief is that defined-benefit pension funds should be funded to buy-out levels, to the extent that they are capable of securing members’ benefits with an insurer. Additionally, any surplus extraction should demonstrably provide clear benefits to scheme members, rather than simply serving the employer’s interest—although we heard evidence on Tuesday that did not necessarily agree with that.
We acknowledge that there are broader issues facing defined-benefit pension schemes that we intend to explore further when the Committee considers the new clauses. In particular, the post-Maxwell accounting framework is a significant constraint on defined-benefit pension funds. The requirement to show deficits on company balance sheets suppresses growth potential. The Bill should not miss an opportunity to address those structural hurdles.
One of the behavioural outcomes we have seen is that defined-benefit pension funds have been investing large amounts of money into bonds, including Government bonds, and not into equities where there is the greatest growth potential in the economy. That throws up a couple of problems in this area. First, the money is not going into equities, which are much more volatile than bonds. Secondly, if we see surplus extraction from some of those funds, that money will come from the Government bond market—the gilt market—and there may be an impact on the Government’s ability to borrow funds, which is something we will hear more about on 26 November. Crucially, the Minister will now be part of that, and I suspect he will be taking into account the bond market’s ability to meet Government borrowing requirements when he gets close to that date.
Moreover, there is nothing in the current legislation to prevent surpluses from being used for purposes that do not support economic growth, such as share buybacks or dividend payments by the host employer. Neither of those outcomes necessarily aligns with the Government’s growth agenda, although it could be argued that the money is going back into the wider economy and finding its way back. None the less, we would like to see more guidance on how that money is to be spent. Simply repaying—potentially—private equity funds a large dividend will not necessarily help the greater good.
The Bill proposes new flexibilities for defined-benefit schemes in surplus. Currently, the Bill is unclear on the level at which employers can extract that surplus and there is concern that, once a scheme is fully funded on a low-dependency basis, buy-out could happen. That is a lower threshold than for a gold standard buy-out and, while it may free up capital for employers and support investment, there are concerns that the change could risk members’ security, as buy-out remains the safest way to guarantee benefits. Amendment 247 would provide strong protection against a change of environment where DB funds start to slip back into deficit positions.
Our amendments 260 and 261 are linked. Just Group plc wrote to the Committee to highlight that members of pension schemes that undertake employer surplus extractions should receive proper notification. Engagement with members should be undertaken before extraction, because ultimately any decisions on surplus extraction could be impactful on them. Setting out clearly in legislation what effective engagement would look like, including the role of the actuary in the process, would help trustees to understand their obligations and Parliament’s intent.
Amendment 260 requires trustees to notify members at least 60 days before making surplus payments to employers, and ensures that members receive full information about proposed surplus payments, enabling informed participation. Amendment 261 aims to strengthen an actuary’s role in oversight of schemes accessing surplus, by requiring confirmation that member notification has occurred before certifying surplus payments. Both amendments strengthen the guardrails around DB surplus extraction, as part of our overall strategy of putting member interest first and protecting trustees. We will be pressing these amendments.
Steve Darling
I rise to speak in respect of amendments 265 and 267, which echo the issues already covered by the shadow Minister. Allowing 60 days’ notice to scheme members is extremely important to the Liberal Democrats—and, to be fair, I am sure it is also important to the Government—and the central intention is to protect outcomes for members of schemes and ensure that there is enough flexibility. That 60 days’ notice is really important to us.
Ensuring that there is enough money in the scheme for any buy-out is the second element, which the hon. Member for Wyre Forest has already alluded to. We think it is very important that the finances are there and that we put scheme members at the centre of the proposals before us. I look forward to hearing from the Minister what reassurance he is able to give us on those points.
Kirsty Blackman
I will speak specifically to amendments 260 and 265. Any communication with scheme members is a good thing, particularly if there are to be changes such as those we have been discussing. Sometimes, surplus extraction may not be for the benefit of scheme members; sometimes it may be for other reasons, and trustees have a duty to make clear what they think it is for and to release a surplus only if they think it is a reasonable thing to do. However, they may not have a full understanding of how members feel about what the surplus could be used for. For example, scheme members who are active members might feel that they would love their company to invest in something to make their lives and their jobs easier, and might be keener on that extraction than the trustees might think, so it would be great to have that input.
Amendments 260 and 265 are incredibly similar—surprisingly similar, in fact—and I am happy to support both, were they put to a vote. Amendment 261 is consequential; on amendments 247 and 267, I do not feel I have enough information on what trustees think to make a reasonable judgment on whether either amendment would be a sensible way forward for trustees to meet their fiduciary duty, which is to provide the best guaranteed return for scheme members. I will step out of votes on amendments 247 or 267, but I will support the amendment that requires members to be consulted in advance.
Mr Bedford
I rise to speak to amendment 260. I thank my hon. Friend the shadow Minister for outlining our rationale for the amendments. My comments regard informing members. I support the right to pay surplus to employers—I think that is the right thing to do, so long as the correct safeguards are in place—but it is right to inform members of that decision. Not only is it the right thing to do, but it will improve member engagement in the whole pensions process. I made a point in Tuesday’s evidence session on the importance of financial education, and a number of witnesses supported that position. By more actively engaging with members, we will ensure that they take part in their own pension provision and ensure that the right decisions are made in their own interests.
Torsten Bell
My overall reflection on the amendments is that in most cases what is being requested is already happening, or risks reducing flexibility for trustees. I will set that out in a bit more detail, but I am grateful to hon. Members for their contributions and for the amendments targeting important areas of concern.
Amendments 247 and 261 aim to maintain the buy-out funding threshold for surplus release from DB schemes. Member security is at the heart of our changes, as I have already set out. We are clear that the new surplus flexibilities must both work for employers and maintain a very high level of security for members, as we all agree. Under these proposals, surplus sharing will remain subject to strict safeguards, including the actuarial certification and the prudent funding threshold, which is the same threshold that the TPR under the previous Government had put in place for defined-benefit schemes to aim for more generally. The defined-benefit funding code and underpinning legislation require that trustees aim to maintain a strong funding position more generally, leaving aside the question of surplus release. They do that so that we have very high confidence that members’ future pensions will be paid.
However, the Government are minded to amend the funding threshold at which surplus can be released from the current buy-out threshold to the full funding on a low dependency basis, as I mentioned earlier. That is still a robust and prudent threshold that aligns with the existing rules, as I have just said. The goal here is to give more options to DB scheme trustees. Again, that is true across the Bill: we are aiming to provide trustees with more options about how they proceed.
Many schemes are planning to buy out members’ benefits with an insurer. In many cases that is the right thing for them to do, but other schemes might want to continue to run on their scheme for some time without expecting future contributions to be required from an employer. The low-dependency threshold will give flexibility to trustees to do so. It is right that they have a variety of options to choose from when selecting the endgame for their scheme.
The Government will set out the details of the revised funding threshold in draft regulations, on which we will consult. More broadly, we think it right that that is done via secondary legislation, not primary legislation.
Steve Darling
Can the Minister give us some timescales? I asked previously about timescales, regulations and secondary legislation. I would be grateful if the Minister could address that.
Torsten Bell
The hon. Member rightly returns to an important question. As I set out at the evidence session on Tuesday, our pension policy road map, published at the same time as the Bill, details exactly when we are planning to bring forward regulations. My understanding is that these particular regulations should be consulted on in the spring of next year—if that is not right, I will make sure we come back to him with further details. As I say, the road map provides the details of that timeline. It is a very important question for people to be clear on. In that consultation, I am sure the evidence we have heard will be taken into account.
Amendments 260 and 265 correctly aim to ensure that members are well informed and represented when it comes to their pension schemes and retirement. The new paragraphs would be inserted into clause 9 of the Bill, which amends section 37 of the Pensions Act 1995. Section 37 already provides that regulations must require members to be notified in relation to a surplus payment before it is made.
This is therefore not about the flexibility of trustees; it is redundant, given the requirements already in the Bill. It is similar to the existing requirement under section 37 of the Pensions Act 1995, and we will again consult on these draft regulations following Royal Assent. Furthermore, trustees already have a clear duty to act in all matters in the best interests of the beneficiaries of their scheme, and they are best placed to decide, in consultation with the sponsoring employer, what actions are best for members—I will not keep repeating that point as we go through the rest of this Bill.
Finally, I thank the hon. Member for Wyre Forest for proposing amendment 261, with its requirement for actuarial confirmation that proposed payments from a DB surplus to employers will not adversely affect members’ benefits, and that members have been notified ahead of that release. Those are valuable objectives, but they are already achieved by the robust safeguards in place, including trustee discretion, the prudent funding threshold —on which we will consult—and the actuarial certification that a scheme is well funded.
In addition, the defined-benefit funding code and the underpinning legislation already require trustees to aim to maintain a strong funding position, and that is actively overseen by the Pensions Regulator. I believe the safeguards we have put in place put members at the heart of the policy, which is a point of cross-party agreement, and will allow trustees to continue to be the people who strike the correct balance between the benefits for employers and members. I hope this offers some reassurance to the Committee that, for the reasons I have outlined, these amendments are unnecessary; I urge hon. Members not to press them.
Kirsty Blackman
The Minister has said that trustees are required to act in the interests of and to the benefit of scheme members. However, they are required to act so that members will get the benefits that they are promised under the pension. They are not required to act to the benefit of scheme members. As I said earlier, there is a distinct possibility—particularly with surplus, which is not going into the pension scheme and which can only be paid if those benefits are already guaranteed—that the surplus is only a surplus in the case where members are definitely going to get those benefits anyway.
It is the case that trustees might not know what is to the benefit of members. Requiring them, or asking them, to consult members on what they would like, or to provide members with information about how money is going to be spent, could get better results for those members. It is not going to change the amount of pension they will get, which is the trustees’ requirement; however, it may change their lives in a more positive way. Whether or not they are people currently paying into the scheme and actively employed, there are ways that the surplus could be spent that would benefit or disbenefit their lives.
In making that case, I think there should be a consultation with members. The hon. Member for Mid Leicestershire made the point very well that we should encourage people to take more interest in and have more input into their pensions, so that they have a better idea of what is going on, of the possibility of surpluses and of how they are spent. I would appreciate it if the Minister, when he is considering the regulations and the changes being made, could think about how best to consult scheme members. Given that trustees have a duty to act not in the best interests of members, but in the best interests of members’ pensions, I would love to see, around the surplus, arrangements that benefit scheme members—whether they are currently paying, future or deferred members, or those already getting their pensions—rather than solely the employer and the employer’s intentions.
Ordered, That the debate be now adjourned.—(Gerald Jones.)
Pension Schemes Bill (Fourth sitting)
Thursday 4th September 2025
(1 month ago)
Public Bill CommitteesPension Schemes Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 4 September 2025 - (4 Sep 2025)
The Committee divided: - Ayes: 4 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 11 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 3 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 3 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 10 - Question accordingly negatived.
The Chair
I remind the Committee that with this we are discussing the following:
Amendment 260, in clause 9, page 8, line 30, at end insert—
“(e) requiring the trustees to provide a prescribed notification, as set out in (f) below, with the members of the scheme (or their representatives) not less than 60 days before making any payment under this section;
(f) the prescribed notification should include—
(i) the proposed amount of surplus to be paid to the employer,
(ii) the reasons for the proposed payment,
(iii) the impact on member benefits,
(iv) the scheme’s funding position after the proposed payment, and
(v) how members may make representations regarding the proposal;
(g) requiring the trustees to have regard to any representations made by members or their representatives having received the prescribed notification.”
This amendment would require trustees to notify members at least 60 days before making surplus payments to employers. It ensures members receive full information about proposed surplus payments, enabling informed participation.
Amendment 265, in clause 9, page 8, line 30, at end insert——
“(e) requiring the trustees to provide a prescribed notification to members of the scheme, or members’ representatives, not less than 60 days before making any payment under this section,
(f) requiring the prescribed notification under subsection (e) include—
(i) the proposed amount of surplus to be paid to the employer,
(ii) the reasons for the proposed payment,
(iii) the impact on member benefits,
(iv) the scheme's funding position after the proposed payment,
(v) how members may make representations regarding the proposal, and
(g) requiring the trustees to have regard to any representations made by members or their representatives having received the prescribed notification under subsection (e).”
This amendment would require trustees to notify members at least 60 days before making surplus payments to employers.
Amendment 267, in clause 9, page 8, line 30, at end insert—
“(e) requiring that, where the scheme actuary certifies under subsection (a) that the scheme’s assets exceed the cost of securing each member’s accrued rights with an authorised insurer for a continuous period of at least six months, the trustees must first secure a full buy-out of those rights before any payment of surplus may be made to the employer or any other person, and
(f) requiring that subsection (e) does not apply if the scheme actuary certifies that any surplus extraction would, after the extraction, still leave the scheme’s assets exceeding the cost of securing each member’s accrued rights with an authorised insurer.”
This amendment inserts a requirement to ensure that surplus extraction prior to a buyout does not adversely impact the scheme’s ability to reach buy-out.
Amendment 261, in clause 9, page 8, line 36, at end insert
“and including confirmation that the proposed payment (surplus access) will not adversely impact members’ benefits and that the prescribed notification has been completed in accordance with regulations made under subsection (2A).”
This amendment would aim to strengthen an actuary's role and oversight of schemes accessing surplus, by requiring confirmation that member notification has occurred before certifying surplus payments.
Does Mr Darling wish to respond further in this debate?
Mark Garnier (Wyre Forest) (Con)
Sir Christopher, I am happy to proceed in order to get things moving.
Question put, That the amendment be made.
John Milne (Horsham) (LD)
I beg to move amendment 3, in clause 9, page 9, line 4, at end insert—
“(e) about the proportion of any surplus that may be allocated, or the manner in which it may be determined, for the purpose of contributing to the provision of free, impartial pension advice and guidance services for scheme members.”
This amendment enables a proportion of surplus funds to be used to fund free pension advice.
The purpose of the amendment is to allow a proportion of pension scheme surplus funds to be allocated to funding free, impartial pension advice and guidance services for members. In my former life in advertising, it was sometimes my job to help people to understand their pension options so that they could make the right choices, and I can tell the Committee it was not an easy task. Pensions are complicated, and far too many people have no idea at all what is in store for them, and therefore do not take advice. We argue that rectifying this gap is the key task that at the moment is underserved by the Bill. There are proposals such as the pensions dashboard that certainly help, but they are by no means sufficient. More action needs to be taken, and that is the essence of the amendment.
Without proper advice, members risk making poor financial decisions, such as taking all their lump sum and getting taxed unnecessarily, which could severely damage their long-term security. Free, impartial advice is essential to level the playing field between those who are more informed and perhaps have higher incomes, and those who are not. The details of our revised proposals are laid out in new clause 1, which, slightly inconveniently, will be discussed later in the proceedings; this amendment is about the funding for that measure. We propose two stages of advice: at age 40, which is a critical moment for all midlife planning and pension consolidation, and again within six years of expected retirement, when the emphasis shifts more to decisions about drawdown, annuities and retirement income options.
The first question that is always asked when any extension to a Government service is proposed is, “How will we pay for it?”. This measure is a highly relevant, targeted solution to that question, made possible by accessing surplus funds. We have general agreement, I think, that surpluses in pension schemes should not be allowed to sit idle or be seen simply as windfall funds, but we have less clarity and agreement on what exactly is the best use for them. I would argue that the measure we propose, employing a small proportion of the surplus to fund member advice, is at once a highly relevant targeted use for the funds, and something that will have a disproportionately large impact on pension adequacy, which is of course a matter of great concern to the Minister outside this Bill.
The amendment does not mandate a fixed proportion; it simply gives the Secretary of State powers to determine what proportion he or she thinks should be used. It creates flexibility and safeguards, so that the balance between scheme health and member benefit can be properly managed. Importantly, funding advice from surpluses would reduce the need for members to pay out of their own pockets; for many, the cost is prohibitive, so it simply does not happen. A further benefit is that it would build trust among the public that schemes are actively supporting member outcomes beyond just the pension pot itself.
To summarise, the amendment is designed to ensure that pension surpluses, when they arise, are used to strengthen member outcomes. Advice and guidance are just as important as the pension itself in ensuring good retirement outcomes. The amendment is a practical, fair and member-focused way of improving the system.
Mark Garnier
As we have heard, the amendment authorises the use of surplus pension funds to contribute to the provision of free, impartial pension advice and guidance services to scheme members. The age of 40 is very important, and I hope that the Minister, on his 42nd birthday—
Mark Garnier
Forty-third! He looks 28. None the less, I hope he is getting plenty of pension advice; who knows when he may need it?
This is a very good provision. The more informed people are about their retirement opportunities, the better. I suppose I have to declare a bit of an interest, inasmuch as I will retire in five years’ time, hopefully. It is incredibly important that people are well prepared for their retirement, and the more information a member of a pension fund has, the better it is. If the amendment is pressed to a vote, we will support it wholeheartedly.
Kirsty Blackman (Aberdeen North) (SNP)
I am in massive agreement with putting more investment into the provision of advice. On Tuesday, we heard the terrible stats that only 9% of people actually get advice on their pension from a financial adviser. Yet this amendment is the wrong vehicle to achieve that, given that it is looking purely at DB surpluses.
My understanding is that people who have DC pensions are much more likely to need advice than those who are on DB pensions, because that someone with a DC pension cannot tell how much they will get before they actually apply for the annuities when they retire. Their life circumstances may change between the age of 40 and hitting retirement. My understanding is that those on DB pensions have a pretty clear idea of what they are getting on a weekly, monthly or annual basis, in addition to a lump sum that they may be awarded as part of that DB pension scheme. Using the surplus created in DB schemes to fund advice for DC scheme participants would not be in the best interests of the scheme members.
I agree that we need more advice; I think that the proposal made in new clause 1 for earlier advice is incredibly important, because by the time someone gets to the age of 50-plus or very close to retirement, they do not have time to fix any issues. I would love to see people, when they are first auto-enrolled, getting advice on how much pension they are likely to get from whatever percentage of pay is put in, what a top-up looks like and how putting money into their pension as early as possible gives them the best possible outcomes in retirement, rather than panicking at the last possible moment to try to increase it.
On the mid-life MOT, free advice is already available for people at the age of 50, but it is drastically under-utilised. The Government could move in the direction of ensuring that when people get their bowel cancer check pack through the post, they also get a date and a time for an appointment with the Pensions Advisory Service, so that they do not have to proactively make it themselves. That would make a massive difference.
Successive Governments have believed that doing that would cause too much uptake and there would not be capacity to provide that service, but as we come to the generation of people who have been auto-enrolled hitting 50, when they are due that mid-life MOT, the benefits would be so great and would provide prospective pensioners with clarity about how much they could get. They could be told that taking the entire thing in cash and putting a chunk of it into a bank account is a truly terrible idea—we know that far too many people do that. I am in favour of anything that the Government can do to expand the free advice service that is there already, but I think that the funding vehicle proposed in amendment 3 is not the right way to go about it. I would like the Government to put more money into it, and many more people getting the advice that they need.
The guidance and targeted support mentioned on Tuesday are incredibly important, increasingly so as we see the trend away from DB schemes towards DC schemes. I was looking at my family’s personal pension the other day, and the amount of money in the DC pot. I do not have the faintest clue what it means. I know something about pensions, but being able to translate that large figure into a monthly amount is simply impossible until it is time to apply for the annuity, when we get the understanding of what our life circumstances look like.
I would like changes to be made to the advice given. I do not think that we are in the right position. I wonder if the review will take some of this into account. On pension sufficiency, as the hon. Member for Mid Leicestershire said, people being better informed and more engaged with their pensions is an incredibly positive thing, but we are not there yet. More needs to be done to encourage people down that route.
Mr Peter Bedford (Mid Leicestershire) (Con)
I want to reiterate a lot of the points mentioned by the hon. Member for Aberdeen North. Financial education is key to unlocking many of the challenges that we face in adulthood, whether budgeting, debt management, saving or planning for retirement. I introduced a ten-minute rule Bill, the Financial Education Bill, earlier this year; I know we already have an element of it in secondary schools, but we need to go further as a country and ensure that everyone, from the very young upwards, has that education to inform the key decisions in our lives.
I take the hon. Member’s point on DB schemes funding those seeking advice for DC schemes, but it is often the case that members have pensions in both DB and DC schemes: people move quite fluidly from a job in the public sector to one in the private sector, and will inevitably have membership in both DB and DC schemes. The Bill would benefit from the amendment proposed by the Liberal Democrats.
I also take the hon. Member’s point on the need for better engagement by employers. I know some large companies offer employees mid-life MOTs on financial education and management. Certainly, FTSE 100 companies that I have worked for offer employees that kind of support as they approach retirement. I am sympathetic to new clause 1, which amendment 3 is connected to, because it is essential that as we get older and plan for retirement, we are fully informed on those decisions. I will support the Liberal Democrat amendment.
Rebecca Smith (South West Devon) (Con)
In line with what has been said already, my thought is that plenty of financial education is a good thing; to say that some is worth pursuing and some is not seems a bit at odds with what we have been debating. I echo what colleagues have said about workers who come from a DC scheme into a DB scheme and need that education. I am sure there are many new Members who are in that position—I cannot be the only person who is—and, while I am fortunate enough to have taken pension advice throughout my career, I know many people have not.
For me, this is not something that is mandated, but a suggestion for something that could be done. Providing another alternative and another opportunity for people to receive financial education—particularly people in their 20s, 30s and 40s who have not had it at school, because it was not part of the curriculum at that point—is something we should welcome and not restrict.
The amendment seems to me perfectly sensible. I appreciate why some people might think it does not go far enough, or that the matter will be addressed later in the reporting back that the Government will do on pensions in general, but the emphasis on people around the age of 40 is particularly important, because they still have a good 20 years—or 30 years, potentially; who knows what will come forward from the Government?—to work and to ensure that they maximise returns to achieve adequacy. Having an additional vehicle to do that seems to me a sensible thing, and I put on record my support in the same way that my hon. Friend the Member for Mid Leicestershire has.
Steve Darling
I should start by saying that I do not recognise the purist approach that we have heard from the hon. Member for Aberdeen North. This is an issue close to my heart, because my father, having seen the poverty that his father was in, saved significantly in his private pension scheme as a lorry driver. Sadly, however, he was extremely poorly advised, and as he approached retirement he put thousands and thousands of pounds into equities; then, in the late 1980s, there was a stock market crash. He might as well have burned half of his money. The further we drive the health of the pension industry, the better, and particularly knowledge for those who may not be very much in the financial world.
We heard in evidence from NEST that only 40% of people have even registered online to know what their pension is doing. For people for whom the financial world is a complete challenge—and even for many of us in this room, getting our head around it totally is a bit of a challenge—it is essential that we use every possible lever to make sure that quality advice is available. As Liberal Democrats, we will unashamedly use every opportunity in the Bill to provide high levels of education for those who are in receipt of pensions and to give them as much wind in their sails as possible.
Torsten Bell
I shall give a short speech, because there is a worrying habit developing of the hon. Member for Aberdeen North giving the Government Front-Bench speech for me. I should encourage that as we go on—she might be slightly traumatised by that, but we are where we are. Everybody in this room will agree on the importance of the principle that has been highlighted, and we have just heard a powerful point exactly along those lines.
Although the Government understand the intent behind amendment 3, there are two reasons why we will not support it. The first is a point of principle, which I have already set out: it is for trustees, not the Government, to decide how surpluses that benefit members should take place. We discussed the issue of discretionary benefits just now.
The second reason is less a point of principle and more a matter of reality. The amendment would provide advice only to existing members of specific schemes. I think we all agree, particularly in the light of the point made by the hon. Member for Aberdeen North, that the main problems are about the defined-contribution space and people coming up towards retirement. Lots of the people who are in schemes who would be coming forward for surplus release are already drawing down a very well-defined pension income.
It is not the ideal way to focus on the particular problem that we all agree exists, but we completely agree that robust guidance that assures that everyone has access to free and impartial advice is very important. That is the job of the Money and Pensions Service, but I completely hear what has been said about how it needs to go further. I am grateful for hon. Members’ contributions, but I urge the hon. Member for Horsham to withdraw his amendment.
John Milne
I thank the Minister for his reply, and I thank hon. Members for their contributions. One thing we all absolutely agree on is the importance and centrality of this issue. If there is one area in which I feel the Bill could have gone further, it is this one.
It is a scary thing to look to the future and see all the trends in where we are heading with pension adequacy. The number of people who will have zero or a very small pension is deeply frightening, particularly when we lay alongside that the fact that many of those people will not own their own house and will still be paying private market rent. The state pension is not designed for that.
It is a crucial issue. I appreciate both the Minister’s objection in principle and the practical objections from him and the hon. Member for Aberdeen North, but we will still push the amendment to a vote. That is more to lay a marker than anything else; I appreciate that our chances of winning the vote are small. We want to lay as much emphasis on the issue as possible. Whether or not it ends up as part of the Bill, perhaps under new clause 1, we want it highlighted.
Question put, That the amendment be made.
Steve Darling
I beg to move amendment 264, in clause 9, page 9, line 4, at end insert—
“(e) Where regulations under subsection (2A) lower the funding threshold for a surplus payment to below the full buy-out funding level, the Secretary of State must—
(i) conduct an assessment setting out—
(A) prescribed stress scenarios and their impact on funding,
(B) a maximum permissible extraction percentage for each scenario, and
(C) contingencies to restore funding;
(ii) consult the Pensions Regulator, the FCA, and such actuarial bodies as may be prescribed; and
(iii) lay a report of the assessment before Parliament.”
This amendment requires the Secretary of State to conduct an assessment when the DWP calibrates any extraction threshold below buy-out.
The Chair
With this it will be convenient to discuss amendment 258, in clause 9, page 9, line 21, leave out
“in subsection (2A), after ‘section’ insert ‘37(2A),’”
and insert
“in subsection (2), after ‘virtue of’ insert ‘(za) section 37(2A)’”.
This amendment would make all regulations on DB surplus extraction subject to the affirmative procedure all times they were made rather than just after first use.
Steve Darling
Amendment 264 would provide a backstop and a check where there are potential extractions and buy-outs. It would give an opportunity for the Secretary of State to cast an eye over the process when the DWP does an assessment. It goes back to safeguarding: as I am sure this Committee will discuss repeatedly, we need to ensure that we have investors’ and beneficiaries’ best interests at heart. I hope that the Secretary of State will take the proposal at face value, as an appropriate guardrail, and I look forward to its endorsement.
Mark Garnier
Conservative amendment 258 would ensure that all regulations made under proposed new section 37(2A) of the Pensions Act 1995, which governs surplus payments from defined-benefit pension schemes, are subject to the affirmative procedure always, not just the first time that they are made. That would give Parliament ongoing oversight and scrutiny of any future regulations in the area. Without the amendment, regulations on defined-benefit surplus extraction would not consistently require parliamentary approval. That would potentially lead to insufficient scrutiny.
The amendment aims to provide better parliamentary control over regulations as they are introduced. The key worry is the risk that the Secretary of State, whoever he or she may be, might use these powers to allow the payment of a surplus at funding levels below buy-out standards at some point in future, which could jeopardise scheme security and could happen without parliamentary scrutiny. The amendment is about improving the transparency and accountability of surplus extraction regulations for DB pension schemes, ensuring that Parliament maintains consistent oversight and guarding against premature surplus extractions that might undermine scheme funding security.
Kirsty Blackman
The Liberal Democrat and Conservative amendments are very different methods to achieve a similar outcome. Conservative amendment 258 is a bit wider, in the sense that it would require the affirmative procedure for a wider range of things, but both parties are concerned about the possibility of regulations allowing a surplus below the buy-out threshold level.
I think the amendments are reasonable asks. I am generally in the habit of supporting more scrutiny of regulations; upgrading the requirements for regulations from the negative to the affirmative procedure is very much in my wheelhouse, given that it is so difficult for Parliament to oppose regulations made under the negative procedure unless the Leader of the Opposition puts their name to a motion praying against them. In practice, that very, very rarely happens. Given that both amendments are asking for relatively small changes to ensure increased parliamentary scrutiny, particularly where the threshold drops below the buy-out level, I think that they are not unreasonable. I am happy to support them both.
Torsten Bell
I thank the hon. Members for Torbay and for Wyre Forest for their amendments. On amendment 264, I hope that I have already reassured hon. Members that there are many safeguards built into the policy for surplus release, both at an individual scheme level and at a wider policy level, including the ultimate control of trustees, the need for prudent funding to be maintained and the actuarial certification.
The Government’s view is that it is not for the Secretary of State to assess every single scheme in the way that the amendment intends. To offer some more reassurance, however, TPR and the PPF have carried out scenario testing in this area; we heard the PPF chief executive’s reassurance in oral evidence on Tuesday. In that regard, I do not think the amendment is necessary. It would also involve the Secretary of State holding a lot of evidence about every single DB scheme in the country, which I do not think is a good use of resources.
Kirsty Blackman
The point is about the regulations on the surplus and the times at which schemes can pay it. It is not about looking at each individual scheme; it is about looking at the level that is set in the regulations. Much as I am sure that the Minister is having a lovely birthday, he would probably admit that he is not going to be the Pensions Minister in perpetuity. It is unlikely that he will still be the Pensions Minister in 50 years’ time. He may therefore not have control of these regulations. This is about putting guardrails in place so that, no matter who is in government, the level cannot be reduced below the full buy-out funding level.
Torsten Bell
I think I am grateful to the hon. Lady for her attempt to fire me. To clarify, carrying out the kind of prescribed stress scenarios and assessments set out in the amendment would require the Department for Work and Pensions to examine the DB landscape. In this specific area, that is the role of TPR and the PPF.
I turn to amendment 258. The first regulations on surplus will be subject to the affirmative procedure, for exactly the reasons that have been set out, and exactly because at that point they will be new but also comprehensive. As with every other pensions Bill, what we do not want to see is the affirmative procedure being used for small, technical changes that come to those regulations in the years that follow. However, our approach does allow for the necessary debate when those regulations are made. On that basis, I urge hon. Members to support the Bill as drafted.
Steve Darling
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment proposed: 258, in clause 9, page 9, line 21, leave out
“in subsection (2A), after ‘section’ insert ‘37(2A),’”
and insert
“in subsection (2), after ‘virtue of’ insert ‘(za) section 37(2A)’”.—(Mark Garnier.)
This amendment would make all regulations on DB surplus extraction subject to the affirmative procedure all times they were made rather than just after first use.
Question put, That the amendment be made.
Torsten Bell
Clause 9 will amend the safeguards on the sharing of surplus. The details will be set out in regulations, the parliamentary procedures of which we have just discussed. These safeguards will place the safety of members’ benefits at the heart of the policy.
Proposed new subsection (2B) of section 37 of the Pensions Act 1995 sets out the requirements, which are there to protect members, that must be set out in regulations before trustees can pay a surplus to the employer—namely that before a trustee can agree to release a surplus, they will first be required to receive an actuarial certification that the scheme meets a prudent funding threshold, and that members must be notified before surplus is released.
The funding threshold will be set out in regulations, which we will consult on, as discussed. We expect that release of the surplus will be permitted only when a scheme is fully funded on a low-dependency basis. Trustees are already required, through existing legislation, to set a long-term funding and investment strategy that targets exactly this funding level. These funding conditions will be set out in regulations made under the affirmative procedure and debated when first introduced.
Proposed new subsection (2C) will provide the ability to introduce additional regulations aimed at further enhancing member protections, where considered appropriate. Superfunds will be subject to their own regime for profit extraction; I am spelling this out, because we will come to it later in the Bill. The proposed new subsection will allow regulations to be made that are consistent with those provisions. Regulations may prevent payments from superfunds for a period, if surplus regulations come into force earlier than the superfund legislation, which we will debate later in the Bill. Crucially, decisions to release any surplus will remain subject to trustee discretion. I also note the removal of the statutory test in section 37(3)(d) of the Pensions Act, on the grounds that it does no more than reflect trustees’ existing duties.
The technical and consequential amendments at subsections (4) to (7) of clause 9 are to ensure that the new measures sit correctly in existing legislation but do not affect the overall policy. In summary, the clause will ensure that the release of a surplus is subject to strict safeguards. I commend it to the Committee.
Question put and agreed to.
Clause 9 accordingly ordered to stand part of the Bill.
Clause 10
Relevant schemes: value for money
Steve Darling
I beg to move amendment 269, in clause 10, page 10, line 10, at end insert—
“(aa) make, publish and keep under review the consistency of—
(i) regulated VFM schemes, or
(ii) regulated VFM arrangements,
with the goals of the Paris Agreement on climate change and clean energy;”.
This amendment, with Amendment 270, would require pension funds and managers to show whether their portfolio investments are consistent with the Paris Agreement.
The Chair
With this it will be convenient to discuss the following:
Amendment 272, in clause 10, page 10, line 10, at end insert—
“(aa) make, publish and keep under review the compliance of—
(i) regulated VFM schemes, or
(ii) regulated VFM arrangements,
with statutory and regulatory targets for reducing sewage discharges by water and sewerage undertakers,”.
This amendment, with Amendment 273, would require pension funds and managers to monitor and report on the compliance of water and sewerage companies they invest in with targets for reducing sewage discharges.
Amendment 270, in clause 10, page 10, line 20, at end insert—
“(d) publish or share with prescribed persons, for the purpose of enabling VFM assessments to be made, prescribed categories of information (referred to as ‘climate alignment metric data’) regarding the scheme’s exposure to climate-related financial risks and the alignment of its investments with the goals of the Paris Agreement on climate change and clean energy.”
This amendment, with Amendment 269, would require pension funds and managers to show whether their portfolio investments are consistent with the Paris Agreement.
Amendment 273, in clause 10, page 10, line 20, at end insert—
“(d) publish or share with prescribed persons, for the purpose of enabling VFM assessments to be made, prescribed categories of information (referred to as ‘sewage discharge compliance data’) regarding the scheme’s exposure to, and investment in, companies holding permits to discharge sewage, including those companies’ performance against statutory and regulatory targets for reducing sewage discharges.”
This amendment, with Amendment 272, would require pension funds and managers to monitor and report on the compliance of water and sewerage companies they invest in with targets for reducing sewage discharges.
Amendment 271, in clause 12, page 12, line 21, at end insert—
“(iv) the consistency of the investment portfolio with the goals of the Paris Agreement on climate change and clean energy, including metrics for assessing climate-related financial risks and opportunities;”.
This amendment would require pension funds and managers to show whether their portfolio investments are consistent with the Paris Agreement.
Amendment 274, in clause 12, page 12, line 21, at end insert—
“(iv) the compliance of the investment portfolio with statutory and regulatory targets for reducing sewage discharges by water and sewerage undertakers, including metrics for assessing related environmental and financial risks and opportunities;”.
This amendment would require pension funds and managers to monitor and report on the performance of water and sewerage companies they invest in against targets for reducing sewage discharges.
Steve Darling
In tabling these amendments, we wanted to make sure that we calibrated them carefully. It is not about giving a clear instruction that says, “You must do this”; it is about ensuring that investors are alive to the Paris agreement on climate change and clean energy and that our water companies are complying with cleaning up our rivers and seas. Introducing a duty to report on how funds are having an impact on that would ensure a level of awareness without dictating to investors and thereby having an impact on the fiduciary duties that trustees should clearly have.
Throughout the Bill, the Government have quite rightly highlighted how pensions can be a force for good for our economy and for those who invest in it. The amendments would reinforce that approach. On climate change, clean energy and cleaning up our seas and rivers, the amendments are writ much larger, without interfering in where the money should be invested.
Mark Garnier
These are not amendments that we feel particularly inclined to support. They would require pension fund managers to make, publish and keep under review data to show that their portfolio investments are consistent with the goals of the Paris agreement on climate change and clean energy. That would include publishing prescribed information relating to climate change alignment and sewage discharge. Those are immensely important and worthy ambitions and intentions; we share their spirit, as we want a cleaner planet, cleaner waterways and improvements to our climate, but I do not think that this is the place to do it. Pension funds should be allowed to look at the best interests of their members, irrespective of wider public and social aspirations, so this is not a proposal that we feel we can support.
Kirsty Blackman
I think this is the place to do it. In fact, I think every place is the place to do it. When we debated the Advanced Research and Invention Agency Act 2022, for example, I proposed that the organisation should be created on a net zero basis. I have tabled many amendments to whatever Bill I have been faced with that have included trying to meet our Paris agreement targets. I have served on Bill Committees quite a lot in the past few years—something my party keeps putting me up to do, for some reason.
The Paris agreement is the biggest issue. I have spoken already about how trustees are required to act in the interests of scheme members’ pensions rather than the interests of scheme members themselves. The Labour Government have tried to overcome that more generally, in terms of decision-making powers. They have tried to do that in Wales with the Future Generations Commissioner, who has the ability to judicially review decisions taken by public bodies in Wales. They can be called in for judicial review, and the Future Generations Commissioner can say, “This decision will cause a problem for future generations. It should be reviewed.” The Government are failing in their ambition to do the same thing in this Parliament. It is bizarre that I am about the only person in this place shouting about how great the Welsh Labour Government’s Future Generations Commissioner is—it is a really good idea.
When people out there are asked what the major issues currently facing the world are, many—particularly younger people—say that climate change is the biggest crisis we face. Scientists tell us that too, so it is completely reasonable that we ask everybody involved with anything to consider the impact of their decision making on our net zero target and on climate change. We ask all sorts of organisations to consider environmental, social and governance impacts. This is another time to do that, because we are creating a value for money framework anyway. We want value for money, but we want the best value—value for future generations. There is no point in everybody having great pensions if they do not live to see them because the planet is not here for them.
If we ask scheme members what they want, I think a significant number would say, “I would like more investment in things that make the planet a better place. I would like more investment in renewable energy and insulation for houses.” They would say that those are some of their priorities. They would obviously still like a guaranteed return too, but it is completely reasonable, in terms of the value for money framework and the best interests of people out there, that we consider the Paris climate change agreement. Sewage is important too, but it is not quite the existential crisis that climate change is.
A value for money framework must look at value for money in a wider sense. One of the things we have spoken about in Scotland a significant number of times is population wellbeing. The Scottish Government are finally members of the Wellbeing Economy Alliance. That is not necessarily about saying that GDP is not important; it is about saying that gross domestic wellbeing is important, and that sometimes we must take decisions that are slightly more expensive but will have a significantly less negative, or more positive, impact on the planet or the wellbeing of the population.
When we think about a value for money framework, it is completely reasonable to talk about the Paris agreement. It is completely reasonable to ask about it in respect of any Government decision. I have written to the Chancellor in the past to ask for a carbon assessment to be published alongside the Budget—what is the impact on the Paris climate change agreement of the tax and spending decisions taken in the Budget, and how do they get us closer to our target?
I am happy to support all the amendments. As the hon. Member for Torbay said, they are not about forcing people to take decisions that are net zero in nature; they are about forcing them to consider the Paris agreement, or the regulatory targets for sewage discharges, when taking decisions. I do not think it is too much for us to ask trustees to be mindful of the impact on the planet of the decisions they are taking.
The vast majority of people in my constituency do not have significant savings. If we look at the general population, we see that about 50% of people have less than 100 quid in savings. They have very little money and are not able to invest in renewables projects. They are not able to direct their money because they do not have any money to invest. What a lot of them do have, following auto-enrolment, is pots of money invested in pensions, but they have very little ability to influence how that money is spent. Scheme trustees have a significant amount of ability to influence where money is invested, but scheme members do not, in the main, have that ability. If we asked people where they would like to see their pensions invested, many of them would pick things that might offer slightly less of a return but are significantly better for the planet. The aims in the amendments are admirable and I am happy to support them.
John Milne
I rise to support what my hon. Friend the Member for Torbay said. As has been emphasised, we are not talking about making things mandatory. It is about making things possible, because there have been cases in which managers take a rather narrow view of fiduciary duty and almost deliberately exclude other considerations. It is about removing that blockage. We feel that the requirement in the amendment is of value and hope that the Minister will consider it.
It is also worth saying that very often one cannot definitively say that one investment will be better than another. There are all the projections and estimates. If it was that clear, every single fund would have the same 10 investments and that would be the end of it, and it would be a very small industry. It is often a matter of assertion, or a calculation. It is often not a case of choosing a lesser return; any return is conjectural in the first place.
Torsten Bell
My support for the Welsh Government’s Well-being of Future Generations (Wales) Act 2015 is on the record, so I get to disagree with the hon. Member for Aberdeen North on something, which will be a relief for everybody.
I thank the hon. Member for Torbay for tabling the amendments. Clearly, addressing climate change is absolutely central to this Government’s agenda. It needs to be done in the right way. Pension funds hold significant capital, and I am pleased to say that at every conference and every session I hold with people involved in the industry I see that investors and pension schemes do now use their influence on companies to encourage them to take responsible action. That has been a big change over the course of the last decade. It can lead to better risk management and potentially also improve returns on investments, as well as helping companies to perform better in relation to environmental targets.
My overall argument, though, is that trustees must already consider financially material risks, including ESG factors. The statement of investment principles and the implementation statement are key tools that are already in place for disclosing a scheme’s approach to ESG issues, including climate change. Ultimately, the amendment is about disclosures; that is what it aims to achieve. Additionally, large schemes with assets above £1 billion, which in future will be the majority of schemes because of the scale measures that we will come back to, must also report on climate-related risks and opportunities, in line with the Task Force on Climate-Related Financial Disclosures.
We are looking to strengthen sustainability reporting, exactly as the hon. Member for Torbay wishes to see, through new UK sustainability reporting standards and our transition plan’s commitment, which the Government consulted on this summer. Taken together, our policy initiatives will modernise the UK’s framework for corporate reporting, giving pension schemes vital information about companies’ decarbonisation plans and about whether to escalate their engagement efforts with investee companies on environmental issues. The DWP is contributing to that work and will review the effectiveness of climate reporting requirements later this year, as part of our post-implementation review of the requirements of the Taskforce on Inequality and Social-related Financial Disclosures.
Given the existing reporting requirements, the Government’s position is that we will gently resist the amendments, to avoid duplication.
Steve Darling
Climate change is an existential threat to humanity, and although sewage may not be such a threat, it is still a significant issue; indeed, it is a wicked issue that needs to be tackled by our society as a whole. I wish to press the amendment to a vote, to show the Committee’s intent ahead of the Bill’s next stage.
Question put, That the amendment be made.
Mark Garnier
I beg to move amendment 254, in clause 10, page 10, line 20, at end insert—
“(2A) Value for money regulations must require responsible trustees and managers to make an assessment of, benchmark and regularly report the—
(a) net benefit outcomes,
(b) investment performance,
(c) quality of service, and
(d) long term members outcomes
of regulated VFM schemes.”
This amendment broadens the definition of value for money to require assessment of net benefit outcome, investment performance, quality of service, and long-term member outcomes, and require schemes to report on these.
On the wider point about value for money, we broadly support the introduction of a robust value for money framework as set out in clause 10. The framework, which was initially introduced under the previous Government, is essential to promoting transparency and accountability in the management of defined-contribution pension schemes, and it mandates responsible trustees or managers to assess and publish reports on the performance of their schemes. Ultimately, that should mean improved performance. It is worth bearing in mind, though, that there are potentially perverse outcomes —as we have seen, for example, with the Phoenix Group—as the consequences of an intermediate rating could drive less growth. I suppose it could be a less risky approach, but greater risk can lead to greater growth. None the less, we need to be careful as there could be perverse outcomes.
I tabled the amendment as we are worried that the current value for money framework for defined-contribution pensions risks focusing too narrowly on costs and charges as the primary determinant of value for members. By contrast, the Australian superannuation system adopts a more holistic definition of value for money, including a net benefit outcome metric, which is defined as the sum of contributions and investment earnings minus all costs, fees, taxes and insurance premiums. Australian trustees are required not only to consider costs, but to act in members’ best financial interests, broadly encompassing factors beyond merely minimising fees. The Australian framework incorporates additional core metrics including service quality, investment performance and member outcomes. This broader approach reflects a more comprehensive assessment of value for money delivered to members.
Kirsty Blackman
Will the hon. Gentleman clarify what “long term members outcomes” means? Does it mean people that have been members of the scheme for a long time, or does it mean members’ outcomes over the long term? The amendment is ambiguous.
Mark Garnier
That is a very good question. Ultimately it means, “What is the performance of the fund?” Members’ best interests can include a lot of different things, but ultimately we need to see the fund grow with the best performance it possibly can, given all things brought together. When members start to receive their pensions, they will therefore get the best terms they possibly can.
We run the risk of trying to look at the wrong definition. For example, there has been an argument recently about the local government pension scheme—this came up earlier this week—with the Reform party talking about the fact that the scheme is charging 50 basis points. The argument is that reducing it to 10 basis points would save money. However, as I was discussing with a Government Back Bencher the other day, one of the problems is that if fees are too low, that reduces the ability of the managers to assess more complicated financial opportunities. If fees are kept at 50 basis points, the capacity to start analysing unlisted investments is retained. If fees are reduced to 10 basis points, the ability and skill of the managers to look into more than investing in other people’s funds or into simple listed equities is reduced. If we start to look at it as a cost-based issue only, we miss out the fact that we get quite a lot of extra expertise if slightly higher management fees are paid.
The Australian framework incorporates additional core metrics including service quality, investment performance and outcomes. There is a concern that the UK value for money framework overemphasises costs and risks discouraging investment in asset classes, as I discussed, that historically produced higher returns but that might have higher shorter-term fees or complexities. This narrow focus could also dampen innovation in pension scheme design and reduce member engagement, ultimately harming long-term retirement outcomes for scheme members. It may be valuable to learn from the Australian approach by developing a value for money framework that balances cost transparency with metrics that encourage good investment strategies and quality services, aligning regulators’ and trustees’ incentives with members’ long-term financial interests.
Our amendment tries to broaden the definition of value for money using the Australian model as a template. It would require the assessment of net benefit outcome, investment performance, quality of service and long-term member outcomes, not just cost. It would introduce a requirement for schemes to report and benchmark across these holistic measures, thereby enabling a more balanced and meaningful comparison of value.
Torsten Bell
I think there is more agreement than the hon. Member for Wyre Forest set out, because we all agree that we want to focus not just on cost and charges. I remind everybody that we were discussing the local government pension scheme this morning—
Alice Macdonald (Norwich North) (Lab/Co-op)
I want to take this opportunity to thank the Minister for his remarks on the value for money scheme, which I welcome, and to put on the record that I am a member of the local government pension scheme. I did not have an opportunity to do that earlier.
Torsten Bell
We are now turning to the value for money framework, which relates to defined-contribution schemes. As I said, we are aiming for a full spectrum of value to be considered by the framework.
I do not think I would normally say this, but I am worried that the hon. Member for Wyre Forest is lacking a bit of patriotism, because the Australian scheme does not take into account some of the wider metrics, such as customer service, that he is rightly encouraging the scheme to focus on, whereas the intention in the Bill is exactly as he sets out—that we should be taking into account not only those longer-term returns, which are ultimately what we should all care about, but also customer service. I completely endorse his objectives.
The value for money clauses have been drafted in a way that allows the Secretary of State the necessary flexibility to set out in regulations the categories of information for the VFM assessments of the kind that are set out in the amendment, such that we can adapt to changes in the pension landscape and learn from operational experiences, as we are already learning from the experience in Australia. There are things to learn from Australia that have gone well, and there are certainly things to learn from that have gone less well. Although the amendment recognises the importance of assessing value across all the pillars of value, it is vital that we do not restrict the framework by embedding the exact details of the categories of information in the primary legislation.
VFM metrics, benchmarks and the assessment process will be specified through regulations, providing clarity for industry on how to report on and assess value provided by in-scope schemes—which, as I said, are basically at this stage workplace defined contribution schemes. Over time, those will be reviewed to make sure that they continue to reflect market changes and the needs of savers. For those reasons, we believe that the clauses are spot on. I urge the hon. Member for Wyre Forest to withdraw the amendment.
Mark Garnier
I thank the Minister for a great effort—“spot on”, maybe, but we still feel inclined to press the amendment to a vote. That is important, even though we know that, rather depressingly, we will probably lose it—although who knows? You never know. It is important to put on the record that we feel that certain measures can be pushed forward, so we will be pressing the amendment to a vote.
The Chair
Order. Before we have the roll call on this Division, I should say that the House of Commons does not recognise abstentions. If people do not wish to vote, they normally say, “No vote” in Committee.
Torsten Bell
I beg to move amendment 28, in clause 10, page 11, leave out line 9 and insert—
“an occupational pension scheme that provides money purchase benefits.”
This amendment ensures that the value for money framework is capable of applying to hybrid schemes (that is, schemes that provide both money purchase benefits and other benefits).
The Chair
With this it will be convenient to discuss the following:
Amendment 1, in clause 10, page 11, line 9, leave out—
“a money purchase scheme that is”.
This amendment, together with Amendment 2, would ensure that the value for money provisions introduced by this Bill apply to all occupational pension schemes.
Amendment 2, in clause 10, page 11, line 14, at end insert—
“(14) Value for money regulations may make different provision for different descriptions of relevant pension schemes and must make provision for the application of the value for money assessment with a VFM rating to defined benefit occupational pension schemes.”
This amendment, together with Amendment 1, would ensure that the value for money provisions introduced by this Bill apply to all occupational pension schemes.
Clause stand part.
Government amendment 35.
Torsten Bell
Amendments 28 and 35 introduce changes into chapter 1 of part 2 of the Bill. Amendment 28 ensures that the value for money framework is capable of applying to hybrid schemes—schemes that provide both money purchase benefits and other benefits. Amendment 35 is minor and consequential to amendment 28. The amendments are of a minor and technical nature and do not alter the policy. I commend them to the Committee.
On a point of order, Sir Christopher, should I proceed to comment on the other amendments or allow those proposing other amendments to come forward before I turn to the clause stand part?
Torsten Bell
On we go! I was going to thank the hon. Member for Torbay for his words on his amendments, but I shall move on to them anyway, and to clause stand part. Ultimately, value for money is a much-needed member protection measure for savers enrolled in a defined contribution scheme. I should remind the Committee why we have it and why it is so important: because the risk of poor value for money now lies in the defined contribution market to such a large extent with individual savers. That is what the Bill is ultimately, most importantly, about.
It is important to remember that members of defined benefit pension schemes already have protections and benefit from the sponsor employer shouldering all that risk, as was mentioned earlier by the hon. Member for Aberdeen North. Those employers also have greater agency to deal with the value-related issues, such as the effective administration of their pension schemes.
Clause 10 sets out that certain pension schemes and arrangements will be in scope for the value for money framework. The clause provides regulation-making powers to specify the types of schemes and arrangements that will be in scope of the value for money requirements. We envisage that those initially in scope will be default occupational pension schemes offering defined contribution benefits. That is fundamental, given that the vast majority of defined contribution savers are saving into exactly those kind of pension schemes. To spell out what that means, we are not talking about non-workplace defined contribution pensions—that is, personal pensions. There is a regulatory power to extend in future if required, but initially we are talking about workplace defined contribution pension schemes.
With that explanation, I hope that the hon. Member for Torbay will not press his amendment, and I commend clause 10 to the Committee.
Kirsty Blackman
I rise to speak to clause 10 and the consultations that the Secretary of State will undertake in advance of making the value for money regulations. Subsection (7) says:
“The Secretary of State must consult with such persons as the Secretary of State considers appropriate before— (a) making value for money regulations; (b) issuing guidance under subsection (6).”
I appreciate that that is in there—it should be in there, as it is important. However, I do not know the road map off the top of my head, although the Minister might. Will the value for money regulations be published in draft in advance of the final decisions being made? I understand that they will go through the affirmative procedure when they do come before Parliament, but, in order to consult, will the Secretary of State publish the drafted regulations so that all of us can see them?
Also, on the right people to consult, I would always recommend that the Secretary of State runs those regulations before the Select Committee in advance of publishing them, so that it can suggest any changes. It is far easier for the changes to be made in advance of the statutory instrument being laid, when it is in draft form, than for there to be an argument in a Delegated Legislation Committee—I am sure that nobody on either side of the House wants there to be arguments in a Delegated Legislation Committee. We would all, I am sure, hope that there would be widespread agreement in advance.
The value for money regulations are really important, and it is important that they are got right. I am pleased that there is to be a consultation, but I push the Minister to agree that it will be significant—not just a couple of people in advance—so that potential problems with the value for money regulations are ironed out, and we do not see 273 amendments to them down the line.
The Chair
Before I call the Minister, I should say that it is not clear to me whether Mr Darling wishes to speak to amendments 1 and 2, which are in this grouping.
Steve Darling
That had eluded me, Sir Christopher, so thank you for drawing me out on this one. Amendments 1 and 2 ensure that there is consistency and that there are no gaps where schemes could perhaps fall between the cracks of legislation. We feel that the amendments would give that continuity of support to schemes.
Torsten Bell
In response to the hon. Member for Torbay, I should say that I have already set out the case for the value for money framework not covering defined benefit pension schemes, which is what the effect of the amendment would be.
To the questions raised by the hon. Member for Aberdeen North, broadly, the answer is yes: the regulations will be published in detail as part of the consultation. Significant consultations have already gone on with a very wide range of stakeholders, both by the TPR and by the Financial Conduct Authority. There are further consultations, and then draft regulations, to come. It is worth thinking about how a lot of the changes in the Bill reinforce each other. It is important that we make reasonably swift progress on the value for money regulations, because the value for money regime is a requirement for us to be able to then make progress on some of the other bits that we will come to discuss, such as contract override and, indeed, small pots.
Amendment 28 agreed to.
Clause 10, as amended, ordered to stand part of the Bill.
Clause 11
Publication etc of metric data
Torsten Bell
I beg to move amendment 29, in clause 11, page 11, line 34, after “publication” insert “or sharing”.
This amendment ensures that information on the database mentioned in clause 11(2)(d) can be made available to (for example) the Secretary of State for Work and Pensions for the purpose of internal review, as well as made available for publication.
The Chair
With this it will be convenient to discuss the following:
Clause stand part.
Government new clause 11—Sharing of database where FCA makes corresponding rules.
Let me explain: although we often debate new clauses as parts of a group, the decisions on the new clauses will be taken after everything else. If Members look at the amendment paper, they will see that that is the situation.
Torsten Bell
Thank you, Sir Christopher. A central part of assessing whether a pension scheme or arrangement is providing value to the saver is how it performs in terms of investment, the quality of the service provided and costs. Having standardised performance metrics and a consistent measure of value will allow for easy and better comparisons across arrangements, which in turn will drive schemes to address poor value.
That is why clause 11 provides the powers necessary to ensure that schemes disclose value for money data on areas such as investment performance, including the types of assets being invested in, the quality of the service provided and charges on members. This information will have to be submitted within specified timescales. It is crucial that the metric data is open to public scrutiny, so clause 11 provides powers to require that the metrics are published and available on an electronic database. To ensure standardisation, regulations may also require the Pensions Regulator to set out the format that information should be submitted in. The powers taken in this clause will enable the creation of consistent, transparent and comparable VFM data to allow us to better understand which schemes are providing best possible value.
I turn to new clause 11, which will be inserted into chapter 1 of part 2. It provides clarity on the use of the electronic database mentioned at clause 11. Where the Financial Conduct Authority has made rules for contract-based schemes that correspond to VFM regulations, it will be permitted to use the electronic database. The new clause therefore facilitates the work of the FCA by facilitating schemes to provide that data to the electronic database. It provides for regulations to permit the use of the electronic database for the publication or sharing of information relating to contract-based schemes. The regulations will be subject to the negative procedure.
The context is that we have been clear from the outset that, for the value for money framework to work effectively, it must apply consistently across both trust-based and contract-based sides of the market. The new clause enables that to happen. It is purely technical in nature and will ensure that value for money data is treated consistently across both those two parts of the market. It does not alter the policy. I commend it to the Committee.
I turn to Government amendment 29, which introduces a change to chapter 1 of part 2. The amendment ensures that information on the database can be made available to, for example, the Secretary of State for Work and Pensions for the purpose of internal review. A large amount of high-quality data is being collected via that process, and it will be able to be made available to the Secretary of State or others, as well as being used for its main purpose under the Bill, which is obviously publication. The amendment is of a minor and technical nature and does not alter the policy. I commend clause 11 and the amendment to the Committee.
Mark Garnier
This seems like a very technical clause, and we certainly have no objections to it. I also have no doubt that we will not be voting against the Government amendment. I think we are very happy with it.
Kirsty Blackman
I have a similar question to the one I had earlier. We need to ensure that those responsible for generating the data are kept in the loop and that they have enough of a timeline to create the correct data. The Government must listen if they say, “We’re very sorry, but we can’t this bit of data in the way that the Government want.” I seek reassurance from the Government that this would be a conversation, so that the Government get the data they want, but that an unreasonable burden will not be placed on the trustees or managers who have to provide that data. That conversation needs to continue as time goes on.
Torsten Bell
The answer to the hon. Lady’s question is that that conversation is going on to a huge degree. Because there are so many lessons to be learned from abroad and so many technical questions to be worked through, including about the provision of data—these are important technical questions for the scheme to work and be operationalised—there is a high level of consultation on the value for money framework. It is absolutely an ongoing conversation. It was happening for some time under the previous Government, and it is continuing now. Another phase of that discussion will be launched in the near future and will continue as we move to the operational phase.
Amendment 29 agreed to.
Clause 11, as amended, ordered to stand part of the Bill.
Clause 12
VFM assessments
The Chair
With this it will be convenient to discuss the following:
New clause 42—Holistic Value for Money Assessment—
“(1) The Secretary of State must make regulations to require that any value for money assessment framework for defined contribution pension schemes includes holistic indicators beyond cost and return.
(2) The framework must include consideration of—
(a) whether the scheme offers access to free or subsidised pension advice or guidance;
(b) the frequency and impact of pension transfer delays for members;
(c) other qualitative indicators as may be prescribed, including those related to member engagement and support services.
(3) Regulations under this section may require that—
(a) schemes are rated according to both quantitative and qualitative indicators of value;
(b) schemes publicly disclose their performance against these holistic criteria;
(c) the frequency of assessment is sufficient to ensure up-to-date information for regulators and members.
(4) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
This new clause ensures that the value for money framework for defined contribution schemes includes whether schemes offer free or subsidised advice, and the extent to which pension transfer delays occur and affect member outcomes.
Torsten Bell
To ensure effective comparability across arrangements, it is necessary to have a clear and standardised assessment of how value is determined. Clause 12 will enable those undertaking the assessment to be clear about the method that they should follow and the criteria to be used. It will allow regulations to detail how a VFM assessment is to be made, the factors that need to be taken into account when making comparisons, the metrics to be used and, importantly, how such comparisons should be made. The clause also gives the flexibility for VFM regulations to introduce benchmarks that schemes should compare their arrangements against. That is necessary to improve comparability and transparency, and to help drive competition among schemes. That will help improve returns for members.
I turn to new clause 42, tabled by the Liberal Democrats; I am grateful to them for their contributions to the debate. Measuring the quality of services provided to members is an important aspect of the VFM framework—I support that entirely. It ensures that we assess not only the quantitative value provided by pension schemes, but the qualitative. Under the VFM framework, the Secretary of State will have the power to require schemes in scope to report on and assess the quality of the services provided to their members; I just made the point about the absence of that in Australia but the fact that it will have a role within our framework. Clause 11 provides for categories of information that schemes may be required to disclose to include
“the quality of services provided to members of the scheme”.
Further detail on the metrics for measuring quality of services will be set out in regulations. It is crucial that metrics are set out in the regulations so that we have flexibility to respond to changes in the pensions market and to learn from operational delivery—again, that is something we have seen in Australia. For that reason, we believe that the current legislative framework is sufficient. I ask the hon. Member for Torbay not to press the new clause.
Mark Garnier
Clause 12 seems fairly reasonable in its approach. Liberal Democrat new clause 42 seems in the broadest sense to follow our amendment 254 in respect of the Australian model; should it be pressed to a vote, we would be happy to support it. I have nothing more to add.
Steve Darling
As I stated earlier, one of our key drivers is making sure that people are able to make quality, informed decisions about their financial long-term future. The debate on the new clause drives that agenda. I am sure that the Minister has the best intentions, but what we are discussing is still within regulations that have yet to break cover. We would be more comfortable if it was in the Bill rather than tucked away in regulations. We will seek to press the new clause to a vote when the time comes.
Question put and agreed to.
Clause 12 accordingly ordered to stand part of the Bill.
Clause 13
Member satisfaction surveys
Question proposed, That the clause stand part of the Bill.
Torsten Bell
It will be a great relief to everybody to hear that clause 13, although vital, is relatively small. Importantly, it enables requirements relating to member satisfaction surveys, of a kind that I know hon. Members are supportive of, to be set out in the value for money regulations. As I have just argued, quality of service is one of the key pillars of the value for money assessment, and member satisfaction is a key aspect within that pillar. These surveys will allow schemes to better understand their members’ experience and to gauge just how good a service they are providing for scheme members. Members’ experiences and views on the quality of service will provide inputs to the holistic assessment of value that this entire part of the Bill aims to offer.
Mark Garnier
We are very happy with this measure. One of the important points, which has been made on a number of occasions, is to do with the wider financial education piece. One would hope that the satisfaction surveys would ask not only whether members of pension schemes are being given sufficient information, but whether they are being taught how to understand what that information means. That is quite important. It is more of a cultural thing than something that should go into the Bill. When we start talking about the complexities of pension funds, it does not necessarily mean a huge amount to the vast majority of people out there, and customer satisfaction surveys should be constructed on that basis. We need to ensure action on that financial education piece, but aside from that, we are very happy to support the clause.
Question put and agreed to.
Clause 13 accordingly ordered to stand part of the Bill.
Clause 14
VFM ratings
Question proposed, That the clause stand part of the Bill.
Torsten Bell
Central to the value for money framework is the assignment of value for money ratings. We discussed that briefly during the evidence session on Tuesday, and some hard questions were asked of me by the hon. Member for Wyre Forest; this clause will help to explain more about it. Rating or scoring a scheme’s value is a major cornerstone of the VFM policy. It is essential to helping savers and employers make informed decisions; they would otherwise have to analyse a very large amount of data. The finer details behind the ratings, such as the conditions under which each rating will apply and when they should be used, will be provided in full in regulations. That will provide clarity and allow the framework to evolve with the market.
After a VFM assessment, trustees or a manager will be required to assign a VFM rating. The clause describes the three categories of ratings that will be used in the VFM regime: fully delivering, intermediate and not delivering. As I pointed out on Tuesday, there are multiple levels available within intermediate—it is not a one-size-fits-all box.
Arrangements rated as fully delivering are those deemed to be providing best value for their members. At the opposite end of the scale, we have the “not delivering” grade. For those arrangements rated as not delivering, trustees will have to draw up an action plan of next steps to move pension savers to an arrangement that is providing value, thus avoiding persistent underperformance affecting members for long periods of time.
Arrangements given an intermediate rating will be those that require more work to improve their value to members. They may be required to inform employers of a “not delivering” rating and to produce an improvement plan that outlines the steps they plan to take towards improvement. That, in turn, will help employers to be better informed of the status of the schemes or arrangements that their staff are enrolled in and allow businesses to make better informed choices when it comes to workplace pensions.
The clause provides flexibility for multiple subcategories of the intermediate rating, meaning that the rating system is not limited to three ratings. To help tackle potential gaming of the VFM regime, we will tighten the rules on how some schemes choose comparators, so that schemes are not able to self-select the comparators they are able to use. That will be done by defining what a scheme should be comparing itself against and detailing the metrics that will determine whether a scheme is providing value. We will of course consult on the draft regulations.
Mark Garnier
In a broad sense, we are very happy to support the clause. There are, though, a number of issues, and the point about benchmarking and what performance is being valued against can be rather complicated. We heard from the Liberal Democrat spokesman, the hon. Member for Torbay, a little earlier about his father’s experience of putting money aside and finding himself wanting to take it out in October 1987—I remember it well; I had been a dealer on the floor of the London stock exchange, so a stock market crash was a pretty hideous thing. However, if we look at a chart of the FTSE 100 from the early 1980s up to now and the 1987 crash, although I think it was down 37% at one point, looks like the smallest of blips in what was otherwise a very long-term bull market that continues to this day.
The one thing we do know for sure is that those wanting better performance are likely to be investing in slightly more volatile assets. That can come from investing in equities or higher-growth businesses. There is no doubt that some higher-growth businesses will go bust, because they are taking risks, but ultimately, how many of us wish we had put more money into Amazon, Google or Apple back in the late 1990s? At the time it was not necessarily seen as a brilliant thing, but some of these businesses have done unbelievably well. That said, how can anybody understand how a company like Tesla, which is really a battery manufacturer, is worth more than General Motors, Ford and Chrysler? It does not necessarily make a huge amount of sense, and yet people are still investing in it.
We can find ourselves looking at the value for money framework and come up with a load of benchmarks, which brings us to the point about the intermediate rating. We could find that an intermediate rating is done at a time when there are particular problems in the stock market, yet, looking at the long term, we could have what could turn out to be a stunning performance. We have to be very careful and not find ourselves throwing out the good in favour of the perfect. This will be something quite complicated; I do not necessarily think it is something for the Bill to worry about, but, as we continue the discourse of pensions performance and adequacy, we need to be very careful that we do not become obsessed with ruling out risk.
There is a big argument about risk in our economy at the moment, which, again, is not for this place, but we could find ourselves ruling out risk. The other thing worth bearing in mind is that, by ruling out risk, we could stop money being invested into businesses that may look absolutely bonkers today, but turn out to be the next Apple, Amazon or Google. We just have to be careful about that.
I suspect we shall have lots of debates over this. The Pensions Minister is on such a meteoric career progression at the moment that I am sure he will find himself as Chancellor of the Exchequer before very long—probably quicker than he imagines—but this is something that we need to keep an eye on. As I say, it is about making sure that we do not rule out the good in pursuit of the perfect.
Rebecca Smith
My hon. Friend is making an excellent speech with a very good historical analysis of what has happened over the last 30 or 40 years. It is worth reflecting on the risk point, particularly for the wide age range of people who hold pensions. This came up during the evidence session: if we end up avoiding risk, the people who are just starting out in their careers and might only be in their early 20s or 30s could end up with a pension that does not deliver anywhere near what it could have delivered, if we apply those same factors. A thought that came to me in the evidence session was how we can ensure that our system allows for risk at the bottom end, but with a tapering out of risk as people get older. The Minister is the expert in this area, and I am interested to know what might be possible in the future. Ultimately, we want to ensure that value for money is based on the right level of risk for the right stage in people’s careers and the right stage in their pensions journey.
Mark Garnier
My hon. Friend makes an incredibly important point. The story that the Liberal Democrat spokesman, the hon. Member for Torbay, told about his father is the most important point here. As we come to the point where we want to cash in the defined-contribution pension, we could find ourselves cashing in at completely the wrong moment. In a stock market crash, although it could be just a blip in a long-term bull market, none the less the hon. Member’s father would have seen a 37% drop in the value of his equities if he was benchmarked to the FTSE 100. If he was in higher growth businesses, he could, as the hon. Member said, have seen a 50% drop. So we have to be very careful.
We can be as risky as we like when we are 21 years old. I cannot remember whether it was Adam Smith or Einstein who said that the eighth great wonder of the world is compound interest. Obviously we want to take risk early but, as we come up to that day when we finally turn our papers in and go home on the last day of work, we need to make sure we have got as much money out of our pension fund as we possibly can. That is why it is important to ensure that the VFM framework does not cause problems.
Steve Darling
This is a very interesting debate as lives continue to lengthen. In terms of people’s capabilities at different ages, 70 is probably the new 60. The reality is that someone might want to take out a proportion of their pension and hope for growth into their 80s, and then crystallise it at that stage of their life. Not that long ago, we had to buy an annuity, and there was not much choice, so we hit a hard wall. There is greater flexibility in the system now.
I want to talk about chickens. We heard talk in the evidence earlier this week of herding chickens, and of people not wanting to be the only white chicken in brown chicken world. It is about allowing the risk that drives growth. We know that allowing that risk can also drive a more vibrant economy. I welcome the Minister’s thoughts on how this framework can avoid that herding and how he would do that. I fear that the answer will be, “It will all be in the regulations and secondary legislation”, but some words of wisdom from the Minister would be welcome.
Torsten Bell
I always aim to provide words of wisdom—say one in 100. Let me engage directly with the points about the nature of the arrangement. The honest answer is that lots of it will be in regulations, but the exact issues raised by both main Opposition parties are ones that we have thought a significant amount about.
The hon. Member for Wyre Forest is right to say that risk aversion generally can be dangerous within the system, in just the same way that excessive risk-taking can be dangerous. He raised two specific issues. One was how short-term market developments affect ratings—that is why the benchmarking is a relative process. Relative benchmarking deals with the ups and downs of the stock market or other asset valuations—we are assessing the relative performance, not the absolute performance.
The hon. Gentleman raises a separate question on the nature of the investment we want to look at, where there may be returns over different timescales. That is why we need to look at different measures and metrics, some of which are backward looking—for example, more standard measures of value for money—and some of which might be forward looking—for example, looking at the costs and asset allocation strategy to come to a view about what forward-looking returns might look like relatively. We have thought about that in some detail.
We then had a useful discussion about life stages—when someone moves from higher risk, because they are confident that they will not be retiring in the middle of a 1987-style downturn. That is exactly what we should be thinking about. One of the objectives of the Bill as a whole is to drive higher returns on average. Later lifestyling, as it is called, into safe assets means that someone can be exposed to some growth potential for longer over their life. When we come to discuss the default pension solutions, that is exactly why, on average, that approach will drive safer outcomes.
At the moment, defined-contribution pension schemes often put people into very safe assets—almost entirely bonds—in the run-up to their retirement. That would not be necessary if we knew that they were heading for a default solution with annuitisation or lifetime income coming in their 70s or 80s. That is exactly the benefit of the changes that we will discuss later. I hope that was a useful discussion of the important points that hon. Members have raised.
Question put and agreed to.
Clause 14 accordingly ordered to stand part of the Bill.
Clause 15
Consequences of an intermediate rating
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendments 30 to 34.
Clause 16 stand part.
Torsten Bell
Clause 15 details the actions that may be required when an arrangement falls into an intermediate rating. That could be an arrangement that is at risk of not delivering value, or one that provides a certain level of value, but needs more work to improve the value it offers. It allows for regulations to detail the actions required of trustees and managers for schemes or arrangements rated intermediate. That could include producing an improvement or action plan, outlining their planned steps towards improved value for members or informing the employers currently paying into the arrangement of its value for money rating and ensuring that the arrangement does not take on new employers until it improves the value rating. That last point was raised at the evidence session on Tuesday.
As clause 14 provides the ability to set a number of sub-categories of rating within the intermediate category, clause 15 enables different consequences to be attached to those sub-categories depending on the value being provided. We are proposing to give schemes in the intermediate rating a period of up to two value for money assessment cycles to make the improvement needed to provide value to their savers.
It is important to differentiate between the intermediate and the “not delivering” rating. Schemes rated as not delivering are essentially not providing value to savers, with no identifiable improvements within a reasonable amount of time. Those schemes will be required to make an assessment of their next steps, which will most likely be to transfer the savers to a scheme that is providing value. That is the ultimate sanction within this framework.
Schemes that are rated intermediate will have identified where improvements can be made and will be required to complete an improvement plan. This would outline the proposed changes to improve their VFM rating within two years. As well as providing definitions of employer and participating employer in the context of the clause, it also allows for the content of an improvement plan to be included in secondary legislation.
Kirsty Blackman
When questioned on Tuesday, the Minister talked about the issues that had been raised about intermediate ratings, and the possibility of intermediate points within intermediate ratings. It would be helpful if he could confirm from the Front Bench that he will take action to ensure that the negative consequences that were raised, with people being so keen to avoid falling out of that, do not happen. The Minister will be aware that confirmation from the Front Bench is helpful in clarifying the intent of the legislation and would put some of our minds at rest.
Torsten Bell
Let me directly address that point, and then I will turn to the Government amendments. The answer is yes. I did not respond, but I should have, to the related point raised by the hon. Member for Wyre Forest in the previous grouping. The experience in Australia was that there was a binary cut-off, but with a very high-stakes outcome if people fell on the wrong side of it. That did lead to herding behaviour. That is one of the most well-established lessons from the Australian experience, and it is certainly central to the evidence that we have heard in the consultations. I can absolutely provide the confirmation that we will be avoiding that outcome, not least via these multiple levels of intermediate ratings.
Government amendments 30 to 34 introduce other changes. These amendments are of a minor and technical nature and clarify the policy intent. Amendments 30, 31 and 33 make drafting corrections. Amendment 32 clarifies that the Pensions Regulator’s assessment of a transfer solution is to be based on the trustees or managers’ assessment carried out for the purposes of the action plan. Finally, amendment 34 removes a power that we no longer need.
Clause 16 details the actions that must be undertaken when schemes or arrangements are rated as not delivering value for money. This is necessary to help protect pension savers from lingering in arrangements that are “not value” and allow them to be moved into arrangements that do provide value. These actions may include submitting an action plan to regulators, informing employers currently contributing to the arrangement of its “not value” rating and closing the arrangement entirely to new employers.
Clause 16 also enables regulations to set out further actions that will be required of trustees or managers, including the conditions under which a “not value” arrangement may not have to be closed to new members. The clause also allows the Pensions Regulator to require trustees or managers to initiate the transfer of members from the “not value” arrangement into another that does offer value. It outlines the conditions when this would apply.
Question put and agreed to.
Clause 15 accordingly ordered to stand part of the Bill.
Clause 16
Consequences of a “not delivering” rating
Amendments made: 30, in clause 16, page 16, line 20, leave out
“the responsible trustees or managers to transfer”.
This amendment corrects an error.
Amendment 31: in clause 16, page 16, line 21, leave out “(all or” and insert “all (or”.
This amendment corrects an error.
Amendment 32: in clause 16, page 16, line 31, leave out sub-paragraph (i) and insert—
“(i) based on the assessment carried out by the responsible trustees or managers under section 14(6)(a) in the action plan of the scheme or arrangement, transferring the benefits of all (or a subset of) the members of the scheme or arrangement to another pension scheme (or arrangement under a pension scheme) could reasonably be expected to result in the generality of the members of the scheme or arrangement receiving improved long-term value for money, and”
This amendment clarifies that the Pensions Regulator’s assessment of a transfer solution is to be based on the trustees or managers’ assessment carried out for the purposes of the action plan.
Amendment 33: in clause 16, page 16, line 34, leave out “the measures” and insert “any other measures”.
This amendment makes a minor clarification.
Amendment 34: in clause 16, page 17, line 8, leave out subsection (5).—(Torsten Bell.)
This amendment removes a power which is no longer needed.
Clause 16, as amended, ordered to stand part of the Bill.
Clause 17
Compliance and oversight
Question proposed, that the clause stand part of the Bill.
Torsten Bell
To ensure consistency, comparability and transparency of the value that arrangements provide, it is essential that all arrangements undertake the same process in the same way and that there is sufficient oversight of the process by the regulator. That is why clause 17 sets out the range of ways in which the regulator may make provision for ensuring compliance with the value for money framework.
The Pensions Regulator will be able to issue compliance and penalty notices to trustees, managers and third parties in breach of their VFM obligations. These notices enable the regulator to set out the steps that must be taken to ensure compliance with the VFM requirements. Financial penalties can be imposed, to a maximum of £10,000 in the case of an individual and up to £100,000 in other cases. Those figures align with other powers we have taken in part 2. There is also provision for the withdrawal of a penalty notice and for the Pensions Regulator to challenge an incorrect VFM rating.
Clause 18 makes it clear that the provisions in this chapter apply equally to pension schemes run by or on behalf of the Crown and to Crown employees. This is the standard approach in legislation to ensure that Crown-operated schemes are covered by the same rules, unless explicitly excluded. Clause 19 is the interpretation clause, which sets out the meaning of the terms used in the VFM clauses 10 to 17. I commend these clauses to the Committee.
Question put and agreed to.
Clause 17 accordingly ordered to stand part of the Bill.
Clause 18 ordered to stand part of the Bill.
Clause 19
Interpretation of Chapter
Amendment made: 35, in clause 19, page 20, leave out lines 13 and 14.—(Torsten Bell.)
This amendment is consequential on Amendment 28.
Clause 19, as amended, ordered to stand part of the Bill.
Clause 20
Small pots regulations
John Milne
I beg to move amendment 262, in clause 20, page 21, line 12, leave out “£1,000” and insert “£2,000”.
This amendment changes the value of small pot consolidation from £1,000 to £2,000.
The purpose of this amendment is to accelerate the consolidation of small, dormant pension pots and to enable more pots to be included. In other words, the amendment would support the Government’s intention to simplify retirement savings by reducing the number of scattered small pots and helping members to keep track of their savings and to avoid losing their pensions altogether. It would serve to improve the efficiency of providers, which in turn could reduce costs for savers.
Mark Garnier
Broadly, we welcome clause 20, which builds on important work that was started under the previous Government to address the issue of small, dormant pension pots. This is a critical step forward to consolidate small pots, which can otherwise be costly and inefficient both for pension schemes and, importantly, for their members. However, we have some concerns about certain aspects of the measure that require further scrutiny.
Notably, the Bill gives the Secretary of State the power to change the monetary value that defines a small pot at a later date. Although that is a logical measure that will probably need to be exercised as the small pots regime becomes more established, there is a risk that drastic changes to the minimum pot size could significantly alter the defined-contribution market in unintended ways. In particular, the potential market impact on schemes serving members with lower average account balances needs to be carefully considered. Automatically consolidating larger pots could reshape the market landscape, affecting members and schemes differently across the spectrum. Pensions UK has suggested that any future increases in the monetary value of the definition of a small pot should be subject to robust consultation with industry stakeholders, alongside an independent market impact assessment, to understand fully the ramifications of such changes.
The Liberal Democrat point is extremely important. I hope that the Minister will verify how the small pot size was set at £1,000. The amendment seeks to increase that to £2,000, but why not £5,000 or lower it to £500? It is very difficult.
The other problem with the clause is that a small pot defined as inactive could be inactively invested—for example, sitting in an index fund for 10 years without anybody worrying about it—and have crept up or down in value. It could be £1,005 one day and £995 the next. Does that change it from being an okay pot to a small pot, and therefore due for consolidation? This is a very difficult measure. Inevitably, it comes to the point of where it is defined. Similarly, will the amount be indexed against inflation, or against the stock market indices? How will the Secretary of State decide to increase it?
There are so many questions about this. My gut feeling is that £1,000 is too small, but equally that it is incredibly difficult to determine what the right size is. I look forward to the Minister extensively discussing with the Committee exactly how he came to £1,000 and not £1,001, £999 or indeed any other number.
Kirsty Blackman
There is possibly cross-party consensus that there is no perfect answer to this problem, but there are lots of wrong answers. If the value had been set at £100,000 or at £1, those would have been very wrong answers. I applaud the way the Liberal Democrats have approached this, by looking at the responses they have received and being willing to flex on the basis of them. I hope the Minister has approached the numbers in the same way.
This amendment is a test of change. It is asking, “Does this work? Does this make a difference?” Whatever value the Government chooses to set the limit at, we will see if it works. At that stage, the Government can assess whether it was the right level or not. This comes back to the point that I made during the evidence sessions about monitoring and evaluation of whether this has worked and how the Government will measure whether it has worked as intended. At what stage will the Government look at that?
At what stage after implementation will the Government make a call about whether the measure has achieved their aims, or whether the number needs to be flexed to meet the aims not just of the Government, but of savers, active and inactive, in their pensions, who would quite like to get a decent return when they hit pension age but perhaps do not have the capacity, the ability, or the time to be involved in actually making the decisions about moving and consolidating the pots.
It would be helpful if the Minister gave us some clarity about what monitoring and evaluation will look like, and about why £1,000 was chosen, so that we can understand the rationale. As I said, there is probably wide agreement that there are quite a few wrong answers but no perfect answer, and this is possibly the best that we are going to get at this moment.
Torsten Bell
The hon. Lady is not only telling me I am going to be fired, but then clearly angling for the job by again giving the speech I was going to give. I agree that there is broad consensus across the room that there is no perfect answer, but there is a balance of risks. We are attempting to introduce a large change to the pension system that will affect millions of people, and we need to do that in a steady and gradual way—yes, with the intention of considering going further in the future, but not in a rushed way.
Let me talk through a few of the issues and points that were raised. As I am sure those proposing the amendment know, our view is that we should stick with the £1,000 limit at this point and then come back to consider future increases once the system has been put in place. We want all hon. Members to have it in their heads that the implementation of this aspect of the Bill is on a slightly slower timeline than some of the other bits we have discussed—for example, because we need the value for money regime to be in place before we move to the small pots part of the picture.
Directly on the question of where the £1,000 limit came from, it came from extensive engagement and formal consultation with industry stakeholders over quite a large number of years. There is no academic answer to why it is £1,000 and not £900 or £1,100, but it does strike a balance between the pressures on a competitive industry and the level of administrative hassle, and the number of people who will be affected. We need to build a system that can manage the flows.
To give Members some idea of quantity, the evidence gathered from pension schemes last year showed that the £1,000 threshold would bring approximately 13 million pots into scope. I appreciate the logic behind calling for a higher threshold, but this one would mean a significant 13 million pots. The hon. Member for Wyre Forest is looking aghast at that number. I am just providing it as a bit of context. For further context, it already represents more than half of all deferred small pots, so it is not that we are trying to affect hardly any to start with; it is a significant number. That is in 2024 terms; the picture will look different in 2030 or so when the measure comes in, but that helps Members to have a sense of it.
On how to change the threshold, I can absolutely provide the reassurance that was asked for: that will be done in a public-facing way. An affirmative resolution is always required to change it. Unlike some other aspects of the Bill, where the first regulations are subject to the affirmative procedure but later changes can be made through the negative procedure, any change to the pot size requirement will always require the affirmative procedure, for exactly the reasons that have been discussed, which are that this would be a material change that affected the industry and individuals as they go through. Certainly, we would consult on that in the future.
For those reasons, I am glad that this is a probing amendment. I hope I have been probed, and we would like the clause to stand part.
Kirsty Blackman
On that point, perhaps I am reading the clause completely wrongly, but it says:
“Small pots regulations…are subject to the affirmative procedure if they…are the first such regulations…otherwise, are subject to the negative procedure.”
I am confused.
Torsten Bell
That is for all regulations except for the setting of the threshold number.
John Milne
Yes, it sounds rather unpleasant. We will think more about this subject, and I am sure we will discuss further, but I thank him for the clarification. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mark Garnier
I beg to move amendment 259, clause 20, page 21, line 23, leave out from “procedure” to end of line 29
This amendment would make all regulations on consolidation of small dormant pots in DC schemes to the affirmative procedure all times they were made rather than just after first use.
The hon. Member for Aberdeen North asked an interesting question about the application of the affirmative procedure to regulations on the pot size. Our amendment seeks to address the use of the affirmative procedure in the wider legislation that goes with this.
As we continue to table amendments urging extra parliamentary scrutiny, I feel myself becoming slightly depressed at the prospect of having to see too much of the Minister, even though he is undoubtedly a lovely chap, in Delegated Legislation Committees as we consider every single change. It is important though, because at the end of the day Parliament needs to scrutinise what is going on, so it is a good thing that the size of the pot is subject to the affirmative procedure.
It is okay, but not ideal that for anything that could be to do with the wider legislation, the negative procedure applies. Members having to look for a very material change going through in a written ministerial statement or whatever and then raise it is not necessarily such a good thing, given that this is fixing 13 million of these pots. That is an awful lot of them. If we increased the threshold to £2,000, would that number be 26 million? A lot of people that could be affected by this.
This was largely a probing amendment to see what the Minister has to say. We are unlikely to divide the Committee on it. None the less, I am very interested to hear what the Minister has to say about the affirmative procedure.
Torsten Bell
I understand why the hon. Member tabled the amendment. I think amendments like this one should be tabled in most Bill Committees by all Oppositions, as they have been over the years.
Let me make one general point and one specific point about the Bill. The general point is that there is always a trade-off between maximum scrutiny of every single part of any change that comes through secondary legislation and the risk of putting undue pressure on parliamentary time for what will be quite minor changes. In the case of the Bill, the pot size requirement is crucial. Lots of what the rest of the regulations deal with will, in fact, be very practical and detailed.
I am not sure that the Committee’s concern that we will be spending our lives together would be allayed by having our time clogged up by all of that detail coming through whenever anything is amended, but I understand the good, democratic reasons why the hon. Gentleman tabled the amendment. I hope that he accepts that as reassurance.
Mark Garnier
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Torsten Bell
The clause, as we have just discussed, will ensure that the Government have the power to introduce regulations to secure the consolidation of eligible small pots into an authorised consolidator scheme. The Bill enables us to address the growing problem of pension fragmentation, where individuals accumulate multiple small pension pots as they move between jobs. Fragmentation can lead to inefficiencies, higher costs for providers and savers, and poor retirement outcomes.
As we have just discussed, the clause creates the eligibility conditions for small pots to be consolidated, including the £1,000 limit. The pot must be classed as dormant, which means that contributions have not been paid into it for at least 12 months, so the individual is not actively saving into the scheme. In addition, there is a requirement that the individual has not, subject to any prescribed exceptions, actively expressed how the pension pot is to be invested. The prescribed exceptions are in part to ensure that the scope specifically targets those who are unengaged savers in default funds, but this will enable us to broaden the scope to include individuals such as those in sharia-compliant funds, who would otherwise be excluded from the automatic consolidation process.
We estimate that these eligibility criteria will bring into scope 13 million dormant pots. This multiple default consolidator approach will support improved retirement outcomes for savers, not least by lowering the charges that they pay on those pots over time, as well as reduce the administrative hassle for pension providers, alongside supporting our vision for a pensions market with fewer, larger schemes that provide greater value. Our impact assessment demonstrates that this solution is estimated to generate greater overall net benefits over the period than other options, including pot follows member.
Kirsty Blackman
I have a question on the definition of “dormant”. The clause states that a pension pot is “dormant” if no contributions have been made for 12 months and if
“the individual has, subject to any prescribed exceptions, taken no step to confirm or alter the way in which the pension pot is invested.”
I am concerned that that definition is too wide.
If somebody has just said, “How much is in my pot?” and is confirming what is invested in it, are they considered to be somebody who is actively involved in their pot and who may not want consolidation? There is obviously a requirement to tell people anyway that it is going to be consolidated. What if they were actively involved, but only to the level that they checked the numbers?
For example, I have a small pension pot. I have tried to amalgamate it with another one, but it did not work because I have changed my name. I would love for it to be amalgamated; I cannot work out how to do it, but I have engaged with that pension pot in recent times and therefore it may not be considered a dormant pot.
Can the Minister give us some clarity or promise future clarity about what “dormant” means? If there has been a rough engagement with it, is that dormant? If people are very keen on their pension pot and have spent a lot of time saying, “Actually, it should be invested like this,” that is definitely not dormant, no matter how small it is. A lot of people will have had only a passing interest and would be delighted for it to be consolidated.
Torsten Bell
The hon. Lady’s last point is basically the right one. The policy objective is that where someone is not actively engaging in their pot, that is available for consolidation. The kind of minor administrative engagement—trying to access the website—is not what is envisaged by the clause. It is to make sure that somebody who has taken active choices about how their pot is invested is not treated as being disengaged when they have done something that is, it turns out, very unusual.
Question put and agreed to.
Clause 20 accordingly ordered to stand part of the Bill.
Clause 21
Small pots data platform
Question proposed, That the clause stand part of the Bill.
Torsten Bell
I beg the Committee’s patience, as a number of clauses are grouped here—Members can thank the powers that be for that—and I will run through them all.
Clause 21 enables the Government to introduce a small pots data platform. This platform will be responsible for determining where each small dormant pot should be consolidated. It will ensure that decisions about where pots should go are made consistently, transparently and with the members’ best interests in mind.
International evidence from other countries, such as Australia, with similar pension systems to the UK has shown that a central platform improves consolidation outcomes, rather than just putting duties on schemes to sort it out. This clause establishes the framework to allow for the necessary infrastructure to be built to support data matching and pot consolidation. The Government believe that the infrastructure will be required to support pension schemes to deal with the volume of small pots that left the hon. Member for Wyre Forest aghast five seconds ago, effectively and efficiently.
As Members may know, we recently worked with Pensions UK, who have undertaken a feasibility review to examine and assess the technical requirements of the small pots data platform. The Government will consider that work as part of our next stages in developing the necessary infrastructure and the underpinning legislation. However, before committing to how best to deliver this infrastructure, we must undertake that full and proper assessment of capabilities.
Clause 22 enables the Government to ensure that members are properly informed about any action that is taken to consolidate their small dormant pension pot. Transfer notices will be the key point of communication between the scheme and the member. We have not had the time to make this point yet, but obviously it will be up to members to opt out of consolidation should they so wish.
Rebecca Smith
How will members know that they have that opt-out? Will that be clear enough, given all the comments we have been making on financial education? People have got to be pretty engaged, and we know from the history that they are not always that engaged in their future.
Torsten Bell
That is an important question. The communication to members will be standardised, by providing the key information that has to be provided and the option of an opt-out—so it will be explicit that they have the option to opt out of the consolidation process—as well as their alternative options, for example moving their fund into another consolidator. I hope that that answers the question.
The notice is of high importance, because receiving that key information is basically the only point at which the member is informed about what is happening to the financial transaction—the Government are not generally in the business of legislating to change people’s financial arrangements without their consent. Clause 22 will ensure that schemes are bound by regulations to send prescribed information that will enable a member to make the decisions, for exactly the reasons that the hon. Lady set out.
Clause 23 will introduce an important safeguard in the broader framework for consolidating small dormant pension pots. It recognises that although automatic consolidation will benefit the majority, it may not be right for everyone and in all circumstances. The Bill aims to streamline pension savings and reduce fragmentation across the industry, but the clause ensures that members’ interests remain at the heart of the process.
Under the clause, a small dormant pension pot may be designated as exempt from automatic transfer if two key conditions are met. First, the pot must satisfy certain prescribed conditions, which will be set out in regulations. Secondly, the trustees or managers of the scheme must determine that it is in the best interests of the individual or a class of individuals in their scheme for the pot to remain where it is.
That is a vital member protection and safeguard. It recognises that although consolidation is generally beneficial, because it reduces administrative costs, there will be circumstances in which transferring a pot may not be in the member’s best interest. The clause provides the ability for the scheme to make that clear and not to transfer in those circumstances.
Kirsty Blackman
Does the Minister have any hypothetical examples? I am not asking him to commit to anything being a prescribed condition, but just to give us some examples so that we have an idea.
Torsten Bell
That is a fair question. The most prevalent example will be people whose existing pot, although small, has unusual and valuable guarantees attached to it, or benefits that they would lose if they transferred into the default fund of another provider. That is likely to be the most common use of the clause. The clause will provide for transparency by allowing regulations to be made to set out in more detail how those decisions and others will take place.
Given the admin costs and unprofitability of small dormant pots, we do not expect schemes to abuse this exemption. For the benefit of people who do not spend lots of time looking at these matters, I should say that lots of schemes are happy to see small pots go, because they are expensive for them to operate; they are neither in the provider’s interest nor in the saver’s. This clause strikes a careful balance.
Clause 24 will ensure that pension savings are not left idle, requiring all eligible pots to be held by a default consolidator. As Members will know, millions of workers accumulate small pension pots as they move between jobs. Specifically, the clause will allow for the transfer of those dormant pots without requiring active consent—again, that is something that Governments do not do lightly, but it is required by the best interests of savers in these cases—where a transfer notice has been issued and no objection received from the member, as I set out in relation to clause 22.
If a member does not opt out, the trustees and managers of the scheme are required to act on the transfer notice and transfer the pot to the designated consolidator. Clause 24 also provides legal certainty, because it will empower schemes to consolidate pots even if doing so breaches existing scheme rules. That removes administrative barriers and places the member’s interest at the heart of the system.
Clause 25 plays a role in providing legal clarity and continuity for individuals whose small dormant pots are transferred. The clause sets out what happens when a pension pot is moved to a different pension scheme or a different arrangement within the current scheme. This ensures that an individual’s membership status, rights and obligations are automatically and seamlessly updated at the point of transfer—so it is not just that a member’s pot has been transferred, but that they have become a member of the scheme that they are entering, even though they have not signed up to a contract explicitly in so doing. This means that they automatically acquire all the rights and responsibilities that come with that membership. In schemes where membership results in a new contractual relationship, the clause will deem that a new contract is formed at the point of transfer.
Clause 26 will play a critical role in ensuring that the transfer of small pots to consolidating schemes is undertaken in a legally robust and administratively efficient manner. By establishing clear timeframes for transfers, it will allow for the safe and effective consolidation of small dormant pension pots.
This clause introduces two key timing rules. First, it mandates the minimum 30-day notice period before any transfer or change of arrangement can take place. That gives individuals the opportunity to review the proposal and respond. That time period is aligned to the approach taken for members who wish to opt out of automatic enrolment.
Secondly, the clause sets out a maximum one-year deadline for completion of the transfer or change of arrangement. It provides clarity and operational certainty for pension schemes and savers. That also enables schemes to maximise the use of bulk transfers, supporting a lower-cost and more efficient transfer process, rather than having shorter deadlines that force them to move individuals in small batches. It also ensures that the small pots consolidation framework remains responsive and co-ordinated. If trustees and scheme managers are waiting for proposals from the small pots data platform, the transfer period can be extended. This clause strikes the right balance by protecting savers and making sure they have time to act, while also providing an impetus for timely action in the consolidation process.
I am grateful to members of the Committee for listening to all those points, and I commend clauses 21 to 26.
Kirsty Blackman
I have a couple of questions on the small pots data platform. On Second Reading, I raised issues about the pensions dashboard and the fact that after a significant length of time, it has not yet appeared. I appreciate that lots of people have been doing lots of work on it, but we do not have it yet.
It is vital that the small pots data platform exists and works in order for small pots consolidation to happen. Can the Minister give us some comfort that it will materialise and work? If there is a possibility of any errors in the system or the data is not correct—if the platform is not absolutely spot on—there is the risk of significant problems being created. Is he convinced that enough investment will be made in the data platform for it to work, and that it will be incredibly safe, given that it will potentially have—like the pensions dashboard—significant amounts of data relating to individuals and money? It therefore needs to be as safe from cyber-attack as possible, if it is presumably in the cloud or another such system. I would appreciate any reassurance about that, and lastly, that it will have the required resources to work and that the Government will push to create the resources if they are not there and the timeline is beginning to lag.
Torsten Bell
I thank the hon. Member for those questions. She is right to mention the dashboard, and I will say two things about that. First, although these are different systems, there are lots of learnings from the process—as we heard from Chris Curry on Tuesday—not least the impetus that it has provided to schemes to make sure they have put all their record keeping in order. For them to be able to engage with the dashboard, they now have a legal requirement to have that data in a standard format. It is also about how the central system works, but it will be a different system, so the hon. Member is right to raise those questions.
I do not want to offer her total certainty because that is not available to me for a scheme that is looking to be operational in the next decade. We have intentionally left that longer timeline for exactly the reasons that the hon. Member has outlined. I can reassure her that very extensive engagement has been going on with industry about this. I mentioned the feasibility study, but there has also been heavy engagement, including on the security element that she mentioned. That is absolutely key, and lessons definitely have gone through from the dashboard approach to make sure that we are happy with how that will take place. I hope that provides her with some—if not perfect—reassurance.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Clauses 22 to 26 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned—(Gerald Jones.)
Pension Schemes Bill (Fifth sitting)
Tuesday 9th September 2025
(4 weeks ago)
Public Bill CommitteesPension Schemes Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 9 September 2025 - (9 Sep 2025)
The Committee divided: - Ayes: 6 / Noes: 8 - Question accordingly negatived.
The Chair
We are now sitting in public and the proceedings are being broadcast. Before we begin, I remind hon. Members to switch electronic devices to silent. Tea and coffee are not allowed during sittings.
Ordered,
That the Order of the Committee of Tuesday 2 September be varied, after paragraph 1(d),
by inserting—
“(da) at 9.25 am and 2.00 pm on Tuesday 16 September;”.—(Taiwo Owatemi.)
Clause 27
Authorisation of consolidator schemes etc by the Pensions Regulator
Question proposed, That the clause stand part of the Bill.
The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)
It is a pleasure to serve under you today, Ms McVey. We recommence our consideration of the small pots part of the Bill. I thank all Members for their engagement during the sittings last week.
Clause 27 is fundamental. It allows regulations to be made to create an authorisation and supervisory framework for pension schemes to become authorised consolidators. This framework will allow master trusts to apply to the Pensions Regulator to become authorised, on the basis that they meet certain conditions and standards, including the value for money test we discussed at length last Thursday.
The clause also ensures ongoing oversight. If a scheme no longer meets the standards, regulations can enable the Pensions Regulator to step in to require the trustees to take prescribed steps and, ultimately, to withdraw authorisation if necessary. That ensures better outcomes, not just fewer pension pots. The clause represents a vital safeguard in the small pots framework.
Clause 28 provides a definition of a “consolidator scheme” and “consolidator arrangement”. A “consolidator scheme” can either be an authorised master trust or a Financial Conduct Authority-regulated pension scheme that appears on a designated list published by the FCA. A “consolidator arrangement” refers to a specific part of the scheme that is intended to receive small pots.
This reflects the structure of pension providers that operate in the UK. Some pension providers offer multiple arrangements within their scheme whereas others may have a single arrangement or offering. The clause caters for both scenarios to ensure that regulators can focus on the particular arrangements that will require authorisation.
To simplify: in practice, all schemes will be authorised by specific arrangement, but there will be some occasions where schemes may only have a single arrangement so the whole scheme will be authorised. By having at least one authorised arrangement, schemes or providers will be authorised consolidators.
Mark Garnier (Wyre Forest) (Con)
This is a very uncontentious and highly technical part of the Bill. We have no objections to any of these provisions and so will be supporting them.
Steve Darling (Torbay) (LD)
As the Liberal Democrat spokesperson, I echo that this is a direction of travel that we welcome. The vast majority of the proposals that are before us today are uncontentious. They follow the correct direction of travel in growth and change that we want to see in our pensions system in the United Kingdom.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Clause 28 ordered to stand part of the Bill.
Clause 29
Further provision about contents of small pots regulations
Torsten Bell
I beg to move amendment 36, in clause 29, page 27, leave out lines 14 and 15.
This amendment clarifies that small pots regulations may confer rights of appeal more broadly than just in relation to the refusal of an application for authorisation.
The Chair
With this it will be convenient to discuss the following:
Government amendments 37 to 40.
Clause stand part.
Torsten Bell
Clause 29 will make the small pot consolidation framework work in practice, through allowing the small pots regulations to cover a range of operational, administrative, data protection and consumer protection matters. It enables the Pensions Regulator to charge a fee for authorisation and gives applicants the right to appeal if their application is refused. Regulations will be able to require trustees and scheme managers to maintain and improve records, and they will protect members from high transfer fees. The clause enables the delegation of functions and powers to the Pensions Regulator, the FCA and the small pots data platform operator. It ensures that data protection and privacy obligations are respected, while allowing necessary data processing to support the scheme’s efficient operation.
The clause will allow the Government to amend existing legislation to support the small pots consolidation framework. Examples of uses of the power include giving the Pensions Ombudsman new powers to investigate member complaints, and ensuring that the small pots data platform is properly funded through the general levy. Pensions law is complex and technical, and needs to evolve with time, so the Government need the flexibility to respond to those changes and regulators’ operational experience without having to table a new Bill every time.
The Bill clearly sets out the multiple default consolidator framework. With targeted amendments, the clause will allow us to fine-tune the framework over time, ensuring operational effectiveness. Any use of so-called Henry VIII powers will be subject to the affirmative procedure. The clause is essential for the practicality, reliability and integrity of the small pots consolidation framework to ensure it is fit for purpose now and for the future.
The Government amendments to the clause are purely technical drafting improvements. Amendment 36 clarifies that appeal rights for schemes are not limited solely to decisions regarding an application for authorisation, so one could appeal on other grounds. Amendment 37 provides further clarity on the liability framework that will be established to ensure that members are protected. It makes it clear that the small pots data platform operator or the trustees or managers of a relevant pension scheme can be made responsible for paying compensation to an individual who has suffered a loss as a result of a breach of the small pots regulations. Amendments 38 to 40 take account of the Data (Use and Access) Act 2025, which was passed by Parliament subsequent to the introduction of this Bill. The amendments do not alter the policy, and I ask the Committee to support them.
Mark Garnier
Perhaps it is exciting for those who enjoy dry reading. We in the Opposition have no objections.
Amendment 36 agreed to.
Amendments made: 37, in clause 29, page 27, line 30, leave out—
“a relevant person, other than the FCA,”
and insert—
“the small pots data platform operator or the trustees or managers of a relevant pension scheme”.
This amendment ensures that the FCA cannot be required to pay compensation under small pots regulations.
Amendment 38, in clause 29, page 27, line 39, leave out “Subject to subsection (4),”.
This amendment is consequential on Amendment 39.
Amendment 39, in clause 29, page 28, line 3, leave out subsection (4).
This amendment removes provision that is no longer needed because of the general data protection override in section 183A of the Data Protection Act 2018, which was inserted by section 106(2) of the Data (Use and Access) Act 2025 and came into force on 20 August 2025.
Amendment 40, in clause 29, page 28, leave out lines 8 and 9.—(Torsten Bell.)
This amendment is consequential on Amendment 39.
Clause 29, as amended, ordered to stand part of the Bill.
Clause 30
Enforcement by the Pensions Regulator
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendment 41.
Clause 31 stand part.
Government amendment 42.
Torsten Bell
Clause 30 seeks to ensure that the rules and conditions set by the regulations are, in practice, followed. These regulations can allow the Pensions Regulator to issue three types of notices: a compliance notice, requiring a person to take specific steps to comply; a third-party compliance notice, directing someone to ensure another party’s compliance; and a penalty notice, imposing a financial penalty for non-compliance or a breach of the regulations. If a scheme fails to comply with the regulations or with a notice issued under them, the Pensions Regulator can impose a financial penalty capped at £10,000 for individuals and £100,000 in other cases. The clause also enables regulations to provide for appeals to the first-tier or upper tribunal, ensuring procedural fairness and accountability. All those are standard approaches to pensions legislation.
Clause 31 gives the Treasury the power to make regulations to enable the FCA to monitor and enforce compliance with the small pots consolidation framework for contract-based schemes. It ensures that the FCA can act decisively to protect consumers and uphold the integrity of the system. Clauses 30 and 31 ensure consistent standards across the pensions market as we look to enforce these measures. Any regulations made under clause 31 must go through the affirmative procedure, ensuring parliamentary oversight.
Amendments 41 and 42 seek to clarify the definition of the term “FCA regulated” when referring to an authorised person in the context of the legislation. The amendments seek to provide greater clarity by ensuring harmony and removing any ambiguity between clause 30(1) and clauses 31 and 34. They ensure that the Pensions Regulator is not inadvertently prevented from regulating a trustee of a pension scheme solely because that trustee is also regulated by the Financial Conduct Authority in a separate capacity. The amendments are purely technical clarifications, and I ask the Committee to support them. I commend the clauses to the Committee.
Mark Garnier
Again, I have no real comments, apart from to ask the Minister, perhaps when winding up, if he could explain how the Government came to the penalty levels of £10,000 for individuals and £100,000 for others. It would be useful to understand what the thinking was behind that.
Kirsty Blackman (Aberdeen North) (SNP)
My question was not dissimilar to the shadow Minister’s question on the amounts of the penalties—£10,000 for an individual and £100,000 in any other case. There is no delegated authority to raise it beyond those levels. There is an ability to set the amounts, provided they do not go above those. Would the process have to be in primary legislation should the Government wish to raise it above those levels? I am not generally in favour of a level of delegated authority, but if we end up in a situation where inflation is out of control, £10,000 may not seem a significant amount for an individual and £100,000 may not seem significant for a larger organisation. They may not be enough to prevent people or create the level of disincentive we wish to see. Have the Government looked at whether £10,000 and £100,000 are the right amounts?
On the clarification about FCA regulation, and the fact that if somebody is FCA regulated in another capacity, it may stop them from being subject to this, it is absolutely sensible that the Government have tabled the amendments. I am happy to support the changes and the clauses.
Torsten Bell
I thank the hon. Members for Wyre Forest and for Aberdeen North. The main question raised is about the level of the fines. To provide some context, the answer is yes—that would need to be amended by further primary legislation; there is not a power in the Bill to change that. It is an increase on previous levels of fines for individuals and organisations—from £5,000 to £10,000 for individuals, reflecting the high inflation we have seen in recent years. On that basis, it gives us certainty that we have seen a substantial increase, and we would not need to change it in the near future, but I take the point that in the longer term, we always need to keep the levels of fines under review, and we will need to do that in this case. I hope that provides the answers to hon. Members’ questions.
Question put and agreed to.
Clause 30 accordingly ordered to stand part of the Bill.
Clause 31
Enforcement by the FCA
Amendment made: 41, in clause 31, page 29, line 38, leave out subsection (4) and insert—
“(4) For the purposes of this Chapter a person is ‘FCA-regulated’ if they are an authorised person (within the meaning of the Financial Services and Markets Act 2000) in relation to the operation of a pension scheme.”—(Torsten Bell.)
This amendment clarifies that the definition of “FCA-regulated”, in relation to a person, refers to the person being FCA-regulated in respect of the operation of a pension scheme (as opposed to in a capacity unrelated to small pots regulations).
Clause 31, as amended, ordered to stand part of the Bill.
Clause 32
Power to alter definition of “small”
John Milne (Horsham) (LD)
I beg to move amendment 4, in clause 32, page 30, line 12, at end insert—
“(4) The Secretary of State must, at least once every three years, review the amount for the time being specified in section 20(2) to consider whether that amount should be increased, having regard to—
(a) the effectiveness, and
(b) the benefit to members
of the consolidation of small dormant pension pots.”
This amendment would require the Secretary of State to review and consider increasing the level of small pension pot consolidation every three years.
The purpose of the amendment is to require the Secretary of State to review at least once every three years the threshold for small dormant pension pot consolidation. It aims to ensure that the level set in clause 20(2) remains effective and relevant over time. The Minister will be aware that we have already considered the right level at which to set the consolidation; we tabled amendment 262 as a probing amendment, which would have changed the small pot consolidation limit from £1,000 to £2,000. As we have discussed, industry has a very wide range of views on what would be the best figure.
However, this amendment asks for a review, not a particular figure. As before, we do not intend to push it to a vote. To us, a formal review process seems sensible, but whether it should be set at three-year intervals or any other figure is open to question. Given the lack of certainty about what figure industry would like, it seems a good idea to review the threshold after we have seen the measure working in practice.
The pensions landscape evolves quickly, with more job changes and rising numbers of small inactive pots. Therefore, a static threshold risks becoming out of date and undermining the policy’s effectiveness, whereas a regular review keeps the system responsive to members’ needs. It would consider effectiveness—whether consolidation is working to reduce fragmentation and improve efficiency, and the benefit to members, so whether savers are seeing clearer statements, reduced charges and better value for money. It would also simplify retirement saving by reducing the number of scattered small pots, would help members to keep track of their savings and avoid losing pensions altogether, and would improve efficiency for providers, which could reduce costs for savers.
I stress that the amendment does not dictate that there should be an automatic increase. It simply requires the Secretary of State to consider whether the amount is still appropriate. Therefore, in our view, it strikes the right balance between flexibility and accountability. To summarise, this measure would keep consolidation policy up to date, effective and beneficial for pension savers. A regular, three-year review is a simple, proportionate step to ensure that the system works as intended.
Kirsty Blackman
I am happy to support the Liberal Democrat amendment. I have already mentioned the Regulatory Policy Committee’s impact assessment—it considers the monitoring and evaluation plan to be weak, saying:
“The policies are all due to be reviewed in 2030. More detailed plans are needed, outlining success metrics, reporting requirements, and methodologies, across the policies.”
The amendment fits quite neatly into what the RPC said, which looks for an understanding and acceptance that there needs to be regular reviews, given that the Government have not committed to a three-year—or shorter—time period on this issue.
There seems to be widespread support for the small pots consolidation across the House. This amount has been picked, and as I said in a previous sitting, there is not necessarily a perfect answer. It could be that change is required, or that all the companies and organisations that are consolidating small pots immediately manage to do it amazingly. It could happen as smoothly as possible, as a result of which the Government could decide to increase the threshold.
I think that compelling the Secretary of State to look at this is completely reasonable to ensure that they are doing it on a relatively regular basis, so that the threshold can be changed if necessary. There is potentially widespread support across the House for ensuring that there is a requirement to monitor the threshold on an ongoing basis. It is not that we do not trust, agree with or appreciate the Secretary of State’s work, but it would give us a level of comfort that it would be done regularly should the Minister accept that, consider something similar on Report or, at the very least, make a commitment from the Dispatch Box that a written statement will be made to Parliament on a fairly regular basis explaining the reasons for keeping or changing the level.
Torsten Bell
I thank the hon. Member for Torbay for tabling the amendment. The Government share his commitment to ensuring that the pot limit remains appropriate. As we have just heard, it is a matter of consensus, and it is good to debate how we best do that. The Government’s view is that the amendment is not necessary at this stage. Clause 32 already enables the Government to undertake a review at any time. That is a deliberately flexible approach that allows us to respond to developments in the market—not least reflecting on the question from the hon. Member for Aberdeen North about inflation—but also to any other material changes, and it empowers the Government to act when needed.
The amendment risks creating unintended consequences with a rigid cycle of Government reviews, which might mean that reviews do not happen when there is a good reason for looking at the matter, and that the Secretary of State is forced to carry them out when there is no rationale for doing so. We favour a more flexible approach. I take seriously the request for clarity that there will be regular reviews, and I can give that clarity. That is the intention.
A wider question has been raised about the success of the policy and its monitoring, which is separate from the level of the threshold. Changes to the threshold might be one response to success metrics, but others might be about the operation of the consolidation process more generally. I commit to actively monitoring those—not least what is happening to people’s pots as they are moved, how people are responding to that and levels of awareness. That is exactly what we need to be doing, irrespective of what happens on the scale of the threshold over time. There is cross-party consensus on the objective here. We have taken a slightly different view on the flexibility of that review and how often it happens, but I give all hon. Members a commitment that that will happen.
Kirsty Blackman
I have just one more brief comment. It drives me completely mad that whoever is standing at that Dispatch Box seems to believe that they will be in government in perpetuity. Given that this is the second colour of Government I have faced across the Committee floor, it may be that the Minister and his Secretary of State—who has changed, by the way—are very keen on doing a regular review, and I appreciate the Minister committing to it. However, it is not that easy for him to commit a Secretary of State of a different political stripe. Therefore, to give us all certainty, it would be great if the Minister went away and considered the possibility of including a more regular review on Report, so that a Secretary of State of any party is required to conduct one more regularly.
Torsten Bell
I thank the hon. Member for that comment. The nature of every piece of legislation means that a future Government can take a different decision. Thanks for the reminder of the nature of British politics—that is how it operates. I am slightly more relaxed than she is, because there will be significant pressure from the industry, and from everybody, to keep this under review. That is not a matter of controversy. It is conceivable that there may be a Government who are steadfastly against ever again looking at the small pots threshold, but having lived through the last 15 years, I would put that low down the list of uncertainties in British politics. However, I take the intention behind the hon. Lady’s point, and I promise never to assume that Labour will win every election from now until eternity.
John Milne
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 33 to 36 stand part.
Government amendment 43.
Clause 37 stand part.
New Clause 36—Automatically amalgamated pension pots—
“(1) The Secretary of State must by regulations provide for the establishment of a scheme to ensure that an individual’s pension pot is linked to the person and upon a person’s change in employment the pension pot automatically moves into the pension scheme of the new workplace.
(2) All employees in the UK will be automatically enrolled into the scheme defined in subsection (1) upon its establishment but must be given the option of opting out.
(3) Where a person opts out, they are able to nominate their qualifying scheme of choice for pensions contributions.”
This new clause allows pension pots automatically to follow members from job to job, consolidating with each new workplace scheme rather than relying on a single lifetime provider.
Torsten Bell
The clause provides the flexibility, as I have just said, to increase or decrease the threshold without requiring new primary legislation, enabling the Government to move quickly and efficiently as developments—whether it be wage growth or changes in contribution patterns—change our pensions landscape. Under the clause, any change to the pot limit must always be approved by Parliament through the affirmative procedure, something that we also discussed last week.
The Government are committed to engaging with industry and consumer groups to ensure any adjustments are evidence-based and informed by the relevant data at the time, enabling us to consider wider impacts such as market competition. Under clause 32, the Secretary of State must undertake public consultation, publish details of the proposed amendments and the reasons for making the proposal, and consider any representations made—putting flesh on the bones on the kind of review that would take place, as we have just discussed.
New clause 36 seeks to introduce a new provision to the Bill, which would establish a “pot follows member” model for pension consolidation. The new clause proposes that, on changing employment, an individual’s pension pot would automatically transfer into their new workplace’s pension scheme. This proposal is not aligned with the Government’s established policy direction, and it would present significant practical and operational challenges, although I recognise that that approach has been discussed extensively over the last 20 years. The approach taken in the Bill has been shaped through extensive engagement and formal consultation with industry, regulators and consumer groups. As part of that policy development work, largely under the last Government, they and we carefully considered the “pot follows member” approach, including its potential benefits and risks. Our impact assessment shows that the multiple default consolidator solution in the Bill is projected to deliver greater net benefits. The evidence in the impact assessment supports our view that that route offers the best value for savers and for the system as a whole.
New clause 36 would require a fundamental overhaul of the current framework that the Bill seeks to introduce. It is not consistent with the rest of the Bill. It would introduce a parallel mechanism that risks duplicating effort, creating confusion and undermining the coherence of the consolidation system. Two of its main downsides are significant administrative barriers for employers, if employees choose to opt out, and the risk that pots are transferred into schemes that offer poor value for money—or, at least, poorer value for money than the ones they are sitting in before they move between employers. For those reasons, I ask the hon. Member for Wyre Forest not to press new clause 36.
Clause 33 makes it clear that the small dormant pots consolidation measures in this chapter apply equally to pension schemes run by or on behalf of the Crown and to Crown employees, as we have discussed previously. Clause 34 provides clear definitions for key terms used throughout the small pots legislation to ensure clarity and consistency of interpretation, and clause 35 provides a definition of what constitutes a pension pot. That might be thought to be straightforward, but for the purposes of small pots consolidation we want to provide clarity on the accurate identification and treatment of individual pension pots. To provide an example, if someone is enrolled into the same pension scheme through more than one job and the scheme keeps the accounts separate, each is treated as a separate pension pot so that they can be consolidated together.
As Members will be aware, the Pensions Regulator oversees the trust-based schemes and the Financial Conduct Authority oversees contract-based schemes. Clause 36 amends the Financial Services and Markets Act 2000 to ensure that the FCA has the powers required to support the small pots consolidation framework through the existing financial regulatory system. This is a vital enabling provision to provide the FCA with the necessary statutory powers to regulate contract-based schemes that wish to act as authorised consolidators in the years ahead. It allows the FCA to make rules requiring pension providers to notify them if they intend to act as a consolidator pension scheme, and it allows the FCA to maintain a list of consolidator schemes and to apply appropriate regulatory standards to them.
More broadly, clause 36 ensures that members of FCA-regulated pension schemes benefit from the same level of protection, transparency and accountability as those in the trust-based system, while also avoiding regulatory gaps and ensuring that all consolidator schemes, regardless of their structure or legal framework, are subject to robust oversight.
Consistent with my arguments on clause 36, clause 37 repeals unused provisions of the Pensions Act 2014 related to automatic transfers, also known as “pot follows member”. This is tidying up the statute book. It was the previous Government who initially legislated for “pot follows member”, but they then decided that that was not the policy they wished to pursue and moved away from it between 2014 and 2024. The amendment recognises that and makes sure we do not have powers on the statute book that confuse the situation.
Finally, Government amendment 43 is a minor and technical amendment necessitated by the repeal of schedule 17 to the Pensions Act 2014 by clause 37(1)(b) of the Bill. The amendment is necessary to update the statute book and clarify a reference in section 256 of the Pensions Act 2004, which otherwise would have been unclear and was making hon. Members nervous. The amendment does not alter policy, and I ask the Committee to support it. I commend clauses 32 to 37 to the Committee.
Mark Garnier
I will speak to our new clause 36. I am grateful to the Minister for his comments; I will come to those in a minute. The Government dropped plans for the lifetime provider or “pot for life” model, which would have allowed individuals to direct all workplace pension contributions into a single, personally chosen pension pot throughout their career. That was first proposed by the Conservative Government. Although we appreciate that the initial lifetime pot model has not had support from the current Government or, to be fair, from the industry, we believe there is much merit in exploring a model that would allow for pensions to follow individuals between jobs. The new clause would ensure that fragmented small pots are not left as workers move between jobs. By changing our current proposals from a lifetime pot to a magnetic pot proposal where the pot follows the individual, we hope we can bring down some of the administrative costs of the initial lifetime pot proposal.
Our new clause 36 will provide for a pension pot that would follow members from job to job, consolidating with each new workplace scheme rather than relying on a single lifetime provider. This approach could reduce fragmentation while retaining the advantages of employer oversight and collective governance. This would have similarities with the Australian system, where a person can staple to their first chosen pension provider so that it follows them from job to job. That helps to reduce the administrative burden on individuals and the number of small pots, and that can reduce costs for consumers and help the overall consolidation of the market. These changes have been backed by some in the industry, including Hargreaves Lansdown, which has said that having a single pot would simplify someone’s pension investment, bringing transparency and clarity. It has said that for those who move jobs frequently, a single pension pot would be invaluable.
The Minister made a couple of points. The first was about the substantial overhaul of the system to be able to deliver reform. Although I appreciate that this may be outside the scope of the Bill, we should not worry about substantial overhauls to make things better for people who are saving for their retirement. It is incredibly important that we get this right. Just because it is a lot of work does not necessarily mean it is a bad thing to do, so I urge him to think about it.
The Minister made a very important point: somebody could move from one job to another and find that their pension moves from a fund that offers good value for money and is performing well to a fund that is performing worse. But exactly the opposite is also the case. If somebody frequently changes jobs, the law of averages and statistics means that over their lifetime they will get the average rate, which means they do not get stuck in one or the other. One would cancel the other out—it is a maths problem.
The Minister has made his points. This is not something we want to press, but we feel very strongly that the Treasury and Treasury Ministers should think very carefully about it, because, as I say, hard work is not a reason not to do the right thing. There is much more support from the industry for the magnetic pot rather than the lifetime pot, which stays with one provider.
Mr Peter Bedford (Mid Leicestershire) (Con)
It is a pleasure to serve under your chairmanship, Ms McVey. As a proud Englishman, it is not often that I admit the Australians are better than us at something. I am talking not about cricket, but about the immensely important issue of pensions adequacy. The Australians do it better, and what underpins their success is the super stapling model, a system that fundamentally changes how savers interact with their pensions. That is why our new clause 36 seeks to follow in Australian footsteps by establishing a model that would automatically amalgamate pension pots through an individual’s working life. Although I recognise and commend the Government’s work on small pot consolidation, I believe that real engagement and adequacy benefit lies in moving towards a lifetime pension pot model. It is a bolder, more engaging and more adequate model that would benefit pension funds and savers alike.
Steve Darling
As Liberal Democrats, one of the key lenses through which we look at the legislation is: how does it simplify the world for those who are not the most financially literate savers into their pensions? As Liberal Democrats, we strongly support the “pot follows member” approach, as it would simplify matters for people. It would ensure a clearer mechanism for savers to be aware of the level of their pension as their life moves on, and allow investments to be drawn together more easily. It would be interesting to hear the Minister’s reflections on that, and on why the Australian model is unsuitable for the United Kingdom.
Rebecca Smith (South West Devon) (Con)
It is a pleasure to serve under your chairmanship, Ms McVey. I want to add a few things to what my hon. Friends have said, and to reflect on the Minister’s rejection of our new clause as a significant administrative burden. I think we are talking about two sides of the same coin, because to have to keep hunting out small pension pots is a little like looking for things in the dark.
First, we are effectively advocating for a “Who Wants to be a Millionaire?” approach, where someone banks at each stage. I have done that while moving jobs over my lifetime, but I am fairly financially literate. It would be helpful if there were a box to tick on a form when changing job to say, “Yes, I want to move it to this company,” a bit like we do with our P45—we are quite capable of taking our tax with us from job to job. If there were a way of taking our pension with us as well, that would be helpful.
As my hon. Friend the Member for Mid Leicestershire said, that approach would put ownership in the hands of the employee, and it would mean that they did not have a niggling feeling in the back of their mind that they had missed a pot that they had forgotten about. Anything to enable people to have ownership of that pot, rather than be constantly on the back foot trying to hunt it down, would make significant sense. Allowing people to choose rather than having to accept what is offered to them would be incredibly helpful. Ultimately, it is up to them to do what they wish, but they would at least have the choice.
We heard a lot in the evidence sessions about the challenge of communication. We have seen that with Equitable Life and all sorts of other things to do with pensions. When someone changes employer, if there were a simple way to say, “I wish to take the pension with me to the new job,” that would reduce, not increase, the administrative burden. I appreciate what the Minister said, but although we are not looking to push our new clause to a vote, it is an incredibly pragmatic suggestion that warrants further reflection.
Torsten Bell
I thank hon. Members for their reflections. I agree with the sentiment of what everybody has put forward, including the hon. Member for Mid Leicestershire—apart from his worryingly weak patriotism.
Torsten Bell
It was self-professed weak patriotism. But the hon. Gentleman is completely right to raise the adequacy issue, which is obviously the role of the Pensions Commission, launched in July, to take forward. He and several others are also right to say that making things easier for savers is a really important objective. That is what the pensions dashboard aims to do in the coming years as well.
Let me make a set of reflections directly on the question being raised. To be clear, the policy in 2014 was “pot follows member”. That is also the policy within new clause 36. The policy being more supported here is a lifetime pot, which is a different policy. The “pot follows member” is still that the employer chooses the pension scheme and the pot moves to the new employer’s scheme as the employee goes, so it is still an employer-to-a-single-scheme model. The lifetime provider model, also advocated by many in the industry but never part of Government policy—it was not in the 2014 Act—is that each individual holds a pension pot, and, on joining an employer, provides the details of that scheme to the employer, and the employer then pays to multiple pension schemes whenever it does its PAYE.
The comments I made refer to the “pot follows member” approach. There is a consensus across the industry that that is not the right way to go; I totally hear the points made in favour of a lifetime provider model. That is not the approach being taken forward by this Bill, but it needs to be kept under review in the longer term. I give hon. Members the reassurance that I will continue to do that.
Mark Garnier
I think the Minister has got this the wrong way round. It was the lifetime pot, which was being paid into as people went around, that the industry did not like, because that was administratively quite difficult. The stapled pot—stapled to the lapel, or whatever, to be dragged around like the Australian one—is what we are proposing this time round, which is the new version that the industry does agree with. I think the Minister might have got his notes upside down.
Torsten Bell
Never! No. We should clarify what we mean by “industry”: in a lifetime provider model, employers take on a significantly greater administrative burden, because they have to engage with potentially every pension scheme in the country. Admittedly, we are limiting the number of those in future, but still, that is what employers find burdensome about a lifetime provider model. That was the preferred model of the right hon. Member for Godalming and Ash (Sir Jeremy Hunt) when he was Chancellor, but it was never actioned as Government policy.
As I said before, the 2014 Act was about “pot follows member”—for good reason, to try to address the small pots worry. I hope that that at least reassures the hon. Gentleman that my notes were the right way up.
Kirsty Blackman
I am now entirely confused. Can the Minister please clarify for all of us what the Bill actually does in terms of the consolidation?
Torsten Bell
I am glad we are all thoroughly confused. Three broad approaches have been set out to this small pots problem. The first is the one that the Bill takes forward, which is the multiple default consolidation solution—the automatic sweeping up of small pots into consolidated schemes to make everyone’s lives easier. Members would have one large scheme, or several larger schemes, but no really small schemes that they had to consolidate themselves. They could then choose to consolidate those larger schemes as they wished; there is a debate to be had about the size of the threshold in future. That is an automated approach.
One thing that is really important, about the point on average returns made by the hon. Member for Wyre Forest earlier, is that this is not about average. A scheme can only be a consolidator if it offers good value, so a pot cannot be swept into one that does not.
There has been much debate about other approaches over the years, and I have tried to distinguish between two of them. They aim to provide more of what has been debated here, which is slightly more ownership of one pot by the individual. However, “pot follows member” is, in practice, still maintaining the relationship between an employer and a single provider. It is not the individual but the employer who chooses the scheme. That is the approach we are rejecting today.
There is then a longer-term discussion about whether there are attractions to a lifetime provider. That is the case in some of the countries that have been mentioned—the “stapled to your lapel” model—where it is the individual who chooses their provider; obviously to some degree individuals can opt out now if their employer is happy. That is not on the table here. It needs to be considered, but it is a much more fundamental change to the relationship between the employers and the pension schemes.
Kirsty Blackman
I thank the Minister for that clarification. These are almost two different stages in the same process: we need to do the consolidation of the small pots right now, and then look at what we are going to do so that small pots will not ever exist and nobody will end up with a small pot, because we do one of the two options or some other option presented for the next step.
My understanding is that if we were to move to what the Conservatives have proposed in new clause 36, that would solve future problems but probably not deal with the situation where somebody has five small pots already. It does not schoomp them all together—I do not know how you are going to write that, Hansard; I am really sorry.
I appreciate what the Minister says about ensuring that the next step is kept under review and not automatically ruling out some of the options presented for the future. I tend to agree that we need to get this bit done—get rid of all those tiny pots that are dormant right now—and then move on to having that discussion, perhaps as part of the sufficiency and adequacy discussions, so that we have a pensions system that ensures that people are as well off as they possibly can be in late life.
Question put and agreed to.
Clause 32 accordingly ordered to stand part of the Bill.
Clause 33 ordered to stand part of the Bill.
Clause 34
Interpretation of Chapter
Amendment made: 42, in clause 34, page 31, line 1, leave out
“No. 42, ‘FCA-regulated person’”
and insert
“‘FCA-regulated’, in relation to a person,”—(Torsten Bell.)
This amendment is consequential on Amendment 41.
Clause 34, as amended, ordered to stand part of the Bill.
Clauses 35 and 36 ordered to stand part of the Bill.
Clause 37
Repeal of existing powers
Amendment made: 43, in clause 37, page 34, line 20, at end insert—
“(3) In consequence of subsection (1)(b), in section 256 of the Pensions Act 2004 (no indemnification for fines or civil penalties), in subsection (1)(b), for ‘that Act’ substitute ‘the Pensions Act 2014’.”—(Torsten Bell.)
This amendment amends section 256(1)(b) of the Pensions Act 2004 in consequence of the repeal of Schedule 17 to the Pensions Act 2014 by clause 37(1)(b) of the Bill, including uncommenced amendments of section 256(1)(b) on which the reference to “that Act” in section 256(1)(b) relies.
Clause 37, as amended, ordered to stand part of the Bill.
Clause 38
Certain schemes providing money purchase benefits: scale and asset allocation
Torsten Bell
I beg to move amendment 44, in clause 38, page 34, line 27, leave out
“‘other than an authorised Master Trust scheme’”
and insert
“‘that is not a relevant Master Trust and’”.
This amendment clarifies a verbal ambiguity in the amendment of section 20(1) of the Pensions Act 2008.
The Chair
With this it will be convenient to discuss Government amendments 45, 46, 50, 52, 56, 60, 65, 67, 73, 76, 77, 79, 81, 82, 86 to 89, 110 and 111.
Torsten Bell
We now come to the sections of the Bill that bring in the pensions investment review measures, particularly those on setting minimum scale levels required by schemes.
Before I briefly describe these amendments, I remind the Committee of the purpose of clause 38, which we will probably be discussing for a substantial period. The clause will insert new scale requirements, which we do intend to use, and asset allocation conditions, which we do not, into the Pensions Act 2008. Specifically, it inserts them into section 20, which deals with the quality requirements in UK money purchase schemes for master trusts, and section 26, which provides equivalent requirements for group personal pension schemes.
Mark Garnier
I would like to speak to the wider clause before coming to our amendments. It is important to get on the record that this is a very bad clause. The Minister mentioned asset allocation, and this measure, which is known as mandation, has gone down incredibly badly with the pensions industry.
Mandation risks undermining the core obligation of trustees, which is to act in the best interests of savers. Pension savings reflect decades of work and are not an abstract figure on a balance sheet—they are the hope of a secure future for millions of people. Trustees and fund managers bear a legal responsibility to protect and grow these savings, investing wisely where the best opportunities may be found. Their role is not to follow political direction but to uphold the trust placed in them and the fiduciary duty they owe, which is the foundation of confidence in the pension system.
As has been said in multiple responses to the Bill, clause 38 as currently written undermines the UK’s reputation as a predictable and rules-based investment environment. When trustees select investments, they must find the safest and strongest options for beneficiaries. Can we even be confident that the Government will be able to provide a pipeline of investment opportunities? Pension funds could end up being forced to fight against each other for a selection of low-performing assets. If these powers are used, it changes accountability. If mandated investments fail, is it the trustees or the Government who should answer for those losses? Savers deserve clarity about who ultimately protects their hard-earned pension pots.
It has been said that this merely provides the powers to do mandation and does not necessarily force firms to do this, but I will come to that later. Our amendment 275 highlights the fact that there is a political party, whose Members are not in attendance here, which has already said that if it gets into government—and, let’s face it, it has a fighting chance—it will mandate pension funds to invest in the UK water industry in order to support the Government renationalising the UK water industry.
I would like to highlight some of the issues that have been raised. The Pensions Management Institute has said:
“this provision sets a dangerous precedence for Government interference in the fiduciary duty of trustees to act in members’ best financial interests.”
Pensions UK has said:
“this ambition is subject to fiduciary duties and is dependent on supporting actions by Government, namely that there will need to be a strong pipeline of investable UK assets. Without this, schemes will be competing against each other for the same assets, which risks asset bubbles and poor value for money.”
The Investment Association has said:
“It comes with significant risks for members in the form of capital being poorly allocated if political preferences take priority over member needs. Any resulting poor investment outcomes will be borne by the member. By creating the risk of political interference in capital allocation, the power undermines the UK’s global reputation as a predictable and rules-based investment environment”.
Which? has said that this measure
“may result in schemes making worse or riskier investment decisions that may not be in the best long-term financial interests of savers.”
Aviva has said:
“as currently drafted in Section 28C, the power in the Bill goes far beyond this policy intent and the scope of the Accord, with very limited constraints on how, and under what circumstances, the requirements could be introduced.”
The Institute and Faculty of Actuaries has said:
“We are concerned about the introduction of investment mandation powers, and potential interference of those powers—or their threatened use—with trustees’ fiduciary duties.”
Unison has said:
“We have significant concerns about these clauses. Fiduciaries are best placed to set the correct balance between asset classes, and equities have liquidity, governance, transparency of pricing, equality of treatment between investors, and other advantages for pension funds.”
Finally, the Association of British Insurers said:
“A mandation reserve power would undermine trust in the pension system and create a risk of political interference in capital allocation, which would undermine the UK’s reputation as a predictable and rules-based investment environment.”
I understand that this is a reserve power of mandation, but it sets a very bad precedent, so we will oppose the clause.
Mark Garnier
We have no objection to the technical amendments, but we will oppose the whole clause.
Steve Darling
We have no issue with the technical amendments. However, for us the crucial issue in the Bill is driving an environment of positive investment, and a system in the United Kingdom that individual investors—as in, would-be pensioners—can believe in.
The mandation element causes concern. As has been alluded to, there are assumptions that Ministers are reasonable people; however, we do not have to look that far across the Atlantic ocean to see politicians behaving unreasonably. It concerns us as Liberal Democrats that giving powers in the Bill without clear management of them is potentially a step too far. While the Minister, and other Ministers in the current Government, may be reasonable, who knows what is coming down the line in a very turbulent political system?
We therefore continue to have grave concerns around mandation, and look forward to hearing what assurances the Minister is able to give. The key outcome for us is making sure that there is a stable pensions system in which people can have confidence, because confidence is crucial for driving the positive investment that I am sure everybody in this room wants to see.
The Chair
I remind all Members that we are talking about the technical amendments. There will be a chance to talk about the clause later.
Kirsty Blackman
Thank you, Ms McVey—I was about to start by saying that I will not talk about clause 38; I will just talk about the technical amendments.
I have made the point before about the significant number of amendments. I do not know why the Government chose to table this number of amendments rather than submit a new clause that would replace the entirety of clause 38 and make all the changes that they wanted to make. I appreciate that the Government got in touch with us with some briefing information in relation to the changes to this clause, but we had that information very recently rather than significantly in advance. Given the huge number of technical amendments, it is very difficult to picture what the clause will look like with them all. Would the Minister agree that there could have been a better way to approach amending clause 38?
Torsten Bell
Let me first respond to the thrust of the comments from the Opposition; I will then come directly to that question. I am conscious that, having sat through Second Reading, most hon. Members have heard my views, and the Government’s views, on this, but let us set out the facts. It is the industry itself that set out the case for change. That is what the Mansion House accord does: it says that a different set of asset allocations is the right way to go in the longer term.
I support the industry’s judgment. The previous Conservative Pensions Minister has welcomed its judgment. I think it is the view of every senior Conservative ex-Minister sitting on the Opposition Back Benches that that change needs to come. [Interruption.] I am not speaking for the Opposition Front Bench; the hon. Member for Wyre Forest has just spoken eloquently for himself. I am speaking for former Conservative Ministers, including former Chancellors. If anything, they accuse me of being too timid—I am not sure what the characterisation of their current Front Bench would be in that regard. That is the status of the debate on this.
Why is there consensus? Leaving aside some of the points that have been raised, it is because this is in savers’ best interests. That is the motivation and the goal. It is also wrong to set out the conflict in terms as broad as the hon. Member for Wyre Forest has just used, because there is a clear savers’ interest test within the Bill that enables trustees or scheme managers to say that proceeding in a certain way would not be in the interests of their savers, and the asset allocation requirements would not bite.
Turning directly to the question about unreasonable Ministers—I have heard rumours of such things. They can exist, and there are protections against them: there are the usual judicial review protections, but in the Bill there are specific requirements to provide a report justifying any use of the reserve power and how it would play out. There are significant limits on the assets—it is broad asset classes—that can be set out in an asset allocation and there are limits to which assets can be covered.
There is the savers’ interest test, and importantly, there is a sunset clause for exactly the reason that we cannot predict what 2040 looks like today. I recognise that hon. Members will not support that part of the clause, but I hope they recognise that the goal is the same, which is that a change in investment behaviour is in savers’ interests. That is what the industry is telling us. As I said last Tuesday, the danger of a collective action problem—the problem that saw commitments made by the industry and the previous Conservative Government not delivered—is partly what this reserve power helps to overcome.
I have absolutely heard the points made about the volume of amendments. They are on the record, as will be all the points made during this process. To answer the question directly, the reason there are so many is that we had lots of useful feedback from industry over the summer, and I wanted to provide more clarity through the clause and make sure that we had the best version of it. We did not want to leave it until Report, so people have had a chance to see it as we go through Committee. I absolutely recognise the points made, and the specific point about the drafting choice of a large number of amendments versus an additional clause. I am sure the drafters will have heard that comment.
Amendment 44 agreed to.
Amendments made: 45, in clause 38, page 34, line 32, leave out “Conditions 1 and” and insert “Condition 1 and Condition”.
This amendment makes a minor verbal change to facilitate differential commencement of the scale and asset allocation conditions.
Amendment 46, in clause 38, page 34, line 37, leave out “of that scheme”.—(Torsten Bell.)
This amendment reflects the fact that a main scale default arrangement may be used by multiple schemes.
Torsten Bell
I beg to move amendment 47, in clause 38, page 35, line 1, at end insert—
“(ba) has previously been approved under section 28D (transition pathway relief) and is to be treated in accordance with regulations as if it had approval under section 28A,”.
This amendment allows for relevant Master Trusts that have previously received transition pathway relief to be treated as if they had scale approval.
The Chair
With this it will be convenient to discuss Government amendments 48, 49, 51, 54, 55, 57 to 59, 62, 130 and 132.
Torsten Bell
This group amends sections 20 and 26 of the Pensions Act 2008, which deal with the quality requirements that a master trust and a group personal pension scheme must satisfy. The amendments will improve the operability of the new sections. In particular they will allow, via regulations, relevant master trusts and GPP schemes that have previously received transition pathway relief—the relief that allows schemes that do not reach the £25 billion threshold in 2030, but are on course to do so soon—afterwards to be treated as if they had scale approval on a temporary basis once the pathway ends.
The amendments will also allow the Pensions Regulator to determine that a relevant master trust may be treated as meeting condition 2 of new section 20(1A) of the 2008 Act without a direct application from the master trust concerned. The effect of that is to allow the regulator to delay the impact of not meeting the scale or asset allocation requirements and to enable steps to be taken to protect members and support employers. A similar requirement for GPPs will be inserted into section 26.
Government amendments 130 and 132 amend the provision in the 2008 Act that deals with the parliamentary scrutiny process relevant to regulations made under the Act. These amendments make sure that all significant powers to make regulations as part of the scale and asset allocation measures are subject to the affirmative procedure.
Amendment 47 agreed to.
Amendments made: 48, in clause 38, page 35, line 16, leave out from “determine” to “Master Trust is” in line 17 and insert “that a relevant”
This amendment means the Regulatory Authority can determine that a relevant Master Trust is to be treated as meeting Condition 1 of subsection (1A) without an application from the Trust.
Amendment 49, in clause 38, page 35, line 18, after “1” insert “or Condition 2”
This amendment means that regulations can allow the Regulatory Authority to determine that a relevant Master Trust is to be treated for a period as meeting Condition 2 (the asset allocation requirement) as well as Condition 1 (the scale requirement).
Amendment 50, in clause 38, page 35, line 20, leave out from “Authority” to end of line 21
This amendment removes some unnecessary wording for consistency with the corresponding amendments to section 26 of the 2008 Act.
Amendment 51, in clause 38, page 35, line 28, at end insert—
“(c) make provision about the Regulatory Authority requiring the trustees or managers of a relevant Master Trust to give the Regulatory Authority a plan showing how they propose to meet or continue to meet the scale requirement under section 28A or the conditions for approval under section 28C.”
This paragraph allows regulations to give the Regulatory Authority a power to require the trustees or managers of a relevant Master Trust to give the Regulatory Authority a plan showing how they propose to meet or continue to meet the scale requirement.
Amendment 52, in clause 38, page 35, line 32, leave out “28A(1)” and insert “28A(12)”.—(Torsten Bell.)
This amendment updates a cross-reference.
Torsten Bell
I beg to move amendment 53, in clause 38, page 35, leave out lines 35 and 36.
This amendment is consequential on Amendment 129.
The Chair
With this it will be convenient to discuss Government amendments 61, 106, 116, 125 and 129.
Torsten Bell
The Committee is being very patient so I shall speak briefly to this group. This group is centred around amendment 129, which sets out the interpretation of a number of terms used throughout the clause and consolidates them in new subsection (14). Key among these is the interpretation of “group personal pension scheme”, which is amended after discussion with the Financial Conduct Authority to ensure that only schemes where all members select their investment approach are excluded from the application of clause 38, to ensure that the vast majority of workplace schemes are covered by the clause. The remaining amendments in this group are consequential to amendment 129.
Amendment 53 agreed to.
Amendments made: 54, in clause 38, page 36, leave out line 12 and insert—
“(a) has previously been approved under section 28D (transition pathway relief) and is to be treated in accordance with regulations as if it had approval under section 28B,”
This amendment allows for group personal pension schemes that have previously received transition pathway relief to be treated as if they had scale approval.
Amendment 55, in clause 38, page 36, line 15, leave out “(7C)(a)” and insert “(7A) or (7B)”
This amendment ensures that new subsection (7D) applies both to exemptions from the scale requirement and to exemptions from the asset allocation requirement.
Amendment 56, in clause 38, page 36, line 20, leave out “authorise” and insert “permit”
This amendment ensures consistency with the equivalent language used for Master Trusts.
Amendment 57, in clause 38, page 36, line 20, leave out “, on an application by the scheme concerned,”
This amendment means the Regulatory Authority can determine that a group personal pension scheme is to be treated as meeting the scale or asset allocation requirement without an application from the scheme.
Amendment 58, in clause 38, page 36, line 22, leave out “and sixth conditions” and insert “or sixth condition”
This amendment allows for a determination by the Regulatory Authority under subsection (7E) to be made in relation to one or other of the scale and asset allocation requirements (rather than only in relation to both).
Amendment 59, in clause 38, page 36, line 31, at end insert—
“(c) make provision about the Regulatory Authority requiring the provider of a group personal pension scheme to give the Regulatory Authority a plan showing how they propose to meet or continue to meet the scale requirement under section 28B or the conditions for approval under section 28C.”
This paragraph allows regulations to give the Regulatory Authority a power to require the provider of a group personal pension scheme to give the Regulatory Authority a plan showing how they propose to meet or continue to meet the scale requirement.
Amendment 60, in clause 38, page 36, line 35, leave out “28A(1)” and insert “28B(12)”
This amendment updates a cross-reference.
Amendment 61, in clause 38, page 36, leave out lines 36 and 37
This amendment is consequential on Amendment 129.
Amendment 62, in clause 38, page 37, line 4, at end insert—
“(c) in paragraph (c), at the end insert “, except so far as those requirements relate to Condition 1 or 2 in section 20(1A)””.—(Torsten Bell.)
This amendment ensures that the requirements mentioned in section 28(3)(c) of the Pensions Act 2008, so far as they relate to the new scale and asset requirements, are not a “relevant quality requirement” for the purposes of that section.
Torsten Bell
I beg to move amendment 63, in clause 38, page 37, line 11, after “requirement” insert
“by reference to the main scale default arrangement”
This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28A.
The Chair
With this it will be convenient to discuss Government amendments 64, 66, 68, 69, 71, 72, 74, 75, 78, 80, 83, 85, 90 and 91.
Torsten Bell
I offer reassurance, as we will shortly come to the end of the amendments for substantive debate.
This group of amendments deals with the main scale default arrangement, along with the scale test and penalties. The MSDA is the pool of investments against which scale will be assessed. As I mentioned, the definition of that is obviously central to the effective enforcement of the scale requirements.
Key among these amendments are Government amendments 72 and 91, which set out some of the details of the MSDA for master trusts and group personal pensions, including that it can be used for the purposes of one or more pension schemes, and that the assets held within it are those of members who have not chosen how they are invested. Regulations will be made that cover other matters, including the meaning of “common investment strategy”. The details we set out in these amendments reflect the invaluable input we received from pension providers and regulatory bodies.
The remaining amendments in the group relating to the MSDA largely clarify how it fits into the wider approval requirements in the new sections 28A and 28B.
Moving on to scale, Government amendments 69 and 85 clarify the circumstances in which assets held by connected master trusts and group personal pension schemes, or where the same provider runs a GPP and master trust, can count towards the scale test. This is to ensure that, where appropriate, assets managed under a common investment strategy where there is a family connection between the master trust and GPP scheme, and where they are used for the same purpose, can be added together to achieve the £25 billion requirement.
Government amendment 71 ensures that the provisions governing penalties are consistent between the TPR and the FCA. Government amendment 90 ensures that regulations can provide for appeals to the tribunal in respect of penalties under regulations under new section 28C(9)(c).
Amendment 63 agreed to.
Mark Garnier
I beg to move amendment 250, in clause 38, page 37, line 12, at end insert
“or
(c) the relevant Master Trust meets the innovation exemption requirement.”
The Chair
With this it will be convenient to discuss the following:
Amendment 251, in clause 38, page 37, line 16, at end insert—
“(3A) A relevant Master Trust meets the innovation exemption requirement if the Trust can demonstrate that it provides specialist or innovative services.
(3B) The Secretary of State may by regulations provide for a definition of ‘specialist or innovative services’ for the purposes of this section.”
Amendment 252, in clause 38, page 39, line 11, at end insert
“or
(c) the relevant GPP meets the innovation exemption requirement.”
Amendment 253, in clause 38, page 39, line 15, at end insert—
“(3A) A relevant GPP meets the innovation exemption requirement if the Trust can demonstrate that it provides specialist or innovative services.
(3B) The Secretary of State may by regulations provide for a definition of ‘specialist or innovative services’ for the purposes of this section.”
Amendments 250, 251, 252 and 253 create an innovation exemption for pension funds that provide specialist or innovative services, as part of the new entrants clause.
Mark Garnier
The Bill sets a minimum asset threshold of £25 billion for workplace pension schemes to operate as megafunds by 2030. This is not, in itself, particularly controversial, and we are all fully aware of the arguments about scale being effective when running pension funds. The requirement is intended to drive consolidation, improve economies of scale and boost investment in UK assets, but there is concern that such a high threshold could disadvantage boutique or niche funds or new entrants into the market that provide specialist services to cater for financially literate members who prefer a more tailored approach to their pension management. For example, Hargreaves Lansdown has highlighted that its £5 billion fund serves members who value investment autonomy and expertise. The risk is that the policy could reduce competition, limit consumer choice and stifle innovation by making it harder for smaller, specialist providers to operate or enter the market
Clause 38 provides little detail of the meaning of the “ability to innovate” and how “strong potential for growth” will be measured, but it is essential that the Bill provides a credible route to support innovation. If we tie the pensions market up by restricting it to a handful of large providers focused on back-book integration and building scale, there will be less space for innovation aimed at pension member engagement. The benefit of the existing market is that its diversity provides choice and creates competition, and competition is an important part of this. Smaller schemes are chosen by employers for specific reasons. If we lose that diversity and essentially create a handful of the same scheme propositions, employers and members will lose out on this benefit.
Realistically, it will be extremely challenging for new entrants to the market to have a chance of building the required scale. Our amendments create an innovation exemption for pension funds that provide specialist or innovative services as part of the new entrants clause. This will allow boutique or niche providers to continue operating if they demonstrate diversity in the market or serve a specific member need, even if they do not meet the £25 billion threshold.
Kirsty Blackman
Amendments 250 to 253, as well as Government amendment 113, which we will discuss later, clarify the word “innovation” and look at how best to define it. There are two different approaches from the Government and the Opposition to what innovation means. I raised the issue of defining innovation on Second Reading, so I am glad that both parties are trying to clarify it here, but I am not entirely happy with the way in which the Government have chosen to do so.
When we come to Government amendment 113, I do not feel that the chosen definition of “innovative products” is necessarily right. There could be a way of working that is innovative not in the product but in the way people access the product. For example, some of the challenger banks that we have had coming up are not necessarily providing innovative products, but they provide innovative ways to access those products, and in some cases, their pitch is that they provide a better interface for people to use. I think there is potentially a niche in the market for innovative services rather than innovative products. Government amendment 113 perhaps ties too much to products, although it depends on what the definition of “products” is.
Obviously regulations will come in behind this that define “innovative”, but I think the pitch made by the Opposition for the addition of “or specialist” is helpful. “Innovative” suggests that it may be something new, whereas there could be specialist services that are not of that size but are specific to certain groups of people who value the service they are receiving, one that is very specific to their circumstances, and who would prefer that operation to keep running and to keep having access to it because of the specialist service that is provided.
I am concerned about Government amendment 113. My views are perhaps closer to the Conservatives’ amendment, but thinking particularly about services rather than the products, and the way in which the services are provided to people and the fact that there could be innovation in that respect. Also, as the hon. Member for Wyre Forest said, there could be particular niche areas that do not need to be that size in order to provide a truly excellent service to perhaps a small group of people. It depends on how the Government define “innovative” and what the regulations may look like this, but I am inclined to support the Conservatives’ amendment.
Torsten Bell
I thank the hon. Member for Wyre Forest for tabling these amendments. We all recognise the importance of innovation in the pension landscape, but I respectfully oppose the inclusion of the amendments in the Bill.
One point that is at risk of being lost from the discussion so far is the central insight that is the motivation for this clause, which is that scale really is important. Scale really does matter. It has the potential to unlock a wide range of benefits, from better governance to lower costs, to access to a wider range of assets. All of those are integral to improving member outcomes, and if we provide many carve-outs, every scheme will say it is a specialist provider that should not be covered because its members value its inherent difference from every other, and we risk undermining the premise that I think has cross-party agreement, which is that we need to move to a regime of bigger schemes.
One of our aims in this Bill, which is relevant to the asset allocation discussion we just had, is to provide clarity that the change will happen, people will not duck and dive around for years attempting to litigate what is and is not a specialist provider and so on. Innovation is really important, as is competition in the market, but we need to do this in a way that does not undermine the purpose of the scale requirements, which I think is a matter of cross-party consensus.
Having said that, while innovation in the market is important, the Government’s view is that it is not an alternative to achieving scale. That is why we have provided for a new market entrants pathway. There, the innovation grants a temporary exemption from scale requirements, not a permanent exemption as the amendments would enable. That is because scale is very important indeed. Applicants to the pathway will be able to enter the market if they can demonstrate they have strong potential to grow to scale, and if they have some kind of innovative design. That is not a permanent exemption from scale requirements, and there should be cross-party consensus on avoiding that.
To provide reassurance on some of the points that have been raised, I emphasise that the scale requirements apply only to providers’ default offers. Providers of specialist offers and the rest, and self-invested personal pensions, are all able to continue to offer those specialist services, but the main offer in the workplace market does need to meet scale requirements. I hope with that explanation, hon. Members will not press the amendments.
Mark Garnier
I am not entirely happy with the Minister’s comments. I am slightly surprised, and I thought he might have listened a bit more carefully. We absolutely understand the economies of scale. A large, £25 billion pension fund can do amazing things. We are 100% behind that. We have not disagreed with that at all. However, I somehow feel myself listening to the Minister and hearing the reverse of the arguments we were making as we tried to allow new-entrant banks into the market after the financial crisis.
Those of a certain age—and the Minister turned 43 the other day, so he will remember the financial crisis—know that the problem was that a few very big banks were spreading the contagion. I remember being on the Treasury Committee and the Parliamentary Commission on Banking Standards after the financial crisis, when we were trying to sort out Labour’s previous mess, and not a single ab initio banking licence had been issued for 100 years. The only way that companies could get into the banking market—as Virgin and Metro were doing—was by buying dormant banking licences. I remember having long conversations—successfully, as it turned out—in order to try to allow companies such as Starling into the market. I think that Starling received the first ab initio banking licence for 100 years.
Having learned over the past 10 or 15 years about the effects of having large scale only, we are now having an argument about potentially stifling the pensions equivalent of companies such as Starling, Metro, Revolut and other innovators coming into the pensions market. I was hoping that from debating the amendments I could be convinced that the Minister would take away the thinking behind what we have come up with: that innovation should be good, and that there should permanently be new, fresh blood coming through. However, I do not think that he has got it. I was not going to push the amendments to a vote, but I now feel motivated to do so.
Kirsty Blackman
I want to make a brief comment about the definition of “specialist”. I appreciate the Minister’s clarification about the default products provided, but there could be a sensible definition of “specialist” that included, for example, that if providers can demonstrate that over 75% of their members engage in the management of their pension fund every year, that would be a very specialist and well-liked service. I understand that the scale is incredibly important. However, if a provider can demonstrate that level of engagement in its pension scheme, because of its innovative product or service, I think it would be sensible to look at the scale requirements, even if that provider does not yet meet them.
The Opposition have kindly left it up to the Minister and the Government to define what “specialist” would be, so I will support the Opposition amendments on that matter. However, when we come to Government amendment 113, I will require some clarification from the Minister about the definition of “products”.
Torsten Bell
I am reassured that our agreement that scale is the desirable outcome is clear. It is great to have that on the record. I also put on the record that there is agreement about the value of innovation and about new entrants. I think that the only distinction is between a new entrant that then grows and a new entrant that does not. Our approach is to allow new entrants, but they need to be ones with a plausible sense that they can get to scale. Inherent to most of the innovation in the market—for example, in collective defined-contribution schemes—is that they would have to operate at scale to be effective. I think that the banking analogy is actually quite apt.
Steve Darling
Would the Minister be kind enough to reflect on a situation currently at play in the market, whereby Phoenix Group is withdrawing the management of billions of pounds from Aberdeen Group? These master products offer opportunities that could significantly impact on viability. Could the Minister reflect on that?
Torsten Bell
Let me just finish the point about the financial crisis, then I will come to the hon. Member’s question. The lesson from the financial crisis was that banks were too big, and the lesson that we all agree about is that pension schemes are too small. That is the distinction—that is why we are doing this Bill now and why the previous Conservative Government introduced different changes after the financial crisis. We are in a very different situation. That said, we need to prepare for the future and, when there are bigger pension schemes, we want a world where new entrants can come into them. I hear what has been said. I want to reassure the hon. Gentleman that we want to see new entrants offering innovative products. I take the point about services, which we will come back to when we come to amendment 113, but that needs to be a pathway, not a permanent carve-out that risks undermining the scale requirements.
Question put, That the amendment be made.
Mark Garnier
On a point of order, Ms McVey. Might it be easier, for brevity, if we vote on amendments 251 to 253 together?
The Chair
The amendments are consequential on amendment 250, so I cannot do that. I will now suspend the sitting while we consider how and whether to meet the hon. Gentleman’s request.
Torsten Bell
I beg to move amendment 70, in clause 38, page 37, leave out lines 39 and 40 and insert—
“(b) what it means for assets of a pension scheme to be managed under a "common investment strategy" (including in particular provision defining that expression by reference to whether or how far the assets relating to each member of the scheme are allocated in the same proportion to the same investments).”
This amendment provides more detail as to how the power to define “common investment strategy” may be used.
Torsten Bell
I will be brief. The link between the definition of a main scale default arrangement and the common investment strategy is key to ensuring that the scale requirements apply to the correct elements of a pension scheme. Amendments 70 and 84 provide more detail on how the power to define a common investment strategy may be used to provide further information on the Government’s meaning when referring to that term.
Amendment 97 removes the “common investment strategy” element from the definition of default funds to avoid confusion with how that term is used in the main scale default arrangement approval in new sections 28A and 28B. I commend the amendments to the Committee.
Amendment 70 agreed to.
Amendments made: 71 in clause 38, page 38, leave out lines 32 to 38 and insert—
“(d) permitting the Authority to impose, on a person who fails to comply with a requirement under paragraph (c), a penalty determined in accordance with the regulations that does not exceed £100,000;”.
This amendment ensures that the penalties language used in section 28A is consistent with that used in new section 28B.
Amendment 72, in clause 38, page 39, leave out lines 1 to 4 and insert—
“(12) In this section ‘main scale default arrangement’ means an arrangement—
(a) that is used for the purposes of one or more pension schemes, and
(b) subject to which assets of any one of those schemes must under the rules of the scheme be held, or may under those rules be held, if the member of the scheme to whom the assets relate does not make a choice as to the arrangement subject to which the assets are to be held.”
This amendment defines “main scale default arrangement” for the purposes of new section 28A.
Amendment 73, in clause 38, page 39, line 7, leave out “relevant”.
This amendment removes an unnecessary tag.
Amendment 74, in clause 38, page 39, line 10, after “requirement” insert—
“by reference to the main scale default arrangement”.
This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.
Amendment 75, in clause 38, page 39, line 12, after “requirement” insert—
“by reference to a main scale default arrangement”.
This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.
Amendment 76, in clause 38, page 39, line 16, leave out “subsection (6)” and insert “subsections (5) and (6)”.
This amendment adds a further cross reference to new section 28B(4).
Amendment 77, in clause 38, page 39, line 17, leave out “held in funds”.
This amendment removes some unnecessary wording for the sake of consistency.
Amendment 78, in clause 38, page 39, line 18, at end insert—
“(ia) are held subject to the main scale default arrangement, and”.
This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.
Amendment 79, in clause 38, page 39, line 20, leave out “held in funds”.
This amendment removes some unnecessary wording for the sake of consistency.
Amendment 80, in clause 38, page 39, line 24, at end insert—
“(ia) are held subject to the main scale default arrangement, and”.
This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.
Amendment 81, in clause 38, page 39, line 27, leave out “held in funds”.
This amendment removes some unnecessary wording for the sake of consistency.
Amendment 82, in clause 38, page 39, line 27, leave out—
“one (and only one) relevant”
and insert “a qualifying relevant”.
This amendment corrects a reference to a relevant Master Trust in new section 28B(4)(c) to take account of new section 28B(8).
Amendment 83, in clause 38, page 39, line 30, at end insert—
“(ia) are held subject to the main scale default arrangement, and”.
This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.
Amendment 84, in clause 38, page 39, leave out lines 38 and 39 and insert—
“(b) what it means for assets of a pension scheme to be managed under a ‘common investment strategy’ (including in particular provision defining that expression by reference to whether or how far the assets relating to each member of the scheme are allocated in the same proportion to the same investments).”
This amendment provides more detail as to how the power to define “common investment strategy” may be used.
Amendment 85, in clause 38, page 40, line 3, leave out from “(4)” to end of line 6 and insert—
“(a) a group personal pension scheme is ‘qualifying’ in relation to the GPP if the provider of the GPP is also the provider of the group personal pension scheme;
(b) a relevant Master Trust is ‘qualifying’ in relation to the GPP if the provider of the GPP is also the scheme funder or the scheme strategist in relation to the relevant Master Trust (within the meaning of Part 1 of the Pension Schemes Act 2017).”
This amendment clarifies the circumstances in which assets held by connected Master Trusts and group personal pension schemes can be counted for the purposes of the application of the scale test to a group personal pension scheme.
Amendment 86, in clause 38, page 40, line 19, leave out “relevant Master Trust or”.
This amendment removes an unnecessary reference to a relevant Master Trust.
Amendment 87, in clause 38, page 40, line 25, leave out—
“managers of the GPP that their”
and insert—
“provider of the GPP that its”.
This amendment replaces a reference to the “managers” of a GPP with “provider” (reflecting normal usage in relation to personal pension schemes).
Amendment 88, in clause 38, page 40, line 27, leave out “the managers” and insert “the provider”.
This amendment replaces a reference to the “managers” of a GPP with “provider” (reflecting normal usage in relation to personal pension schemes).
Amendment 89, in clause 38, page 40, line 35, leave out—
“considered by the Authority to have failed”
and insert “who fails”.
This amendment ensures consistency with the new language in section 28A.
Amendment 90, in clause 38, page 40, line 38, at end insert—
“(e) providing for the making of a reference to the First-tier Tribunal or Upper Tribunal in respect of the issue of a penalty notice or the amount of a penalty.”
This amendment ensures that regulations can make provision for appeals to the Tribunal in respect of penalties under regulations under new section 28C(9)(c).
Amendment 91, in clause 38, page 40, line 42, leave out from beginning to end of line 3 on page 41 and insert—
“(12) In this section ‘main scale default arrangement’ means an arrangement—
(a) that is used for the purposes of one or more pension schemes, and
(b) subject to which assets of any one of those schemes must under the rules of the scheme be held, or may under those rules be held, if the member of the scheme to whom the assets relate does not make a choice as to the arrangement subject to which the assets are to be held.” —(Torsten Bell.)
This amendment defines “main scale default arrangement” for the purposes of new section 28B.
Mark Garnier
I beg to move amendment 248, in clause 38, page 41, line 4, leave out from beginning to end of line 9 on page 43.
This amendment would remove the ability of the Government to set mandatory asset allocation targets for certain pension schemes, specifically requiring investments in UK productive assets such as private equity, private debt, and real estate.
The Chair
With this it will be convenient to discuss the following:
Amendment 275, in clause 38, page 41, line 31, at end insert—
“(5A) A description of asset prescribed under subsection (4) may not be securities in any UK water company.”
This amendment would ensure that the prescribed percentage of asset allocation would not include assets in the water sector and fund trustees will not be compelled to allocate scheme assets to the water sector.
Amendment 249, in clause 38, page 45, line 3, leave out from beginning to end of line 27 on page 46.
This amendment is consequential on Amendment 248.
New clause 4—Establishment of targeted investment vehicles for pension funds—
“(1) The Secretary of State may by regulations make provision for the establishment or facilitation of one or more investment vehicles through which pension schemes may invest for targeted social or economic benefit.
(2) Regulations under subsection (1) must specify the descriptions of targeted social or economic benefit to which the investment vehicles are to contribute, which may include, but are not limited to, investment in—
(a) projects that revitalise high street areas;
(b) initiatives demonstrating social benefit;
(c) affordable or social housing development.
(3) The regulations must make provision for—
(a) the types of pension schemes eligible to participate in such investment vehicles;
(b) the governance, oversight, and reporting requirements for the investment vehicles and participating pension schemes;
(c) the means by which the contribution of such investments to targeted social or economic benefit is measured and reported;
(d) the roles and responsibilities of statutory bodies, including the Pensions Regulator and the Financial Conduct Authority, in authorising, regulating, or supervising such investment vehicles and the participation of pension schemes within them.
(4) The regulations may—
(a) make different provision for different descriptions of pension schemes, investment vehicles, or targeted social or economic benefits;
(b) provide for the pooling of assets from multiple pension schemes within such vehicles;
(c) require pension scheme trustees or managers to have regard to the availability and suitability of investment vehicles when formulating investment strategies, where consistent with—
(i) their fiduciary duties, and
(ii) the long-term value for money for members.
(5) In this Chapter, ‘pension scheme’ has the same meaning as in section 1(5) of the Pension Schemes Act 1993.”
This new clause would allow the Secretary of State to establish investment funds to encourage investment in areas such as high streets, social housing and investments with clear social benefits.
Mark Garnier
Amendments 248 and 249 talk about removing mandation—something I spoke about when we debated clause 38, so I will not cover those amendments other than to say that it is something we feel strongly about. Amendment 275 concerns mandation with regard to the water industry. It comes as a result of an announcement from the leader of Reform about potentially using pension fund money to invest in Thames Water, and part of Reform’s manifesto talked about nationalising the water industry, but using pension fund money to own 50% of those holdings. To a certain extent, that is performative because we are talking about a specific sector. This amendment specifically talks about the water companies, but it could be carried forward to any other potentially nationalised sector.
John Milne
I will speak to new clause 4 on targeted investment vehicles. Its purpose is to empower the Secretary of State to establish or facilitate targeted investment vehicles for pension funds. Overall, the pensions industry is supportive of the Bill, as are the Liberal Democrats, but some sections have expressed concern that a requirement to invest in UK infrastructure and assets could lead to excess demand for a limited stock of investment, especially in the early days when the economy is adjusting. In a worst-case scenario, it could lead to overpaying for investments or difficulty in reaching Government targets. Government assistance to ensure a healthy flow of investment vehicles would therefore serve to prevent that from happening.
Furthermore, there is a unique opportunity to create vehicles that would allow schemes to invest in projects with clear social and economic benefits. It could include many different types of investments. For example, the Government could support the development of investment vehicles designed to revitalise high streets and local communities, provide affordable and social housing development, provide care home accommodation or support other projects that deliver long-term value while strengthening society.
The new clause sets out regulations that would set clear rules on which schemes can participate. Different provision could be made for different schemes and types of investment vehicles. The Pensions Regulator and the Financial Conduct Authority would be given defined responsibilities in authorising, supervising and regulating these vehicles. To be clear, trustees would only be expected to consider the investments where consistent with their fiduciary duties and long-term value for money for members. Pension funds are among the largest sources of long-term capital in the UK, so harnessing even a small proportion for socially beneficial investment could deliver real economic and community impact. Pooling of assets would also facilitate open access for smaller schemes. Done properly, that could align members’ retirement interests with a wider public good.
To summarise, the new clause is designed to ensure a constant supply of suitable investment vehicles so that pension funds can invest at scale in areas that are currently not receiving sufficient attention. At the same time, it would create a framework where pensions could be a force for social renewal and financial security. The clause ensures opportunities with safeguards in place for schemes to contribute to national priorities, while still securing value for members.
Kirsty Blackman
Although I am delighted by the intention of the hon. Member for Wyre Forest to get one over Reform with amendment 275, and I am quite happy to back that notion, I am also pretty happy with nationalised water in Scotland. Scottish Water is significantly better performing than the other water companies, so I would not automatically say that nationalised water is a bad thing, given that our water is lovely in Scotland. However, we could do with a little more rain on the north-east coast, given that we have had the driest spring and summer for 40 years, which is not ideal. I gently disagree with the hon. Member because the amendment does not take into account the Scottish context. I would love to see more investment in Scottish Water from pension funds or from Government-led investment vehicles or decision making.
On amendments 248 and 249, I am much more relaxed about mandation than the Conservatives are, as Members might expect given my ideological position. I have much less of an issue with going in that direction. I have heard all the Government have said about not planning to use those powers. It is reasonable for the Government to direct the economy in certain directions—that is what tax and Government spend are for. A good chunk of that is about ensuring that we make interventions so that the economy grows in the way that we want it to.
In many cases, Governments have historically refrained from picking winners when a decision to do so could have grown the economy faster. For example, historically, the Government could have given more backing to certain ports to ensure that they could grow, particularly through renewable energy or by building offshore wind farms, because we could do with more local capacity throughout the UK. Had Governments of all colours been clearer about which areas and regions they were backing, that understanding could have enabled those areas to win more contracts.
On new clause 4, the options for how mandation could work and the investment vehicles that are in place, I have talked about affordable and social housing development. The biggest thing the Government could do to encourage social housing, in particular, is to cancel the right to buy, which would allow local authorities to build significant levels of social housing. That is how we are managing to increase our housing stock in Scotland. We are not there yet—nobody says that we are—but we are able to build new social housing in Scotland at a scale that most local authorities south of the border are not, because cancelling the right to buy has made it affordable. I would love to see more investment in social housing.
I would have liked renewable energy to be included in the Lib Dems’ new clause 4. I appreciate that we cannot include everything, but it would have been nice, particularly when it comes to smaller renewable energy projects and in combined heat and power initiatives. Large-scale CHP makes a really positive difference in Aberdeen city. We have a large combined heat and power network, which heats a significant number of our multi-storey blocks at far lower prices. They are still seeing an increase in prices, absolutely, but they do not need to worry about putting money in the meter, because they know they will have hot water and heating for a fixed monthly fee, rather than paying more in winter and less in summer.
Lastly, harking back to the Future Generations Commissioner for Wales, it would be interesting for the Government to consider whether any potential mandation benefits future generations, given the intergenerational gap and given that people my age and younger are increasingly of the view that we will never get a state pension, because it will simply not exist by the time we reach retirement age—I am sorry if not everybody is at that level of cynicism, but most people my age and younger are. Looking at where our private pensions are invested and at the Government’s direction of travel, it would at least be an interesting thought exercise, in advance of any Government decision on mandation, to consider whether that money would benefit future generations or make things worse for them. In Wales, decisions can be called in for judicial review, should a public authority act against the wellbeing of future generations.
Looking at whether investments that could be directed by the Government would benefit or have a detrimental impact on future generations would be an interesting way to tie the Government’s hands. That way, we could see investment not simply in massive motorways, High Speed 2 or dual carriageways, but in things that have a demonstrable benefit, or at least no adverse impact, on the wellbeing of future generations. Surely that should be a positive thing for us all, given our huge responsibilities for the future of the planet and to those who will be living on these islands. Requiring that to be considered when the Government look at mandation could be a great way to do it.
I am not sure what I will do when we come to new clause 4—it will be voted on at the very end because it is a new clause. I like the idea, but I am not convinced that I would go down that exact route. I will not be supporting the Conservative amendments in this group, which I understand the shadow Minister is terribly shocked about, but there are places where we can have significant ideological disagreements, and this is definitely one of them.
Mr Bedford
I refer the Committee to my entry in the Register of Members’ Financial Interests, having worked in the water sector before being elected to Parliament. I will be speaking predominantly to amendment 248. The Committee heard evidence from industry experts who expressed concerns about the Bill’s mandation power. They were consistent and clear in raising concerns about the reserve powers in the Bill. I would like to reiterate some of those concerns raised by the industry, which I believe hon. Members should support today.
At the heart of clause 38 is its impact on the fiduciary duty of trustees—not just a mere technicality, but a duty that has been at the heart of trust-based governance for centuries. Trustees have a legal duty to act solely in the best interests of their members. However, the Government believe it is acceptable to tear up that duty through a ministerial power grab. If the Bill is passed in its current form, Ministers will have the power to override the judgment of trustees, which I do not believe is appropriate. That is not to guide or support, but to mandate them—to potentially force them to act against what are arguably the best interests and returns for their members.
That leads me to the potential impact on pensions adequacy in the UK. We are facing a pensions adequacy crisis, as I and other members of this Committee have said before. The majority of people are not saving anywhere near enough for retirement, and the cost to the state pension will only continue to rise, yet we have seen that the Government are willing to take investment decisions out of the hands of pension fund trustees.
David Pinto-Duschinsky (Hendon) (Lab)
As the Minister has previously said, there will be a savers’ interest test. There will be a series of safeguards, including the fact that if the Government want to exercise the power, they will have to file a report. This is a power ringfenced with safeguards. What Opposition Members have not said is what they would do instead to raise the returns of the pension market, because that is the issue. The hon. Member for Mid Leicestershire is exactly right that there is not enough pension saving, but that is exactly because we are not seeing those returns. If not this power, what would the Opposition do instead to raise investment levels?
Mr Bedford
I will come on to some of those points later, so I will address them then.
Mark Garnier
This is rather strange, because I wanted to intervene on the intervention, but I hope that my hon. Friend will come on to the various other things that we have proposed. For example, we have proposed looking at the Maxwell rules, which are driving the incentive of pension fund trustees to invest in gilts because of the implications of volatile markets for balance sheets. We are trying to look at the wider regulation that is driving certain behaviour, and I hope that my hon. Friend will raise that in due course. We are 100% behind the Bill—not every single part of it, although the thrust is very good—but, as my hon. Friend will mention, there are areas that could be changed to achieve its aims.
Mr Bedford
I hope to address some of those points.
The Government are willing to take investment decisions out of the hands of pension fund trustees to force investments into projects that may be politically convenient for them, but may potentially lead to financial loss for members. They are directing investment on the backs of ordinary UK savers. When people save into a pension scheme, they are entrusting their future security to a system that is working supposedly for them and not for political gain. To answer the point made by the hon. Member for Hendon, rather than coercing trustees to follow conditions set by Ministers, would it not be better to create the right economic conditions to make trustees want to invest in the UK?
The last Conservative Government, through their Mansion House reforms and the work of my right hon. Friend the Member for Godalming and Ash, brought in active commitment from the pension fund trustees who want to invest. We did not need to mandate that, and the Government should learn from that approach. Amendment 248 will preserve the fiduciary duty, but continue the trajectory to increase pension fund investment in the UK.
John Grady (Glasgow East) (Lab)
Would the hon. Member accept that pension trustees should, in accordance with their fiduciary duties, actively consider investing in such things as private equity, private patient capital and interests in land? The fact that so many people have agreed, under the Mansion House arrangements, to invest in such classes of assets, which have grown exponentially in scope over the last 25 years, makes the basic point that they will yield much better returns for my constituents. The thrust is simply to get better returns for pension savers in the United Kingdom.
Mr Bedford
I trust the pensions industry to make those judgments because they are the experts in this area, not Government Ministers, who often have short-term views. On Second Reading, one of my hon. Friends raised the example of HS2 and how Government priorities and policies can change over time. Would the hon. Member be happy for his constituents to have their money invested in a Government project or a large infrastructure scheme that is then scrapped, and to see huge losses to their pension scheme? I have huge concerns about the mandation point.
Clause 38, in its current form, undermines the trust that I mentioned earlier. I therefore urge hon. Members to back our amendment to ensure that the fiduciary duty remains and that we protect the security of millions of savers.
Kirsty Blackman
I corrected the Minister the other day on the definition of fiduciary duty, and the hon. Member for Mid Leicestershire just made a similar error. The fiduciary duty is not to act in the best interests of scheme members but to act in the best interests of getting them the pensions they were promised, or of growing their pensions. It is not necessarily about their best interests; it is about the best interests of their pension and the size of it.
We spoke about this quite a lot in relation to the local government pension scheme. There could be investments that make a person’s life significantly better than having an extra fiver a year in their pension. These are two different things. I appreciate that fiduciary duties should be what they are—I am not arguing with that; I am saying that the definition is not about acting in the best interests of scheme members but simply about growing their pension pots.
In terms of the two Lib Dem amendments and the points made about the investability of projects, we could argue about chickens and eggs and what will come first: will it be the economy growing in order that pension funds can find more investable projects, or will it be a pipeline of projects ready for funds to invest in, which is what the witnesses giving evidence last Tuesday suggested they need? If the Government are clear, not necessarily that they will include mandation but that there is a stick at the end of the process if the carrots do not work, confidence in that pipeline will grow in order for those projects to be there. I would love those projects to include what the Liberal Democrats are suggesting—housing and regeneration of town centres, for example—as well as investment in renewable energy and an increase in energy efficiency measures.
John Milne
Renewable energy schemes—particularly community energy, which I am a big fan of—are a very good addition, so we would support that.
Torsten Bell
I shall speak briefly because I am conscious that we need to adjourn shortly for Treasury orals, which I know everybody will be joining us for. I will not rehearse the arguments I have already set out against the purpose of amendments 248 and 249, other than to note that I do not agree with the characterisation by the hon. Member for Mid Leicestershire.
Amendment 275 seeks to prevent the Government from designating securities in UK water companies as qualifying assets for the purpose of the asset allocation requirement. I recognise the points that the hon. Member for Wyre Forest made, and I am not surprised to hear that Reform has not thought through its policies in this regard. The Government have set out the safeguards we have put in place around the use of this power. We do not think we should single out a particular sector in primary legislation, so I ask Members not to press their amendments.
I thank the hon. Member for Horsham for introducing new clause 4. The investment he references is exactly the kind that we think would raise financial returns and improve quality of life at retirement. That is the purpose of these changes. He rightly raises the bringing together of the demand side—that is, the Mansion House accord and the change in investment behaviours—with the supply side. That is exactly what the Government are doing via planning permissions and everything else, to ensure that the pipeline of projects is there, including via the British Growth Partnership work, which is intermediating all of that. On that basis, we think that the new clause is unnecessary, but I completely agree with much that it contains.
Steve Darling
Reflecting on events over the weekend, may I congratulate the Minister on being one of the few who remained in post? There is talk of the Prime Minister using all levers of power to drive forward work on certain wicked issues. One of the big wicked issues is the lack of affordable housing. In my constituency of Torbay, only 8% of our housing stock is social-rented, compared with a national average of 17%. I encourage the Minister to reflect again on this and take the opportunity of new clause 4—surely socialists should vote for clause 4. This is another opportunity to apply all the pressure we can to drive more social-rented housing, to support our communities and those most in need in society.
Torsten Bell
I just point out that many of the measures in the Bill will support exactly that kind of investment in social housing, including those on scale and the local government pension scheme. On that basis, I think these amendments are unnecessary.
Ordered, That the debate be now adjourned.—(Taiwo Owatemi.)
Pension Schemes Bill (Sixth sitting)
Tuesday 9th September 2025
(4 weeks ago)
Public Bill CommitteesPension Schemes Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 9 September 2025 - (9 Sep 2025)
The Committee divided: - Ayes: 3 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 2 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 10 / Noes: 3 - Question accordingly agreed to.
The Chair
I remind the Committee that with this we are discussing the following:
Amendment 275, in clause 38, page 41, line 31, at end insert—
“(5A) A description of asset prescribed under subsection (4) may not be securities in any UK water company.”
This amendment would ensure that the prescribed percentage of asset allocation would not include assets in the water sector and fund trustees will not be compelled to allocate scheme assets to the water sector.
Amendment 249, in clause 38, page 45, line 3, leave out from beginning to end of line 27 on page 46.
This amendment is consequential on Amendment 248.
New clause 4—Establishment of targeted investment vehicles for pension funds—
“(1) The Secretary of State may by regulations make provision for the establishment or facilitation of one or more investment vehicles through which pension schemes may invest for targeted social or economic benefit.
(2) Regulations under subsection (1) must specify the descriptions of targeted social or economic benefit to which the investment vehicles are to contribute, which may include, but are not limited to, investment in—
(a) projects that revitalise high street areas;
(b) initiatives demonstrating social benefit;
(c) affordable or social housing development.
(3) The regulations must make provision for—
(a) the types of pension schemes eligible to participate in such investment vehicles;
(b) the governance, oversight, and reporting requirements for the investment vehicles and participating pension schemes;
(c) the means by which the contribution of such investments to targeted social or economic benefit is measured and reported;
(d) the roles and responsibilities of statutory bodies, including the Pensions Regulator and the Financial Conduct Authority, in authorising, regulating, or supervising such investment vehicles and the participation of pension schemes within them.
(4) The regulations may—
(a) make different provision for different descriptions of pension schemes, investment vehicles, or targeted social or economic benefits;
(b) provide for the pooling of assets from multiple pension schemes within such vehicles;
(c) require pension scheme trustees or managers to have regard to the availability and suitability of investment vehicles when formulating investment strategies, where consistent with—
(i) their fiduciary duties, and
(ii) the long-term value for money for members.
(5) In this Chapter, “pension scheme” has the same meaning as in section 1(5) of the Pension Schemes Act 1993.”
This new clause would allow the Secretary of State to establish investment funds to encourage investment in areas such as high streets, social housing and investments with clear social benefits.
Question put, That the amendment be made.
The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)
I beg to move amendment 92, in clause 38, page 41, line 8, leave out “of the totality”.
This amendment is consequential on Amendment 94.
The Chair
With this it will be convenient to discuss Government amendments 93 to 96 and 133.
Torsten Bell
It is wonderful to have you in the Chair, Ms Butler. Amendments 92 to 96 are minor amendments that clarify that any asset allocation percentage requirements should be calculated as a percentage of default funds, rather than as a percentage of the total assets of a scheme. That is how the Mansion House accord works and how these powers are intended to operate.
Amendment 133 simply ensures that the Government can remove redundant provisions from primary legislation should the sunset provisions—which as a result of Government amendment 228 will now appear in clause 101—cause the power we have been discussing to expire. I commend the amendments to the Committee.
Amendment 92 agreed to.
Amendments made: 93, in clause 38, page 41, line 9, after “in” insert “default”.
This amendment confines the application of the asset allocation requirement to default funds of a relevant Master Trust or a group personal pension scheme.
Amendment 94, in clause 38, page 41, leave out lines 10 to 14 and insert—
“(2) Regulations under subsection (1) may prescribe a percentage by reference to—
(a) all of the assets of the scheme that are held in default funds, or
(b) a prescribed description of the assets of the scheme that are so held.”.
This amendment clarifies that a percentage may be prescribed under section 28C(1) in respect of either all the default funds of a scheme or a particular subset of those default funds.
Amendment 95, in clause 38, page 41, line 15, leave out “or (2)”.
This amendment is consequential on Amendment 94.
Amendment 96, in clause 38, page 41, line 18, leave out from “description” to end of line 19.—(Torsten Bell.)
This amendment is consequential on Amendment 93.
Amendment proposed: 275, in clause 38, page 41, line 31, at end insert—
“(5A) A description of asset prescribed under subsection (4) may not be securities in any UK water company.”—(Mark Garnier.)
This amendment would ensure that the prescribed percentage of asset allocation would not include assets in the water sector and fund trustees will not be compelled to allocate scheme assets to the water sector.
Question put, That the amendment be made.
Torsten Bell
I beg to move amendment 98, in clause 38, page 42, line 12, leave out “relevant Master Trusts or” and insert—
“the trustees or managers of relevant Master Trusts or the providers of”.
This amendment clarifies that legal obligations fall on the trustees or managers of relevant Master Trusts or on the providers of group personal pension schemes (rather than on the schemes themselves).
The Chair
With this it will be convenient to discuss the following:
Government amendments 99 to 105.
New clause 32—Impact Assessment for defined benefit schemes’ asset allocation changes—
“(1) Before implementing any regulatory or policy change for defined benefit schemes’ asset allocation, the Secretary of State must assess the impact of such a change on schemes’ asset allocations.
(2) To determine the impact of a change outlined in subsection (1), the Secretary of State must consult with—
(i) the Debt Management Office,
(ii) industry stakeholders, and
(iii) such individuals or organisations as they deem appropriate.
(3) If the assessment under subsection (1) determines that a change could result in schemes shifting away from owning gilts to equities, the Secretary of State must publish an impact assessment before the implementation of the change.”.
This new clause requires an impact assessment for defined benefit schemes’ asset allocation changes.
Torsten Bell
I will start with the Government amendments and then turn to new clause 32. The amendments relate to proposed new section 28C and specify more detail about the role of the regulator in over- seeing the granting and withdrawal of approvals under this section, including a penalty-making power where a provider does not comply with the relevant requirements, and a clarification to ensure that subsection (14) on the interaction of these provisions with scheme documentation operates as intended.
New clause 32 would require the Secretary of State to conduct an impact assessment—and I appreciate, as I am sure the Opposition will come to shortly, that it is an impact assessment for a particular purpose—before implementing any regulatory or policy change for defined-benefit schemes’ asset allocation. First, let me reassure the hon. Member for Wyre Forest that the Government have no plans to make such changes to defined-benefit schemes’ asset allocation. I reiterate that the reserved powers contained in the clause only relate to defined-contribution workplace schemes. There are no plans to change defined-benefit asset allocations through the Bill. Therefore, the new clause is not considered necessary, and I encourage the hon. Member not to press it. I am sure he will want to make some wider points about the changes in asset allocation within defined-benefit schemes, and their impact on the wider economy.
Mark Garnier (Wyre Forest) (Con)
I rise to speak to new clause 32, which looks at the effects of some of the changes on the UK gilt market. Defined-benefit pension schemes are major holders of UK Government bonds, with pension funds holding around 28% of the gilt market —the UK Government bond market—as of early 2022. Those investments provide stable, long-term funding for the UK Government and are essential to the functioning of the debt market.
Significant shift by DB schemes away from gilts and into equities—which, in itself, is not a bad thing, as long as it does not happen in a disorganised way, which could be prompted by policy changes—may reduce the demand for gilts, potentially increasing yields and destabilising the market. At the end of the day, if 28% of the ownership of the gilt market is taken away, somebody else needs to be found to buy it. Otherwise, there will be a falling market. We all know what a gilt crisis looks like for pension funds. The 2022 gilt crisis highlighted the market’s vulnerability to large and sudden sales by pension funds, which triggered a fire-sale spiral and required Bank of England intervention to stabilise prices. It was not a good day. The Debt Management Office and market experts have noted that the gilt market is highly reliant on pension fund investment, and any structural reduction in demand could impact Government borrowing costs and market stability.
The Office for Budget Responsibility has highlighted concern about the impact of a low gilt allocation scenario, which is likely if the Bill achieves the outcomes that the Government want. A low gilt allocation scenario would mean that pension sector allocation of gilt holdings would drop to 10% of GDP by around 2040, down from around 30% today. That in itself, all other things being equal, would result in an extra £22 billion of debt interest payments on the current gilt market. We are highly concerned that a wholesale move from the gilt market by the pension industry places even more burden on the Treasury to manage debt payment. As the deficit continues to grow, the Government must have laser focus on the impact on the gilt market in relation to how they fund Government debt.
The new clause introduces a requirement for an impact assessment before any regulatory or policy changes that could materially alter DB schemes’ asset allocations away from gilt. It should mandate consultation with the Debt Management Office and industry stakeholders to monitor and mitigate risk to market stability. We are not trying to stop the Government persuading pension funds into equities or other alternative investments, but we need a proper conversation with the Debt Management Office about what that means for the cost of Government borrowing, which could potentially be significant.
Torsten Bell
I will not speak for long. The hon. Member is absolutely right to say that defined-benefit schemes have been material buyers of gilts over a long period. The market is perhaps deeper and more robust than what some of his remarks might imply. There is a range of participants in our gilt markets. However, I take the point that pension schemes are one of them. Contributions such as those from the Office for Budget Responsibility are valuable in that debate, and I reassure him on two fronts. First, I know that he did not mean it quite like this, but the deficit is not growing this year; in fact, it is falling by around 1% of GDP, marking us out from some other countries. Secondly, he is absolutely right to say that the DMO should and does engage with market participants across a wide range of matters. However, on that basis, and on the basis that the Bill does not envisage changes in DB schemes’ asset allocations, I ask him to withdraw the new clause.
Amendment 98 agreed to.
Sarah Edwards (Tamworth) (Lab)
I beg to move amendment 276, to clause 38, page 42, line 41, at end insert—
“(aa) the progress towards the targets set out in the Mansion House Agreement (2025) and the state of the supply pipeline of qualifying assets;”.
To clarify the extent of the review to be conducted before the “mandation” power is deployed.
It is an honour to serve under your chairship, Mr Turner. It may be that the subject of my amendment is already covered or that the Minister may wish to take it away for consideration. I commend the tracked changes document that was shared with us and that has enabled us to read clause 38 with all of its new additions in a much easier format. I implore the House to use that tool in other Committees, because it has made it much easier this afternoon.
The all-party parliamentary group for pensions and growth heard from the pensions industry at the roundtables that it held, and this amendment speaks to a point that I made on Second Reading. It is a clarifying point concerning the Mansion House agreement, which sets out targets and a supply and pipeline of investments to be made available by pension funds to invest into. It is a point of clarification because it is arguably good and noble to channel that investment, but the pipeline needs to be managed to ensure good outcomes for members, whose money will be helping to build these projects. It is about future-proofing the Bill, because as the Minister has said in previous sittings, he may not be our Pensions Minister forever.
In short, the purpose of my amendment is to clarify the extent of the review to be conducted before a mandation power is deployed. It is merely a clarification point for the pensions industry.
Kirsty Blackman (Aberdeen North) (SNP)
I rise to support amendment 276. It is similar to some of the points that I brought up earlier, which were also brought up in the oral evidence session, about the consistency and existence of that pipeline and the fact that it needs to be there. Reviewing in advance of a decision being made on mandation would be the sensible thing.
I mentioned earlier the issue with chickens and eggs—which comes first?—and I think the amendment brings more of a focus in primary legislation on ensuring that the pipeline exists in order that these companies and organisations can meet their commitments under the Mansion House agreement. It is all well and good for them to have the Mansion House agreement, but if the opportunities are not there and are not investment-ready, it will be difficult for them to meet those targets. This is a sensible amendment, and I am more than happy to support it.
Torsten Bell
Before I come to the detail of the amendment, I should re-emphasise the point made by my hon. Friend the Member for Tamworth about the volume of amendments to clause 38 in particular, which is why I asked for the amended clause with track changes to be circulated to the whole Committee. I hope that Members have found that useful.
Turning to the amendment, I have a lot of sympathy for what my hon. Friend is trying to achieve. It is important that we monitor progress on the Mansion House commitments and continue to stay focused on the strength of the pipeline. There are parts of the Bill that would already facilitate that, including data collection that is consistent with monitoring the Mansion House progress, and the strength of the pipeline, which was obviously relevant to consideration of the saver’s interest test, and thus left in the Bill. I suggest that, given our sympathy with the idea of this amendment but its interactions with several other existing parts of the Bill, we commit to reviewing it with a view to deciding whether we should come back with something similar on Report, if the hon. Lady is content with that.
Sarah Edwards
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: 105, in clause 38, page 43, line 7, at end insert—
“(and for that purpose, a provision of the trust deed or rules of the scheme is ‘in conflict’ with provision under this section so far as the former does not allow for the assets of the scheme to be managed in such a way as to meet the conditions for approval under this section)”.
This amendment clarifies the application of section 28C(14).
Amendment 106, in clause 38, page 43, line 8, leave out subsection (15).—(Torsten Bell.)
This amendment is consequential on Amendment 129.
Torsten Bell
I beg to move amendment 107, in clause 38, page 43, line 9, at end insert—
“28CA Information
(1) Regulations may make provision about information that the trustees or managers of a relevant Master Trust or the provider of a group personal pension scheme must give to the Regulatory Authority about the allocation of assets of the relevant Master Trust or group personal pension scheme.
(2) The regulations may make provision about—
(a) the types of information that must be given;
(b) when it must be given;
(c) the form and manner in which it must be given.”
This new section would allow regulations to require the provision of information about asset allocation to the Secretary of State and the Regulatory Authority.
The amendment is supplementary to a provision in the introduced Bill, proposed new section 28C(10)(d), which permits the Government to make regulations about the provision to regulators of information relating to the allocation of assets by the relevant pension providers. The amendment ensures that, in the event that the regulator does not possess crucial information that the Government require in order to design the possible asset allocation framework, or to write the report on saver and growth impacts that they will be legally required to produce, the Government can obtain that information via the regulators.
Kirsty Blackman
I want to ask the Minister why the amendment has been tabled. Have the regulators asked for it so that they can get the information they need, or has the provision been identified by the Government? Basically, what consultation is being done to ensure that the amendment makes sense and is doing what people need it to do?
Torsten Bell
The direct answer is that, yes, the amendment comes from discussions with regulators, to make sure that the flow of information is sufficient to live up to Parliament’s intent and that meaningful reports on the saver and growth impacts can be provided.
Amendment 107 agreed to.
Torsten Bell
I beg to move amendment 108, in clause 38, page 43, line 19, at end insert “, and
(b) has a credible plan in place for meeting the scale requirement within the meaning of section 28A(2)”.
This amendment makes it a condition of approval for transition pathway relief that a Master Trust has a credible plan in place for meeting the scale requirement.
Torsten Bell
This group of amendments deals with the transition pathway relief, which we touched on earlier in the context of support for innovation within the pension landscape.
First, amendments 108 and 109 amend proposed new section 28D so that, to be approved on the transition pathway, a master trust or group personal pension scheme respectively must produce a credible plan for meeting the scale requirements, before the end of the pathway. I should clarify what I said earlier, sorry—this is the transition pathway; we are not talking about the new entrant pathway.
In addition, via amendment 131, we are inserting new subsection (15A) into clause 38, to ensure that the pathway will expire five years after the scale requirements come into force. We accept that in certain circumstances schemes may need more time to reach scale, but we want the end destination—going back to our conversation about scale and certainty that scale will be achieved—to be clear. I commend these minor amendments to the Committee.
Mark Garnier
I thank the Minister for talking through the amendments. We understand the intention behind them, but we are worried that, as can often be the case, there may be an unintended consequence: the creation of a closed shop for master trusts. We do not want suddenly to find that, in trying to make a transition pathway, we end up making things more difficult because it has been interpreted in the wrong way. We are minded to oppose the amendments, but perhaps the Minister could instead give us his thoughts on how we can ensure that they do not get used the wrong way and that we do not end up with a closed shop of master trusts.
Steve Darling (Torbay) (LD)
I echo what the shadow Minister has just highlighted. We all want the reform that the Bill introduces, but we do not want what results from this process to be set up forever, with a lack of opportunity for change; I will talk a little further about that when we come to new clause 3. Some reassurance from the Minister that there is an opportunity for new entrants and innovation would be extremely welcome.
Torsten Bell
I apologise for my slip of the tongue at the start of my speech. This group of amendments deals with transition pathway relief. Here, in many cases we are talking about existing schemes that may not meet the £25 billion threshold, but which have a plausible path to that scale requirement over the following five years—I think that is a point of consensus across the Committee. That is what we are engaging with here. It is a reasonable approach to avoid a cliff edge, for exactly the reason that the shadow Minister set out.
Mark Garnier
I completely understand that. The question is, what is plausible? One man’s plausible might be another man’s impossible. That is the bit that we are worried about: how to ensure that someone is not squeezed out who otherwise could be in it.
Torsten Bell
I completely recognise that. Let me say a few words about how we have tried to balance those tests. We want to see the industry get to scale, and we want clarity about what the end point is, but we want to provide a pragmatic approach to how we get there. Balancing that is what drove us to the five-year approach, which is different from some of the earlier discussions in the pensions investment review about an earlier, harder deadline of 2030.
Within the Bill there is flexibility for regulators where people are just approaching the deadline or in other situations, to avoid difficult situations where people’s authorisation is put into question at short notice. That is important, but so is providing the clarity that they will be required to get to scale. It cannot be a never, never. It needs to be a pathway to a destination; it cannot just be a hope.
I think that we have taken a pragmatic, balanced approach, but I appreciate that others will have their views. There will be those in the industry who will worry that they may not be on track to meet those scale requirements, but that is in the nature of the beast of our saying that the industry needs to change. I appreciate that that will mean some change for some organisations. We have tried to be flexible and to take a pragmatic approach.
Amendment 108 agreed to.
Amendments made: 109, in clause 38, page 43, line 28, at end insert—
“, and
(b) has a credible plan in place for meeting the scale requirement within the meaning of section 28B(2).”
This amendment makes it a condition of approval for transition pathway relief that a group person pension scheme has a credible plan in place for meeting the scale requirement.
Amendment 110, in clause 38, page 43, line 33, leave out “authorisation” and insert “approval”.
This amendment is to ensure that new section 28D of the Pensions Act 2008 refers correctly to an approval under new section 28A or 28B of that Act.
Amendment 111, in clause 38, page 44, line 15, after “20(1A)” insert “or section 26(7C)(c)”.—(Torsten Bell.)
This amendment corrects an omission so that new section 28E of the Pensions Act 2008 works effectively for group personal pension schemes.
Torsten Bell
I beg to move amendment 112, in clause 38, page 44, line 20, at end insert—
“(za) the scheme in question does not yet have any members,”
This amendment ensures that relief under section 28E is only available to schemes that are not yet operational.
The Chair
With this it will be convenient to discuss the following:
Government amendments 113 to 115.
New clause 3—New market entrants: scale and asset allocation—
“(1) In making regulations under Chapter 3, the Secretary of State must have regard to the need to identify and mitigate barriers faced by new market entrants in the defined contribution pensions market.
(2) The Secretary of State must consider how regulations will—
(a) foster a competitive environment that supports innovation among new and existing providers;
(b) ensure fair access to the market for schemes with strong potential for growth and an ability to innovate, including those not yet meeting prescribed scale thresholds.”
This new clause would require the Secretary of State to consider the effect of regulations under Chapter 3 on scale and asset consolidation on new market entrants.
Torsten Bell
These amendments clarify aspects of the approval criteria for prospective new entrants into the multi-employer DC market after the scale requirements come into force. Amendment 112 requires that a new prospective provider must have no current members—it must actually be new to the market. We want to ensure that the route is used only by those for whom it is intended, rather than as a loophole around the main intent of the Bill.
Amendment 113 requires that new entrants have strong potential to grow in order to meet the scale requirements under section 28A, and that the prospective scheme in question has an innovative product design. I think we will come to the question of product shortly, but to skip ahead, the regulations would allow us to talk about innovation in the nature of the service, not just in the product. That is a question for us to take away in the design of those regulations. That is not in the Bill itself, but it is an important clarification.
The remaining amendments in this group are consequential on amendment 113. They will offer greater clarity to potential applicants to this pathway, and I commend them to the Committee.
I thank the hon. Member for Torbay for tabling new clause 3 and acknowledge his wish that the pathway for new entrants into the DC multi-employer market be as supportive as possible for new providers. We of course agree with that sentiment. We want to see fewer, bigger schemes, but not a lack of competition in the longer run, even though we are a long way from that.
From an innovation viewpoint, the new clause is not necessary to achieve that aim. Competition will come from the possibility of innovation, but must also flow into the building of scale, which is the overall intent of the legislation. Given that the spirit of the new clause is achieved by the new entrants pathway, I ask the hon. Gentleman not to press it to a vote.
Steve Darling
It is a pleasure to serve under your chairmanship, Mr Turner.
Will the Minister put a little more flesh on the bone in respect of the ladder of opportunity for new entrants? We need to make sure that we do not end up with a system with large schemes and nobody being able to get into the super-league of opportunity that we have currently. We want to see innovation over time and hoped that, through the new clause, we could bake that into the system. We can have aspirations for how future Ministers deal with these matters, but we must give confidence to the industry in respect of future entrants, so that it continues to be a vibrant industry that drives investment and growth for people’s pensions. That is essential. We would be extremely grateful for some more flesh on the bone.
Kirsty Blackman
I appreciate the Minister’s clarification that I had talked about amendment 113 prematurely, but it was relevant in the context of the previous discussion.
I also appreciate the Minister’s clarification on the definition of “product”. I understand why he wants to make the amendment to tighten the Bill up a wee bit; however, it potentially tightens it up too much. Before Report, will he consider whether the use of the word “product” is right? Does he need to look at including that word in the definitions provided at the end of clause 38—I do not think it is currently included—to cover not only the physical things or offerings to people in terms of the products and investments they could look at, but the niche and specific service provision that might be attractive to people who are looking to invest their pensions because they have specific life conditions, or because their life and work does not fit into a normal box? I appreciate the earlier clarification in respect of the default products, which was incredibly important and helped to clarify my mind, but it would be helpful if the Minister agreed to take away my suggestion.
I can understand why the Liberal Democrats tabled new clause 3. We should consider where we are with the innovation pathway, and the fact that the new entrant pathway exists and the relevant regulations have not yet been created. I assume that the Minister and his team will listen to a huge number of people. Clause 38 says that
“such persons as the Secretary of State considers appropriate”
must be consulted; I hope that will be a wide group of people with significant experience in the industry.
Given that so many of us have mentioned challenger banks and new financial institutions, perhaps the consultation will look at what has been learned in that respect and whether some of the innovative decisions, and the regulations that allowed the provision of innovative products, should be included in the scope of the regulations. I would rather the innovation be quite wide, rather than quite tight, given that the scale thresholds and requirements have to be met anyway.
If somebody has a credible plan to reach that scale, surely pretty much any of the innovative solutions they may be suggesting are good, because they are also providing a credible plan to get that significant level of scale and the efficiencies that come along with that. Potentially the definition of products in the defined terms at the end could be a good vehicle for the Minister to ensure that the scope is as wide as he would like it to be.
John Milne (Horsham) (LD)
To add briefly to the comments of my hon. Friend the Member for Torbay, I emphasise that with new clause 3 we are taking a non-prescriptive approach. It says that
“the Secretary of State must have regard to the need to identify and mitigate barriers faced by new market entrants in the defined contribution pensions market.”
It is a very gentle ask. We are all very aware of the issues today, but will they still be in everybody’s mind in the future?
Torsten Bell
I will come back on the question about the word “product” and definitions. I reassure the Committee that I will go away and make sure that is clear if it is not clear enough already.
The core Liberal Democrat question is, are we baking innovation in? It is a good question for us all to be asking. I think the answer is yes. To broaden the conversation out slightly, we want to see innovation from existing providers as well. We anticipate that there will still be 15 or so large providers in the 2030s. That is still a highly competitive market. Not just looking at costs but also at customer service and all the rest in the value for money regime should be a spur to that innovation. That is a key part of the set of clauses we were discussing last week.
I should explicitly note that the scale tests do not cover the most obvious innovation that is likely to come in the market in the coming years, which is CDC schemes. By their nature, if they are to be successful, they will get to scale anyway, but to make their path easier and to be clear that we do see a role for CDC innovation moving forward, those are not part of these requirements. The innovation pathway exists for exactly this reason, as we have discussed.
Several Members have raised a question about consultation. I confirm that there is a requirement for a public consultation, which should certainly learn lessons that go beyond the experience of the pensions industry to the wider financial services sector—lessons of competition entry. We talked about that in the banking sector earlier, but the same thing would apply, for example, to other parts of the insurance sector and others. We will take that away. We are very conscious at the moment, in our wider approach to regulation, of providing earlier authorisation, where that can be done. I suspect we may come back to that in the superfunds discussion later this week.
Amendment 112 agreed to.
Amendments made: 113, in clause 38, page 44, leave out lines 21 and 22 and insert—
“(a) the scheme in question has strong potential to grow so as to meet the scale requirement under section 28A,
(aa) the scheme in question has an innovative product design, and”.
This amendment ensures that the eligibility conditions for new entrant pathway relief are more precisely articulated.
Amendment 114, in clause 38, page 44, line 34, leave out from “of” to “(including” in line 35 and insert “ “strong potential to grow” and “innovative product design” ”.
This amendment is consequential on Amendment 113.
Amendment 115, in clause 38, page 44, line 36, leave out from “has” to end of line 37 and insert “strong potential to grow or an innovative product design”.
This amendment is consequential on Amendment 113.
Amendment 116, in clause 38, page 45, leave out lines 1 and 2.—(Torsten Bell.)
This amendment is consequential on Amendment 129.
Torsten Bell
I beg to move amendment 117, in clause 38, page 45, line 4, leave out “may” and insert “must”.
This amendment, together with Amendment 118, means that regulations about suspending the requirement for approval under section 28C have to have effect at any time when section 28C has effect as a result of regulations under that section.
Torsten Bell
This is a group of minor amendments, mostly aiming at improving the clarity of proposed new section 28F, for example by removing duplication. I draw Members’ attention to the most significant amendments, which are amendments 117 and 118. They make clear that the Government must introduce the savers’ interest exemption mechanism if they are to introduce asset allocation requirements. That is a “must” rather than a “may” because the Government’s intention is that there must always be a savers’ interest exemption.
Kirsty Blackman
I have a brief comment on Government amendment 117. Because there were so many amendments, it was quite difficult to ensure that the Minister went through all of them with a fine-toothed comb. The explanatory statement for this one does not make any sense to me—it perhaps makes sense to other people. Reading the explanatory statement was deeply unhelpful, and I ended up being more confused than I was before. I appreciate the intention—what the Minister said amendment 117 was for—and the way that he described the rest of the amendments in this group, but I am pointing out for future reference that it would be helpful if we could understand the explanatory statements.
Torsten Bell
Noted.
Amendment 117 agreed to.
Amendments made: 118, in clause 38, page 45, line 9, at end insert—
“(1A) The Secretary of State must make regulations under subsection (1) so that they have effect whenever regulations under section 28C(1) or (2) have effect.”
See the explanatory statement for Amendment 117.
Amendment 119, in clause 38, page 45, line 14, leave out “the scheme or”.
This amendment means the asset allocation requirement can only be suspended where it would cause material financial detriment to the members of a scheme.
Amendment 120, in clause 38, page 45, line 15, leave out from “the scheme” to end of line 17.
This amendment simplifies the description of what may be done by regulations under new section 28F(1).
Amendment 121, in clause 38, page 45, line 17, at end insert—
“(aa) may make provision about the basis on which the Authority may or must form such a view, including about the evidence which the Authority may or must take into account;”.
This amendment clarifies that the regulations can circumscribe the basis on which the FCA or TPR can reach a view on the material financial detriment test in subsection (2)(a).
Amendment 122, in clause 38, page 45, line 23, at end insert—
“(c) must provide for the Authority’s determination on an application to be referred to the Upper Tribunal.”
This amendment ensures that decisions on an application for the suspension of the asset allocation requirement will be referable to the Upper Tribunal.
Amendment 123, in clause 38, page 45, leave out lines 24 to 26.
This amendment is consequential on Amendment 121.
Amendment 124, in clause 38, page 45, line 28, after “as” insert “material”.
This ensures that regulations under subsection (4) can also make provision about what kind of detriment is classed as “material”.
Amendment 125, in clause 38, page 45, line 30, leave out subsection (5).—(Torsten Bell.)
This amendment is consequential on Amendment 129.
Torsten Bell
I beg to move amendment 127, in clause 38, page 45, line 31, at end insert—
“28G Risk notices
(1) The Regulatory Authority (‘the Authority’) may give a risk notice to the trustees or managers of a relevant Master Trust if the Authority considers that—
(a) there is an issue of concern in relation to the relevant Master Trust, and
(b) the relevant Master Trust will, or is likely to, cease to meet the conditions for approval under section 28A or 28C if the issue is not resolved.
(2) A ‘risk notice’ is a notice that requires the trustees or managers of a relevant Master Trust to submit to the Authority a plan (a ‘resolution plan’) setting out proposals for resolving the issue of concern.
(3) A risk notice must—
(a) identify the issue of concern;
(b) specify the date by which the resolution plan is to be submitted.
(4) If the Authority is not satisfied that the proposals in a resolution plan are likely to be adequate to resolve the issue of concern, the Authority may give a further notice to the trustees or managers requiring them to submit a revised plan by a date specified in the notice.
(5) The trustees or managers must implement the proposals in a resolution plan if the Authority—
(a) is satisfied that the proposals are likely to be adequate to resolve the issue of concern, and
(b) notifies the trustees or managers accordingly.
(6) The Authority may direct the trustees or managers to comply with the requirement imposed by subsection (5).
(7) Where the trustees or managers are required by subsection (5) to implement the proposals in a resolution plan, they must—
(a) submit to the Authority, before the end of a period specified in regulations, a report setting out what progress they are making in implementing the proposals (a ‘progress report’);
(b) submit further progress reports to the Authority at intervals specified by the Authority.
(8) Resolution plans and progress reports must be provided in the manner and form specified by the Authority.
(9) A reference to a resolution plan in subsections (4) to (8) includes a reference to a resolution plan as revised under subsection (4).
(10) Regulations may—
(a) specify information that a risk notice must contain;
(b) provide that the date referred to in subsection (3)(b) or (4) must fall before the end of a period specified in the regulations.
(11) Section 10 of the Pensions Act 1995 (civil penalties) applies to a trustee or manager of a relevant Master Trust who fails to comply with—
(a) a notice under subsection (1) or (4),
(b) a direction under subsection (6), or
(c) a requirement imposed by subsection (7).”
This amendment allows the Regulatory Authority to issue risk notices to the trustees or managers of a relevant Master Trust or the provider of a group personal pension scheme if there were an issue in relation to the scheme relating to the quality requirement.
Torsten Bell
These amendments relate to compliance and enforcement. Government amendment 127 allows the Pensions Regulator to issue risk notices to the trustees or managers of a relevant master trust or the provider of a group personal pension scheme if there were an issue in relation to the scheme relating to the quality requirement. This will require the relevant master trust to develop a resolution plan to address the regulator’s concerns. The regulator may then direct the relevant master trust to implement the measures in that plan.
Amendment 128 allows regulations to make provision for the imposition of penalties where a relevant master trust or GPP scheme accepts contributions from an employer when it should not. It will allow the regulator to issue penalties of up to £100,000 in relation to each employer from which contributions continue to be accepted. It will also give the provider the right of appeal against the penalty.
Amendment 126 enables the FCA to monitor and enforce compliance of any FCA-regulated person in scope of chapter 3 of part 2 of the Bill. It also provides that the Treasury may make regulations to enable the FCA to take action for monitoring and enforcing compliance of any FCA-regulated person with any provision under chapter 3. I commend the amendments to the Committee.
Kirsty Blackman
It looks like these amendments came up because of conversations with the regulator, which is looking to ensure that it can use the powers that the Bill intends to create. This is not the first time we have had amendments that have been suggested by the regulator. I would appreciate it if the Minister could go away, and, perhaps when he is making regulations or bringing forward future legislation on pensions, ensure that he has more in-depth chats with the regulator in advance, so the original legislation can be drafted in a way that will work for the regulator, rather than having to be amended after Second Reading.
Torsten Bell
Point noted.
Amendment 127 agreed to.
Amendments made: 128, in clause 38, page 45, line 31, at end insert—
“28H Penalties
(1) Regulations may make provision about the imposition by the Regulatory Authority of a penalty on the trustees or managers of a relevant Master Trust or the provider of a group personal pension scheme where the scheme—
(a) fails to meet the condition in section 20(1A) by virtue of not being approved under section 28A or 28C, and
(b) accepts contributions from an employer in relation to a jobholder on the basis that it is an automatic enrolment scheme in relation to that jobholder.
(2) Regulations may make provision about the imposition by the Regulatory Authority of a penalty on the provider of a group personal pension scheme where the scheme—
(a) fails to meet the condition in section 26(7A) or (7B), and
(b) accepts contributions from an employer in relation to a jobholder on the basis that it is an automatic enrolment scheme in relation to that jobholder.
(3) The regulations must provide—
(a) that a penalty must not exceed £100,000 in relation to each employer from which contributions are accepted as mentioned in subsection (1)(b) or (2)(b), and
(b) that there is a right of appeal against the imposition of the penalty.”
This amendment allows regulations to make provision for the imposition of penalties where a relevant Master Trust or a group personal pension scheme accepts contributions from an employer in relation to a jobholder on the basis that it is an automatic enrolment scheme in relation to that jobholder.
Amendment 126, in clause 38, page 45, line 31, at end insert—
“28I Enforcement by the Financial Conduct Authority
(1) The Treasury may make regulations to enable the Financial Conduct Authority to take action (in addition to any action it may otherwise take under the Financial Services and Markets Act 2000) for monitoring and enforcing compliance of any FCA-regulated person with any provision of or under this Chapter.
(2) The regulations may apply, or make provision corresponding to—
(a) provision made by or under this Part in relation to the Regulator, or
(b) any provision of the Financial Services and Markets Act 2000,
with or without modification.
(3) In this section, ‘FCA-regulated person’ means an authorised person (within the meaning of the Financial Services and Markets Act 2000).”
This amendment allows monitoring and enforcement functions to be conferred on the FCA in relation to the compliance of FCA-regulated persons with provisions of or under Chapter 1 of the Pensions Act 2008, including the new provisions on scale and asset allocation.
Amendment 129, in clause 38, page 46, line 9, leave out subsection (14) and insert—
“(14) In section 99 (interpretation of Part)—
(a) the existing words become subsection (1);
(b) in that subsection, at the appropriate places insert—
‘“group personal pension scheme” means a personal pension scheme which is available, or intended to be available, to employees of the same employer or of employers within a group, but does not include—
(a) a stakeholder pension scheme (as defined in section 1 of the Welfare Reform and Pensions Act 1999), or
(b) any pension scheme that requires all its members to make a choice as to how their contributions are invested;’;
‘“Regulatory Authority” has the meaning given by regulations under subsection (2);’;
‘“relevant Master Trust” has the meaning given by section 20(4);’;
(c) after that subsection insert—
‘(2) The Secretary of State may by regulations define “Regulatory Authority” for the purposes of this Part.’”
This amendment consolidates certain interpretative provisions. It also amends the definition of “group personal pension scheme” so that only schemes where all members select their investment approach are excluded.
Amendment 130, in clause 38, page 46, line 19, leave out “26(7A), 28E” and insert—
“26(7A), (7B), (7C) or (7E),”.
This amendment, together with Amendment 132, ensures that regulations relating to the new scale and asset requirements are subject to affirmative parliamentary procedure.
Amendment 131, in clause 38, page 46, line 20, at end insert—
“(15A) The following provisions of the Pensions Act 2008 (which relate to transition pathway relief) are repealed at the end of the period of 5 years beginning with the day on which they come into force—
(a) paragraph (c) of Condition 1 in section 20(1A);
(b) section 26(7C)(b);
(c) section 28D;
(d) the word ‘28D’ in section 143(5)(a).”
This amendment provides for transition pathway relief to cease to be available 5 years after the commencement of the scale requirement.
Amendment 132, in clause 38, page 46, line 20, leave out “28C,” and insert—
“28C (other than subsection (10)(d))), 28D, 28E, 28F, 28H, 28I,”.
See the explanatory statement for Amendment 130.
Amendment 133, in clause 38, page 46, line 21, leave out subsection (16) and insert—
“(16) If this section is repealed under section 101(5A) (repeal where asset allocation requirement uncommenced) in respect of the insertion of the provisions mentioned in that subsection, the Secretary of State may by regulations amend this section in consequence of that repeal.
(17) Regulations under subsection (16) are subject to the negative procedure.”—(Torsten Bell.)
This amendment is related to Amendment 228. It allows for regulations to be made tidying up the various references to the asset allocation requirement in clause 38 in the event that the power to commence that requirement is never exercised.
Question put, That the clause, as amended, stand part of the Bill.
Torsten Bell
I beg to move amendment 134 in clause 39, page 46, line 36, after “2008” insert—
“in relation to the scale requirement in section 28B or the asset allocation requirement in section 28C,”
This amendment, together with Amendment 135, ensures that provisions in or under the Pensions Act 2008 are added to section 204A of the Financial Services and Markets Act 2000 (meaning of “relevant requirement” and “appropriate regulatory”) only so far as they relate to the scale requirement or the asset allocation requirement.
The Chair
With this it will be convenient to discuss the following:
Government amendments 135 to 137.
Clause stand part.
Clause 40 stand part.
Torsten Bell
As amended, the clause introduces consequential amendments relating to clause 38 to ensure that the changes needed for the asset allocation and scale measures appropriately wire into existing legislation. The clause does this by making amendments to the Financial Services and Markets Act 2000 and the Pension Schemes Act 2017. The clause makes an insertion into section 1A and an amendment to section 204A of the 2000 Act. It ensures that the FCA’s statutory functions are extended, which would include its new enforcement functions for clause 38 in relation to scale and asset allocation.
The second part of the clause adds new authorisation criteria for master trusts into the 2017 Act. These new criteria will require trustees of a master trust to satisfy the Pensions Regulator that they have a sufficient investment capability and continue to have a main scale default arrangement. Introducing these criteria will enable implementation of the Government’s policy objective, set out in the final report of the pension investment review, to ensure schemes utilise the benefits of scale to deliver better investment outcomes.
The clause sets out factors that the Pensions Regulator will be required to consider in deciding that the master trust authorisation criteria are met and enables further detail to be set out in regulations. The effect of these additions to the authorisation regime are essential as they help to drive capability within master trusts. I commend clause 39 to the Committee.
Government amendments 134 and 135 ensure that the necessary extension of the FCA’s authorisation functions under FSMA encompass only its new role in overseeing the scale and asset allocation requirements and does not extend to other non-relevant requirements in the Pensions Act 2008. It has a constraining effect.
Government amendment 136 makes it clear that the addition to section 5 in part 1 of the Pension Schemes Act 2017 regarding decisions on application is about the scheme meeting the scale requirements under condition 1 of section 20(1)(a) of the Pensions Act 2008. Government amendment 137 gives the Secretary of State the ability to set out the meaning of terms in specific areas. I urge Members to support Government amendments 134 to 137.
Clause 40 deals with the application of scale and asset allocation measures to Crown schemes. The substantive provisions in chapter 3 take the form of amendments to the Pensions Act 2008, the Pension Schemes Act 2017 and the Financial Services and Markets Act 2000. These Acts already deal with application to the Crown in their own way, and it is not the intent of the Government to disrupt or confuse these settled positions. Accordingly, after consideration, we seek to delete this clause. To be clear, I do not commend the clause to the Committee.
Amendment 134 agreed to.
Amendments made: 135, in clause 39, page 46, line 38, after “2008” insert
“in relation to the scale requirement in section 28B or the asset allocation requirement in section 28C,”
See the explanatory statement for Amendment 134.
Amendment 136, in clause 39, page 47, line 10, leave out “quality” and insert “scale”
This amendment changes a parenthetical description so that it is clearer.
Amendment 137, in clause 39, page 47, line 27, leave out from “(2)” to end of line 32 and insert—
“(4) The Secretary of State may by regulations—
(a) make provision about the meaning of terms used in subsection (2);
(b) specify further factors that the Pensions Regulator must take into account in deciding whether it is satisfied about the matters mentioned in subsection (1).
(5) The first regulations that are made under this section are subject to affirmative resolution procedure.
(6) Any other regulations under this section are subject to negative resolution procedure.”— (Torsten Bell.)
This amendment expands the power currently in the new section 12A(3) of the Pension Schemes Act 2017, created by clause 39(11) of the Bill, so as to allow the Secretary of State to make provision about the meaning of terms in new section 12A(2) of the Pension Schemes Act 2017.
Torsten Bell
I beg to move amendment 138, in clause 39, page 47, line 32, at end insert—
“12B Scale requirement
(1) The Secretary of State may by regulations make provision about how the Pensions Regulator is to decide whether it is satisfied that a Master Trust scheme that has its main administration in the United Kingdom meets Condition 1 in section 20(1A) (scale requirement) of the Pensions Act 2008.
(2) The regulations may, among other things, specify matters which the Pensions Regulator must take into account in making its assessment.
(3) The first regulations under this section are subject to affirmative resolution procedure.
(4) Any subsequent regulations under this section are subject to negative resolution procedure.”
This amendment inserts in the Pension Schemes Act 2017 a power to make regulations about how the Pensions Regulator is to decide whether a Master Trust meets the scale requirement.
It is with some relief that I reassure Members this is the last amendment to this section of the Bill. Government amendment 138 amends one of the new authorisation criteria for master trusts that the Bill inserts into the Pension Schemes Act 2017, which provides that a master trust scheme must meet the scale requirement. It grants the Government the power to make regulations about how the pensions regulator should satisfy itself that a master trust scheme has met the scale requirements. I commend the amendment to the Committee.
Amendment 138 agreed to.
Clause 39, as amended, ordered to stand part of the Bill.
Clause 40 disagreed to.
Clause 41
FCA-regulated pension schemes: contractual override
Torsten Bell
I beg to move amendment 140, in clause 41, page 48, line 22, after “2008” insert “or section 3(2), 5(2) or 7(3) of the Pensions (2) Act (Northern Ireland) 2008 (c. 13 (N.I.))”
This amendment extends the application of the contractual override measure to Northern Ireland pension schemes.
The Chair
With this it will be convenient to discuss the following:
Government amendments 141 to 146.
Clause stand part.
Torsten Bell
We now come to the contractual override part of the Bill. This group of amendments expands the scope of clause 41 to apply to Northern Ireland pension schemes. Just like in Great Britain, many pension scheme members in Northern Ireland will be in arrangements delivering poor value and outcomes. However, due to a lack of engagement from members, there is often little providers can do to address that. Extending these changes to Northern Ireland will help to solve that. These amendments will create better outcomes for pension scheme members in Northern Ireland, and I therefore ask the Committee to support these amendments.
Amendments 143 and 144 add another layer of consumer protection to the already rigorous consumer protections we have included in the Bill. Currently a provider is required to receive certification from an independent person with sufficient expertise that the best interest test has been met. To clarify, that test requires the provider that wishes to use the contract override to carry out an assessment that it is in the interests of scheme members that the override take place. That test then has to be certified by an independent person. This is about strengthening that independent person test. The amendments require the Treasury to make regulations defining “independence” by specifying requirements which must be met by an independent person before they can be appointed, and ensure that the independent person has no conflict of interest. The FCA is then required to include the provisions made by these regulations in its rules. The amendments make an important change to the Bill by ensuring there will be clear rules on who can undertake this important role, and I therefore commend them to the Committee.
Clause 41 inserts proposed new part 7A, on what we call the contractual override mechanism—referred to as a unilateral change—into the Financial Services and Markets Act 2000. This will enable providers of FCA-regulated, defined-contribution workplace pension schemes —note we are talking about FCA-regulated, defined-contribution workplace schemes only—to override the terms of a pension scheme without the consent of members and either transfer members to a different pension scheme, make a change that would otherwise require consent, or vary the terms of members’ contracts, but only when certain clear conditions, including most importantly the best interest test, are met. This will establish broad equivalence with the trust based market, where these changes are already available, so trustees already have these powers within the trust-based market. It will also create better outcomes for consumers, deliver on a long-awaited industry ask, and help drive scale and consolidation within the sector, achieving the consolidation we talked about in relation to the previous clause. It is an important enabler of those changes.
The clause also amends sections 105, 168 and 429 of FSMA to ensure that the contractual override mechanism can work as intended, and to ensure that the appropriate parliamentary procedures apply to regulations that are made under this part, and that amend or repeal primary legislation. I commend the clause to the Committee.
Amendment 140 agreed to.
Amendments made: 141, in clause 41, page 48, line 24, leave out from “member”” to end of line 25 and insert
“means an active member within the meaning of Part 1 of the Pensions Act 2008 (see section 99 of that Act) or Part 1 of the Pensions (2) Act (Northern Ireland) 2008 (c. 13 (N.I.)) (see section 78 of that Act).”
This amendment is consequential on Amendment 140.
Amendment 142, in clause 41, page 48, line 33, leave out from “arrangements”” to end of line 34 and insert
“means direct payment arrangements within the meaning of section 111A of the Pension Schemes Act 1993 or section 107A of the Pension Schemes (Northern Ireland) Act 1993.”— (Torsten Bell.)
This amendment is consequential on Amendment 140.
Sarah Edwards
I beg to move amendment 278, in clause 41, page 49, line 26, at end insert
“and only after VFM assessments are available to the Trustees as part of the decision making process.”
This amendment would restrict external transfers until VFM assessments are available to ensure that Trustees can carry out their fiduciary duty.
The amendment relates to contractual override. It may have been covered in the new drafting of the clauses, as it was tabled on the previous text. The Minister may have seen this potential eventuality, and it may be provided for elsewhere, but we have spoken at length in Committee about the importance of pensions adequacy and about the landscape moving towards a higher membership of defined-contribution schemes.
The amendment is an attempt to bridge the gap presented by the delay between the regulations’ implementation, and to ensure that investments are made not on the basis of low-cost, low-risk funds prior to the regulations being implemented, which potentially would lock down investments. It is another small addition that clarifies the importance of the value for money framework, which the Bill is championing, and it adds to the requirement of consent in the provision by adding focus on ensuring that value for money assessments are available prior to the transfer, as an extra protection for trustees to carry out their fiduciary duty.
Torsten Bell
I thank my hon. Friend. She is right that it is important that we think through how to line up the value for money work with the question we are now turning to on contractual overrides. I will come back to distinguish between the data that comes through the value for money process and the actual formal assessments themselves, which is what is referred to in the amendment. We agree that the value for money data is vital for ensuring consumer protections, and it is why the implementation of the contractual override mechanism is already being timed so that it is in conjunction with the value for money framework. The very keen can read that in the road map we set out in June, which gets into exactly those questions.
To go into a bit more detail—and I appreciate that my hon. Friend already knows this—the data for the value for money assessment will be available ahead of the formal assessments, and it is on that basis that people will be able to go ahead with some forms of contract override—for example, when they are moving members within parts of the individual providers, so they would have all the information that they require.
My hon. Friend raised a specific question about when people are being transferred between schemes. Should that always wait for the full value for money assessments? I will give her another commitment that I will take that away and consider it. There may be some circumstances in which that information is available, and we do not wish to unduly constrain providers, but it is a reasonable point for us to be discussing. As I say, she is right to raise the point about the interaction between the value for money data, including its visibility to other people, and the contractual override. If she is happy to withdraw the amendment, I will consider whether we can provide further clarity on the point on Report.
Sarah Edwards
On that basis, I am happy to beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mark Garnier
I beg to move amendment 257, in clause 41, page 53, line 7, at end insert—
“117GA FCA guidance
(1) The FCA must issue guidance on contractual overrides.
(2) Guidance on contractual overrides must include—
(a) when and how overrides can be used;
(b) how to demonstrate transfers are always in members’ best interests; and
(c) how contractual overrides are independently certified.”
Amendments 255, 256 and 257 ensure that contractual override powers are operational in advance of the first value for money assessments.
The amendment is very similar to amendment 278, which was tabled by the hon. Member for Tamworth. The industry has highlighted to us a concern that the Government’s proposed sequencing will not provide enough time between contractual overrides becoming permissible and VFM assessments being conducted, which will totally undermine the effectiveness of consolidation and value improvement. Pensions UK has encouraged the Government to accelerate that and to bring forward the implementation to allow schemes to make progress on consolidation sooner, so that the override is in place well in advance of the VFM framework.
We drafted amendment 257 with the idea that if transfers took place before the VFM framework was implemented, further guidance from the FCA would be required on how and when overrides could be used. However, we welcome the compromise set out in amendment 278, which would ensure that external transfers do not take place until VFM assessments are available. Frankly, that amendment is better-crafted than ours. If we had done them the other way around, I would have deferred to the advice of the hon. Member for Tamworth on whether she wanted to move the amendment. She was right to withdraw her amendment, and we will withdraw ours, but I urge the Minister to write to us both on the outcome of this matter before Report. It would be useful to have his comments beforehand so that we can challenge him on Report, and possibly move the amendment again—who knows?
Torsten Bell
As the hon. Member has asked so kindly, I assure him that I will write to him and to my hon. Friend the Member for Tamworth ahead of Report.
Mark Garnier
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: 143, in clause 41, page 53, line 8, leave out “Powers to make” and insert “Treasury”.
This amendment is consequential on Amendment 144.
Amendment 144, in clause 41, page 53, line 25, at end insert—
“(1A) The Treasury must by regulations require the FCA to include provision of a description specified in the regulations in general rules made in compliance with section 117E(4)(a) (how to determine whether a person is independent), alongside any other provision included in such general rules.
(1B) Regulations under subsection (1A) must in particular require the FCA to include in such general rules provision designed to ensure that the independent person does not have a conflict of interest.”
This amendment requires the Treasury to make regulations about the requirements that need to be met by an independent person appointed under section 117E.
Amendment 145, in clause 41, page 53, line 38, leave out from “benefits”” to end of line 39 and insert
“means money purchase benefits within the meaning of the Pension Schemes Act 1993 (see section 181(1) of that Act) or the Pension Schemes (Northern Ireland) Act 1993 (see section 176(1) of that Act);”.
This amendment is consequential on Amendment 140.
Amendment 146, in clause 41, page 54, line 3, leave out from “scheme”” to end of line 4 and insert
“means a personal pension scheme within the meaning of the Pension Schemes Act 1993 (see section 1(1) of that Act) or the Pension Schemes (Northern Ireland) Act 1993 (see section 1(1) of that Act);”.—(Torsten Bell.)
This amendment is consequential on Amendment 140.
Clause 41, as amended, ordered to stand part of the Bill.
Clause 42
Default pension benefit solutions
Torsten Bell
I beg to move amendment 147, in clause 42, page 55, line 9, leave out “eligible members” and insert “each eligible member”.
This amendment clarifies that trustees or managers are required to make a default pension benefit solution available to every eligible member of the scheme.
The Chair
With this it will be convenient to discuss the following:
Government amendments 148 to 155.
Clause stand part.
Torsten Bell
We now move from the contractual override provisions of the Bill to the default pension benefit solutions. This is a material change to our pension landscape, as the defined contribution landscape has matured, as I will come to. Again, I am glad that there has generally been cross-party consensus on the issue.
Clause 42 is pivotal in ensuring that members of defined-contribution pension schemes are provided with default options for pension benefit solutions when they want to access their pension assets, thereby reducing the complexity for individuals of securing an income in and through later life. These solutions must be designed to provide a regular income to members during retirement. The clause makes provision for an exemption where that would not be appropriate. We intend to set out in regulations what is meant by
“designed to provide a regular income”
and by “retirement”.
Members will have access to pre-designed benefit solutions that are tailored to meet the needs of the scheme’s membership. The intention is that, normally, individuals need not make a decision about how they would take their pension benefits, except to confirm that they want to start receiving payment. The clause also provides for periodic reviews to be prescribed to ensure that the solutions remain appropriate.
Not only will this measure support our commitment to enhancing the pension system robustness and ensuring that members normally benefit from a later-life income with the necessary communications of governance alongside it, but it will potentially provide the trustees with a level of assurance in relation to the investment strategy, enabling decisions about investment in longer-term assets, which will support the opportunity for investment in productive assets, including in the UK. The Opposition spokesperson, the hon. Member for Wyre Forest, raised that point in another context, but in this part of the DC landscape in particular, this provision means that schemes will not need to move all assets into safer assets as people approach retirement, if they are clear about the product that people will be in during their retirement.
Government amendments 147 to 155 are minor. They provide clarity on what is a default pension benefit solution, who is an eligible member and what is a relevant scheme, and they provide for the negative parliamentary procedure for subsequent regulations relating to when, and in what circumstances, default pension benefit solutions need to be reviewed.
Kirsty Blackman
If you will give me a bit of leeway, Mr Turner, I promise to speak only once on default pension benefit solutions. I might stray slightly outwith clause 42.
I am looking for clarity from the Minister on default pension benefit solutions. We have heard a lot of concern about how communications cannot be made to members, how there are possible issues with advertising and how members are communicated with. Can the Minister confirm that he is taking that concern seriously and has ensured that, under the General Data Protection Regulation and other data protection legislation, schemes can communicate legally with members in order to provide pension benefit solutions without being traced by the Information Commissioner’s Office or marketing regulators? Providers have raised that concern regularly.
I made it clear on Second Reading and in the oral evidence sessions that I think this proposal is a good thing. It is a massive concern that so many people are taking a lump sum without any plan for what that might look like or how the rest of the money will enable them to continue to live their life as they would like. I am really pleased that we are moving towards a better situation. However, we have not asked providers to do this before; it is something new. Providers will have to upskill themselves to make this change, both in their conversations with scheme members and in assessing whether the solutions that they provide are the correct ones.
Pension providers and insurers are used to putting people in boxes and saying, “This is a box of people for whom this solution might work.” However, some providers may not be used to clumping people together like that and providing solutions that will work for as many of them as possible. I do not think that there is a different way to do it. However, I would appreciate reassurance from the Minister that this will be kept under review; that there will be a significant amount of conversation with providers, as well as with scheme members who are receiving advice or a direction to a default scheme; and that regulators will keep an eye on whether the suggested default pension benefit solutions are appropriate for as many people as possible.
Of particular interest to me is the review timescale. What will happen to ensure that the proposal is working as intended? As I say, I think it is the right thing to do, but I want to make sure it works. I want people to have the best possible outcomes in retirement. If the position is marginally better than it is today, that will be good but not great. It would be lovely if it were way better, and if people were being suggested or guided to the solutions most appropriate for them. We do not just want to move from people dumping everything in a bank account to some people not doing so. It would be great to know that the solutions provided were working for a majority of people.
I would welcome any comfort that the Minister can give me on the review period and on what reassurance Parliament will have that people are being offered the solutions. As I say, provided that I get decent answers from him, I will be quite happy not to talk again for this entire portion of the Bill. I am sure that people will be delighted to hear that.
Torsten Bell
I thank the hon. Lady for rightly raising the important question of communication to members. I draw the Committee’s attention to clause 44, which explicitly aims, in quite some detail, to engage with that question. It contains requirements on providers—again, with the detail to come in regulations—about how they set out their general policy, but also how they communicate to particular individuals as they head towards retirement and, potentially, enrolment in a default solution.
It is absolutely right to say that this measure is new for providers, for regulators and for the industry in the UK, and we should always have that in mind. We should take some comfort from the success of automatic enrolment in doing something new. Other countries had moved to auto-enrolment solutions ahead of us, and the same is true here to a degree. In Australia, there is a similar pattern: it has got further ahead in terms of the average size of pots, has seen some of the negative outcomes that we can potentially see in the data in the UK, and has then moved to a version of this and is working that through. We will be able to learn from its experience, as well as just working this through ourselves.
The hon. Lady asked how the measure will be taken forward. We aim to launch a public consultation in the spring and summer next year. These requirements would come in earlier than some of the wider changes that the Committee has discussed—on small pots, for example, which will come far later, and on value for money. We think it is urgent that we get on with this, because we are approaching a situation in which DC pots will be significant for some members, but I completely appreciate her point that it is a large change for the industry.
Clause 44 requires some direct communications with members. I reassure the hon. Lady that there is nothing in the GDPR or other data protection requirements that would prevent providers from communicating in that way. They will not require consent from members to do it, which is important, because otherwise it would not be effective. There are wider questions about direct marketing—communications that are not about setting out the actual situation—in this space, and I am considering those. They are tied up with questions about targeted support and the rest, but it is important for us to continue thinking about this in the pensions space, where there is a history of downsides to direct marketing. We want to make sure that this is not that, but provision of information about the working of a scheme of which someone is a member.
Kirsty Blackman
Once this measure beds in—once we have people being moved to default benefit solutions, or those boxes and the solutions have been created—how will it be kept under review? Will there be a process for review five years down the line, when a significant number of people have been moved to default benefit solutions, to ensure that it is working as intended and that any potential problems that Australia perhaps did not come across can be ironed out?
Torsten Bell
I thank the hon. Lady for that question. There is not a formal requirement on the Secretary of State to carry out a review as we are going. My honest view is that any regulator and Secretary of State will want to actively monitor what happens. I very strongly expect that this will be discussed at great length at every single pension conference around those years, because all the providers will be talking to each other about how they are taking these things forward.
The hon. Lady will remember the discussion last Tuesday with some providers, including the National Employment Savings Trust and People’s Pension, about how they are already planning to bring these solutions forward. Although they are new for the industry, most providers had already been thinking about this, because they know that it would be the right thing to do even if there were not a Government requirement to do it, and because I have been clear with them for quite some time that this is the direction of travel in both the trust market and the GPP market.
I am not sure that we need a rigid, set date for a review, but I will take away the hon. Lady’s wider question about what reassurance we can offer that people will be actively monitoring what has happened rather than just watching and seeing what happens. I can certainly write to the regulators, for example, to make it clear that that will be our expectation.
Amendment 147 agreed to.
Amendments made: 148, in clause 42, page 55, line 11, at beginning insert
“at least in such circumstances or”.
This amendment allows for regulations to provide that particular events (as well as times or intervals) trigger a requirement to review default pension benefit solutions.
Amendment 149, in clause 42, page 55, line 13, leave out “relevant” and insert “pension”.
This amendment ensures that the definition of “pension benefit solution” is capable of operating in relation to a pension scheme that is not a relevant scheme (such as a collective money purchase scheme).
Amendment 150, in clause 42, page 55, line 25, leave out
“as a default pension benefit solution,”
and insert
“of the scheme as the pension benefit solution under which—
(i) the eligible members of the scheme generally, or
(ii) a subset of those eligible members,
will receive pension payments unless they choose to receive pension payments under a different pension benefit solution,”.
This amendment clarifies the definition of “default pension benefit solution”.
Amendment 151, in clause 42, page 55, line 40, at end insert
“;
(d) such other factors as may be prescribed.”—(Torsten Bell.)
This amendment allows other factors to be added by regulations to the factors that trustees or managers of a relevant scheme have to take account of in determining what default pension benefit solutions the scheme should make available.
Steve Darling
I beg to move amendment 279, in clause 42, page 55, line 40, at end insert—
“(4A) The trustees or managers of a relevant scheme, in determining whether to adopt or vary a default pension benefit solution, must—
(a) issue a written notice of the proposal to all members of the scheme, including—
(i) the expected impact on benefits and investment strategy, and
(ii) a written attestation that a market-wide assessment of all available options was undertaken;
(b) ensure a consultation period of at least 60 days has elapsed;
(c) confirm that fewer than 10 per cent of eligible members have objected in writing.”
This amendment adds the “without member opposition” safeguard to defined contribution schemes when changes to default pension benefit solutions are considered. It also requires a whole of market assessment to ensure the best solutions are chosen for members.
It is a privilege to move the amendment, because as Liberal Democrats we want to make sure that pensioners are at the heart of the Bill, as do many colleagues of different parties in this room, I am sure. For us, it is about driving a positive culture of engagement. The expectations that these proposals would place on managers or trustees would drive a positive engagement culture, as well as putting guardrails and protections around investments. I would welcome the Minister’s reflections on how the Bill would tackle our aspiration for the positive engagement culture that I am sure all Members in the room wish to see achieved through the Bill.
Torsten Bell
The amendment is absolutely right that trustees should consider a wide range of options when they are developing their default pension benefit solutions. As I have just remarked to the hon. Member for Aberdeen North, I suspect that that will be a big focus for trustees and scheme managers in the years ahead. Clause 48 does make provision for trustees or managers to consider the needs and interests of scheme members. I would emphasise that as the priority, as opposed to considering every option already on the market, because we are looking for them to develop the right solutions. In most but not all cases, that will be in-house; we will come back to some of the cases where they will not be doing that. We do not want to make it sound like an off-the-shelf situation in lots of cases, although I appreciate that doing their job will require them to look across the market.
I have a slight worry about setting a hard 10% of membership expressing an objection as a way of vetoing an approach. First, in many cases, there will not be a single default solution for members within a scheme; there will be a number of them for different cohorts within that scheme, not least based on the size of pots or their wider situation. We do not want a subset of a scheme to be able to vote down the solutions for everybody within the scheme, which is what the amendment would allow. The amendment would also allow those who are a very long way from retirement to shape the outcomes for those who are about to come to retirement.
My most important point, however, is that individuals have an absolute right to opt out. Although we talk in terms of default, just as we talk about automatic enrolment, the purpose is that this is a softer default than automatic enrolment. That is partly because we are expecting multiple defaults, not a single one where everyone is required to save at least a certain amount, but also because people will be able to opt out and have a range of different defaults.
I hope that I have provided reassurance that the Bill already includes important safeguards, and that trustees and scheme managers will already need to consider the issues that the Liberal Democrat amendment rightly puts on the table.
Steve Darling
I thank the Minister for his positive feedback. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: 152, in clause 42, page 56, line 1, leave out
“are to assess the needs and interests of its”
and insert
“of a scheme are to assess the needs and interests of the scheme’s”.
This amendment corrects a minor verbal inconsistency.
Amendment 153, in clause 42, page 56, line 14, leave out “money purchase benefits” and insert
“benefits falling within paragraph (a) of the definition of ‘money purchase benefits’ in section 181(1) of the Pension Schemes Act 1993”.
This amendment restricts the definition of “eligible member” of a relevant scheme so that it does not include members who are accruing or entitled to collective money purchase benefits.
Amendment 154, in clause 42, page 56, line 16, leave out “established under a trust”.
This amendment amends the definition of “relevant scheme” so schemes that are not established under a trust may fall within the definition.
Amendment 155, in clause 42, page 56, line 25, at beginning insert “(1)(b) or”.—(Torsten Bell.)
This amendment provides for negative parliamentary procedure for regulations that prescribe when or in what circumstances default pension benefit solutions need to be reviewed.
Clause 42, as amended, ordered to stand part of the Bill.
Clause 43
Transferable members
Torsten Bell
I beg to move amendment 156, in clause 43, page 56, line 29, leave out—
“a member of the scheme”
and insert—
“eligible members of the scheme (whether comprising the members of the scheme generally or a subset of those members)”.
This amendment clarifies how the exclusion in clause 43(1) operates.
The Chair
With this it will be convenient to discuss Government amendments 157 to 160 and 165.
Torsten Bell
We have now reached clause 43—the clause that deals with the situation I mentioned briefly earlier, which is where a scheme thinks that it is in the best interests of its members that the default solution is provided by another scheme or provider, and it sets out how that should take place. Amendments 156 to 160 and 163 and 165 all relate to the operation of providing pension benefit solutions via transfers to another scheme. The intention of the amendments is merely to provide helpful clarifications or to otherwise ensure that the clauses operate in line with the policy intent.
Amendment 156 clarifies that trustees or managers may choose to offer to transfer all the scheme’s members to another scheme for the purpose of providing a pension benefit solution, or just a subset of those members—as I said before, there may be a different cohort within each scheme with the right default for them. Amendment 158 clarifies that it will be for trustees or managers of a relevant scheme to determine whether it is reasonably practical for the scheme to provide a default pension benefit solution. Amendment 160 clarifies that trustees or managers of a relevant scheme may offer to transfer members to another scheme if they have determined that the other scheme would provide a better outcome for those members than they would provide within their own scheme—again, the interests of members should come first.
Amendments 157 and 159 are consequential amendments. Amendment 163 clarifies that trustees or managers of a relevant scheme must arrange for transfers to take place and not just facilitate them. That ensures that members should be supported through the whole process—we do not want schemes thinking their job is done as soon as they have set out that process, and leaving members to wrestle with it. These are minor but important technical amendments. They do not alter policy. I ask the Committee to support them.
Amendment 156 agreed to.
Amendments made: 157, in clause 43, page 56, line 30, leave out from “such” to end of line 31 and insert—
“members are referred to in this Chapter as ‘transferable members’.”
This amendment is consequential on Amendment 156.
Amendment 158, in clause 43, page 56, line 32, leave out from “that” to “to design” in line 33 and insert—
“the trustees or managers of the principal scheme have determined that it is not reasonably practicable for them”.
This amendment makes the first condition in clause 43(2) subject to the determination of the trustees or managers.
Amendment 159, in clause 43, page 56, line 33, leave out “that member” and insert “the members concerned”.
This amendment is consequential on Amendment 156.
Amendment 160, in clause 43, page 56, line 36, leave out from “have” to end of line 38 and insert—
“determined that a qualifying pension benefit solution of a qualifying scheme (other than the principal scheme) will provide a better outcome for the members concerned than any default pension benefit solution that the trustees or managers of the principal scheme could design and make available to them.”—(Torsten Bell.)
This amendment clarifies the application of the second condition in clause 43(3).
Torsten Bell
I beg to move amendment 161, in clause 43, page 57, line 1, leave out “and willing” and insert “to and agrees”.
This amendment is consequential on Amendment 174.
The Chair
With this it will be convenient to discuss Government amendments 162 to 164, 175, 174 and 176.
Torsten Bell
In cases where trustees or managers of a relevant scheme have determined that it is not reasonably practical to provide a solution themselves, or that better member outcomes could be achieved if another scheme delivered a solution, they can arrange for the transfers to be made. That is what clause 43 permits. Whether a member is receiving a default solution in-house or being transferred to another scheme to receive that solution, the policy intent is that the member experience should be broadly similar—there should not be a difference in their experience of it. Amendment 164 seeks to ensure that there is parity in the requirement placed on schemes. In particular, the amendment requires schemes to ensure that a scheme receiving transferable members is able to provide a pension benefit solution that meets the needs and interests of the scheme’s membership.
Amendment 174 aims to ensure that no scheme will be left in a position where it is unable to comply with the wider guided retirement provisions due to factors outside their control. There is a requirement on schemes to provide guided retirement under the Bill, but if there are factors outside their control that make that difficult, we want to have a backstop that is provided by introducing a power to designate schemes of last resort, which could be used to facilitate transfers from any relevant pension scheme for the purpose of providing a qualifying pension benefit solution. Hon. Members will think of the similar approach that NEST provided in auto-enrolment world—although we are not intending to need it in this case—where employers would always have a scheme they could go to, given that there was a requirement on them to enrol employees.
Amendments 161, 162 and 174 merely provide helpful clarifications or otherwise ensure that clause 43 operates in line with the policy intent. Amendment 176 applies the negative parliamentary procedure to regulations relating to highly technical aspects of the policy. These amendments, taken together, provide for small targeted changes to clause 43, and I encourage hon. Members to support them.
Amendment 161 agreed to.
Amendments made: 162, in clause 43, page 57, line 7, at beginning insert
“at such times or in such circumstances as may be prescribed,”.
This amendment allows for regulations to specify when transfer arrangements need to be entered into.
Amendment 163, in clause 43, page 57, line 8, leave out “facilitating relevant transfers” and insert
“effecting a relevant transfer to that scheme”.
This amendment clarifies that schemes will be required to arrange with receiving schemes to carry out relevant transfers (not just to facilitate them).
Amendment 165, in clause 43, page 57, line 9, leave out
“steps required by the regulations”
and insert “prescribed steps”.
This amendment corrects a verbal inconsistency.
Amendment 164, in clause 43, page 57, line 9, at end insert—
“(5A) In carrying out the step in subsection (5)(a), the trustees or managers of the principal scheme must have regard to the matters mentioned in section 42(4) (and for that purpose references in those paragraphs to “the scheme” are to the principal scheme).
(5B) Section 42(5) applies for the purposes of subsection (5A) as it applies for the purposes of section 42(4).
(5C) The trustees or managers of the principal scheme must, at least in such circumstances or at such times or intervals as may be prescribed, review the suitability of any qualifying pension benefit solution in respect of which they have identified a qualifying scheme as mentioned in subsection (5)(a).”—(Torsten Bell.)
This amendment ensures that schemes are subject to similar duties in respect of their “transferable members” to the duties to which they are subject in respect of other eligible members.
Torsten Bell
I beg to move amendment 167, in clause 43, page 57, line 10, leave out “In subsection (5)(a)(ii)” and insert “In this Chapter,”.
This amendment reflects the fact that “qualifying pension benefit solution” is, as a result of other amendments, now used more widely in the Chapter.
The Chair
With this it will be convenient to discuss the following:
Government amendments 166 and 168 to 173.
Clause stand part.
Torsten Bell
We now move to the substance of clause 43 and the proposed amendments. Clause 43 allows schemes to partner with another for the purpose of delivering a suitable pension solution to their membership—or cohorts of their membership. It allows those transfers to qualifying pension benefit solutions when either providing an in-house solution is not reasonably practicable, or a solution offered by another scheme is deemed to provide a better outcome for members. It requires trustees or managers of the principal scheme to identify qualifying schemes that provide solutions that meet the requirements of their membership. That could, for example, include transferring members to a collective defined-contribution scheme. Power is also taken to limit or prohibit the charging of transfer fees. This clause is vital overall, as it provides the flexibility that I have discussed in the course of debate on the previous group of amendments and allows trustees to deliver the best outcomes for their members.
Amendment 154 removes a drafting error and clarifies that all occupational pension schemes that provide defined-contribution benefits are included in the definition of relevant scheme, not just those established under a trust. Whether a pension scheme member is receiving a default solution in-house or being transferred to another scheme to receive a qualifying solution, as I said earlier, the policy intent is that they have a similar experience.
Amendments 166 to 169 and 173 ensure that there is a parity of requirements on schemes in those cases. Amendments 170 and 171 are consequential amendments, while amendment 172 corrects a minor inconsistency in language. I commend them and the clause to the Committee.
Amendment 167 agreed to.
Amendments made: 166, in clause 43, page 57, line 10, after “solution”” insert
“, in relation to a qualifying scheme,”.
This amendment is consequential on Amendment 167.
Amendment 168, in clause 43, page 57, line 12, leave out “receiving”.
This amendment is consequential on Amendment 167.
Amendment 169, in clause 43, page 57, line 15, leave out
“eligible members of the receiving”
and insert “members of the”.
This amendment is consequential on Amendment 167, and also reflects the fact that a qualifying scheme need not necessarily be a relevant scheme, so the reference to “eligible members” (which is defined by reference to “relevant schemes”) is not right in all cases.
Amendment 170, in clause 43, page 57, line 16, leave out “eligible”.
This amendment reflects the fact that a qualifying scheme need not necessarily be a relevant scheme, so the reference to “eligible members” (which is defined by reference to “relevant schemes”) is not right in all cases.
Amendment 171, in clause 43, page 57, line 17, leave out “eligible”.
This amendment reflects the fact that a qualifying scheme need not necessarily be a relevant scheme, so the reference to “eligible members” (which is defined by reference to “relevant schemes”) is not right in all cases.
Amendment 172, in clause 43, page 57, line 21, leave out “But”.
This amendment makes a minor verbal change in light of other amendments to clause 43.
Amendment 173, in clause 43, page 57, line 23, leave out “subsection (5)” and insert “this section”.
This amendment reflects the fact that, as a result of other amendments, “qualifying scheme” is used more widely in the section.
Amendment 175, in clause 43, page 57, line 35, at end insert—
“(9A) Regulations may make provision about the conditions in subsections (2) and (3), including about the basis on which the determinations mentioned in those subsections are to be made.”
This amendment allows for regulations to make provision elaborating on the conditions in subsections (2) and (3).
Amendment 174, in clause 43, page 57, line 35, at end insert—
“(9B) Regulations may require a pension scheme of a prescribed description to agree to receive a transfer in respect of the accrued rights of a transferable member where—
(a) the principal scheme has been unable, having used reasonable endeavours, to identify a qualifying scheme that is able and willing to do so, and
(b) any other prescribed conditions are met.
(9C) A requirement under subsection (9B) may only be imposed on a pension scheme that is one or both of the following—
(a) a Master Trust scheme within the meaning of the Pension Schemes Act 2017;
(b) a consolidator scheme within the meaning of Chapter 2 of Part 2 (consolidation of small dormant pension pots).”
This amendment allows for regulations to require certain schemes to act as schemes of last resort in cases where the principal scheme cannot find a qualifying scheme that is willing to receive a transfer.
Amendment 176, in clause 43, page 57, line 40, at beginning insert
“Regulations under subsection (5C), (10) or (11) are subject to the negative procedure; and other”.—(Torsten Bell.)
This amendment applies negative parliamentary procedure to regulations under subsection (5C), (10) or (11).
Clause 43, as amended, ordered to stand part of the Bill.
Clause 44
Provision and gathering of information
Torsten Bell
I beg to move amendment 177, in clause 44, page 58, leave out line 2 and insert
“Where only one pension benefit solution is available to the members of a relevant scheme,”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
The Chair
With this it will be convenient to discuss the following:
Government amendments 178 to 195.
Clause stand part.
Torsten Bell
Clause 44 relates to the provision of information to members about the solution or solutions that they offer them. We discussed the clause earlier with the hon. Member for Aberdeen North. The clause requires schemes to communicate and describe the default pension benefit solutions available and the circumstances for those for whom it would be suitable. Powers are taken to make further provisions in secondary legislation. The key policy behind the clause is to ensure that scheme members are well informed about their pension options. The Bill requires all communications issued by schemes to be in clear and plain language, which will help members to make better decisions regarding their retirement income.
The clause allows trustees or managers to request relevant information from their members to determine what an appropriate default solution would be for their membership. Pension schemes will also have the ability, and potentially be required, to gather information from their members to ensure that where a scheme has multiple default pension benefit solutions, the member receives communications about the one deemed most appropriate for them. For example, what wider pension provision people have is important when they think about what is the right solution for them.
Amendment 177, 179 to 181, 183, 186, 187, 190 and 192 to 195 ensure that clause 44 operates in relation to qualifying pension benefit solutions, as well as default pension benefit solutions. That change will mean that the same communication requirements will apply irrespective of whether a scheme member is being transferred to another pension scheme to receive a pension benefit solution or staying with the same scheme. Amendments 178, 182, 184, 185, 188, 189 and 191 provide minor language changes to improve consistency across the Bill.
Clause 44 is essential for promoting informed decision making among scheme members.
Amendment 177 agreed to.
Amendments made: 178, in clause 44, page 58, line 3, leave out “the member” and insert
“each eligible member of the scheme”.
This amendment corrects a minor verbal error.
Amendment 179, in clause 44, page 58, line 5, leave out “member’s default”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 180, in clause 44, page 58, line 8, leave out “default”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 181, in clause 44, page 58, line 9, leave out from beginning to “the trustees” in line 10 and insert
“Where more than one pension benefit solution is available to the eligible members of a relevant scheme,”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 182, in clause 44, page 58, line 10, leave out “the member” and insert
“, each eligible member of the scheme”.
This amendment corrects a minor verbal error.
Amendment 183, in clause 44, page 58, line 12, after “solution” insert
“or qualifying pension benefit solution”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 184, in clause 44, page 58, line 14, leave out “option” and insert “solution”.
This amendment makes a clarificatory change to the tag used in clause 44(2).
Amendment 185, in clause 44, page 58, line 17, leave out
“the default pension benefit solution”
and insert “the specified solution”.
This amendment is consequential on Amendment 184.
Amendment 186, in clause 44, page 58, line 18, leave out “member’s default”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 187, in clause 44, page 58, line 27, leave out from “of” to “is” in line 29 and insert
“a default pension benefit solution or qualifying pension benefit solution and an explanation that such a solution”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 188, in clause 44, page 58, line 29, leave out “an” and insert “a regular”.
This amendment makes the language of clause 44(4)(b) consistent with clause 42(3)(b).
Amendment 189, in clause 44, page 58, line 31, leave out “eligible members” and insert “each eligible member”.
This amendment makes a minor clarificatory change.
Amendment 190, in clause 44, page 58, line 32, leave out
“the default pension benefit solutions offered by the scheme”
and insert
“the pension benefit solutions available to the eligible members”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 191, in clause 44, page 58, line 34, leave out paragraph (b).
This amendment is consequential on Amendment 190.
Amendment 192, in clause 44, page 58, line 38, leave out from “describing” to end of line 40 and insert
“a particular pension benefit solution that the trustees or managers consider to be suitable for the eligible member in question;”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 193, in clause 44, page 59, line 2, leave out “default”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 194, in clause 44, page 59, line 10, leave out “default” and insert
“, or in the case of transferable members identifying,”.
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 195, in clause 44, page 59, line 11, leave out “default”.—(Torsten Bell.)
This amendment ensures that clause 44 operates in relation to qualifying pension benefit solutions as well as default pension benefit solutions.
Clause 44, as amended, ordered to stand part of the Bill.
Clause 45
Information etc in connection with selection of benefit solution
Torsten Bell
I beg to move amendment 196, in clause 45, page 59, line 27, leave out “offer” and insert “provide or make available”.
This amendment allows for regulations either to require information to be provided directly to members or to require it to be made available to them.
The Chair
With this it will be convenient to discuss the following:
Government amendments 197 to 202.
Clause stand part.
Torsten Bell
The purpose of the clause is to help improve pension engagement so that individuals can make better decisions themselves if they want to do so. As I said earlier, this is about softer defaults than we have in the case of automatic enrolment. The clause grants a power to make regulations requiring schemes to offer and provide information to assist members in the selection of their pension benefit solutions. The clause also includes a regulation-making power that could require schemes to monitor rates of decumulation —that is the drawdown of the pension pot used by members—and issue warnings if they believe that that should be changed. That could be used to help prevent individuals from inadvertently running out of money in later life, or it could even be used to recommend increasing withdrawals. Again, we have talked a lot about Australia. I do not know whether we are feeling patriotic at the moment, but one of the lessons from Australia is that in many cases one of the dangers is insufficient drawdown, and people under-consuming in later life. In either case, this approach could potentially help to prevent people from living in poverty during retirement, either because they are not spending enough or because they are drawing down too much early on.
The Government’s broader objective is that individuals need not make any decisions about how their savings are invested or how they should take their pension benefits, except to confirm that they want to start receiving payment. That is a big change from the status quo, which is very complicated at the point someone approaches retirement. However, I want to emphasise that individuals will retain their pension freedoms and are able to opt out of any default, should they wish to do so.
This provision allows for members to receive information to enable engaged and engageable members to make informed decisions. The clause includes a power to require that the information provided is based on members’ individual circumstances, where those are known to the scheme. The intention is that relevant general information will be provided to individuals. The policy behind this clause is to help bridge knowledge gaps and enhance members’ understanding of their options.
I turn to the associated amendments. Amendments 196 and 201 provide clarity that information may be sent directly to scheme members or made available to them, for example via websites. Amendments 198 and 199 clarify that schemes may be required to provide information to their members on any of the options available to them under pension freedoms, not just those available under the default scheme. Amendment 202 clarifies that schemes may tailor the information provided to scheme members using information already held by the scheme. Amendment 197 requires that information provided to scheme members under clause 45 must be
“in clear and plain language”.
Finally, amendment 200 removes some unnecessary wording.
The amendments are all technical in nature. They are not intended to change, but to enhance the deliverability of the policy.
Amendment 196 agreed to.
Amendments made: 197, in clause 45, page 59, line 28, after “information” insert
“expressed in clear and plain language”.
This amendment requires that information required by regulations under clause 45 be in clear and plain language, mirroring the requirement in clause 44(6).
Amendment 198, in clause 45, page 59, line 30, leave out “default”.
This amendment, together with Amendment 199, ensures that clause 45 operates in respect of pension benefit solutions other than default pension benefit solutions.
Amendment 199, in clause 45, page 59, line 31, leave out “default”.
See the explanatory statement for Amendment 198.
Amendment 200, in clause 45, page 59, line 32, leave out
“(for example as regards the rate of income withdrawal)”.
This amendment removes the suggestion that members would decide the rate of income withdrawal, since that would be determined by the scheme.
Amendment 201, in clause 45, page 59, line 33, leave out “given” and insert
“provided or made available to a member”.
This amendment is consequential on Amendment 196.
Amendment 202, in clause 45, page 59, line 35, leave out
“obtained under powers conferred by section 44”.—(Torsten Bell.)
This amendment removes the reference to clause 44 from clause 45(2), so that information given by virtue of clause 45(1) may be based on information that the trustees or managers hold otherwise than by virtue of clause 44.
Clause 45, as amended, ordered to stand part of the Bill.
Clause 46
Pension benefits strategy
Torsten Bell
I beg to move amendment 203, in clause 46, page 60, line 8, leave out “default”.
This amendment ensures that clause 46 operates in respect of qualifying pension benefit solutions as well as default pension benefit solutions.
The Chair
With this it will be convenient to discuss the following:
Government amendments 204 to 208.
Clause stand part.
Torsten Bell
This clause is the one most relevant to the Liberal Democrat amendment 279 that we discussed earlier, because it requires trustees or managers of relevant pension schemes to formulate, review and, where appropriate, revise their pension benefits strategy. This is where they will need to show that they have considered the range of options set out in that Lib Dem amendment.
The production and review of such a strategy will hold occupational pension schemes to account for how they have identified the requirements of their membership and how they have used that information to design the default pension benefit solution, or solutions, that they have put in place, or to identify an appropriate qualifying pension benefit solution elsewhere.
Additionally, schemes will need to set out in their strategy their plans for how they will communicate effectively with their members—another issue that has been at the centre of our discussions today. There is also a requirement for the scheme to review their strategy, and Government have taken a power to specify minimum intervals for review. Regulations may also set out further requirements for evidence of how the scheme has complied with any of the requirements set out in this chapter. The strategy must be published and made available to both the regulator and members of the scheme, which will enable effective monitoring, analysis and evaluation at an aggregate level.
Government amendments 203 and 204 will ensure that clause 46 operates in respect of qualifying pension benefit solutions as well as default pension benefit solutions. Amendment 205 adds effective communication to the list of things that must be addressed in the strategy. Amendments 206 and 207 correct an error in the Bill as drafted. Amendment 208 allows regulations to require that the information about compliance with provisions of the chapter be published alongside a benefit strategy. Amendment 210 removes a provision made redundant by other amendments.
Amendment 203 agreed to.
Amendments made: 204, in clause 46, page 60, line 9, leave out from beginning to “pension” in line 10 and insert
“design, or in the case of transferable members identify,”.
This amendment ensures that clause 46 operates in respect of qualifying pension benefit solutions as well as default pension benefit solutions.
Amendment 205, in clause 46, page 60, line 12, leave out paragraph (c) and insert—
“(c) communicate effectively with eligible members of the scheme with regard to pension benefit solutions and comply with any regulations under section 45.”
This amendment adds effective communication to the list of things that a pension benefits strategy must address.
Amendment 206, in clause 46, page 60, line 25, leave out “and” and insert “or”.
This amendment corrects an error.
Amendment 207, in clause 46, page 60, line 26, leave out “be authorised to”.
This amendment corrects an error.
Amendment 208, in clause 46, page 60, line 35, at end insert—
“(3A) Regulations may require the trustees or managers of a relevant scheme to publish, alongside a pension benefits strategy (or revised pension benefits strategy), prescribed information or evidence as to whether and how they have complied with the requirements imposed by virtue of this Chapter.”—(Torsten Bell.)
This amendment allows regulations to require that information about compliance be published alongside a pension benefits strategy.
Torsten Bell
I beg to move amendment 209, in clause 46, page 60, line 36, leave out subsection (4).
This amendment leaves out a penalty provision that government amendments to Clause 47 would make redundant.
The Chair
With this it will be convenient to discuss the following:
Government amendment 211.
Clause stand part.
Clauses 47 and 48 stand part.
Government amendments 212 and 213.
Clause 49 stand part.
Torsten Bell
Clause 47 allows for a compliance framework to be developed to ensure that trustees or managers of pension schemes comply with the requirements of chapter 5 of the Bill and take their responsibilities seriously; hon. Members will by now be used to seeing parts of this at the back of sections of pension legislation.
It is worth noting up front that amendment 211 replaces the penalty provisions in clause 47 with a new mechanism for introducing enforcement powers via regulations. The regulations could allow for the Pensions Regulator to issue compliance notices, third-party compliance notices and penalty notices. These types of enforcement notice are not unusual, and they appear in other pensions legislation, such as the pensions dashboard regulations and the regulations on climate change governance and reporting.
Penalties will be limited to no more than £10,000 in the case of individuals and up to £100,000 in other cases, such as corporate trustees. We have introduced these changes to ensure consistency with other clauses in the Bill, including the provisions related to value for money and small pots consolidation; we discussed the size of those penalties recently.
Clause 47 will enable the regulator to remove and replace trustees in the event of non-compliance. Amendment 209 will remove a penalty provision in clause 46 that is made redundant by amendment 211. Clause 48 makes it clear that the measures in this chapter apply to pension schemes run on behalf of the Crown, another standard provision. Clause 49 provides the definitions for terms used in chapter 5 of the Bill, including many of the important ones I have run through today. Amendments 212 and 213 add the definitions of “pension benefit solution” and “qualifying pension benefit solution” to the list of defined terms in clause 49. They do not change the definition of these terms elsewhere in the clauses.
Amendment 209 agreed to.
Clause 46, as amended, ordered to stand part of the Bill.
Clause 47
Enforcement and compliance
Amendment made: 211, in clause 47, page 61, line 4, leave out subsections (1) to (5) and insert—
“(1) Regulations may make provision with a view to ensuring the compliance of any person with any provision of or under this Chapter.
(2) The regulations may in particular—
(a) provide for the Pensions Regulator to issue a notice (a ‘compliance notice’) to a person with a view to ensuring the person's compliance with a provision of or under this Chapter;
(b) provide for the Pensions Regulator to issue a notice (a ‘third party compliance notice’) to a person with a view to ensuring another person's compliance with a provision of or under this Chapter;
(c) provide for the Pensions Regulator to issue a notice (a ‘penalty notice’) imposing a penalty on a person where the person—
(i) has failed to comply with a compliance notice or third party compliance notice, or
(ii) has contravened a provision of or under this Chapter;
(d) provide for the making of a reference to the First-tier Tribunal or Upper Tribunal in respect of the issue of a penalty notice or the amount of a penalty;
(e) confer other functions on the Regulator.
(3) The regulations may make provision for determining the amount, or the maximum amount, of a penalty in respect of a failure or contravention.
(4) But the amount of a penalty imposed under the regulations in respect of a failure or contravention must not exceed—
(a) £10,000, in the case of an individual, and
(b) £100,000, in any other case.
(5) Any penalty payable under the regulations is recoverable by the Regulator.
(5A) In England and Wales, any such penalty is, if the county court so orders, recoverable under section 85 of the County Courts Act 1984 or otherwise as if it were payable under an order of that court.
(5B) In Scotland, a penalty notice is enforceable as if it were an extract registered decree arbitral bearing a warrant for execution issued by the sheriff court of any sheriffdom.
(5C) The Regulator must pay into the Consolidated Fund any penalty recovered under this section.”—(Torsten Bell.)
This amendment replaces the provisions in subsections (1) to (5) of clause 47 about fixed penalty notices with a power to make regulations providing for compliance notices, third party compliance notices and penalty notices.
Clause 47, as amended, ordered to stand part of the Bill.
Clause 48 ordered to stand part of the Bill.
Clause 49
Interpretation and general
Amendments made: 212, in clause 49, page 62, line 13, at end insert—
“‘pension benefit solution’ has the meaning given by section 42(2);”.
This amendment adds “pension benefit solution” to the list of defined terms in clause 49.
Amendment 213, in clause 49, page 62, line 19, at end insert—
“‘qualifying pension benefit solution’ has the meaning given by section 43(6);”.—(Torsten Bell.)
This amendment adds “qualifying pension benefit solution” to the list of defined terms in clause 49.
Clause 49, as amended, ordered to stand part of the Bill.
Clause 50
Corresponding provision in relation to FCA-regulated schemes
Torsten Bell
I beg to move amendment 214, in clause 50, page 62, line 33, leave out from beginning to end of line 8 on page 63 and insert—
“137FBD FCA general rules: guided retirement
(1) The FCA must make general rules for the purpose of ensuring that default or qualifying pension benefit solutions are made available to members of relevant pension schemes.
(2) In determining what provision to include in the rules, the FCA—
(a) must have regard to provision made by, and any provision made under, Chapter 5 of Part 2 of the Pension Schemes Act 2025 (guided retirement: schemes regulated by the Pensions Regulator), and
(b) must aim to ensure, so far as possible, that the outcomes achieved by the rules in relation to relevant pension schemes correspond to those achieved by that Chapter, and any regulations made under it, in relation to pension schemes to which that Chapter applies.
(3) In this section—
‘default or qualifying pension benefit solution’ means a pension benefit solution which—
(a) is designed for delivering money purchase benefits under a pension scheme to some or all of the members of the scheme,
(b) is designed to provide a regular income for the members concerned in their retirement (whether or not together with other benefits), and
(c) meets any other prescribed conditions;
‘FCA-regulated pension scheme’ means a pension scheme whose operation—
(a) is a regulated activity, and
(b) is carried on in the United Kingdom by an authorised person;
‘money purchase benefits’ has the same meaning as in the Pension Schemes Act 1993 (see section 181 of that Act);
‘pension benefit solution’, in relation to a pension scheme, means a contractual or other arrangement for making pension payments in respect of members’ accrued rights;
‘pension scheme’ has the meaning given in section 1(5) of the Pension Schemes Act 1993;
‘relevant pension scheme’ means an FCA-regulated pension scheme that is—
(a) an auto-enrolment scheme,
(b) a workplace personal pension scheme that is not an auto-enrolment scheme, or
(c) a pension scheme of a prescribed description,
and for that purpose ‘auto-enrolment scheme’ has the meaning given in section 117A(3) and ‘workplace personal pension scheme’ has the meaning given in section 117A(5).”
This amendment adjusts the requirement for the FCA to make rules corresponding to Chapter 5 of Part 2. It ensures that the FCA has the flexibility to make provision that is different from that contained in Chapter 5 of Part 2 provided that the FCA’s rules aim to achieve corresponding outcomes to that Chapter.
Torsten Bell
We now turn to clause 50, the last clause in this part of the Bill. The overriding objective of this clause, together with amendment 214, is to make corresponding provision in relation to FCA-regulated schemes. Clause 50 inserts into the Financial Services and Markets Act 2000 new section 137FBD, which will deliver default pension benefit solutions to FCA-regulated pension schemes, ensuring that members on both sides of the market benefit from default solutions.
Amendment 214 is a technical amendment that refines the requirement on the FCA to deliver those solutions for members of FCA-regulated pension schemes and ensures consistency between FCA and TPR-regulated schemes—a key objective of the Government. It clarifies that the FCA must make rules to ensure that default pension scheme solutions are made available to members of FCA-regulated schemes and, in making those rules, must have regard to provisions made by the rest of chapter 5 of part 2, which we have been discussing and which sets the framework for the TPR to provide those solutions.
The FCA must also aim to ensure, as far as possible, that the outcomes achieved by its rules correspond to those achieved under chapter 5, and any regulations made under it regarding TPR-regulated pension schemes. The amendment therefore seeks to ensure that, from a member’s perspective, default pension benefit solutions are provided consistently across the market, whether they are a member of a TPR or an FCA-regulated pension scheme, while giving the FCA the flexibility to deliver that outcome in a way that suits its methods of regulating pension schemes. DWP, the FCA and The Pensions Regulator will work together to develop and deliver default pension benefit solutions, further boosting fairness and consistency across the market.
Amendment 214 agreed to.
Clause 50, as amended, ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Taiwo Owatemi.)
Pension Schemes Bill (Seventh sitting)
Thursday 11th September 2025
(3 weeks, 5 days ago)
Public Bill CommitteesPension Schemes Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 11 September 2025 - (11 Sep 2025)
The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)
It is a pleasure to serve under you today, Ms Lewell. As we come to the first clauses dealing with superfunds, I start by setting out the background. Superfunds provide a route for employers to secure the liabilities of closed defined-benefit schemes that are unable to afford insurance buy-out. Their purpose is to better protect members from potential losses in the event of employer insolvency, and to release employers to focus on and invest in their core business, helping to drive economic growth. Superfunds already operate within the framework of pensions legislation and the interim guidance issued by the Pensions Regulator. That interim regime has enabled us to learn what works well, but it is now time to put the regulatory framework for superfunds on a permanent footing.
Clause 51 provides an overview of part 3 of the Bill and sets out the structure and content of the legislative framework for superfunds. Clause 52 defines a superfund scheme as a
“trust-based occupational pension scheme”
that is
“not supported by a substantive employer covenant”
but by a “capital buffer” made of private capital instead. Clause 53 sets out that superfund sections are to be treated as separate schemes, meaning that any potential failure would be contained within that section. Clause 54 prohibits unauthorised superfund activities.
Clause 55 allows the Pensions Regulator to authorise superfunds if it is satisfied that they are likely to meet the ongoing requirements set out in chapters 4 and 5 of the Bill. It will enable the regulator to assess the superfund’s organisation, staff, plans, policies and procedures to ensure that it has robust governance and continuity arrangements. Clause 56 makes it clear that the Pensions Regulator must make an authorisation decision within six months of receiving a completed application, with the potential to extend that period by up to three months. The new legislative regime will protect scheme members and enhance the confidence of stakeholders and market participants.
Mark Garnier (Wyre Forest) (Con)
The Opposition support the clauses and welcome the action to legislate formally for defined-benefit superfunds. Securing this in a legislative framework will give trustees and sponsors greater confidence when considering this new consolidation option for defined-benefit schemes. The measures build on the consultation conducted under the previous Government, as well as the intention that the former Chancellor of the Exchequer, my right hon. Friend the Member for Godalming and Ash (Sir Jeremy Hunt), laid out in his 2023 Mansion House speech.
Superfunds are capital-backed consolidators that allow defined-benefit schemes to shift liabilities away from the sponsoring employer, thereby enhancing the security of members’ benefits. By transferring pension obligations to a superfund, companies can reduce long-term liabilities and refocus on core operations, while maintaining strong protection for retirees. Superfunds offer a new endgame strategy for DB schemes unable to secure an insurance buy-out, helping to safeguard member benefits in underfunded or marginal schemes. These measures all seem reasonable, and as I said, this work started under the previous Government, so we wholeheartedly support it.
Question put and agreed to.
Clause 51 accordingly ordered to stand part of the Bill.
Clauses 52 to 56 ordered to stand part of the Bill.
Clause 57
Prohibition of unapproved superfund transfers
Question proposed, That the clause stand part of the Bill.
Torsten Bell
Chapter 3 sets out the criteria for approving superfund transfers. The clause protects the integrity of the superfund regime that we are aiming to put in place through the Bill by making it clear that the penalty for committing an unauthorised superfund transfer may be a fine, imprisonment for up to two years, or both. I commend the clause to the Committee.
Question put and agreed to.
Clause 57 accordingly ordered to stand part of the Bill.
Clause 58
Approval of superfund transfers
John Milne (Horsham) (LD)
I beg to move amendment 268, in clause 58, page 67, line 34, leave out subsection (a) and insert—
“(a) that, as at the date of the application, the financial position of the ceding scheme is—
(i) not strong enough to enable the trustees to arrange an insurer buy-out, or
(ii) not affordable for the next 36 months following an assessment, certified by the scheme actuary, of all funding options to become strong enough;”.
This amendment expands the onboarding condition to give an alternative to a single day snapshot of a scheme’s funding position.
The Bill tests a scheme’s funding position on a single snapshot day. We feel that is too rigid and could unfairly exclude schemes. A scheme might just miss the mark on that day, even though funding prospects over the next three years are realistic and affordable. The amendment would allow actuaries to certify affordability over a 36-month horizon, providing a fairer and more flexible test. It would protect members by ensuring viable schemes are not shut out, while still requiring strong actuarial oversight. That is especially important in an environment where economic conditions and markets can move significantly and take scheme funding positions with them.
Schemes have not always enjoyed the present funding levels, and today’s surplus is tomorrow’s deficit. We should have regard to that fact and approach the legislation in a manner that reflects it. In the assessment over a longer time period, the trustees would also be able to consider and respond to the situation in relation to dividends, changing investment strategies and expected scheme contributions, among other key factors. In summary, the purpose of the amendment is not to block the superfund option for schemes, but rather to ensure that the legislative framework is set squarely on the basis of protecting DB scheme member benefits and the security and soundness of the pensions system.
Kirsty Blackman (Aberdeen North) (SNP)
We have discussed other parts of the regime—for example, new entrants and their ability to scale up, and the longer-term prospects for that—which were perhaps a bit more flexible than this part. Although I am not entirely convinced that the exact wording of the amendment provides the best way to go about it, if the Minister gives some reassurance and a commitment to consider the possibility of not just taking a snapshot day, and to look at the potential ability to scale up or grow, I would be more comfortable with the legislation than I am currently.
Torsten Bell
I thank the hon. Members for Torbay and for Horsham for the amendment. It is sensible to discuss one of the key questions in the design of superfunds policy. My main reassurance is that this exact option, or options in this space, were part of the extensive consultation on superfunds. That is important to understand. They were in the consultation, and a wide range of views were expressed in the responses, many of them pointing to the clear practical difficulties of providing the legislative test to assess whether a scheme could afford an insurance buy-out in future, as opposed to its exact position at the time of the assessment.
For reasons I will come on to, that does not mean that it is not important to look ahead to whether a scheme is likely to be able to buy out in the future, but we have taken the view, following the consultation, that that should not be the test on the face of the Bill. That is because, when it comes to projections looking ahead, both the cost of an insurance buy-out and the scheme funding levels can fluctuate significantly. Forecasts ask for more judgment to be exercised compared with an assessment of what the buy-out market is offering at the time it is carried out. It is about the current funding levels. Clause 58 already states that schemes can transfer a superfund only when they are currently unable to secure members’ benefits with an insurer.
I will offer two elements of reassurance to the hon. Member for Horsham. First, we need to be clear about the role of the legislation, which is as I just set out, and the role of the trustees, who are the ones who would approve a transfer to a superfund. Trustees will absolutely be looking ahead and thinking about the kinds of issue that the hon. Member highlighted. Do they wish to see a superfund transfer or a buy-out transfer in future? Is it plausible that they would get one? They will be relying on the guidance of the TPR and the clear intent in the legislation, which is that superfunds will provide an additional option, not replace the core approach of most defined-benefit schemes’ goal, which is an insurance buy-out. I therefore do not support putting the proposed test on the face of the Bill. Also, as the hon. Member for Aberdeen North pointed out, there are issues with the drafting of the amendment, which requires trustees in legislation to do what they will, in practice, be doing anyway.
The second point of reassurance I can offer is that the Bill sets out a power to substitute another condition to replace this condition, if needed. We will consult the industry to assess what, if any, further requirements might be added to satisfy members before the regime comes into effect. I hope that on that basis, the hon. Member will be happy to withdraw his amendment.
John Milne
I thank the Minister for his reassurance, but urge him to keep this in mind. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Kirsty Blackman
I beg to move amendment 277, in clause 58, page 67, line 34, leave out from “application” to end of line 36 and insert
“the Trustees agree, after due consideration, that it is the best option for their fund’s members;”.
This amendment would prevent a fund from having to carry out an insurance buy-out option.
The amendment asks a reasonable question about the duties of the trustees, and the possibility that they will be overwritten by the legislation and taken away from trustees. I would appreciate some reassurance from the Minister on whether the trustees will still have a duty to act in the best interests of scheme members once the legislation goes through, and whether the amendment tabled by the hon. Member for Tamworth would make things better for trustees, with them better able to act in the best interests of pension scheme members.
Torsten Bell
I will answer the hon. Lady’s question directly, and then come to the amendment more broadly. The best way to think about this amendment is that it asks us to remove one of the core framings of the superfund regime, which is that it is not replacing buy-out, where that is available, to trustees. The amendment enables trustees to do what they like, including moving to a superfund even if they could have moved to an insurance buy-out. That is not the policy intention of this Government, nor was it the policy intention of the previous Government. It also does not align with most of the responses to the consultation.
As I said earlier, the job of the legislation is to provide clarity regarding the overall framework, which is that superfunds exist for those schemes that are not able to afford an insurance buy-out. Within that, it is for trustees to make wider judgments, as they do all the time. Directly to the hon. Lady’s question, trustees’ duties to take the decisions that deliver the best outcomes for their members, as a short hand, is totally unaffected by this. This is just a constraint on what the superfund regime is there for, and not because we do not want to see arbitrage between an insurance regulatory regime and a superfund’s regulatory regime. I hope that provides some clarity.
Kirsty Blackman
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Torsten Bell
I beg to move amendment 215, in clause 58, page 68, line 1, at beginning insert
“that it is reasonable to expect”.
This amendment adjusts the onboarding condition in relation to the capital adequacy threshold. The Regulator now needs to be satisfied, as at the time it decides the application, that it is reasonable to expect that the threshold will be met immediately following the superfund transfer (rather than that the threshold definitely will be met at that time).
Torsten Bell
Amendment 215 simply clarifies the policy intent behind the clause. It reflects the reality that pension schemes’ funding is fluid and difficult to predict. Amendment 216 makes the clause clearer and ensures consistency with amendment 215. Amendment 217 introduces a power to enable the Government to consult industry and the regulator on an appropriate timeframe in which to assess whether the technical provision threshold has been met. Amendment 218 is consequential to amendment 217.
Amendment 219 allows the Secretary of State to make special provisions to modify or disapply the onboarding conditions, which we have just been discussing, in subsection (2) in the instance of a merger, division or restructuring of superfund sections. Amendments 220 and 221 set out parliamentary procedures for the powers introduced by amendments 217 and 219 respectively. I hope that hon. Members feel able to accept these amendments.
Amendment 215 agreed to.
Amendments made: 216, in clause 58, page 68, line 3, leave out
“there is a very high likelihood”
and insert
“it is reasonable to expect”.
This amendment adjusts the onboarding condition in relation to the technical provisions threshold for consistency with the change made by Amendment 215.
Amendment 217, in clause 58, page 68, line 5, leave out from “period” to end of line and insert
“specified in regulations made by the Secretary of State;”.
This amendment allows for regulations to set the period by reference to which the onboarding condition relating to the technical provisions threshold is assessed.
Amendment 218, in clause 58, page 68, line 22, leave out paragraph (b).
This amendment is consequential on Amendment 217.
Amendment 219, in clause 58, page 68, line 32, at end insert—
“(5A) The Secretary of State may by regulations modify subsection (2) in its application to a superfund transfer of a kind described in section 53(3) (merger of sections etc).”
This amendment allows for regulations to make special provision about how the onboarding conditions apply (or do not apply) in relation to a superfund transfer within clause 53(3) (under which a restructuring of sections within a superfund can itself be treated as a superfund transfer).
Amendment 220, in clause 58, page 68, line 42, at end insert—
“(7A) Regulations under subsection (2)(d) are subject to the negative procedure.”
This amendment provides for negative parliamentary procedure to apply to regulations made by virtue of subsection (2)(d) as amended by Amendment 217.
Amendment 221, in clause 58, page 68, line 43, at end insert—
“(8A) Regulations under subsection (5A) are subject to the negative procedure.”—(Torsten Bell.)
This amendment provides for negative parliamentary procedure to apply to regulations made by virtue of the provision inserted by Amendment 219.
Torsten Bell
This is an important clause whose role is to set out the criteria for the Pensions Regulator to approve each transfer to a superfund, having dealt with the authorisation of superfunds separately. Those include that the superfund has been authorised by the regulator and that the ceding employer scheme has no active members; we are talking about closed defined-benefit schemes.
The clause also sets out onboarding conditions, which are designed to ensure that members’ benefits are well protected. Superfunds are secure, but not as secure as an insurance buy-out. Schemes with sufficient funds to buy out benefits with an insurer may therefore not enter a superfund. Other onboarding conditions require that the trustees of the ceding scheme make the assessment in the interests of scheme members that the transfer to a superfund will make it more likely that the members’ benefits will be paid in full, and that the capital adequacy threshold is met—which is the main answer to the earlier question from the hon. Member for Aberdeen North. Those and other measures, alongside a known and up-front capital buffer, will ensure that there is a very high probability that members’ benefits will be paid.
Affirmative regulation-making powers will allow greater specificity about the onboarding conditions, including the financial metrics of the capital adequacy threshold and the information that must be provided to the regulator to satisfy the onboarding conditions. I commend clause 58 to the Committee.
Kirsty Blackman
I have a quick question, which may also be relevant to other clauses that we discussed earlier, but which I did not bring up at that point. It is about the consistency of consultations and regulations from the Department for Work and Pensions and the Financial Conduct Authority, particularly when consultations are taking place and there are scheme members and prospective pensioners who expect their pension to work in the same way as others and do not have a clue what the arrangements are—for example, whether it is regulated by the FCA or anyone else. Can we still expect parity of service and clarity?
I am aware that the different structures may require slightly different regulations. I want reassurance from the Minister on ensuring that scheme members see a consistent level of service that makes sense in the regulatory frameworks. I also want reassurance that larger organisations running different types of scheme can easily work within and respond to both types of consultation because there is enough consistency applicable across different regulatory mechanisms, within the constraints of the law and depending on the scheme type. I have been asked by insurance and pension industry professionals to raise that with the Minister, and any reassurance that he can give would be appreciated.
Torsten Bell
The first reassurance I can give is that this part of the Bill requires only one regulatory framework, because it all sits within the Pensions Regulator and within the defined benefit part of the landscape, as I am aware the hon. Member for Aberdeen North knows.
On the hon. Member’s wider point, which is relevant to many parts of the Bill, I absolutely agree and will offer a two-part reassurance—we will also come to a new clause later that directly gets at this issue. I entirely agree that having two regulatory regimes is no excuse for having different consumer experiences across the two halves of the regime. To address that, I have made sure that the Bill supports the same outcomes, and have stress tested that considerably, but also made it clear that, as a Government policy agenda, our goal is that that should be the case, full stop, including in some areas where it has not been historically. That is absolutely what we need to keep working towards. We should all have that in our heads.
When it comes to the regulations, it is also our clear intention that the FCA and TPR should be working very closely together, as we discussed with the value for money regulations, for example.
Question put and agreed to.
Clause 58, as amended, accordingly ordered to stand part of the Bill.
Clause 59
Special provision for certain schemes coming out of assessment period
Question proposed, That the clause stand part of the Bill.
Torsten Bell
Just to clarify, there is significant support from the industry for clause 59 in general terms. This is in part because of the successful rescue of the Debenhams pension scheme out of the Pension Protection Fund assessment—it had not entered the PPF; had it done so, there would have been a significant cut in members’ benefits—by the currently sole operating superfund, Clara Pensions. PPF assessment following employer insolvency is designed to ensure that member benefits are protected. Some schemes that come out of PPF assessment are too well funded to stay in the PPF, because they could achieve better member outcomes than might be offered by the PPF.
The clause amends the onboarding conditions in these instances, to allow trustees of a scheme in PPF assessment to seek to secure their liabilities with a superfund at less than full benefits, but more than would otherwise have been secured through a buy-out that was available, given the level of their assets at that point. Based on the evidence from the PPF’s purple book, we anticipate that, on average, five in 10 so-called PPF-plus schemes could benefit each year. Trustees can continue to buy out the level of benefits that the scheme can afford with an insurer, but this clause provides them with the option of entering a superfund, where they consider doing so to be in the interest of members.
Clause 60 specifies that an application must be made in the manner and form specified by the Pensions Regulator. The approval process enables the regulator to protect schemes and their members during the application process, and aligns with the regulator’s systems and processes and its experience with other authorisation and supervisory regimes. I commend clauses 59 and 60 to the Committee.
Question put and agreed to.
Clause 59 accordingly ordered to stand part of the Bill.
Clause 60 ordered to stand part of the Bill.
Clause 61
Governance and structure
Torsten Bell
One of the new features of a superfund regime is that there is a responsible body for the superfund that carries out key parts of its operations. Clause 61 sets out a clear framework of policies and procedures that the responsible body of a superfund must ensure is in place, so that the pension scheme is managed and administered effectively and members’ benefits are protected.
The clause will operate alongside the requirements for an effective system of governance and internal controls, which the scheme trustees are already subject to under the Pensions Act 2004. It places an overarching obligation on the responsible body to ensure that the appropriate governance-related policies and procedures are in place across the operating model of the superfund as a whole, to ensure that the responsible body upholds the same standards as scheme trustees in the interests of scheme members. This is in recognition of the greater potential for conflicts of interest than would be seen in a traditional defined-benefit scheme.
The clause further requires the responsible body to ensure that the superfund meets prescribed conditions as to its structure, including but not limited to its compliance with tax legislation. The detailed structural requirements for superfunds will be set out in regulations, following consultation and in response to innovations in the market.
Clause 62 sets out the management documents that must be prepared and maintained as part of the ongoing requirements for an authorised superfund. The documents include a business plan, a governance manual, a continuity strategy, and a fees and expenses policy. That suite of documentation is designed to ensure the good management of superfunds, and it builds on the requirements and learnings from other authorisation regimes, such as master trusts and collective defined-contribution schemes.
Question put and agreed to.
Clause 61 accordingly ordered to stand part of the Bill.
Clause 62 ordered to stand part of the Bill.
Clause 63
Duty to monitor financial thresholds
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 64 stand part.
Government amendment 222.
Clauses 65 to 68 stand part.
Torsten Bell
This group of clauses introduces requirements for superfunds that concern funding and investment. Clause 63 places a duty on the responsible body of a superfund to protect members’ benefits by having robust policies and procedures in place to monitor the financial thresholds.
Clause 64 defines those financial thresholds, which are key components of the regulatory regime and follow the example of the Solvency II supervisory ladder of interventions, tailored to the unique characteristics of superfunds. That means that there is a series of clear and known consequences, both positive and negative, that could happen in superfunds as a direct response to changes to their funding levels. The financial thresholds are designed to protect the security of members’ benefits. When certain thresholds are breached, there are mandatory actions that must be taken to protect members.
Government amendment 222 is minor and technical, and seeks to provide certainty and clarity to the operators and administrators of superfunds that they can use the buffer funds both to invest the buffer in the hopes of generating growth, and to pay expenses, fees and—importantly, for the Treasury half of my job—any taxes that are owed.
Clause 65 requires that arrangements must be made to transfer capital buffer assets to the scheme’s trustees in specific circumstances. That is the important protection, because it is the capital buffer that provides the equivalent of the employer covenant protection that we see in traditional defined-benefit schemes. The release of the buffer to the trustees as part of an approved response plan—which we will come to in clause 81—is fundamental to the protection of members’ benefits.
Clause 66 ensures that the capital buffer cannot be released to anyone other than the scheme’s trustees, except where the liabilities of the scheme have been satisfied, or where the release is a permitted profit extraction. It is important that permitted profit extraction takes place only when the security of the scheme has been materially improved, above the superfund’s initial capital adequacy requirements, which are obviously significant.
Clause 67 requires the responsible body of the superfund to have an investment strategy for the capital buffer, prepared in accordance with any requirements specified in regulations made by the Secretary of State.
Clause 68 requires the responsible body of the superfund to appoint an appropriately qualified, independent person to verify the valuations of the capital buffer at least once a year.
Question put and agreed to.
Clause 63 accordingly ordered to stand part of the Bill.
Clause 64 ordered to stand part of the Bill.
Clause 65
Capital buffer: compulsory release to trustees
Amendment made: 222, in clause 65, page 73, line 2, leave out “for market value consideration” and insert
“—
“(a) in the ordinary course of the investment of the capital buffer, or
(b) in payment of fees, expenses, taxes or other charges incurred (in each case) in connection with the management or administration of the capital buffer”.—(Torsten Bell.)
This amendment clarifies the circumstances in which the capital buffer is regarded as “released” for the purposes of Part 3.
Clause 65, as amended, ordered to stand part of the Bill.
Clauses 66 to 68 ordered to stand part of the Bill.
Clause 69
Key functions
Question proposed, That the clause stand part of the Bill.
Torsten Bell
This series of clauses sets out requirements for the approval or certification of key superfund personnel. Trustees and actuaries, among others, are already held to account by strict codes of practice and legislative frameworks. These provisions seek to ensure that those working within the responsible bodies of superfunds are also held to an appropriately high standard of conduct.
Clause 69 requires a superfund to have at least one individual responsible for each key administrative function. Clause 70 requires approval from the regulator for individuals looking to hold a key function. This is to ensure that the individual appointed to the role is suitable. A fit and proper test will be conducted to confirm that the named individual has the knowledge and experience for the responsibility that they are undertaking.
Clause 71 requires the responsible body of a superfund to conduct due diligence and be satisfied that any individual carrying out work associated with a key function is suitable. The responsible body must issue a certificate to the individual that it is satisfied with their suitability and must maintain a register of all such certificates. This approach intends to echo the responsibility that trustees assume when delegating tasks toward the carrying out of a key function in a pension scheme.
Clause 72 requires the regulator to approve the superfund scheme trustees. Regulations will specify the information and background checks that the regulator should undertake to ensure that the trustees are fit and proper. Members should note that civil penalties apply to any breaches of clauses 70 to 72. I commend clauses 69 to 72 to the Committee.
Question put and agreed to.
Clause 69 accordingly ordered to stand part of the Bill.
Clauses 70 to 72 ordered to stand part of the Bill.
Clause 73
Events to be notified to the Regulator
Question proposed, That the clause stand part of the Bill.
Torsten Bell
We now come to the clauses relating to information and reporting requirements for superfunds.
Clause 73 requires the trustees of a superfund to notify the Pensions Regulator if certain events occur that might indicate the need for further investigation by the regulator—for example, a material deterioration in the investment performance of the scheme. Clause 74 requires the superfund trustees to regularly update the Pensions Regulator on the financial position of the superfund. This will enable effective monitoring by the regulator. These regular reports are additional to existing valuation and reporting requirements under the existing defined-benefit scheme funding framework.
Clause 75 allows the regulator to request information from the responsible body of a superfund to monitor its compliance with ongoing requirements that the regulator may specify. Similar powers to request such returns exist in the master trust and CDC authorisation regimes. Clause 76 allows the regulator to appoint someone to prepare a report about a suspected breach of the requirements. This provision is similar to both section 71 of the Pensions Act 2004 and the FCA’s arrangements for the procurement of a report by a skilled person. As in the 2004 Act, the responsible body—the “person” issuing a notice—must bear the cost of the report. Clause 77 requires the responsible body of a superfund to provide information to the superfund trustees to enable them to comply with relevant legislation, including their obligations to report under clause 74. This is about making sure that trustees have access to information that the responsible body may hold.
Members should note that civil penalties apply to the responsible body for breaches of clauses 73, 75, 76 and 77. I commend clauses 73 to 77 to the Committee.
Question put and agreed to.
Clause 73 accordingly ordered to stand part of the Bill.
Clauses 74 to 77 ordered to stand part of the Bill.
Clause 78
“Event of concern” and “period of concern”
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 79 to 81 stand part.
Government amendments 223 and 224
Clauses 82 to 87 stand part.
Torsten Bell
We turn now to chapter 5, which is concerned with “events of concern”—events that require closer regulatory scrutiny. These are events such as breaches of financial thresholds, an unauthorised extraction of capital or a material risk of insolvency. An “event of concern” will result in a “period of concern”, which will end once it has been resolved by the regulator or the superfund winds up.
Clause 78 sets out the list of circumstances in relation to a superfund that give rise to an event of concern. Subsection (4) provides an affirmative power to adjust the period and circumstances of financial thresholds not being met. This is because different risks may emerge as the market evolves and further events of concern may be needed.
Clause 79 requires a relevant person to notify the Pensions Regulator when an event of concern occurs or is likely to occur. Members may find it helpful to note that this provision replicates existing measures for defined-contribution master trusts.
Clause 80 requires the superfund or the trustees to produce a response plan to address the event of concern. The response plan must be approved by the Pensions Regulator. If it is not satisfied that the response plan is sufficient, it can request a new plan. Clause 81 specifies the required content of any response plan.
Government amendment 223 is technical. It ties the direction-making powers of the regulator explicitly to the requirements placed upon a given member of the superfund group or trustee of the superfund scheme in clause 80. Clause 80(1) requires the submission of a response plan to an event of concern, while clause 80(3)(b) requires the revision of any response plan if the regulator is not satisfied. Government amendment 224 clarifies the limits of the regulator’s powers to direct superfunds to take corrective action during the event of concern.
Clause 82 lists the specific powers that will be granted to the Pensions Regulator during periods of concern to ensure the timely and effective resolution of any event of concern. A member of the superfund group must comply with a direction given to them by the regulator.
Clause 83 grants the regulator the power to make a direction to pause only if it is satisfied that doing so is necessary to protect the interests of superfund members. Members should note that this direction-making power is standard and reflects those in the regulator’s master trust and CDC authorisation regimes.
Clause 84 allows the regulator to issue a fixed penalty notice to a person if it considers they have failed to comply with some of these requirements. The penalty must not exceed £100,000.
Clause 85 allows the regulator to issue an escalating penalty notice for failure to comply with a requirement, if it has already issued the person a fixed penalty notice under clause 84 in respect of that failure. The penalty is to be determined according to regulations and must not exceed £20,000 per day.
Clause 86 enables the regulator to withdraw authorisation from a superfund if it considers that the superfund has failed to comply with its ongoing requirements. Superfund pension schemes are defined-benefit occupational pension schemes and will be subject to the employer debt provisions under section 75 of the Pensions Act 1995.
Superfunds will include a statutory employer. If that employer becomes insolvent or the scheme enters wind-up, a debt will be triggered from the employer in the normal way under section 75 if the scheme cannot secure member benefits through an insurer buy-out. That is an additional protection that matches how that is carried out in traditional defined-benefit schemes.
Clause 87 enables employer debt to be paid, or partly paid, by funds released from the capital buffer rather than directly by the statutory employer itself.
Question put and agreed to.
Clause 78 accordingly ordered to stand part of the Bill.
Clauses 79 to 81 ordered to stand part of the Bill.
Clause 82
Regulator’s direction-making powers during period of concern
Amendments made: 223, in clause 82, page 84, line 9, leave out
“if no response plan has been approved”
and insert
“if a person has failed to comply with section 80(1) or (3)(b) (requirement to propose response plan or revised response plan)”.
This amendment limits the direction-making power in clause 82(1)(c) so that it can only be exercised where a person has failed to produce a response plan or a revised response plan as required by clause 80.
Amendment 224, in clause 82, page 84, line 16, at end insert—
“(1A) A direction under subsection (1)(c) may not require the provision of financial support to the superfund scheme.”—(Torsten Bell.)
This amendment provides that the direction-making power in clause 82(1)(c) cannot be used to require a person to provide financial support to the superfund scheme.
Clause 82, as amended, ordered to stand part of the Bill.
Clauses 83 to 87 ordered to stand part of the Bill.
Clause 88
Power to extend superfunds legislation to similar structures
Question proposed, That the clause stand part of the Bill.
Torsten Bell
This is the last grouping that covers the superfund regulatory regime. Clause 88 allows regulations to extend the superfund regime, with or without modification, to structures that share similar characteristics to superfunds. To fall within scope of the power, the structures must hold defined benefit liabilities and not be supported by a substantive employer covenant. The clause could be used, for example, to address schemes that provide benefit security through something other than a capital buffer, such as an insurance product.
Clause 89 is designed to ensure that superfund schemes, despite their special characteristics, fit within the legislative framework applicable to occupational pension schemes. Superfund schemes present particular issues because there is no traditional employer and it will not necessarily be obvious, when the scheme is established, who its eventual members will be. The intention, however, is for them to be regulated as occupational pension schemes and to be structured in a way that works with the relevant legislative frameworks.
Clause 90 makes two specified amendments to legislation in consequence of part 3. The first amendment clarifies how the employer debt legislation will apply where a superfund pension scheme is sectionalised. The second amendment will remove the requirement for a certificate of broad comparability when trustees transfer to a superfund after a scheme comes out of PPF assessment. In such circumstances, trustees will still be required to consider whether the transfer was in the interests of members, and the test in clause 59 will need to be satisfied. This will provide protection for transferring members.
Clause 91 enables transitional provision to be made in relation to a superfund that is already operating under the regulator’s interim regime, which I mentioned earlier. Clause 92 provides definitions for key terms. The Secretary of State may by affirmative regulations amend the definition of “superfund group”. This will provide the flexibility to deal with variation in those group structures and ensure that appropriate entities are captured within the regulatory regime. I commend clauses 88 to 92 to the Committee.
Question put and agreed to.
Clause 88 accordingly ordered to stand part of the Bill.
Clauses 89 to 92 ordered to stand part of the Bill.
Clause 93
Alienation or forfeiture of occupational pension
Question proposed, That the clause stand part of the Bill.
Torsten Bell
Before a 2022 High Court ruling, it was widely accepted that the Pensions Ombudsman had the status of a competent court, so that a Pensions Ombudsman determination alone would be sufficient for a pension scheme to recoup an overpayment from a member’s pension. The ruling called that into question. Clause 93 simply reinstates the original policy intent that the ombudsman’s determination in pension overpayment dispute cases is sufficient. That is what was debated in Parliament when the ombudsman was established in 1931. Without this legislation, a large additional burden would be imposed on an already stretched county court system.
Turning to clause 94, being diagnosed with life-limiting illness can cause unimaginable suffering for a person and their loved ones. Those nearing the end of their life should be able to access the financial support that they need at that difficult time. I am pleased that we are now able to introduce this clause to amend the definition of terminal illness in the Pension Protection Fund and financial assistance scheme legislation.
Terminal illness is currently defined as where a member’s death from a progressive disease can be reasonably expected within six months. Clause 94 extends that to within 12 months. These new arrangements may enable a few more affected members to claim a payment, but they will mostly enable members to receive payments at an earlier stage of their illness. That small change could make a big impact for affected members at a very difficult time.
Clause 95 covers another aspect of the Pension Protection Fund: its levy. Improved scheme funding of the PPF means that it is far less reliant on the levy than it was previously. For the 2025-26 financial year, the levy has been set at £45 million, its lowest rate. However, the current legislation restricts the PPF board from increasing the levy by more than 25% of the previous year’s levy. That has made it risky for the PPF to reduce the levy significantly, even when it is not needed, because it could take several years to restore it to the previous levels if required. Clause 95 gives the board greater flexibility to adjust the levy by amending the safeguard. The new safeguard will be to prevent the board from charging a levy that is more than the sum of the previous year’s levy and 25% of the previous year’s levy ceiling.
Clause 96 focuses on pensions dashboards. Current legislation does not allow the PPF to provide to pensions dashboards information about the compensation that people can expect, or for the display of that information. The clause expands the scope of pensions dashboards to include information relating to compensation from the PPF and financial assistance from the financial assistance scheme, and it could benefit around 140,000 people. I commend clauses 93 to 96 to the Committee.
Mark Garnier
I will be incredibly brief. We have heard a number of details from the Minister. Clauses 93 to 96 contain what we believe are sensible and welcome amendments that reflect current market and scheme conditions. In particular, the changes related to the Pension Protection Fund are positive. With a strong funding position in many defined benefit schemes recently and the PPF’s healthy reserves exceeding £14 billion, these legislative changes are timely. The industry strongly supports the option for a zero levy, which reduces financial pressure on well-funded schemes. The Opposition wholeheartedly support these clauses.
Steve Darling (Torbay) (LD)
The Liberal Democrats welcome the direction of travel. As the shadow Minister identified, the industry has demanded some elements of the clauses, but they are mostly about supporting consumers. The end users of these services should be a key element of what the Bill is about.
Kirsty Blackman
I agree with the point that the Liberal Democrat spokesperson just made. The clauses represent good decisions both for those who work in the industry and for members of the public—people paying into pension schemes and hoping to get an adequate pension when they retire.
I want to comment on a few things included in the clauses. The Work and Pensions Committee report that was published a couple of years ago asked for several of the changes that are being made here, and I appreciate that the Government are now moving towards making a significant number of them in what is the most major piece of pensions legislation we have seen in years. I do appreciate the changes being made.
I am incredibly supportive of the changes to the terminal illness criteria, which create consistency with other Government legislation on the definition of terminal illness. As the Minister said, if this allows more people to access payments earlier and can improve their quality of life when they know how very short their remaining time is, it will be incredibly helpful. It will enable those individuals to access additional payments and funding more easily and quickly, so that they can make the most of the short time they have left. I appreciate that change.
The pensions dashboard changes are sensible, because people will be able to see the widest possible range of things when they log into the dashboard. It will do what it says on the tin, which is to bring everything together in one place, rather than people having to go somewhere else.
Lastly, I do not disagree on the PPF levy changes; I think this is the right decision. However, there is a significant surplus, and there are other things that could have been done with it; we will discuss new clauses 18 and 19 later. I thought the Government’s response to the Work and Pensions Committee report that I mentioned was sensible when it came to the PPF levy changes: “Yes, we agree this needs to be changed and we will look into it.” The response on the pre-1997 lack of uplift for members in the PPF and the FAS was not so helpful. It was more like, “Well, this is an impact on the Government’s balance sheet.” That is genuinely what the Government’s response says.
I am concerned that there are two very different ways of looking at the answers to those questions. In both cases, the answer could have been: “There is a significant surplus. We agree we should do something about it.” Changes could then have been made to support people who are in some cases really struggling to make ends meet, as was mentioned in last Tuesday’s witness session. That could have made a significant difference to their lives. If the Government had committed to allowing or encouraging the PPF to apply an inflationary uplift and provide support—even if they did so in a particularly progressive way, to support folk with the lowest earnings—that would have made the biggest possible difference to people who are genuinely struggling right now.
Torsten Bell
I thank all hon. Members for the consensus around these amendments. We will return to the question of indexation shortly with some of the new clauses. I also want to correct the record. In the exciting debate on the Pensions Ombudsman, I mentioned 1931 but meant 1991. It is not quite as old as I suggested, so I am glad that is now noted.
Question put and agreed to.
Clause 93 accordingly ordered to stand part of the Bill.
Clauses 94 to 96 ordered to stand part of the Bill.
Clause 97
Amendments of Pensions Act 2004
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendments 229, 230, 232, 231 and 233 to 239.
Schedule.
Torsten Bell
Clause 97 introduces the schedule of amendments that are being made to the Pensions Act 2004. These amendments extend the regulatory functions of the Pensions Regulator to include superfunds and other matters in the Bill. Amendments 229 to 239 ensure that a similar effect is achieved in relation to the guided retirement, value for money, scale and asset allocation provisions, and the small pot measures.
I particularly draw Members’ attention to paragraph 16 of the schedule, which amends section 127 of the Pensions Act 2004 to extend the duty of the board of the pension protection scheme to superfund schemes. It is important that members of superfunds receive the same protection as members of other occupational schemes.
Paragraph 18 of the schedule amends section 224 of the Pensions Act 2004 to require that superfunds’ actuarial reports, produced in years between triennial valuations of scheme assets and liabilities, must be sent to the Pensions Regulator. This is an additional requirement for superfunds, which will allow for greater oversight by the regulator of their funding positions.
Question put and agreed to.
Clause 97 accordingly ordered to stand part of the Bill.
Amendments made: 229, in schedule, page 100, line 16, leave out “Part 2 or 3 of” and insert—
“Chapter 1, 2, 3A or 5 of Part 2 of, or any provision of Part 3 of,”.
This amendment confines the application of section 13 to specific Chapters of Part 2. The reference to Chapter 3A is to the Chapter referred to in the explanatory statement to NC15.
Amendment 230, in schedule, page 100, line 27, at end insert—
“(1A) Before paragraph (da) insert—
‘(dza) sections 28A to 28F of the Pensions Act 2008 (scale and asset allocation);’”
This amendment ensures that the powers of the Pensions Regulator to inspect premises conferred by section 73 of the Pensions Act 2004 are exercisable in relation to the Regulator’s functions under the new scale and asset allocation measure inserted in the Pensions Act 2008 by Chapter 3 of Part 2 of the Bill.
Amendment 231, in schedule, page 100, line 31, leave out “(value for money)”.
This amendment is consequential on Amendment 232.
Amendment 232, in schedule, page 100, line 31, leave out “Chapter 1” and insert “Chapters 1, 2, 3A and 5”.
This amendment ensures that the powers of the Pensions Regulator to inspect premises conferred by section 73 of the Pensions Act 2004 are exercisable in relation to Chapters 2, 3A and 5 of Part 2 of the Bill. The reference to Chapter 3A is to the Chapter referred to in the explanatory statement to NC15.
Amendment 233, in schedule, page 100, line 32, leave out “(superfunds)”.
This amendment is consequential on Amendment 232.
Amendment 234, in schedule, page 101, line 16, leave out “any” and insert “or by virtue of any”.
This amendment, which relates to Amendment 235, ensures that functions under regulations made under the provisions mentioned in section 80(1)(c) are also captured by that provision.
Amendment 235, in schedule, page 101, leave out line 22 and insert—
“‘Chapter 1, 2, 3A or 5 of Part 2 of, or any provision of Part 3 of, the Pension Schemes Act 2025’”.
This amendment extends the offence in section 80 of the Pensions Act 2004 to false or misleading information provided in connection with the Pensions Regulator’s functions under or by virtue of Chapters 1, 2, 3A or 5 of Part 2 of the Bill. Chapter 3 of Part 2 is already covered, as it amends existing legislation already mentioned in section 80(1)(c). The reference to Chapter 3A is to the Chapter referred to in the explanatory statement to NC15.
Amendment 236, in schedule, page 101, line 25, leave out “any” and insert “or by virtue of any”.
This amendment, which relates to Amendment 237, ensures that functions under regulations made under the provisions mentioned in section 80A(2)(c) are also captured by that provision.
Amendment 237, in schedule, page 101, leave out line 31 and insert—
“‘Chapter 1, 2, 3A or 5 of Part 2 of, or any provision of Part 3 of, the Pension Schemes Act 2025’” —(Torsten Bell.)
This amendment extends the civil penalty provisions in section 8A of the Pensions Act 2008 to false or misleading information provided in connection with the Pensions Regulator’s functions under or by virtue of Chapters 1, 2, 3A or 5 of Part 2 of the Bill. Chapter 3 of Part 2 is already covered, as it amends existing legislation already mentioned in section 80A(2)(c).
Amendment 238, in schedule, page 102, line 10, after “legislation” insert—
“—
(a) after paragraph (d) insert—
‘(ea) Part 1 of the Pensions Act 2008 in relation to the scale requirement in section 28B or the asset allocation requirement in section 28C,’;”
This amendment ensures that the scale and asset allocation provisions in Chapter 3 of Part 2 can be the subject of a Regulator code of practice under section 90 of the Pensions Act 2004.
Amendment 239, in schedule, page 102, line 12, leave out “Part 2 or 3 of” and insert—
“Chapter 1, 2, 3A or 5 of Part 2 of, or any provision of Part 3 of,”.—(Torsten Bell.)
This amendment confines the references in section 90(6) of the Pensions Act 2004 to specific Chapters of Part 2.
Schedule, as amended, agreed to.
New Clause 11
Sharing of database where FCA makes corresponding rules
“(1) This section applies if the Financial Conduct Authority makes rules, in relation to persons regulated by it, that correspond to value for money regulations.
(2) The Secretary of State may by regulations make provision for the purpose of enabling or facilitating the use of the database mentioned in section 11(2)(d) for the publication or sharing of information—
(a) that relates to persons to whom the rules made by the Financial Conduct Authority apply, and
(b) that corresponds to metric data,
including provision conferring functions on a person appointed as mentioned in section 11(2)(d).
(3) Regulations under subsection (2) are subject to the negative procedure.”—(Torsten Bell.)
This new clause, intended to be inserted after clause 17, allows for the same value-for-money database to be used for FCA-regulated schemes as for schemes regulated by the Pensions Regulator.
Brought up, read the First and Second time, and added to the Bill.
New Clause 12
Interpretation of Chapter
‘(1) In this Chapter—
“the appropriate authority” , in relation to the making of regulations, means—
(a) where the only pension schemes to which the regulations apply are FCA-regulated pension schemes, the Treasury;
(b) where the only pension schemes to which the regulations apply are not FCA-regulated pension schemes, the Secretary of State;
(c) in any other case, the Treasury and the Secretary of State acting jointly;
“the appropriate regulator” , in relation to a pension scheme, means—
(a) in relation to an FCA-regulated pension scheme, the FCA;
(b) in relation to any other pension scheme, the Pensions Regulator;
“approved main scale default arrangement” , in relation to a pension scheme, means a main scale default arrangement in respect of which the pension scheme is approved under section 28A or 28B of the Pensions Act 2008;
“consolidating” a non-scale default arrangement into an approved main scale default arrangement means ensuring that any assets held subject to the non-scale default arrangement are instead held subject to the approved main scale default arrangement;
“the FCA” means the Financial Conduct Authority;
“FCA-regulated” , in relation to a pension scheme, has the meaning given in subsection (2);
“main scale default arrangement” , in relation to a pension scheme, has the same meaning as in section 28A and 28B of the Pensions Act 2008;
“money purchase benefits” has the same meaning as in the Pension Schemes Act 1993 (see section 181 of that Act);
“non-scale default arrangement” , in relation to a pension scheme, means an arrangement—
(a) which is not an approved main scale default arrangement, and
(b) subject to which assets of the scheme must under the rules of the scheme be held, or may under those rules be held, if the member of the scheme to whom the assets relate does not make a choice as to the arrangement subject to which the assets are to be held;
“operate” , in relation to a default arrangement, has the meaning given in subsection (3);
“pension scheme” has the meaning given by section 1(5) of the Pension Schemes Act 1993;
“the provider” of a pension scheme means—
(a) in relation to an FCA-regulated pension scheme, the person mentioned in subsection (2)(b);
(b) in any other case, the trustees or managers;
“the trustees or managers” , in relation to a pension scheme, means—
(a) in the case of a scheme established under a trust, the trustees of the scheme, and
(b) in any other case, the persons responsible for the management of the scheme.
(2) A pension scheme is “FCA-regulated” if the operation of the scheme—
(a) is carried on in such a way as to be a regulated activity for the purposes of the Financial Services and Markets Act 2000, and
(b) is carried on in the United Kingdom by a person who is in relation to that activity an authorised person under section 19 of that Act.
(3) The provider of a pension scheme “operates” a non-scale default arrangement or main scale default arrangement if any assets held for the purposes of the scheme are held subject to the non-scale default arrangement or main scale default arrangement.’—(Torsten Bell.)
This new clause makes provision about the interpretation of the new Chapter referred to in the explanatory statement to NC15.
Brought up, and read the First time.
The Chair
With this, it will be convenient to discuss the following: Government new clause 13—Crown application.
Government new clause 14—Amendments of the Financial Services and Markets Act 2000.
Government new clause 15—Regulations restricting creation of new non-scale default arrangements.
Government new clause 16—Regulations about consolidation of non-scale default arrangements.
Government new clause 17—Review in relation to non-scale default arrangements.
Torsten Bell
These new clauses deliver proposals that are contained in the final report of the pension investment review by adding a new chapter in part 2 of the Bill.
Clause 38 set out the requirements for master trusts and group personal pensions to demonstrate that they have sufficient scale, and this new chapter merely supports that delivery. There are too many default arrangements without scale in some schemes, and this fragmentation does not benefit savers. To prevent further fragmentation, new clause 15 allows for regulations to be made to restrict the creation of new non-scale default arrangements. This is not a ban on new default arrangements; there will be circumstances where they will be in savers’ interests. However, any new non-scale default arrangements will need to obtain regulatory approval before they can accept any moneys into them.
We must also deal with the existing fragmentation, and new clause 17 requires a review to be established jointly by the DWP and the Treasury on non-scale default arrangements. This review will look at the scale of the issue and why action has not been taken to consolidate these non-scale default arrangements where it would benefit savers for that to take place.
We anticipate that the review will commence in 2029, once the value for money and contractual overrides are in place. They will provide the tools needed for providers to take action before the review commences. Those tools will help to reduce fragmentation. The FCA and the Pensions Regulator will be required to provide information and assistance to the review. Once the review has been completed, it will be required to publish its findings, and these will inform further steps to support consolidation.
Torsten Bell
I beg to move, That the clause be read a Second time.
I thank all Members for their patience. The new clause amends part 1 of the Pensions Act 2008. It is essential to address a current gap in the pension system to ensure that employers share timely and accurate data with pension schemes, beyond the current one-off requirement for employers to provide that information to schemes at the point when the employee is enrolled into the scheme.
Improving data records will help to improve member communications and will support pension schemes to operate more efficiently and effectively. Poor data contributes to wasted administration costs because it often requires manual interventions to verify identities and match records, which is especially important to facilitate the small pots framework that we have discussed previously.
Finally, the new clause extends the relevant pre-existing compliance provisions in the Pensions Act 2008 to these new duties, ensuring that the regulator will have suitable enforcement powers. In summary, the new clause supports better governance through improved data quality.
Question put and agreed to.
New clause 20 accordingly read a Second time, and added to the Bill.
New Clause 22
Additional powers for certain scheme managers
“(1) Scheme regulations may make provision for the purpose of conferring any power or powers falling within subsection (2) or (4) on a specified scheme manager for a scheme for local government workers in England and Wales.
(2) Scheme regulations under this section may make provision conferring on the scheme manager (in relation to carrying out its functions as a scheme manager)—
(a) any specified power or powers of a local authority under Part 6 of the Local Government Act 1972, or
(b) any power or powers corresponding to one or more of the powers of a local authority under that Part.
(3) The power to make provision by virtue of subsection (2) is not exercisable if, or to the extent that, the scheme manager already has the powers of a local authority under Part 6 of the Local Government Act 1972 (otherwise than by virtue of scheme regulations under this section).
(4) Scheme regulations under this section may make provision conferring on the scheme manager (as part of its functions as a scheme manager) power to provide any administrative, professional or technical service for any other person who is a scheme manager for a public service pension scheme.
(5) In subsection (4)—
(a) ‘public service pension scheme’ means a scheme for the payment of pensions and other benefits to or in respect of persons of a description set out in section 1(2) of PSPA 2013, and
(b) ‘scheme manager’ (in the third place it appears) means any person who is, for the purposes of PSPA 2013, a scheme manager for any such scheme.
(6) The power to make provision by virtue of subsection (4) is not exercisable if, or to the extent that, the scheme manager already has the power to provide services referred to in that subsection (otherwise than by virtue of scheme regulations under this section).
(7) Scheme regulations under this section may amend or modify any Act passed before or in the same Session as this Act.
(8) In this section ‘specified’ means specified in scheme regulations under this section.”—(Torsten Bell.)
This new clause enables regulations to confer additional powers specified in subsection (2) or (4) on a specific scheme manager. Most but not all of the scheme managers already have those powers, so the intention is to enable the others to be given any of the powers that they do not already have.
Brought up, read the First and Second time, and added to the Bill.
New Clause 23
Sections (Validity of certain alterations to salary-related contracted-out pension schemes: subsisting schemes) to (Powers to amend Chapter 1 etc: Great Britain): interpretation and scope
“(1) The following provisions of this section have effect for the purposes of this section and sections (Validity of certain alterations to salary-related contracted-out pension schemes: subsisting schemes) to (Powers to amend Chapter 1 etc: Great Britain).
(2) ‘GB scheme’ means an occupational pension scheme that was a salary-related contracted-out scheme in England and Wales or Scotland; and for this purpose an occupational pension scheme was a salary-related contracted-out scheme in England and Wales or Scotland at any time if the scheme was contracted-out at that time by virtue of satisfying section 9(2) of the Pension Schemes Act 1993 (as it then had effect).
(3) ‘Scheme actuary’, in relation to a scheme, means—
(a) the person for the time being appointed as actuary for the scheme under section 47 of the Pensions Act 1995 (professional advisers), or
(b) if there is no person so appointed, a fellow of the Institute and Faculty of Actuaries appointed by the trustees or managers of the scheme to carry out the functions of the scheme actuary under section (Validity of certain alterations to salary-related contracted-out pension schemes: subsisting schemes).
(4) ‘Section 37(1)’ refers to section 37(1) of the Pension Schemes Act 1993 (prohibition of alterations to rules of contracted-out schemes in certain circumstances).
(5) ‘Regulation 42’ refers to regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996 (SI 1996/1172) (requirements for alterations to rules of contracted-out schemes).
(6) An alteration purporting to have been made to the rules of a GB scheme is a ‘potentially remediable alteration’ if—
(a) by virtue of section 37(1) and paragraphs (1) and (2) of regulation 42 (as they had effect at the time), the alteration could not be made unless the requirements of paragraph (2)(a), (b) and (c) of regulation 42 (as they then had effect) had been met,
(b) it was treated by the trustees or managers of the scheme, after it was purportedly made, as a valid alteration,
(c) no positive action has been taken by the trustees or managers of the scheme on the basis that they consider the alteration to be void (and so of no legal effect) by reason of non-compliance with the requirements of paragraph (2)(a) and (b) of regulation 42, and
(d) it is not excluded from the scope of remediation under sections (Validity of certain alterations to GB salary-related contracted-out pension schemes: subsisting schemes) and (Validity of certain alterations to GB salary-related contracted-out pension schemes: wound up schemes and other special cases) (see subsection (8)).
(7) In subsection (6)(c) ‘positive action’, in relation to a purported alteration, means—
(a) notifying any members of the scheme in writing to the effect that the trustees or managers consider the alteration to be void (by reason of non-compliance with the requirements of paragraph (2)(a) and (b) of regulation 42) and that the scheme will be administered on the basis that it has no legal effect, or
(b) taking any other step in relation to the administration of the scheme, in consequence of the trustees or managers considering the alteration to be void, which has (or will have) the effect of altering payments to or in respect of members of the scheme.
(8) An alteration purporting to have been made to the rules of a GB scheme is excluded from the scope of remediation under sections (Validity of certain alterations to GB salary-related contracted-out pension schemes: subsisting schemes) and (Validity of certain alterations to GB salary-related contracted-out pension schemes: wound up schemes and other special cases) if any question relating to the validity of the alteration, so far as relating to the requirements of paragraph (2)(a) and (b) of regulation 42—
(a) has been determined by a court before this section comes into force in legal proceedings to which the trustees or managers were a party;
(b) was in issue on or before 5 June 2025 in legal proceedings to which the trustees or managers were a party, but has been settled by agreement between the parties at any time before this section comes into force, or
(c) was in issue on or before 5 June 2025 in legal proceedings to which the trustees or managers were a party, and remains in issue when this section comes into force.”—(Torsten Bell.)
This new clause is intended to form part of a new Chapter 1 in Part 4 to address issues arising from the decision of the Court of Appeal in Virgin Media Ltd v NTL Pension Trustees. This decision called into question the validity of past alterations to salary-related contracted out occupational pension schemes. It appears that a number of schemes were purportedly altered without the prior actuarial confirmation required (under regulation 42(2)(b) of the Occupational Pension Schemes (Contracting-Out) Regulations 1996) being given. In other cases inadequate records mean that the current trustees or managers of some schemes cannot tell whether the necessary confirmation was given. The new Chapter will provide for the retrospective validation of such alterations where certain conditions are met, dealing with Northern Ireland pension schemes separately. The new clause also provides that alterations whose validity was in issue in legal proceedings commenced on or before 5 June 2025 are outside the scope of remediation under the new Chapter. That was the date on which a published ministerial statement indicated that the Government proposed to take retrospective legislative action to address issues arising from the Virgin Media case.
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss the following:
Government new clause 24—Validity of certain alterations to GB salary-related contracted-out pension schemes: subsisting schemes.
Government new clause 25—Validity of certain alterations to GB salary-related contracted-out pension schemes: wound up schemes and other special cases.
Government new clause 26—Power to amend provisions of Chapter 1 etc: Great Britain.
Government new clause 27—Sections (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) to (Power to amend Chapter 1): interpretation and scope.
Government new clause 28—Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes.
Government new clause 29—Validity of certain alterations to NI salary-related contracted-out pension schemes: wound up schemes and other special cases.
Government new clause 30—Powers to amend Chapter 1 etc: Northern Ireland.
Torsten Bell
These new clauses are intended to help schemes affected by the implications of the Virgin Media v. NTL pension trustees court judgments, which found that certain benefit changes could be void if a scheme cannot produce actuarial confirmation that they met the requirements at the time. That has created significant uncertainty about affected schemes’ liabilities and funding requirements.
The new clauses apply to private and public sector defined-benefit pension schemes that were contracted out between 1997 and 2016 under the reference scheme test, which imposed certain legal requirements upon them. The new clauses let schemes ask their actuary to confirm retrospectively that a past change to benefits would not have stopped the scheme from meeting these legal requirements at the time, rather than requiring the scheme to produce actuarial confirmation of the same facts at the time that the change was actually made. They will help members and schemes get the certainty they need.
I want to assure the Committee that these new clauses do not change the underpinning standards that were required. They are not a retrospective pardon for benefit changes that did not meet the legal standards within existing schemes. If a scheme did not obtain written confirmation at the time, and cannot obtain retrospective confirmation, the benefit changes can be held to be void, as provided for under current law.
New clause 23 defines the language and parameters of the other clauses of this section of the Bill. New clause 24 gives the trustees or managers of a scheme the power to ask the scheme actuary to confirm that a previous change to benefits would not have stopped the scheme from meeting legal requirements at that time.
New clause 25 introduces an approach for schemes whose liabilities have already been transferred to the Pension Protection Fund or to the financial assistance scheme. Any benefit changes will be deemed to have been made with actuarial confirmation in those cases. This different approach is needed because individual schemes no longer exist when they have entered the PPF, and there is no longer a scheme actuary. The PPF and FAS would also not have the information required on individual schemes to enable an actuary to provide retrospective confirmation. This ensures that the level of compensation or assistance will continue to be paid to members at current levels.
New clause 25 also introduces an explicit provision for wound-up schemes that deems that benefit changes made to the scheme were compliant with the requirement to have confirmation from an actuary. This will make sure that the benefits provided to members, for example through an annuity, will not be incorrect as a result of any historical failure to obtain a written actuarial confirmation.
The legal recourse for members would otherwise be against the former scheme trustees, because they cannot have recourse against the provider of the annuity. However, we think it would be unreasonable for these trustees to be potentially personally liable in a situation where they could not obtain a retrospective actuarial confirmation because the scheme and its records no longer exist.
New clause 26 provides a regulation-making power to provide for specified alterations to be excluded from the scope of the retrospective confirmation route and to make consequential amendments to the legislation. The power is not intended for immediate use but is included to future-proof the legislation. The clause also contains a separate power to amend existing primary legislation. I want to assure the Committee that the power is narrow, enables consequential amendments to be made, and is subject to the affirmative procedure.
New clauses 27 to 30 make mirroring provisions for Northern Ireland, at the request of the Northern Ireland Executive. I commend the new clauses to the Committee.
Question put and agreed to.
New clause 23 accordingly read a Second time, and added to the Bill.
New Clause 24
Validity of certain alterations to GB salary-related contracted-out pension schemes: subsisting schemes
“(1) This section applies to any potentially remediable alteration purportedly made to a scheme other than one to which section (Validity of certain alterations to GB salary-related contracted-out pension schemes: wound up schemes and other special cases) applies.
(2) If the conditions mentioned in subsection (3) are met in relation to it, the alteration is to be treated for all purposes as having met the requirements of paragraph (2)(a) and (b) of regulation 42 before it was purportedly made, and so as having always been a valid alteration so far as those requirements are concerned.
(3) The conditions are—
(a) that the trustees or managers of the scheme have made a request in writing to the scheme actuary for the actuary to consider whether or not, on the assumption that it was validly made, the alteration would have prevented the scheme from continuing to satisfy the statutory standard, and
(b) that the scheme actuary has confirmed to the trustees or managers in writing that in the actuary’s opinion it is reasonable to conclude that, on the assumption that it was validly made, the alteration would not have prevented the scheme from continuing to satisfy the statutory standard.
In this subsection ‘the statutory standard’ means the statutory standard for a contracted-out scheme under section 12A of the Pension Schemes Act 1993 as it had effect at the time the alteration was purportedly made.
(4) A scheme actuary who has received a request under subsection (3)(a) in relation to a potentially remediable alteration to a scheme—
(a) may take any professional approach (including making assumptions or relying on presumptions) that is open to the actuary in all the circumstances of the case;
(b) may act on the basis of the information available to the actuary, as long as the actuary considers it sufficient for the purpose of forming an opinion on the subject-matter of the request.
(5) A condition mentioned in subsection (3) may be met by action taken before (as well as action taken after) this section comes into force.
(6) Subsection (7) applies to a scheme if —
(a) there is an assessment period in relation to the scheme within the meaning of Part 2 of the Pensions Act 2004, or
(b) the scheme is operating as a closed scheme under section 153 of that Act.
(7) The powers of the Board of the Pension Protection Fund under section 134 and section 155 of the Pensions Act 2004 to give directions includes power to give a direction to the trustees or managers of the scheme requiring them—
(a) to make a request under subsection (3)(a) above in relation to a potentially remediable alteration to the scheme, and
(b) to take any necessary action to enable or facilitate the making of a decision by the scheme actuary as to whether to give the confirmation described in subsection (3)(b) above in relation to that alteration.”—(Torsten Bell.)
This new clause enables the trustees or managers of a scheme to ask the scheme actuary to consider the position of an alteration when it was (purportedly) made. If the actuary confirms that it is reasonable to conclude that at that time the alteration would not have prevented the scheme from continuing to meet the statutory standard for contracted-out schemes, then the alteration is retrospectively deemed by subsection (2) to have been validly made, so far as the requirements of regulation 42(2)(a) and (b) are concerned.
Brought up, read the First and Second time, and added to the Bill.
New Clause 25
Validity of certain alterations to GB salary-related contracted-out pension schemes: wound up schemes and other special cases
“(1) This section applies to any potentially remediable alteration purportedly made to the rules of—
(a) a scheme which has been wound up before this section comes into force,
(b) a scheme for which the Board of the Pension Protection Fund has, before this section comes into force, assumed responsibility in accordance with Chapter 3 of Part 2 of the Pensions Act 2004 (see section 161 of that Act), or
(c) a scheme which is a qualifying pension scheme for the purposes of regulation 9 of the Financial Assistance Scheme Regulations 2005 (SI 2005/1986) and in respect of which payments are required to be made under section 286 of the Pensions Act 2004.
(2) The alteration is to be treated for all purposes as having met the requirements of paragraph (2)(a) and (b) of regulation 42 before it was purportedly made and so as having always been a valid alteration so far as those requirements are concerned.”—(Torsten Bell.)
This new clause deals with cases where it would not now be practicable for the confirmation described in NC24(3)(b) to be obtained in relation to a potentially remediable alteration. In such cases the clause retrospectively deems the alteration to have been validly made so far as the requirements of regulation 42(2)(a) and (b) are concerned.
Brought up, read the First and Second time, and added to the Bill.
New Clause 26
Power to amend provisions of Chapter 1 etc: Great Britain
“(1) The Secretary of State may by regulations amend any of sections (Sections (Validity of certain alterations to GB salary-related contracted-out pension schemes: subsisting schemes) to (Powers to amend Chapter 1): interpretation and scope), (Validity of certain alterations to GB salary-related contracted-out pension schemes: subsisting schemes) and (Validity of certain alterations to GB salary-related contracted out pension schemes: wound up schemes and other special cases) for the purpose of providing for purported alterations of any specified description to be outside the scope of remediation under either or both of sections (Validity of certain alterations to salary-related contracted-out pension schemes: subsisting schemes) and (Validity of certain alterations to salary-related contracted-out pension schemes: wound up schemes and other special cases).
(2) In subsection (1) ‘specified’ means specified in the regulations; and a specified description of purported alterations may be framed by reference to features of the alterations or of the schemes purportedly altered by them (or a combination of both).
(3) Regulations under subsection (1) are subject to the negative procedure.
(4) The Secretary of State may by regulations make incidental, supplementary, consequential or transitional provision in connection with any provision of this Chapter (other than this section and section (Powers to amend Chapter 1 etc: Northern Ireland)).
(5) Regulations under subsection (4) may amend any Act passed before or in the same Session as this Act.
(6) Regulations under subsection (4) are subject to the affirmative procedure if they contain provision made under subsection (5); otherwise they are subject to the negative procedure.”—(Torsten Bell.)
This new clause enables regulations made for England and Wales or Scotland (a) to specify further categories of alterations in respect of which the clauses validating otherwise void alterations do not apply and (b) to make incidental, supplementary, transitional or consequential provision relating to any provision of the new Chapter addressing the validity of alterations to pension schemes.
Brought up, read the First and Second time, and added to the Bill.
New Clause 27
Sections (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) to (Power to amend Chapter 1): interpretation and scope
“(1) The provisions of this section have effect for the purposes of this section and sections (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) to (Powers to amend Chapter 1 etc: Northern Ireland).
(2) ‘NI scheme’ means an occupational pension scheme that was a salary-related contracted-out scheme in Northern Ireland; and for this purpose an occupational pension scheme was a salary-related contracted-out scheme in Northern Ireland at any time if the scheme was contracted-out at that time by virtue of satisfying section 5(2) of the Pension Schemes (Northern Ireland) Act 1993 (as it then had effect).
(3) ‘Scheme actuary’, in relation to an NI scheme, means—
(a) the person for the time being appointed as actuary for the scheme under Article 47 of the Pensions (Northern Ireland) Order 1995 (SI 1995/3213 (N.I. 22)) (professional advisers), or
(b) if there is no person so appointed, a Fellow of the Institute and Faculty of Actuaries appointed by the trustees or managers of the scheme to carry out the functions of the scheme actuary under section (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes).
(4) ‘Section 33(1)’ refers to section 33(1) of the Pension Schemes (Northern Ireland) Act 1993 (prohibition of alterations to rules of contracted-out schemes in certain circumstances).
(5) ‘Regulation 42’ refers to regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations (Northern Ireland) 1996 (SR 1996 No. 493).
(6) An alteration purporting to have been made to the rules of an NI scheme is a ‘potentially remediable alteration’ if—
(a) by virtue of section 33(1) and paragraphs (1) and (2) of regulation 42 (as they had effect at the time), the alteration could not be made unless the requirements of paragraph (2)(a), (b) and (c) of regulation 42 (as they then had effect) had been met,
(b) it was treated by the trustees or managers of the scheme, after it was purportedly made, as a valid alteration,
(c) no positive action has been taken by the trustees or managers of the scheme on the basis that they consider the alteration to be void (and so of no legal effect) by reason of non-compliance with the requirements of paragraph (2)(a) and (b) of regulation 42, and
(d) it is not excluded from the scope of remediation under section (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) Validity of certain alterations to NI salary-related contracted-out pension schemes: wound up schemes and other special cases) (see subsection (7)).
(7) In subsection (6)(c) ‘positive action’, in relation to a purported alteration, means—
(a) notifying any members of the scheme in writing to the effect that the trustees or managers consider the alteration to be void (by reason of non-compliance with the requirements of paragraph (2)(a) and (b) of regulation 42) and that the scheme will be administered on the basis that it has no legal effect, or
(b) taking any other step in relation to the administration of the scheme, in consequence of the trustees or managers considering the alteration to be void, which has (or will have) the effect of altering payments to or in respect of members of the scheme.
(8) An alteration purporting to have been made to the rules of an NI scheme is excluded from the scope of remediation under sections (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) and (Validity of certain alterations to NI salary-related contracted-out pension schemes: wound up schemes and other special cases) if any question relating to the validity of the alteration, so far as relating to the requirements of paragraph (2)(a) and (b) of regulation 42—
(a) has been determined by a court before this section comes into force in legal proceedings to which the trustees or managers were a party,
(b) was in issue on or before 5 June 2025 in legal proceedings to which the trustees or managers were a party, but has been settled by agreement between the parties at any time before this section comes into force, or
(c) was in issue on or before 5 June 2025 in legal proceedings to which the trustees or managers were a party, and remains in issue when this section comes into force.”—(Torsten Bell.)
This new clause makes provision for Northern Ireland corresponding to NC23. Northern Ireland generally has its own pensions legislation which is separate from the legislation applying to England and Wales and Scotland.
Brought up, read the First and Second time, and added to the Bill.
New Clause 28
Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes
“(1) This section applies to any potentially remediable alteration purportedly made to an NI scheme other than one to which section (Validity of certain alterations to NI salary-related contracted-out pension schemes: wound up schemes and other special cases) applies.
(2) If the conditions mentioned in subsection (3) are met in relation to it, the alteration is to be treated for all purposes as having met the requirements of paragraph (2)(a) and (b) of regulation 42 before it was purportedly made, and so as having always been a valid alteration so far as those requirements are concerned.
(3) The conditions are—
(a) that the trustees or managers of the scheme have made a request in writing to the scheme actuary for the actuary to consider whether or not, on the assumption that it was validly made, the alteration would have prevented the scheme from continuing to satisfy the statutory standard, and
(b) that the scheme actuary has confirmed to the trustees or managers in writing that in the actuary’s opinion it is reasonable to conclude that, on the assumption that it was validly made, the alteration would not have prevented the scheme from continuing to satisfy the statutory standard.
In this subsection ‘the statutory standard’ means the statutory standard for a contracted-out scheme under section 8A of the Pension Schemes (Northern Ireland) Act 1993 as it had effect at the time the alteration was purportedly made.
(4) A scheme actuary who has received a request under subsection (3)(a) in relation to a potentially remediable alteration to a scheme—
(a) may take any professional approach (including making assumptions or relying on presumptions) that is open to the actuary in all the circumstances of the case:
(b) may act on the basis of the information available to the actuary, as long as the actuary considers it sufficient for the purpose of forming an opinion on the subject-matter of the request.
(5) A condition mentioned in subsection (3) may be met by action taken before (as well as action taken after) this section comes into force.
(6) Subsection (7) applies to a scheme if —
(a) there is an assessment period in relation to the scheme within the meaning of Chapter 3 of Part 3 of the Pensions (Northern Ireland) Order 2005 (SI 2005/255 (N.I. 1)) , or
(b) the scheme is operating as a closed scheme under Article 137 of that Order.
(7) The powers of the Board of the Pension Protection Fund under Article 118 and 139 of the Pensions (Northern Ireland) Order 2005 to give directions include power to give a direction to the trustees or managers of the scheme requiring them—
(a) to make a request under subsection (3)(a) in relation to a potentially remediable alteration to the scheme, and
(b) to take any necessary action to enable or facilitate the making of a decision by the actuary as to whether to give the confirmation described in subsection (3)(b) in relation to that alteration.”—(Torsten Bell.)
This new clause makes provision for Northern Ireland corresponding to NC24.
Brought up, read the First and Second time, and added to the Bill.
New Clause 29
Validity of certain alterations to NI salary-related contracted-out pension schemes: wound up schemes and other special cases
“(1) This section applies to any potentially remediable alteration purportedly made to the rules of—
(a) a scheme which has been wound up before this section comes into force,
(b) a scheme for which the Board of the Pension Protection Fund has, before this section comes into force, assumed responsibility in accordance with Chapter 3 of Part 3 of the Pensions (Northern Ireland) Order 2005 (see Article 145 of that Order), or
(c) a scheme which is a qualifying pension scheme for the purposes of regulation 9 of the Financial Assistance Scheme Regulations 2005 (SI 2005/1986) and in respect of which payments are required to be made under section 286 of the Pensions Act 2004.
(2) The alteration is be treated for all purposes as having met the requirements of paragraph (2)(a) and (b) of regulation 42 before it was purportedly made and so as having always been a valid alteration so far as those requirements are concerned.”—(Torsten Bell.)
This new clause makes provision for Northern Ireland corresponding to NC25.
Brought up, read the First and Second time, and added to the Bill.
New Clause 30
Powers to amend Chapter 1 etc: Northern Ireland
“(1) A Northern Ireland Department may by regulations amend any of sections (Sections (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) to (Powers to amend Chapter 1 etc: Northern Ireland): interpretation and scope), (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) and (Validity of certain alterations to NI salary-related contracted-out pension schemes: wound up schemes and other special cases) for the purpose of providing for purported alterations of any specified description not to be within the scope of remediation under either or both of sections (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) and (Validity of certain alterations to NI salary-related contracted-out pension schemes: wound up schemes and other special cases).
(2) In subsection (1) ‘specified’ means specified in the regulations; and a specified description of purported alterations may be framed by reference to features of the alterations or of the schemes purportedly altered by them (or a combination of both).
(3) A Northern Ireland Department may by regulations make incidental, supplementary, consequential or transitional provision in connection with any provision of this Chapter (other than section (Powers to amend Chapter 1 etc: Great Britain) and this section).
(4) Regulations made under this section are subject to negative resolution within the meaning given by section 41(6) of the Interpretation Act (Northern Ireland) 1954.
(5) The power of a Northern Ireland Department to make regulations under this section is exercisable by statutory rule for the purposes of the Statutory Rules (Northern Ireland) Order 1979 (S.I. 1979/1573 (N.I. 12)).”—(Torsten Bell.)
This new clause enables regulations made for Northern Ireland (a) to specify further categories of alterations in respect of which the clauses validating otherwise void alterations do not apply and (b) to make incidental, supplementary, transitional or consequential provision relating to any provision of the new Chapter addressing the validity of alterations to pension schemes.
Brought up, read the First and Second time, and added to the Bill.
New Clause 1
Universal Pension Advice Entitlement
“(1) The Secretary of State must by regulations establish a system to ensure that every individual has a right to receive free, impartial pension advice at prescribed times.
(2) Regulations under subsection (1) must provide for individuals to be offered advice—
(a) at or around the age of 40; and
(b) at a prescribed age, not more than six years before the individual's expected retirement age.
(3) The regulations must make provision about—
(a) the content and scope of the free, impartial pension advice, which may include, but is not limited to, guidance on—
(i) pension types (including both defined contribution and defined benefit schemes),
(ii) investment strategies,
(iii) charges,
(iv) consolidation of pension pots, and
(v) retirement income options;
(b) the qualifications, independence, and impartiality requirements for any person or body providing advice;
(c) the means by which individuals are notified of their entitlement to receive the advice and how they may access it;
(d) the roles and responsibilities of pension scheme trustees, managers, and providers in facilitating access to advice;
(e) the sharing member information with prescribed persons or bodies subject to appropriate data protection safeguards.
(4) Regulations under this section may—
(a) make different provision for different descriptions of pension schemes or different descriptions of individuals;
(b) confer functions in connection with the provision or oversight of the advice on—
(i) the Pensions Regulator,
(ii) the Financial Conduct Authority,
(iii) the Money and Pensions Service, or
(iv) other prescribed bodies;
(c) require the provision of funding for the advice service from prescribed sources.
(5) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”—(John Milne.)
This new clause makes provision by regulations for everyone to receive free, impartial pension advice at age 40 and again around five years before their expected retirement.
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss the following:
New clause 40—Targeted Advice Access for Under-Saving Cohorts—
“(1) The Secretary of State must make regulations to provide enhanced access to pension advice or guidance for cohorts identified as under-saving for retirement.
(2) Regulations may make provision for—
(a) identifying under-saving groups, including but not limited to—
(i) women,
(ii) ethnic minority groups, and
(iii) others affected by long-term pay or pension gaps;
(b) mechanisms to fund and deliver targeted support;
(c) reporting and evaluation requirements to assess take-up and effectiveness.
(3) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
This new clause allows for the creation of targeted pension advice or guidance interventions for groups at risk of under-saving for retirement.
New clause 41—Cap on cost of advice for pension holders—
“(1) The Secretary of State may by regulations introduce a cap on the cost recoverable for providing pension advice per pension holder under any scheme operating free or subsidised advice.
(2) The cap may vary depending on—
(a) the value of the pension pot;
(b) the type of pension scheme;
(c) the complexity of advice required.
(3) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
This new clause enables the introduction of a cost ceiling for advice provision to members of pension schemes.
New clause 43—Auto-Enrolment into Pension Wise Guidance Sessions—
“(1) The Secretary of State must make regulations requiring that individuals reaching prescribed ages are auto-enrolled into Pension Wise guidance appointments.
(2) The regulations may provide for—
(a) opt-out procedures;
(b) the prescribed ages or pension milestones at which auto-enrolment occurs;
(c) the means by which schemes notify members and facilitate appointments.
(3) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
This new clause aims to increase engagement with Pension Wise by auto-enrolling members into guidance sessions at key decision points, with the ability to opt out.
John Milne
We have tabled a number of amendments designed to improve people’s access to advice. As I said in a previous sitting, for me, the biggest missing link in this Bill is the absence of action on pensions advice. Relatively few people are able—or perhaps willing— to access paid advice, and that situation is not likely to change. We have to find another way.
The purpose of new clause 1 is to help people to properly understand their pension options through universal access to free, impartial advice at key life stages. We previously debated how that might be funded—slightly ahead of time—but this is purely about the principle of that advice.
Most people find pensions very complicated. It is hard to persuade people to engage with the issue at a young enough age, and it is even harder for someone to grasp what would constitute an adequate pension many years before they might have to draw on it. The Work and Pensions Committee, of which I am a member, has repeatedly highlighted this issue and examined ways to improve things.
The intention of new clause 1 is to ensure that everyone—not just the financially literate or well advised—can make informed decisions about retirement. Advice would be offered at or around age 40, which is a critical moment for mid-life planning and pension consolidation, and again within six years of expected retirement, to support decisions about drawdowns, annuities and retirement income options. That change is designed to give people confidence and clarity about their pensions, and to avoid poor decisions that would undermine retirement security.
Rachel Blake (Cities of London and Westminster) (Lab/Co-op)
I have read the new clause with interest, and listened carefully, and I am sure that this Committee is united in wanting there to be good advice on pensions. It would help me to better understand the proposal if the hon. Member could describe why he thinks the Money and Pensions Service is not already providing that, and why he thinks there is a gap that would justify this type of measure.
John Milne
I thank the hon. Member for her question. We have to look at performance: over the years, most people—the great majority of people—have not been getting any advice. Those who do tend to be better off because they have more private pensions, so they are obviously far more engaged, but the majority of people, especially now we have many on auto-enrolment, have minimal engagement. There are some very good services on hand—such as Pension Wise advice, which is free; I will come on to that in another measure—but, overall, people are simply not accessing that advice.
We are keeping the wording of the new clause reasonably open to establish the principle. There are many ways to solve the problem, and we will come to some of those in other new clauses. We are hoping to get agreement on the principle, though there are many ways to crack this particular egg.
Moving on to new clause 40, this is about targeted advice access for under-saving cohorts. Its purpose is to put the focus on groups of people who have historically been among the worst served by our current pension system.
John Grady (Glasgow East) (Lab)
Has the hon. Gentleman considered some of the reforms that the FCA is considering, such as the advice guidance boundary review? I understand the thrust of what he is trying to do—to ensure that people get proper pension advice. Hopefully, everyone would agree with that, but I wonder how it fits in with the wider context of the work that the FCA is doing.
John Milne
This is really about trying to place the Minister’s attention on this important issue—we will not press the new clause to a vote. It is about focusing the Minister’s mind on the task at hand. The undersaving groups include, but are not limited to, women, ethnic minority groups and others affected by long-term pay or pension gaps. The new clause would provide mechanisms to fund and deliver targeted support.
New clause 41 is designed to put a cap or ceiling on the amount of free advice accessed by any individual saver. It is a subset of new clause 1. Some individuals have very complicated financial affairs, which threaten to take a disproportionate amount of effort to decipher, in the event that we were to provide free advice. Those individuals will tend to be much better off and with multiple pension pots, which is precisely why they will end up needing more advice. Placing a ceiling on the advice available would ensure that the free advice was targeted only at those who needed it most.
New clause 43 is a potential solution to the information deficit that we are trying to address. It would enable auto-enrolment into Pension Wise as the vehicle for giving advice. We tabled it as a probing amendment to provoke the Minister’s consideration. The purpose of the new clause is to help people properly understand and engage with their pension by auto-enrolment into Pension Wise advice at key stages, with the freedom to opt out. Pension Wise guidance is free, impartial and has very high satisfaction rates—94%—among those who have used it, yet uptake remains strangely low, which is an excellent illustration of exactly why the whole advice area needs urgent attention.
Government data shows that of those who have accessed defined-contribution pension pots, only 14% have done so after receiving Pension Wise advice. That is despite various efforts, including a stronger nudge to encourage taking guidance before pots are accessed. Wake-up packs and other communications have shown limited effectiveness, and the evidence shows that savers will need more than passive information; they need action-oriented support.
If anything, the situation is getting worse. The proportion of pensions accessed after receiving guidance or advice has reduced by around 9 percentage points since 2021-22. Evidence from the DWP’s 2022 research shows that although most people start saving for retirement in their 20s and 30s, many do not start planning for retirement until their 50s. Auto-enrolment into guidance would therefore significantly increase take-up and improve retirement outcomes for many. Defined-contribution scheme members, in particular, often lack clear information about their options; Pension Wise would help fill that gap.
New clause 43 leaves flexibility for the Secretary of State to determine the appropriate ages, processes and notification methods. We recognise that it would be a significant move, and that there would be technical issues to solve. That is why we have tabled it only as a probing new clause, to explore whether the Government will look at trials or further measures to boost guidance uptake. Auto-enrolment into a pension scheme has been a great success, so perhaps the next logical step is auto-enrolment into advice. Why not try it?
Mark Garnier
I am keen to speak to these Liberal Democrat new clauses, because we have a fundamental problem. Research by Pensions UK shows that more than 50% of savers will fail to reach their retirement income targets set by the 2005 Pensions Commission, and closing the gap between what people are saving and what they will need must be a pressing concern of any Government. So, we need the second part of the pensions review to be fast-tracked, with a laser-like focus on pensions adequacy.
This takes me back to when I first became a Member of Parliament some 14 or 15 years ago. The big issue at the time in the independent financial advisers market was the retail distribution review. My hon. Friend the Member for West Worcestershire (Dame Harriett Baldwin) and I held our first Backbench Business debate on the retail distribution review, and it is recorded in Hansard that we predicted this would be a problem as a result—fewer independent financial advisers being available to give advice.
There were three key elements of the retail distribution review. They were very well-intended, and let us not beat about the bush: there were reasons why they were brought about. One of them was intended to raise the professional standards of independent financial advisers, and I think we would all agree that that has to be a good thing. The advisers complained at the time because they did not want to take exams. If they had been in the business for 40 years, why would they feel that they needed to take an exam? But why should they not improve their standards? There were issues to do with lifetime liability—advisers’ taking responsibility beyond seven years for advice that they had given, which was very contentious. Also there was clarity on the models of advice being given.
However, the key element that caused the problems was where independent financial advisers, prior to that moment, were being paid a commission on the product that was being sold, which potentially led to product bias. If a commission was being paid at 2.5% on one product and 1% on another, the independent financial adviser would have a material interest in selling that higher-commission product, even if it was a worse product. That could have been dealt with by having a maximum commission rate on all the products; it could have been set at 100 or 150 basis points, which would have dealt with that problem. We saw this issue in the London stock exchange until 1986, when there were fixed rates of commission, so nobody could undercut another broker by providing cheaper dealing measures. We therefore knew it could work.
The direct result of all this was that when the retail distribution review was brought in by the FCA in January 2013, we saw a massive drop in the 35,000 independent financial advisers. That has since recovered, and we now have around 36,000 advisers. The important point is that a financial adviser who goes out to persuade somebody to take advice on their pension now needs to charge a fee. Before that, to the person receiving the advice, the financial adviser would appear to be doing it for nothing. There would be an agreement, so it would be transparent and they would know exactly what was going on.
However, the point is that now, if I am being asked to put money into a pension fund and I know I am paying the 1.5%, the fact that the commission is coming out of the money going in feels much less restrictive than being sent a bill for £1,500 or £2,000. That is much more difficult to meet, even though it comes to the same point in the end. The result of this is that, whereas about 50% of people used to put money into pensions and receive financial advice, the number is now 9%.
There are an awful lot of newly elected Members of Parliament here. After 10 or 15 years, they will find themselves in a Bill Committee making these points and saying, “We told you this would be a problem. We told you so, yet here we are trying to resolve a problem that we knew was going to happen, and we allowed it to.” I am very cynical about Parliament sometimes, as all Members will be eventually. The important point is that the Liberal Democrat new clauses are an attempt to deal with the problems that we knew would come about. Auto-enrolment is brilliant—we really like auto-enrolment—but there are various things coming in under this Bill. We have to be careful that the things we bring in with the best intentions do not end up creating bigger problems due to unforeseen circumstances.
If the Liberal Democrats pressed new clause 1, we would happily support it, as it is a good amendment. It will be interesting to see if that comes through, but this is something we have to get right. People need to get advice because far too many people are going to go barrelling into their 67th birthday, or whatever it is, and suddenly discover that they have run out of money, and that is not a good place to be.
Kirsty Blackman
I really appreciate the trip down memory lane that the hon. Member for Wyre Forest has taken us on. I wish I had the tenacity to hold on to “I told you so” for 14 years. I am going to say it all the time anyway, even though I will not be able to hold on as long as he has.
Turning to the Liberal Democrats’ new clauses 1, 40 and 43, I am aware that the Government, and the people of these islands, are looking at the sufficiency and adequacy of pensions and ensuring that people can have adequate pensions when they reach retirement age. I appreciate that the review is being undertaken and that work is being done, but this is about an additional way to ensure that people think about that as early as possible. I have a colleague who says “EMILY”, which stands for “Early money is like yeast”, and it is the same in election campaigns as it is in pensions. The earlier people boost their pension fund the more it grows, because of the magic of compound interest.
It is great that we have auto-enrolment at a relatively early age—albeit not early enough—so that people can begin to grow their pension pot. However, I do not think people understand the importance of putting as much money as they can into their pension pot as early as possible, as has been said, particularly when they are in their mid to late 20s and have so many competing interests—trying to get on the housing ladder, or paying for their university debts or for small children, who cost an inordinate amount of money. When people have all those competing interests at the same time, funding their own pension can fall down the list of priorities. However, if they were aware of how important it is to put that funding in as early as possible and how much it would mean to them in retirement, they might make slightly different choices.
There are an awful lot of good things in these new clauses that could be explored. Around 40 is a sensible age at which advice could be provided, as new clause 1 suggests, because that would give people enough time to make some changes. Giving people more advice when they are initially auto-enrolled would also be incredibly sensible. They might not read it then, but they might. The more we can do to provide people with advice, the better, because then they will have the opportunity to take it up.
As the pensions dashboard comes online, that may create a higher level of interest in finding out what everything looks like. Earlier in Committee, I made some points about DC pots and the difficulty in translating that number into what someone’s annuity, or their monthly or weekly payment, looks like, and that only increases and compounds the problem. People do not understand what this means for them in retirement, because it is difficult to do those sums without advice. It is not easy to try to work out, and even if people are given advice at 40, although it may take into account their circumstances at that point, these could drastically change by the time they reach retirement age. They may have a very different level of annuity from that which was suggested, even with the same predicted pension pot growing in the expected way.
On targeted advice for cohorts that are saving less, with the review of adequacy it would help if the Government would commit to ensuring that undersaving groups are strongly considered, so that all the advice and tactics—whether automatic appointments or ensuring that people are given access to the pensions dashboard—are in place for the highest engagement.
Lastly, on the auto-enrolment sessions, I have spoken about how when people hit 50 they are posted a bowel cancer screening test, and when people are of an age for vaccines they are given an appointment and just need to go along. People are posted a letter or sent an email saying, “This is the time and date for your smear test,” and they go along. We recognise that preventive measures are important. People are much more likely to take up that vaccine or smear test and are much more likely to also go to that session if we make it as easy as possible.
The Liberal Democrat spokesperson, the hon. Member for Horsham, mentioned the Pension Wise service. It has an incredibly high level of satisfaction. If only any of us on this Committee or our parties had that level of support from our constituents—we would be absolutely dancing to get that level of positivity. The Pension Wise service has that level of positive feedback because people recognise and appreciate the advice. However, that advice is given once, or only after a certain point. My understanding is that a 25-year-old cannot phone, ask for an appointment and get an understanding of where things are looking for them and where that protection is. However, sending people an actual appointment and telling them that this is the time is something. They can then choose to cancel that appointment. Obviously, some people will not turn up; we see some people not turning up for vaccines. It does not stop us sending invitations to those vaccine appointments because we know they increase uptake.
I have heard this Government—or maybe the previous one—complain about increased costs if there is an uptick in the number of appointments. There would obviously be an increase in costs and pressure on the service should more individuals engage. However, more people having a sufficient pension and being able to take informed decisions—pay more, or withdraw their DC pension in a sensible way, rather than just putting it into a bank account, which we have heard is what a significant number do—will save the Government money and contribute to the economy. If we increase the number of people with better access to more money in retirement we will grow the economy. Although there is likely to be spending associated with increasing the provision of advice, it would make such a positive difference to those individuals and the economy that it could not be a bad thing.
I do not know whether today is the time to add the requirement for those appointments. If the Government were willing to consider the possibility of sending out appointment invitations, that would help. I would still support the amendment, but it would help. I know the review is taking place. If the Government committed to considering that as part of the review, that would be helpful—of course, if they could commit to just doing it, that would be better. Doing so would give us all an assurance and understanding that they are not just putting blockers in the way because it is been suggested by somebody else. We would like the Government to seriously consider it. If they are not willing, they should reply to MPs about why it is not possible and why they think it will not increase uptake.
Hon. Members who spoke about the cost of advice are absolutely correct. It is not that people do not want advice—some may not want advice and will not care, others will just take whatever they happen to get when they hit retirement age and some do not have the capacity to understand the advice if they were to seek it out—but some simply cannot afford advice. They do not have the money today to pay for that advice. There is a group of people who cannot pay for advice now because we are in a cost of living crisis. Their electricity bills and so on have gone up and the price of food is still suffering from inflation. Those people may not have a couple of thousand pounds—perhaps significantly more—lying around to pay for that advice. The people who will have the most in retirement are the most likely to grow their pensions further because they are the only ones who can afford the advice. As the hon. Member for Horsham said, we need more people to know about Pension Wise, so that they can get some advice and make good decisions.
I would appreciate it if the Minister would seriously consider all the amendments that have been tabled by the Liberal Democrats.
Ordered, That the debate be now adjourned.—(Taiwo Owatemi.)
Pension Schemes Bill (Eighth sitting)
Thursday 11th September 2025
(3 weeks, 5 days ago)
Public Bill CommitteesPension Schemes Bill 2024-26 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 11 September 2025 - (11 Sep 2025)
The Committee divided: - Ayes: 5 / Noes: 8 - Question accordingly negatived.
The Committee divided: - Ayes: 3 / Noes: 8 - Question accordingly negatived.
The Chair
I remind the Committee that with this we are discussing the following:
New clause 40—Targeted Advice Access for Under-Saving Cohorts—
“(1) The Secretary of State must make regulations to provide enhanced access to pension advice or guidance for cohorts identified as under-saving for retirement.
(2) Regulations may make provision for—
(a) identifying under-saving groups, including but not limited to—
(i) women,
(ii) ethnic minority groups, and
(iii) others affected by long-term pay or pension gaps;
(b) mechanisms to fund and deliver targeted support;
(c) reporting and evaluation requirements to assess take-up and effectiveness.
(3) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
This new clause allows for the creation of targeted pension advice or guidance interventions for groups at risk of under-saving for retirement.
New clause 41—Cap on cost of advice for pension holders—
“(1) The Secretary of State may by regulations introduce a cap on the cost recoverable for providing pension advice per pension holder under any scheme operating free or subsidised advice.
(2) The cap may vary depending on—
(a) the value of the pension pot;
(b) the type of pension scheme;
(c) the complexity of advice required.
(3) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
This new clause enables the introduction of a cost ceiling for advice provision to members of pension schemes.
New clause 43—Auto-Enrolment into Pension Wise Guidance Sessions—
“(1) The Secretary of State must make regulations requiring that individuals reaching prescribed ages are auto-enrolled into Pension Wise guidance appointments.
(2) The regulations may provide for—
(a) opt-out procedures;
(b) the prescribed ages or pension milestones at which auto-enrolment occurs;
(c) the means by which schemes notify members and facilitate appointments.
(3) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”
This new clause aims to increase engagement with Pension Wise by auto-enrolling members into guidance sessions at key decision points, with the ability to opt out.
David Pinto-Duschinsky (Hendon) (Lab)
After hearing the untrammelled cynicism of the Opposition, I thought there would be nothing better than to bring some fresh-faced optimism to the debate. I am very grateful to be called, Ms Lewell. I have a couple of brief points to make.
As we heard in the interventions made just before the break, there is unanimity on the need to tackle the incredibly important issue of advice. As the shadow Minister pointed out, levels of advice to pension holders have collapsed, which has profound consequences, particularly for those who need help the most. There is real consensus on the need to address this issue, and the Government are making huge strides to do so, whether that be the introduction of the dashboard or the now renamed Money Wise. As the hon. Member for Horsham mentioned, the Work and Pensions Committee has also looked at this issue, the lesson from which is that this is a horses for courses problem—a complex problem that requires complex, nuanced and sophisticated solutions that target different types of group and use different approaches. That lies at the heart of why I am asking some questions about the new clause.
First, exactly because what we need is a quite sophisticated, multi-pronged and varied policy response, using a quite basic, one-size-fits-all response in statute feels like the wrong way to address the problem. Secondly, as the shadow Minister highlighted, I am somewhat worried about the law of unintended consequences. There is the simple issue of cost. My quick consultation of Google suggests that 378,000 people turn 40 each year and the most basic advice normally costs several thousand pounds, so the bill will not be insubstantial. We may have had a conversation earlier about that, but how the cost might be covered has not really been addressed.
As important is the broader question of capacity. The shadow Minister made an excellent point about how the capacity for retail advice was changed unintentionally by a well-meant measure. If we start looking at what capacity would be needed to offer even a basic standard of advice to over 300,000 more people each year than we are seeing now, we begin to see a problem. We need to do a lot more work on modelling how that advice would actually be provided, what the market would look like and what the second-order effects would be.
John Grady (Glasgow East) (Lab)
My hon. Friend makes a very good point, at the heart of which is the question of what work needs to be done to introduce anything along these lines. One would have to look at what the Financial Conduct Authority is doing, the existing service provisions, the costs, and how we smooth out implementation. There are a lot of practical issues with implementing something like this, are there not?
David Pinto-Duschinsky
As ever, my hon. Friend is absolutely right and his intervention goes to a third point: this also feels a bit premature.
As my hon. Friend mentioned, we are in the midst of the incredibly important advice and guidance boundary review. For many of the groups that we want to help, advice might not actually be the right solution, but guidance might be, and we are in the midst of re-tooling that. Similarly, we are in the midst of rolling out dashboards, which will transform the landscape but not fix the problems on their own; we may need to layer new policy initiatives on top. It seems that we are at risk of putting the cart before the horse.
I also add that when I read new clause 1 in detail, I saw that it refers to “advice”. On my reading, that would constrict potential policy responses and force the Government to go down the advice route, rather than provide other services that might be on offer through the advice and guidance boundary review.
The intention is good. I think there is huge consensus on the need to tackle the problem, but the right way to do it is through sophisticated and proper policy making, rather than the blunt instrument of amending primary legislation. For those reasons, I oppose this new clause.
The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)
I thank the proposers of these new clauses. I will take them in the way they were intended—to spark debate.
We have had quite a wide debate and I think there is consensus on the subject, but I want to put a slightly different spin on the problem statement we are talking about. We have come at a lot of the discussion on the new clause as if there is too little advice. I would slightly reframe the question when it comes to pensions, which is that there is too much complexity, and too little advice or guidance. I think that is the right way to think about the problem that we are confronting with the system as a whole.
I will broadly outline our approach to try to tackle that problem statement. The task is to reduce the complexity as well as to increase the guidance and the advice that are available. Having watched the pensions debate over the past 15 years, I have observed that we have too often made pensions more complicated, and then said, “If we only had this advice, it would all be fine.” I do not think that is the right answer. That is a mistake about the nature of the system that we are delivering.
Our job is to reduce the complexity, or to reduce the consequences of it being difficult for people to deal with. That is obviously what a lot of the Bill is trying to do. With small pots, the aim is obviously to reduce complexity. That is what the value for money measures are designed to do. Seen through that lens, they are also aimed at reducing the costs of that complexity. The value for money regime is there to reduce the consequences of it being difficult to engage with and members not choosing their own provider.
Mark Garnier (Wyre Forest) (Con)
The Minister raises an interesting point. We have talked about a lot of different bits and pieces with complexity and all the rest of it. We have not spoken about when we educate people about money.
In the olden days, when I was a newly elected MP, I was one of the chairs of the all-party parliamentary group for financial education for young people. That was about getting financial education into the curriculum. It is probably now more important than ever that we teach people of school age about the importance of financial planning, including pensions. Can the Minister assure the Committee that he will take up with his colleagues in the Department for Education the changes that could be made to bring this type of education into the curriculum for kids, who are all going to be adults soon?
Torsten Bell
I shall take that up directly with the new Economic Secretary to the Treasury, who I am sure will talk to her colleagues in the Department for Education. I can offer the hon. Member some entirely anecdotal optimism on that issue. Whenever I now do school events in Swansea, I am seeing very high levels of financial engagement. After I have given a very worthy speech, most of the questions are not about how to reduce inequality but instead are about personal financial advice. I think the youth of today are all over it—that is my lived experience.
I have mentioned small pots and value for money. I want to flag two other areas. Dashboards have been mentioned, and they are a very large part of how we provide support. The default pensions solutions are crucial to reducing complexity, and that is probably the biggest measure in the Bill. The need to provide more advice or guidance for people to access their defined-contribution pots is reduced significantly because of the existence of default solutions. We definitely still want people to have access to advice and the ability to opt out of those defaults, but default solutions help significantly. That is why the communication of those default pension solutions, which we discussed quite extensively, is so important for people. That is why that is in the Bill.
We have touched on making more support available. We have universal access for people of any age to free impartial support through MoneyHelper—that is what the Money and Pensions Service is providing—and we have a specific focus on support for over-50s in Pension Wise. Several hon. Members have said, absolutely rightly, that access to financial advice fell in the aftermath of the reforms over a decade ago, but there is some better news on Pension Wise. The 2024 Financial Lives survey showed that of those who accessed a defined-contribution pot within the last four years, 40% had accessed Pension Wise. I think that is probably more than most hon. Members in this debate would expect, though it may not be enough. However, those people had used Pension Wise when heading towards access; they had not used it as a mid-life MOT product, which is a different thing. That 40% was up from 34% in 2020, so some things have gone in the right direction. I am gently noting that, not claiming any credit for it because it predates the election. There is a lot of overlap between what those systems of advice are providing and the measures in new clause 1.
Regarding new clause 40, I absolutely agree on how we think about under-saved groups. The groups identified in the new clause are more or less the same groups of people experiencing financial wellbeing challenges whom MaPS targets, so that is a point of consensus, but I am absolutely open to suggestions of what more we can do to make sure that we are tackling that issue. The Pensions Commission is considering the wider question of adequacy, which is why we are looking at not just average adequacy but the fairness of the system.
Kirsty Blackman (Aberdeen North) (SNP)
Will the Minister give a commitment that the commission will specifically look at groups that are less likely to have a sufficient pension, rather than just looking at an average and increasing that average?
Torsten Bell
I can absolutely give that guarantee, because that is in the terms of reference of the Pensions Commission. I will come back to the wider question of the commission in one second. I will not go into detail, but targeted support is a large part of providing more guidance, and we expect the roll-out of that early next year. There is more coming in that space; we are not relying solely on MaPS.
How should we think about the interaction of dashboards and bigger DC pots? At the moment, for lots of people entering their retirement, their DC pot may be a smaller part of their overall pension income, but as we move forward, it will become the large majority of their income. That will be very visible because of dashboards. One of the reasons MaPS has been reluctant —although I do not want to say “reluctant”—to promise to deliver the kind of automatic enrolment that is being discussed by the Committee is that a lot of planning work is under way to make sure that when dashboards come online, MaPS is ready and set up to deal with the significant increase in demand for help and in engagement that may come from that. The experience of some pension schemes in Australia is that as pension pots become bigger, there is much more demand for support and guidance. We should expect that demand to grow in the years ahead with or without dashboards, but definitely with dashboards and the other measures together.
Kirsty Blackman
When dashboards increase engagement, as we all expect they will, will the Minister report back to the House, or encourage someone to report back to the House, on how much engagement has increased by, so that we all have an awareness of it, rather than it being in stats kept in the background that we do not know about?
Torsten Bell
Absolutely. I think we will want to look at the impact across a range of measures of engagement. Do dashboards help consolidation of pots? Do they encourage people to save more? We also need to be aware of riskier behaviours that dashboards could trigger. We are currently engaged in significant user testing of the system to make sure that we have done what we can to make sure that when people have visibility of their pension pots, they do not adopt behaviours that we do not want.
On the question about the Pensions Commission from the angle of the advice and guidance sector, it is an independent commission so I cannot speak for it. However, I think the commission will have heard the focus of that question, and the length of this debate in Committee.
Turning to the specific question put by the hon. Member for Horsham on what he said was the purpose of this group of new clauses, I assure him that my mind has been entirely focused by him on this issue, and that I will continue to talk to MaPS about what further lessons there are to learn.
John Milne (Horsham) (LD)
I thank the Minister for his reply. I take his comments about trying to reduce complexity. That is a wholly good thing for all concerned, not least us. Other contributors asked, how necessary is this? Are there not services already out there, or is this not the direction of travel? Do we really need to take this action now? In answering that, I will turn the Minister’s argument about mandation back at him: if it were not necessary, it would have happened already. That is very much the case. People are not taking advice, and sadly, they are reaching retirement very inadequately prepared for it.
That, indeed, is the other half of this question. This is not just about giving advice on the best way to make use of one’s pension through auto-enrolment or whatever; it is about alerting people at a young enough age—40 or whatever—to the fact that what they have is not going to cut the mustard in any way. It is not going to deliver the standard of lifestyle they want. They still have time at 40 to do something about it, whereas at 50 or 60, they have what they have. I am 65, so my fate is sealed. That needs to be part of any solution.
On underserved cohorts, WASPI women are the classic example—a group of people who were tragically under-informed, who received inadequate letters from the Department for Work and Pensions and so on. That led to terrible distress and is a problem to this day.
Kirsty Blackman
Does the hon. Gentleman share my concern, and will he suggest to the Minister, that although it is important for those who will have great big DC pots at some point in the future, because of auto-enrolment, it is also important for people to get advice if they have a mixture of DB and DC pots, or if they have small DC pots that have built up as a result of auto-enrolment? It is not just a future problem, but a problem for people who reach pension age between now and when those big DC pots are the norm.
John Milne
That is a very fair comment—I will not repeat it. Overall, we would like to press new clause 1 to a vote, in order to put it on the record, without necessarily expecting victory.
Question put, That the clause be read a Second time.
Steve Darling (Torbay) (LD)
I beg to move, That the clause be read a Second time.
New clause 2 is about market consolidation, and ensuring that the Minister undertakes to report back so we can see how it is progressing. Clearly, market consolidation will have positive impacts, but there is a law of unforeseen consequences, so it is important to ensure that there is a regular health check on what is happening in the market. It is not only about that law of unintended consequences, but about checking out the opportunity for new entrants to come into the system, and making sure that there are no unexpected barriers. To our mind, it is good practice that one would hope would be undertaken.
The new clause is a probing amendment; we will not be pressing it to a vote, but I look forward to reassurances from the Minister. We are keen to get on the public record what he says in this area, because we know from conversations with the industry that there is some interest in the matter.
Kirsty Blackman
I highlight again that the Regulatory Policy Committee considered the monitoring and evaluation plan in the impact assessment to be weak. It said that although everything would be reviewed around 2030, there were not many other points that the Government had committed to reviewing.
In the new clause, I probably would not have picked a timescale of 12 months after Royal Assent, given the length of the road map and the timings for the introduction of a significant number of things. I appreciate that as the new clause is crafted, it can pick up on problems before they occur. If things are moving towards consolidation in advance of the timelines, the Government should be able to analyse where the prospective issues are. However, the Minister could commit to providing Parliament with a review, and either giving information to the Work and Pensions Committee or making information and statistics publicly available.
Rachel Blake (Cities of London and Westminster) (Lab/Co-op)
The hon. Member has spoken passionately about local government schemes, and I have quite a lot of experience of them. Does she agree that they have many regulations that would meet some of the proposals in new clause 2? That might allay some of her concerns and mean that we do not need a Division on the new clause.
Kirsty Blackman
I agree that there is a particularly high level of transparency in regulations around local government pension schemes that is not available in any of the other pension schemes that we are discussing. Because major primary pensions legislation does not happen often—we have a lot of secondary legislation around pensions—this is a real opportunity to ensure that the changes that are made have the desired and intended effect.
I have asked various Governments about post-implementation reviews of legislation, and I have had some interesting responses from Government Departments that did not know which pieces of legislation required a post-implementation review, nor whether they had been done. Part of my concern is that no matter whether the Government change, if there is a change of personnel, there does not appear to be any tracking process in Departments to say when post-implementation reviews will take place or whether they have been done, and there is no feedback process in place either.
Bill Committees that consider legislation have no right to an update on whether that legislation worked, and that makes no sense. If the Government say that a certain tax will take in £10 million over the next three years but nobody tells us whether that worked, how can the Government then expect us to believe that tweaking that tax will take in another £10 million when they cannot tell us how much it took in in the first place? My concern is that post-implementation review processes are not strong enough; there is not enough checking in Government to ensure that reviews take place.
I appreciate that the Minister wants this to work. He wants consolidation to happen and to have the desired positive effects. He does not want the negative effects. This is about commitment to a level of transparency so that we can all see what has and has not worked. It is not a criticism, because we all largely agree on a good chunk of this legislation; it is about all of us understanding what things in the legislation have been more positive or more negative than expected.
John Grady
Is it possible to identify any particular gaps in the competition regime? Chapters 1 and 2 of the Competition Act 1998 cover things like exclusivity arrangements, and so on. There is a regime for market studies, which would also enable this issue to be addressed, and, manifestly, this would be of serious consumer interest under the competition regime. I just wonder what gap new clause 2 addresses in the current regulatory regime.
Kirsty Blackman
My understanding is that new clause 2 calls for a report. It addresses transparency. It is all well and good that stuff on competition regulations is published—I have no idea where it is published. We are asking for a report to the House, which we would all be able to access. I did not write the new clause, but it would be helpful if the Minister agreed to transparency and to review this in good time so that we can make better decisions on future legislation.
Torsten Bell
The first thing to say is that this is focused on scale. We appreciate that the Bill would lead to major changes to the pensions market—the hon. Member for Torbay is absolutely right—and we want to understand and monitor the consolidation and scale process over the coming years. To state the obvious, market changes such the scale measures we are talking about take time, and many of the measures in the Bill will not even be implemented within the 12 months. On that basis, I hope that the hon. Gentleman will not push the amendment to a vote.
I agree on the wider point about the Bill as a whole and the need for strong monitoring and evaluation. I would probably take a slightly different approach from the hon. Member for Aberdeen North. The Bill contains a large number of measures, and the right way to monitor their implementation will be different for different parts of the Bill. When it comes to the questions of scale, which are the focus of this amendment, the monitoring—[Interruption.] That is not the response I was looking for. The monitoring is slightly more visible because we are talking about the number of workplace schemes, or at least workplace defaults, that exist.
Let me lay out a bit of what we have in place to monitor. We will be able to monitor scale, charges and, because of the interaction with the value for money regime, returns and asset allocation. Lots of the key success metrics that are meant to come with the scale changes, as well as the delivery of scale itself, will be visible. My honest view is that it is on all of us—obviously, it is particularly on the Government—to pay attention to that as we go.
On the wider question of whether we will consider further, I have already committed to do that and to come back and reflect on Report on how we do that. I put on the record my view that that is a reasonable thing to do, and I will do it, but we need to think about it differently for different parts of the Bill.
Steve Darling
I thank the Minister for putting his thoughts on the record. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 5
Report on fiduciary duty and discretionary indexation of pre-1997 benefits
“(1) The Secretary of State must, within 12 months of the passing of this Act, publish 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.
(2) The report must consider—
(a) the impact of current fiduciary obligations on trustees’ ability to award discretionary increases to pre-1997 pension benefits;
(b) the potential benefits of permitting such discretionary indexation for affected pensioners;
(c) the funding conditions and thresholds under which discretionary indexation could be considered sustainable;
(d) the appropriate level of regulatory oversight and guidance required to ensure that discretionary increases are granted in a fair, transparent, and financially responsible manner;
(e) international approaches to indexation of legacy pension benefits;
(f) the legal and actuarial implications of amending fiduciary duties in this context.
(3) In preparing the report, the Secretary of State must consult—
(a) the Pensions Regulator,
(b) the Financial Conduct Authority,
(c) representatives of pension scheme trustees, members, and sponsoring employers, and
(d) such other experts or bodies as the Secretary of State considers appropriate.
(4) The Secretary of State must lay a copy of the report before both Houses of Parliament.”—(Steve Darling.)
This new clause requires the Secretary of State to 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.
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss the following:
New clause 18—Indexation of pre-1997 benefits—
“(1) Schedule 7 (pension compensation provisions) of the Pensions Act 2004 is amended as follows.
(2) In paragraph 28(3) leave out ‘so much of’ and ‘as is attributable to post-1997 service’ in each place they occur.
(3) Leave out paragraphs 28(5)(b) and (d), 28(5A) and 28(7).
(4) In paragraph 28(6) leave out definitions of ‘post-1997 service’ and ‘pre-1997 service’.”
This new clause would make indexation of compensation provided through the Financial Assistance Scheme and Personal Protection Funds applicable to both pre-1997 and post-1997 service.
New clause 19—Indexation of pre-1997 benefits for Financial Assistance Scheme members—
“(1) Schedule 2 (determination of annual and initial payments) of the Financial Assistance Scheme Regulations 2005 is amended as follows.
(2) In paragraph 9(2) leave out the first occurrence of ‘so much of the expected pension as is attributable to post-1997 service’ and insert ‘the expected pension’.
(3) In paragraph 9(2) leave out the second occurrence of ‘so much of the expected pension as is, proportionately, attributable to post-1997 service’ and insert ‘the expected pension’.
(4) In paragraph 9(2) leave out the definition of ‘post-1997 service’.
(5) Leave out paragraph 9(3) and insert—
‘Where the qualifying member has pensionable service prior to 6th April 1997 which has not been included in the underlying rate but which their scheme provided for, the scheme manager must determine the annual increase attributable to that service for each year since the date on which the annual payment was first payable and, if that increase has not been paid to the member, reimburse the member for that amount.’”
This new clause would make indexation of compensation provided through the Financial Assistance Scheme applicable to pre-1997 service and reimburse members for the annual increases in payments they should have received in light of this change.
Steve Darling
[Interruption.] I am not quite used to getting interrupted by thunder. Perhaps I should get used to it, with Jennie winning Westminster Dog of the Year, or at least the popular vote. Clearly, it was rigged—I jest.
On a more serious note, we are looking at a cohort of pensioners, the pre-’97 pensioners, who have been left behind without indexation. We heard moving evidence from two gentlemen who shared the challenges that many of those pensioners face, living in higher levels of poverty because of the failure to index.
Our proposal is to ensure that there is a responsibility to explore the possibility of amending the fiduciary duties—something I was not even aware of until I started exploring the Bill—to support the possibility of indexation. I am aware that a more prescriptive new clause has also been tabled. As Liberal Democrats, we sympathise with the aims, but we feel that we need to have confidence that the system has the capacity to pay out. Our proposal is a steady hand on the tiller approach. It is about sense checking and ensuring that there is an ability to support the appropriate levels of indexation. I hope that the Minister will look kindly upon the proposal, as it is the more level-headed approach, with all due respect to Plaid and the SNP.
Kirsty Blackman
I rise to speak in support of the new clause tabled by the Liberal Democrats and new clauses 18 and 19, which were tabled by my wonderful colleague from Plaid, the hon. Member for Caerfyrddin (Ann Davies).
The witnesses who came before us last week to speak about the lack of indexation for pre-1997 pensions made an incredibly passionate and powerful case for changing the system. We mentioned earlier the Work and Pensions Committee’s report, which suggested that the Government need to look at this issue seriously. I was quite disappointed by the Government’s response, which did not actually say very much. All it said was that changing the system would have an impact on the Government’s balance sheet. Well, yes, it might have an impact on the Government’s balance sheet, but it would have a significant impact for people who are in this situation through absolutely no fault of their own. They did the right thing all the way along, but the company they were with collapsed and the Pension Protection Fund or the financial assistance scheme has not given them the uplift.
The group of people we are talking about are getting older. They are not young any more. We know that older pensioners are the most likely to be in fuel poverty and to be struggling with the cost of living crisis. They are the ones making the choice about whether to switch on the heating. Given the rate of inflation that we have had in recent years, there is a real argument for utilising a small amount of the PPF’s surplus to provide a level of indexation. The cut-off is very arbitrary; it is just a date that happened to be put in legislation at that time. Were the Government setting up the PPF today, and the compensation schemes for people who lost their pension through no fault of their own, I do not think they would be arguing for not indexing pensions accrued before 1997. That would not be a justifiable position for today’s Government to take.
I am not sure whether the Bill is the right place to do this, but my understanding is that it needs to be done in primary legislation; it cannot be done in secondary legislation. Given what I mentioned earlier about the significant length of time between pieces of primary pension legislation, if the Government do not use the Pension Schemes Bill to address this problem today, on Report or in the House of Lords, when will they? How many more of the pensioners who are suffering from the lack of indexation will have passed away or be pushed into further financial hardship by the time the Government make a decision on this, if they ever intend to?
As I have said, I cannot see a justification for not providing the indexation. We know the PPF levy changes have been put in place because of that surplus, and there is recognition that the surplus exists and has not been invented—the money is there. I understand that the situation is different for the two funds, but particularly with the PPF, I do not understand how any Member of this House, let alone the Government, could argue against making this change to protect pensioners.
It may have an impact on the Government’s balance sheet, but it does not have an impact on the Government’s income, outgoings and ability to spend today. The PPF money cannot be used for anything other than reducing the levy or paying pensions. It is very unusual to have such ringfenced, hypothecated money within the Government’s balance sheet, but this money is ringfenced. The Government cannot decide to spend it on building a new school or funding the NHS. It can be used only for paying the pensions of people whose companies have gone under.
I very much appreciate the hard work of my colleagues in Plaid Cymru on this issue in supporting their constituents, as well as people such as Terry Monk, who gave evidence to us last week along with Mr Sainsbury. Now is the time for the Government to change this to ensure fairness and drag some pensioners out of poverty, so that they have enough money to live on right now during this cost of living crisis.
Mark Garnier
I want to follow on from the two powerful speeches by the Liberal Democrat and SNP spokespeople, the hon. Members for Torbay and for Aberdeen North, in highlighting the fact that this problem is—dare I say it—disappearing over time. This feels slightly similar to the ongoing contaminated blood debate, and it is a similar type of thing. The people who would be compensated for the contaminated blood are, for tragic reasons, disappearing. Indeed, I think there are now 86,000 pensioners who were caught up in this particular problem, and the longer this is kicked down the road, the smaller the problem will become, for obvious reasons.
The principle behind this is absolutely right. It is incredibly important that we as a country, society and community look after all these people. Where people have done the right thing and put money into their pension, but it has not followed through, that is a big problem.
One thing does bother me: I do not want to be too political, but the Government have dug themselves a freshly made £30 billion black hole in the last year. Although the SNP spokesperson is absolutely right that the £12 billion in the PPF is available to spend only on pensions, the problem is that because it appears on the country’s balance sheet, if the money to pay the price for this—I think it is £1.8 billion—came out of that, there would be a £1.8 billion increase on the country’s collective balance sheet. The argument would go that it would then reduce it. At some level, fiscal prudence has to come in to make sure we are not creating a deeper black hole. Because of the change of accounting at the back end of last year, this could turn the Government’s £30 billion fiscal black hole into a £32 billion one, even though that money is earmarked only for pensions.
I would like to hear from the Minister how the Government will resolve that. I would like him to make an undertaking that we will hear something about it on 26 November, and that there will be something in the Budget to resolve this fiscal conundrum. We need to know where the money will come from, and that the Government have set it aside. This is a perfect opportunity to deal with a problem that has been going on since 1997, and that becomes more profound every time the Office for National Statistics announces the rate of inflation. If the Minister gave us that assurance, I would trust him—being an honourable and decent man—that he could make his current boss get something done about this on 26 November.
Torsten Bell
Despite the hon. Member’s kind invitation, and as he well knows, I am not about to start commenting on the Budget—something I have heard him say himself many times over the years in his previous roles.
More seriously, the last 50 years tell us that the question of pension uprating is a big deal and very important. By “uprating”, I mean how pensions keep pace with earnings or prices. Obviously, on the state pension we tend to talk in terms of earnings. It is a big issue. The lesson of the 1980s and 1990s was about rising pensioner poverty at a time when the state pension was not earnings indexed but earnings were growing significantly. That is why we ended up with 30% or 40% pensioner poverty during those years. History tells us that those things are important. History aside, they are also obviously important for individuals, as we heard at the evidence session.
Luke Murphy (Basingstoke) (Lab)
I want to add my voice and the calls of my constituents for that issue to be addressed and tackled. I have been contacted by several constituents, one of whom has lost up to 70% of the value of their occupational pension. I add my voice to those calling for the Government to do what they can to address this issue, which I know the Minister recognises is having a huge impact on many people’s lives.
Roger Sainsbury, among others, raised the issue in the evidence session. He said that he had confidence that the Government would come up to the mark and find a way through the perceived difficulties. I seek reassurance from the Minister on behalf of my constituents that the Government will do all they can to ensure that that is the case.
Torsten Bell
I thank my hon. Friend for his questions. Let me come to the two halves; two different issues are actually being raised in these amendments and I want to make sure that we deal with them separately.
New clause 5 deals with discretionary increases for schemes that have not fallen into the PPF—those with solvent employers. Here, as I said in the surplus discussion, the changes on surplus provide a new route for trustees who do not have the power to make those discretionary increases off their own bat to discuss with employers discretionary increases on pre-1997 pension accruals. It is also clear that we need to understand this issue well. The Pensions Regulator has been engaging in surveys on this issue for exactly that reason and will continue to do so. Overall, my argument is that, for those schemes still operating, we are not going to be in the business of legislating to overwrite scheme rules when it comes to whether schemes had indexation in them pre-1997.
Questions of the PPF and FAS represent an important debate, as we heard last Tuesday—I answered questions about that then, and I will not pain everyone by repeating my answers.
New clauses 18 and 19 would not work. The new clauses as drafted would apply to subsets of the PPF population. Some pensioners would receive indexation, and some would not. The same flaws in the new clauses apply to FAS. We will definitely be opposing the new clauses, but that is without regard to the wider questions, which, as I said, I commented on last Tuesday.
Steve Darling
I beg to move, That the clause be read a Second time.
I am afraid I have a difficulty, Ms Lewell: I am appearing soon in a Westminster Hall debate as a spokesperson, so I will have to go part-way through this debate—accept my sincere apologies for that.
New clause 7 is the beginning of a series of new clauses on pensions injustices. It is intended to probe. I know from fellow MPs that there are significant amounts of casework about people who fall short of being acknowledged as receiving benefits from pensions, such as spouses or partners of different descriptions.
Our world is complicated. I am adopted, and went from having one sibling to nine siblings in total; I have a complicated family. We all have complicated families. Equally, historically, pensions may not have taken account of how people’s lives might have become more complicated, such as with partners and the way that life moves on. We ask the Minister to reflect on that, and see how he may be able to tackle this injustice. I apologise for leaving before we complete the debate on the new clause, Ms Lewell.
Kirsty Blackman
If the new clause is pressed to a vote, I will not take part because it does not impact pensions in Scotland. However, I want to relay to the Committee and the Minister that I have heard a number of heartbreaking stories on this subject; I am aware that it is not the Minister’s fault that such situations have occurred. What has most impacted me is when I have heard the stories of people having to choose not to live with their partners if they are to continue to receive pensions.
Someone’s deceased police officer partner may have died a significant time ago. Finding happiness in a new relationship is a lovely thing, but that person might have to choose between getting the survivor’s pension and living with their new partner. That is a horrific decision that nobody should ever have to make. It would be great if the Minister recognised the issue: that people are being pushed into making difficult choices because of how the schemes have been written. I do not necessarily want the Minister to commit to changing the legislation, as I do not know whether it is within his gift to fix this, but will he recognise that the current situation is unfair? I think that would be a step in the right direction.
John Milne
Further to the remarks made by my hon. Friend the Member for Torbay on the new clauses, and as the hon. Member for Aberdeen North commented earlier, pension Bills come along once in a generation, so we are taking this opportunity to bring a number of long-standing issues under scrutiny, hopefully for comment.
Torsten Bell
I thank the hon. Member for Torbay, who has just left us, for moving new clause 7. To clarify, it would require the Secretary of State to commission an independent review into the police pension scheme on these particular issues. I know this will be a matter of cross-party consensus, but the most important thing is to stress the value placed on the contribution of police officers across the country. I see them every day, particularly in the centre of Swansea, and they play a really important role.
The rules providing for the cessation of survivor benefits, where a survivor remarries or cohabits, are typically features of legacy public service pension schemes, and we are discussing the 1987 police pension scheme in this case. Reformed public service pension schemes do not include these challenges, as we have moved away from a system with significant inheritable rights. The same also applies to the new state pension system introduced under the coalition Government, which does not include the same degree of inheritability as the basic state pension did.
I want to take a similar approach to the many issues that will be raised in such calls for reviews. It is really important for me to be clear about why we do not support reviews into these schemes—particularly in this case, where it closed 20 years ago—as I do not want to raise expectations that will not be met. That would be deeply unhelpful to people who have been campaigning on this issue for many years.
In this particular case, there is the principle that we will not retrospectively legislate to change the terms of pensions far in the past, around 20 years ago. I am saying this very gently, but the reality is that my position is shared by most parties in this House. If the coalition Government, made up of a Liberal Democrat Pensions Minister and other Conservative Ministers, had wanted to resolve these issues and take an approach different from the one I am setting out today, they would have done it in a previous Parliament.
The last thing I want to do is give false expectations to people who often face consequences from the terms of these pension schemes—terms I do not support, but that is why they have ceased to be part of modern pension schemes. I do not want to give false certainty that we will start reopening public service pension schemes from decades ago. That would lead to false expectations, and that is the last thing we should be doing.
On that basis, we will not be supporting the new clause, but I understand the case that people have made and why people are raising it in this place. As I say, that is our approach to this issue.
John Milne
I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 8
Independent review into pension losses incurred by former employees of AEA Technology
“(1) The Secretary of State must, within three months of the passing of this Act, commission an independent review into the pension losses incurred by former employees of AEA Technology who—
(a) transferred their accrued pension benefits out of the UK Atomic Energy Authority (UKAEA) public service scheme to AEA Technology (AEAT) on privatisation in 1996, and
(b) suffered financial losses when AEA Technology went into administration in 2012 and the pension scheme entered the Pension Protection Fund (PPF).
(2) The review must examine—
(a) the extent and causes of pension losses incurred by affected individuals,
(b) the role of Government policy and representations in the transfer of pensions during the privatisation of AEA Technology,
(c) the findings of the Public Accounts Committee and the Work and Pensions Select Committee,
(d) the adequacy of safeguards provided at the time of privatisation,
(e) potential mechanisms for redress or compensation, and
(f) the estimated financial cost of any such mechanisms.
(3) The review must be—
(a) conducted by an independent panel appointed by the Secretary of State, with relevant expertise in pensions, public policy, and administrative justice, and
(b) transparent and consultative, including engagement with affected pensioners and their representatives.
(4) The panel must report its findings and recommendations to the Secretary of State and lay a copy of its final report before Parliament within 12 months of its establishment.
(5) The Secretary of State must, within 6 months of the publication of the report under subsection (4), lay before both Houses of Parliament a statement setting out the Secretary of State’s response to that outcome.”—(John Milne.)
This new clause would require the Secretary of State to commission an independent review into the pension losses incurred by former employees of AEA Technology.
Brought up, and read the First time.
John Milne
I beg to move, That the clause be read a Second time.
The new clause would require the Secretary of State to commission an independent review into pension losses suffered by former employees of AEA Technology. It focuses on employees who transferred benefits from the UK Atomic Energy Authority to AEA on privatisation in 1996, and who later suffered losses when the company went into administration. Many former employees experienced significant losses due to circumstances beyond their control, and this review would ensure a transparent, evidence-based assessment of what went wrong. It would also hopefully provide a structured way to explore redress or compensation options for affected pensions.
To summarise, the new clause would ensure that lessons were learned and safeguards were strengthened for future privatisations and pension transfers. We move it in the hope that the Minister will put his thoughts on the record, so that campaigners can at least see them—like them or not, they will know where he stands.
Torsten Bell
I reiterate my overall approach to the issues being raised in relation to historical cases, but we all recognise the difficult position that members of this particular scheme found themselves in. Many scheme members who move into the PPF receive a lower pension than they were otherwise expecting, and I think we are all sympathetic.
The hon. Member will be aware that there have been many reviews of this case, including by the Public Accounts Committee, the Work and Pensions Committee and, obviously, the Pensions Ombudsman. The coalition did not act on this particular case, and I do not want to raise expectations that we are going to reopen it now, given the number of reviews that have already taken place.
However, I can offer slightly more reassurance to the hon. Member going forward. He will be aware of changes in policy that mean that, when there are privatisations of the kind that sits behind this challenging case, workers will remain in public service pension schemes. They would not be moved across into another scheme. That is obviously what sits behind anxieties about the transparency of the advice provided in this case. I hope that that offers the hon. Member the kind of reflection that he asked for, but we are not in a position to support the new clause.
John Milne
I thank the Minister for his observations, and I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 9
Independent review into state deduction in defined benefit pension schemes
“(1) The Secretary of State must, within three months of the passing of this Act, commission an independent review into the application and impact of state deduction mechanisms in occupational defined benefit pension schemes.
(2) The review must consider—
(a) the origin, rationale and implementation of state deduction in the Midland Bank Staff Pension Scheme,
(b) the clarity and adequacy of member communications regarding state deduction from inception to present,
(c) the differential impact of state deduction on pensioners with varying salary histories, including an assessment of any disproportionate effects on—
(i) lower-paid staff, and
(ii) women,
(d) comparisons with other occupational pension schemes in the banking and public sectors, and
(e) the legal, administrative, and financial feasibility of modifying or removing state deduction provisions, including potential mechanisms for redress.
(3) The Secretary of State must ensure that the person or body appointed to conduct the review—
(a) is independent of HSBC Bank plc and its associated pension schemes;
(b) possesses relevant expertise in pensions law, occupational pension scheme administration, and equality and fairness in retirement income; and
(c) undertakes appropriate consultation with—
(i) affected scheme members,
(ii) employee representatives,
(iii) pension experts, and
(iv) stakeholder organisations.
(4) The person or body conducting the review must—
(a) submit a report on its findings to the Secretary of State within 12 months of the date the review is commissioned; and
(b) the Secretary of State must lay a copy of the report before Parliament and publish the report in full.
(5) Within three months of laying the report before Parliament, the Secretary of State must publish a written response setting out the Government’s proposed actions, if any, in response to the report’s findings and recommendations.
(6) For the purposes of this section—
‘state deduction’ means any provision within a defined benefit occupational pension scheme that reduces pension entitlements by reference to the member reaching state pension age or by reference to any state pension entitlement;
‘defined benefit pension scheme’ has the meaning given in section 181 of the Pension Schemes Act 1993;
‘Midland Bank Staff Pension Scheme’ includes all associated legacy arrangements and any successor schemes administered by HSBC Bank Pension Trust (UK) Ltd.” —(John Milne.)
This new clause would require the Secretary of State to commission an independent review into clawback provisions in occupational defined benefit pension schemes, in particular, the Midland Bank staff pension scheme.
Brought up, and read the First time.
John Milne
I beg to move, That the clause be read a Second time.
New clause 9 would require the Secretary of State to commission an independent review into the application and impact of state deduction mechanisms in occupational defined benefit pension schemes. It focuses specifically on clawback provisions in the Midland bank staff pension scheme and associated legacy arrangements.
We believe that a review is needed because state deduction provisions can reduce members’ pension entitlements, sometimes in ways that are complex or unclear. There are concerns about fairness, transparency and disproportionate impact, particularly on lower-paid staff and women. A review would ensure that members, regulators and Parliament had clarity about the origin, rationale and effect of such provisions.
The review would examine the history and rationale for the deductions, assess the clarity and adequacy of member communications over time, analyse differential impact on pensioners with varying salary histories, and compare state deduction practices with other occupational schemes in banking and the public sectors. It would also consider the legal, administrative and financial feasibility of modifying or removing state deduction provisions. Finally, it would be an independent and consultative process. The clause would ensure transparency and fairness, and it would provide Parliament and Members with clear, evidence-based guidance on the way forward.
Torsten Bell
I am conscious that there was a debate in the main Chamber on this issue before the summer recess, when we were able to go into the issue in much more depth. The debate related to integrated pensions, but in that context people are usually referring to the HSBC historical pension scheme in particular. Without rehearsing everything I have said about our not being in the business of promising to change pension scheme rules, schemes have wide discretion about the nature of their rules and the entitlements that scheme members accrue. It is not for the Government to change those.
The law is very clear that the Government require transparency, just as the hon. Member for Horsham called for, and that includes clear communication of what the entitlement from any given pension scheme is, including issues to do with what is referred to as integrated pensions or clawback pensions. People do have to have received communication that spells that out. The role of the Pensions Ombudsman is to check that that has happened. That is where people can go if they feel that they have not received clear communication about what their scheme entitlements were.
I think we can all understand that if anybody started to receive a pension and was shocked to see a deduction in it when they went over the state pension age, that would be very significant for them. It is the job of the Pension Ombudsman to investigate cases such as that.
John Milne
I thank the Minister and beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 10
Use of electronic mail for direct marketing purposes relating to pensions
“(1) Section 22(3) of the Privacy and Electronic Communications (EC Directive) Regulations 2003 is deemed to apply to unsolicited electronic communications relating to pensions when the sender is—
(a) a firm authorised to provide Targeted Support under Article 55A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 issuing a Targeted Support communication, or
(b) a qualifying pension scheme, as defined in section 16(1) of the Pensions Act 2008.
(2) Subsection (1) applies when the recipient is—
(a) a customer of the firm under subsection (1)(a), or
(b) a member of the pension scheme under subsection (1)(b).” —(John Milne.)
This new clause would require that the provisions relating to the use of electronic mail for direct marketing purposes under the Privacy and Electronic Communications *(EC Directive) Regulations 2003 would apply to communications from firms providing targeted support on pensions or from qualifying pension schemes.
Brought up, and read the First time.
John Milne
I beg to move, That the clause be read a Second time.
New clause 10 would require that provisions relating to the use of electronic mail for direct marketing purposes would apply to communications from firms providing targeted support on pensions or from qualifying pension schemes. That matters because pension savers deserve protection from unwanted or misleading marketing, especially when they may be vulnerable to scams. I used to work in direct marketing, so I feel a little bit guilty.
John Milne
Obviously, all mine were absolutely above board. Currently, the privacy and electronic communications regulations do not clearly cover pension-related marketing from schemes or targeted support firms. This new clause seeks to close that loophole. People should be able to trust that communications from their scheme or adviser are genuine and not just spam dressed up as guidance. We would position this as a balance, so that legitimate communications to scheme members remain possible, but only within clear safeguards. In summary, it is a simple consumer protection measure that would protect savers from nuisance emails and potential mis-selling.
Kirsty Blackman
I have a brief comment on the direct marketing purposes. An increasing number of people rely on email communication to get updates on their pension, rather than paper updates. I am aware of a significant number of people of younger generations who are not keen on opening letters that come through their door. They may also not be keen on opening emails, but at least they will be able to search for them, because they will not delete them, and will be able to find out what is in them.
I spoke to somebody the other day who was quite surprised at the low percentage of people who had signed up to use the app for the National Employment Savings Trust. Most of the providers and individuals I have spoken to have seen an increase in the number of people who are keen to use apps or communicate only via electronic communication. The point made by the hon. Member for Horsham is incredibly important. We need to ensure that a balance is in place and that people are provided with the correct and actual updates in a way that they want to receive them, but that they are protected from scams.
David Pinto-Duschinsky
I do not disagree with the hon. Lady, but does she agree that this might be a tiny bit premature, given that there is currently a consultation going on about making changes to these rules? The objective of the new clause is valuable, but maybe putting it in statute is not the right way to go.
Kirsty Blackman
Mr Speaker and previous Speakers have encouraged us as Members not to worry about repetition. Generally, the more we can talk about and highlight issues the better. Part of the point of the new clause is to ensure that the Minister recognises and says from the Front Bench that this is an important issue. Whether or not there is an actual consultation taking place, if we can have that commitment—we will probably ask him for that commitment again and again, given the nature of this place—we would be very happy to receive it.
I agree with the hon. Member for Horsham that the balance is really important. When it comes to guided retirement products, it is key that companies do not worry that the privacy and electronic communications regulations, or any legislation, is going to get in the way of proper communications, but that people are also protected from potential scam communications, and that we are able to crack down on anyone undertaking scams and looking to take significant amounts of money—these are the largest amounts of savings that the vast majority of us will ever have in our lives.
Rebecca Smith (South West Devon) (Con)
I have a query off the back of the comments of the hon. Member for Aberdeen North.
We heard in the evidence sessions that there is a danger that overdoing the requirements for marketing will get in the way of providing guidance. That came up directly in the response to some of our questions, I think specifically from Legal and General and Aviva. Companies are already in a position where, if they are not careful, offering guidance is considered marketing. Therefore, they do have their hands tied by existing legislation.
I am slightly intrigued why this new clause has been tabled, given that Liberal Democrat colleagues will have also heard that evidence. More work is needed on this issue than just adding a new clause to the Bill; I heard from the hon. Member for Hendon that there is a consultation.
Although I understand the point about protecting vulnerable customers from scamming, I feel the evidence we heard demonstrates that more work is needed, work that is not included in the Bill, to make sure that pension companies are able to advertise in such a way that they can play their part in the guidance process that we have debated at length, and in how people get that financial education.
I understand the premise of the new clause, but we have many more questions to answer on this. If anything, I think we need to be making it easier for pension companies, the legitimate people in the room, to be able to communicate. There could be unintended consequential issues; we are trying to deal with scammers, but we might inadvertently stop people accessing information that we are trying to help them to receive.
Torsten Bell
Let me attempt to offer some words of clarification and then come to what the Government are doing on this issue.
To clarify, pension schemes are covered by the rules on direct marketing already. I think the new clause as drafted would probably have the opposite effect to what the hon. Member for Horsham intends, by carving out pension schemes from the limitations on direct marketing. That would be a loosening of the direct marketing restrictions for pension schemes. There are people in the industry that have been calling for exactly that, so that may be where the new clause is coming from, but I clarify that they are covered; the direct marketing rules prevent pension schemes from behaving in those kinds of ways.
What is the context here? We are obviously aware of concerns that the existing direct marketing rules, which apply to pension schemes, may limit providers’ ability to deliver the new targeted support regime that is being developed by the Government, exactly as the hon. Member for South West Devon has just set out. Under targeted support, FCA-authorised firms will be able to proactively suggest appropriate products or courses of action to customers. That could help people to make decisions about access to their pension, but it obviously needs to be done in the right way.
We have heard the feedback from stakeholders on the interaction between that wish for targeted support and direct marketing rules, which is where most of the debate on this area has been. Because targeted support involves recommending specific courses of action, it could be considered direct marketing. That is the cause of the tension.
There are particular issues for pension providers who administer auto-enrolled members, where the individual has not chosen the pension scheme or engaged with them. As a result of that, they cannot generally satisfy the requirements of what is called the soft opt-in, because the provider has not collected the information from the individual at the point at which they were enrolled—it has gone through the employer.
What are we doing about that? We are examining quite a range of policy options at the moment. That includes legislative change, which can probably be done via secondary legislation. I think that is the right way for us to proceed. When we do that, we need to get the balance between enabling targeted support and making sure that we do not have inappropriate direct marketing within the pension space. I definitely would not want to see a carve-out from all direct marketing rules for the pension sector as a whole, as there are risks that come with that. I hope that gives Members some clarity and an explanation of what the Government are doing to take this issue forward.
John Milne
I thank the Minister for his clarification, and I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
Kirsty Blackman
On a point of order, Ms Lewell, I am aware that I cannot make a speech at this point, but will the Minister write to me on whether he is planning to do anything about pre-1997 indexation of the PPF and FAS? If he writes to me about that, I will be happy not to push new clause 18 to a vote.
Torsten Bell
I suspect that I have already written to the hon. Lady, because she has raised some constituency cases with me, but she can receive another one of those letters.
New Clause 33
Report of defined benefit schemes impact on productivity
“(1) The Secretary of State must, within 12 months of the passing of this Act, publish a report on the impact on corporate productivity of defined benefit schemes.
(2) The report must include an assessment of—
(a) investment strategies of defined benefit funds,
(b) the returns on investment of defined benefit funds, and
(c) the impact of investment strategies and returns on productivity.
(3) The Secretary of State must lay a copy of the report before both Houses of Parliament.”—(Mark Garnier.)
This new clause would require the Government to commission a report on the impact on corporate productivity of defined benefit schemes.
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss the following:
New clause 34—Recognition rules for Defined Benefit scheme deficits—
“(1) The Secretary of State must by regulations revise the balance sheet recognition rules for Defined Benefit pension scheme deficits.
(2) Revision of the balance sheet recognition rules under subsection (1) may include allowing the deferment or partial deferment of deficits to future financial years when calculating the balance sheet.”
This new clause would require the Secretary of State to revise the balance sheet recognition rules for Defined Benefit pension scheme deficits.
New clause 35—Alternative disclosure for long-term deficits—
“(1) When a Defined Benefit pension scheme has a long-term deficit, it shall be permitted to disclose the deficit on an alternative basis, rather than recognising the full deficit as an immediate liability, if a formal recovery plan has been agreed.
(2) For subsection (1) to apply, a formal recovery plan must have been—
(a) agreed by the scheme trustees, and
(b) approved by The Pensions Regulator.
(3) The Pensions Regulator shall issue guidance on the format and content of the alternative disclosure specified in subsection (1).”
This new clause permits DB schemes to disclose a long-term deficit on an alternative basis.
Mark Garnier
When we look at the thrust of the Bill, the mandation measure is all about trying to get pension funds to help to create greater productivity within the UK economy. A couple of days ago, in a very helpful intervention on a speech made by my hon. Friend the Member for Mid Leicestershire, the hon. Member for Hendon made the point that, while we are standing against mandation, we must ask: what are we standing in favour of? How are we trying to get behind the grain of the Bill? These three new clauses respond to that question of what we are doing to ensure that the Bill actually can use pension fund money to promote economic growth, invest into the UK and get better returns for the pensioners.
One of the problems facing defined-benefit pension schemes is that, in response to the outrage over Maxwell and Mirror Group Newspapers pinching money from pension schemes back in the 1980s and 1990s, rules were introduced that were basically designed to ensure that it would not happen again. They were introduced in such a way to ensure that, if a defined-benefit pension scheme were to go into deficit, the deficit would be reflected on the balance sheet of the host company.
We still see that today in some larger companies; I think the British Telecom pension scheme currently has a deficit of £7 billion, and that appears on British Telecom’s balance sheet. That does two fundamental things. First, if a company has a deficit on its balance sheet, that restricts its ability to raise equity or debt to invest into its business, so the host business cannot expand because it has a defined-benefit pension scheme with a deficit attached to it.
A second problem then comes as a result of the Maxwell rules: the trustees of a defined-benefit scheme with a host company will be reluctant to invest that into high-volatility assets. We know that, over a long period of time, the equity market will perform far better than the bond market. The problem is that we can have volatile markets in the short term, which could introduce a deficit in the defined-benefit pension scheme that translates to a deficit on the balance sheet.
For example, if we look at stock market performances from the 1980s to now, we will see a very steady rise in the stock markets over time, which have done particularly well. However, if we go back to 1987 or various other times, such as 2000-01, we will see big stock market crashes that will have appeared on the balance sheets of those defined-benefit pension scheme host companies. As a result, these pension schemes are missing out on the long-term growth to push away the short-term volatility that hits the host company. With these three new clauses, we are trying to get that out of the way so that defined-benefit pension schemes feel more comfortable about investing in higher-growth and therefore higher-volatility assets.
Torsten Bell
I am grateful to the hon. Member for Wyre Forest for tabling the new clauses, and for his impressive consistency; he has spoken to this issue many times not only in this Committee, but elsewhere, and I have heard him. I agree on some of the wider issues he is raising, particularly his reflections on some of the impacts of decisions taken in the late 1990s. Before I come to the more technical responses to the new clauses, the hon. Member’s objective is to see different investment approaches taken by defined-benefit schemes. Many issues that were historically the case have been removed by the passing of time, because they are now closed schemes whose investments are now changing for other reasons, not because of the questions of regulatory pressure in the 1990s and so on. I leave that as an aside.
To give the hon. Member a bit more optimism, based on the Bill, I already have schemes saying to me that they may take different approaches on investments because of the option of a surplus release. That gives a different incentive structure for employers about what they wish to see their pension schemes doing, and for trustees, if there is a sharing of the benefits of upside risk that comes with that. I have had several large employer’s pension schemes raising that issue with me in the recent past. That is to give him some case for optimism to set against the long-term pessimism.
I will turn to the details of the new clauses. New clause 33 would require the Government to produce and lay a report before both Houses of Parliament, with an assessment of the investment strategies of defined-benefit pension schemes and their impact on productivity.
There is already a requirement for defined-benefit schemes to produce much of that information in their triennial valuation and to submit key documents to the Pensions Regulator, including information on investments and changes in asset allocations over time, so the regulator has much of the information already. In addition, multiple reports are already produced annually on defined-benefit schemes and their investments. The purple book is the most obvious example; it is produced by the Pension Protection Fund. I know that everybody here will be an avid reader of it; I promise people that it is reasonably widely read, including in the City.
New clause 34 seeks to change the arrangements for reporting defined-benefit pension scheme liabilities in the employer’s accounts. I am impressed by the wish of the hon. Member for Wyre Forest for us to engage in a Brexit from international financial reporting standards, but he will be unsurprised to learn that the Government are not about to do that. These are globally recognised financial reporting frameworks that allow comparability, and we are not in the business of changing them.
New clause 35 would require the Secretary of State to introduce an alternative basis to disclose schemes’ funding deficits. The Pensions Act 2004 put in place the current regime for valuations. Our view is that that approach has taken some time to implement but it is now well understood and well established, so leaving it in place is by far the best thing that we can do, while also considering in more detail the consequences of other things that drive the choices of pension schemes. On that basis, I encourage the hon. Member for Wyre Forest to withdraw the new clause, and I certainly do not expect to see my hon. Friend the Member for Hendon support it.
Mark Garnier
I am partially reassured by the Minister’s comments, but it really comes down to the kindness of my heart—I would not want the hon. Member for Hendon to be pulled off the Committee and put in an awkward situation. It would be unfortunate to force him to fall out with the Whips so early in his parliamentary career, so I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 37
Review of impact of this Act
“(1) Within five years of the passing of this Act, the Secretary of State must carry out a review of the impact of the provisions of this Act on actual and projected retirement incomes.
(2) The review must consider—
(a) the impact of the provisions of this Act on actual and projected retirement incomes, and
(b) whether further measures are needed to ensure that pension scheme members receive an adequate income in retirement.
(3) The Secretary of State must prepare a report of the review and lay a copy of that report before Parliament.”—(Mark Garnier.)
This new clause would require the Secretary of State to prepare a report on the impact of this Act within 5 years of its passing.
Brought up, and read the First time.
Mark Garnier
I beg to move, That the clause be read a Second time.
Under new clause 37, the review of the impact of the Act would focus on pensions adequacy. The current Government plan to delay the comprehensive consideration of pensions adequacy to future phases of the pensions review. Any resulting reforms from those future evaluations are projected to take several years to develop and implement, and there is widespread concern that without a mandated regular review process, inadequate pension outcomes will persist. Millions of people in the UK therefore risk having insufficient retirement income, particularly lower earners, ethnic minorities, the self-employed and those with interrupted careers.
Automatic enrolment has expanded workplace pension participation and now covers over 88% of eligible employees, but significant savings shortfalls remain. Recent forecasts and analysis warn of a retirement crisis, with many future pensioners expected to have less income than today’s retirees unless action is taken. The Government’s renewed Pensions Commission is due to report in 2027, focusing on the adequacy, fairness and sustainability of the retirement framework, but that report will only come in 2027.
The new clause would create a statutory obligation for the Secretary of State to conduct a full review within five years of the Bill’s passage, focusing on its impact on actual and projected retirement incomes. It would require an assessment of whether current policies and contribution levels are sufficient to ensure adequate retirement incomes. The Secretary of State would have to report the findings to Parliament, increasing accountability and transparency. That would formalise an ongoing review cycle to monitor pension adequacy regularly, preventing the consideration of the issue being indefinitely postponed.
As we all know, pension adequacy is vital to preventing poverty in later life and to ensuring quality of life for retirees. Despite expanded coverage through auto-enrolment, however, many people are still on track to fail to meet retirement income targets. Financial resilience frameworks show disparities in adequacy among lower earners, women and other vulnerable groups, and current retirement income depends on a number of variables, including contribution, sufficiency, investment returns, longevity and state pension level.
The new clause would ensure that the Government take responsibility to monitor and report regularly on pension adequacy outcomes. It would mandate a formal review mechanism, enhancing policy responsiveness and parliamentary oversight. Ultimately, it aims to safeguard millions of future retirees from inadequate incomes, and support a sustainable and fair retirement system.
Torsten Bell
We have now had a few discussions about the case for monitoring and evaluating the Bill and what is going on in the pension landscape more generally. I do not want to repeat everything I have said previously, so I will just address whether this is the right approach or whether it should be done through the Pensions Commission that is under way and looking at most of these issues. My view is that the Pensions Commission is focused on the headline issues that the hon. Member for Wyre Forest has just mentioned. I do not want to confuse that work by having another process consider the same issues at the same time. It is also valuable to have the independence of the commission when doing that.
My main message is that we do not have to wait long, because the Pensions Commission will report in 2027, which is earlier than the five years that we would have to wait for the Secretary of State’s inevitably excellent report as a result of this new clause. We should have faith in Baroness Drake, Ian Cheshire and Nick Pearce to deliver that.
Kirsty Blackman
I am not as au fait with the terms of reference of the review as the Minister. Is it possible that it will say, “We recommend that another review is undertaken in five, 10 or 15 years?” Will it look at whether the review is all we need at this point in time or whether we will need another review in future?
Torsten Bell
I do not want to speak for the commissioners because that would be to prejudge their work. I can tell the hon. Lady what the terms of reference require and they definitely rule out long-grassing in that they require actual recommendations for change to deliver a fair, adequate and sustainable pension system. It would certainly be open to them to say, “Do these things, and we also think that monitoring should be x and y.” That would be for them to say, and as it is an independent commission, I do not want to prejudge that. It definitely cannot be just that; it would have to include recommendations for change.
Mark Garnier
We tabled new clause 37 partly to try to get some reassurance from the Minister. Two years is still quite a long time, as is five, but it is incredibly important that we are on top of what is going on in the pension industry, not least because we do not want any of our constituents to end up with miserable retirements. However, I am marginally reassured by the Minister’s comments. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 38
Guidance on the roles of the Financial Conduct Authority and the Pensions Regulator
“(1) The Secretary of State must establish a joint protocol outlining the roles and responsibilities of the Financial Conduct Authority and the Pensions Regulator regarding their regulatory responsibility of the pension industry.
(2) A protocol established under subsection (1) must include—
(a) an overview of the coordination mechanisms between the two bodies;
(b) a published framework for oversight of hybrid or work-based personal pension schemes;
(c) a requirement for regular joint communications from both bodies to clarify regulatory boundaries for industry stakeholders.”—(Mark Garnier.)
Brought up, and read the First time.
Mark Garnier
I beg to move, That the clause be read a Second time.
This will be the last new clause I will be talking to. It looks at the guidance on the roles of the Financial Conduct Authority and the Pensions Regulator. In preparing for this Bill, we spent a lot of time engaging with the industry just a mile and a half up the road. Among the industry there is persistent confusion regarding the division of regulatory responsibility between the Financial Conduct Authority and the Pensions Regulator.
The FCA regulates contract-based pension schemes—personal pensions, group personal pensions and stakeholder pensions—focusing on firm authorisation, conduct and consumer financial advice. TPR regulates trust-based occupational schemes, including defined-benefit and defined-contribution trust schemes, and it targets schemes, governance and employer duties. Overlapping interests exist in hybrid or workplace pension schemes, but unclear boundaries and differing enforcement powers can create regulatory gaps and inconsistencies. That ambiguity causes compliance difficulties for employers, trustees and industry stakeholders, and may ultimately affect pension savers.
The new clause would require the Government to establish a statutory joint protocol between the FCA and TPR, clearly defining and publishing their respective roles and responsibilities. The protocol must outline formal co-ordination mechanisms between the FCA and TPR, include a published framework specifically addressing oversight of hybrid and workplace personal schemes where regulatory remit overlaps, and include a requirement for regular joint communications from both regulators to guide industry and clarify regulatory boundaries. That matters because collaboration between the FCA and TPR ensures comprehensive consumer protection across all pension products.
With pension system complexity increasing—with mega schemes, master trusts and hybrid arrangements—co-ordinated regulation is critical. That will enable both regulators to leverage their strengths—the FCA in consumer conduct and financial advice, and TPR in governance and compliance enforcement. That will help trustees, employers, firms and savers to better understand which regulator to engage to resolve issues and access support.
Industry feedback consistently calls for more precise demarcation to avoid confusion and compliance risks. The Government’s wider reforms and digitisation initiatives, such as pension dashboards, further heighten the need for co-ordination. The new clause would promote regulatory clarity and efficiency through mandated guidance, protecting pension consumers and enabling robust governance across the sector. Clear regulatory pathways will better support pension savers by ensuring consistent standards and enforcement across all types of pension schemes.
Kirsty Blackman
I asked questions earlier about the consultation processes that DWP and the FCA are undertaking and about ensuring consistency in that consultation. This is a similar issue. I like the way that the new clause has been written to ensure that there are protocols so that everybody knows what side of the line they fall on. That can be a particular issue for organisations that have responsibility for both trust-based and contract-based pensions. They may be trying to scale or make efficiencies through investing or having similar default products, even though we are talking about two different types of scheme.
It would be helpful if the Government would commit to ensuring that, where those issues arise, and people are having conversations with the FCA and the Pensions Regulator about what side of the divide they fall on, the Government are keeping a watching brief. If there is regular confusion, the Government should ensure that they clarify the guidance so that people know which side they fall on. Those schemes that are either hybrid or have some sort of umbrella that encapsulates both trust-based and contract-based regulation will then know which side they fall on. They will be able to comply with both regulators, if that is the requirement, or with one of them.
As we said earlier, it is incredibly important that scheme members—current pensioners and prospective pensioners—get an excellent level of service. The vast majority of people do not know, and do not care, whether they are in a trust-based or contract-based pension scheme; all they want is to get as good a pension as possible when they hit retirement. Anything that the Minister can do to ensure that companies have a huge amount of clarity about where they fall, and that scheme members get the best outcomes when they hit retirement, would be helpful.
Torsten Bell
We all agree that we want providers and, most importantly, consumers to operate in this landscape as easily as possible. Particularly in the case of consumers, we do not want them to know the difference between the two. I have been very clear with both regulators that that is the objective, and I have been very clear with both Departments that oversee them that that is what we are doing.
Delivering that in practice requires thinking about how we legislate, and that is what we have done with the Bill to make sure that we are providing exactly the same outcomes through both markets. It is about Government providing clarity to regulators—we are absolutely providing that—and then about how the regulators themselves behave.
I am very alive to the issue that is being raised. There is some good news about the existing arrangements, which need to continue, because they are examples of effective co-ordination between the FCA and TPR. I have seen that through joint working groups, consultations, shared strategies and guidance, and regular joint engagement with stakeholders. The value for money measures in the Bill are probably the most high-profile recent experience of entirely joint working between the FCA, TPR and DWP.
The wider collaboration is underpinned by what is called the joint regulatory strategy and a formal memorandum of understanding that sets out how the two regulators should co-operate, share information and manage areas of overlap. I think that that basically achieves the objectives that the hon. Member for Wyre Forest set out, even if it is provided not by the Secretary of State but by a memorandum of understanding between the two organisations. I can absolutely reassure him and the hon. Member for Aberdeen North that I am very focused on this issue.
Mark Garnier
I am highly reassured by the Minister’s words. The important point is to ensure that if the bodies are to work together and do this, we need to keep them held to account on it. The Financial Conduct Authority was set up as an independent regulator and reports back to such things as the Treasury Committee. Presumably, TPR reports back to the Work and Pensions Committee. Already we can see a potential problem there, because separate Select Committees are doing the investigation. That is an important point, but I am confident that the Minister and his civil servants are aware of the problem and will be resolutely super sharp-focused on this issue to ensure that we have regulatory clarity. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 39
Section 38: commencement
“(1) The provisions in section 38 shall not come into force except in accordance with regulations made by the Secretary of State.
(2) A statutory instrument containing regulations under subsection (1) may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”—(John Milne.)
This new clause would require that the provisions in clause 38 could only be enacted once agreed through secondary legislation.
Brought up, and read the First time.
John Milne
I beg to move, That the clause be read a Second time.
Overall, this Bill has wide cross-party support, as evidenced by the fact that we have been rattling through it at such a pace. However, the power of mandation is undoubtedly the most controversial aspect. To be briefly Shakespearean: to mandate or not to mandate, that is the question.
The new clause would require that the provisions in clause 38—the mandation powers—be enacted only through secondary legislation. It is an attempt to square the circle between two competing views. The Liberal Democrats have concerns about the implications of mandation, frankly, as has much of the pensions industry. For example, Pensions UK, which is a signatory of the Mansion House accords, has stated:
“We believe that the best way of ensuring good returns for members is for investments to be undertaken on a voluntary, not a mandatory basis. We also note powers being taken to specify required investment capability for schemes, and to direct LGPS funds to merge with specific pools. All of these powers will require careful scrutiny.”
Similarly, the Society of Pension Professionals has said:
“The SPP does not support the reserve power to mandate investment in private market assets and recommends its removal from the legislation. The mandation power creates significant uncertainty, including questions about legal accountability for investment underperformance and how eligible assets will be defined. The threat of mandation risks distorting market pricing and could reduce public trust in pensions, as savers may fear that financial returns are no longer the top priority.”
The Minister has stated on a number of occasions that mandation should not be necessary, that he does not expect to have to use it and that the Mansion House accord demonstrates the industry’s willingness to act voluntarily. The obvious response is that if that really is the case, and that UK private markets truly offer the best option for pension savers while meeting the fiduciary duties, the industry should not need any prodding and mandation will not be required. The Minister’s response on previous occasions, and no doubt today, has been to observe the history and point out that thus far, the industry has been slow to make that change.
We recognise that the Minister is wholly committed to the path of giving himself mandation powers, whatever we or anyone else says. Indeed, he sees it as core to the legislation. For that reason, we have proposed the new clause as a halfway house. The power would be put on the books, but it would require secondary legislation to be enacted. It would give the Minister the ability to have access to mandation powers at short notice if he deemed it necessary, without needing primary legislation, but in the meantime, it does not hang over the industry like a sword of Damocles. It may seem just a psychological difference, but psychology matters, and there are other advantages.
Somewhat counterintuitively, sometimes having too much of a stick can be a problem in itself. The Minister would be under pressure to use the stick for the sake of consistency in every case where any company went slightly over the limit or was under the limit, even when he might prefer to take a softer, more conciliatory approach. We therefore see this new clause as a way to help the Minister exercise the powers he needs, but without stepping too heavily on industry’s toes. As he has said, he does not believe that he will ever need to exercise the power, so let us keep it at arm’s length.
Torsten Bell
I will resist the temptation to relitigate the entire argument about clause 38, which we discussed at some length on Tuesday. I entirely agree with the thrust of the new clause, which is that there should be scrutiny of the use of any such powers—that includes the scale measures, not just asset allocation.
I can offer the hon. Member for Horsham some reassurance, because the Bill already provides that all significant regulations made under clause 38, including the ones he is referring to, are always subject to the affirmative parliamentary procedure. That is the effect of the changes made to section 143 of the Pensions Act 2008 by clause 38(15). That should give him a lot of reassurance. It is true that the new clause could put a further vote in the system, but the effect is the same. I have bad news about Governments with majorities: whether they are asked to vote once or twice, the outcome will look quite similar.
For the sake of transparency, I should flag that there are some much less significant measures in clause 38 that are subject to the negative resolution procedure. I will spell them out: regulations made that require regulatory authorities to report information relating to asset allocation to the Secretary of State, regulations made in respect of new information provisions, and regulations made in respect of the regulator’s power to issue a risk notice. The negative procedure is never used for the major aspects of clause 38, which, as the hon. Gentleman set out, is a central part of the Bill. I hope that reassures him that Parliament would have to support any measures to bring in the regulations that will underpin clause 38. As I have said ad nauseam, we intend to bring into effect the scale parts of clause 38, but do not anticipate the need to use the reserve power elements.
John Milne
I thank the Minister for his clarification. I emphasise that the new clause is as much for industry’s comfort as Parliament’s; nevertheless, I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 44
Administration levy
“(1) The Pensions Act 2004 is amended as follows.
(2) In section 116 (grants), leave out from ‘expenses’ to end of section.
(3) Omit section 117 (administration levy).
(4) In section 173(3) (Pension Protection Fund), before subsection (3)(a) insert—
‘(aa) any sums required to meet expenses incurred by the Board in connection with the operation or discontinuance of the Pension Protection Fund,’
(5) In section 188(3) (Fraud Compensation Fund), before subsection (3)(a) insert—
‘(aa) sums required to meet expenses incurred by the Board in connection with the operation or discontinuance of the Fraud Compensation Fund,’.” —(John Milne.)
This new clause abolishes the administration levy and provides for the expenses of the PPF and the FCF to be met out of their general funds. It would enable FCF expenses to be covered by the FCF levy.
Brought up, and read the First time.
John Milne
I beg to move, That the clause be read a second time.
This new clause would abolish the administration levy, which allows the Pension Protection Fund and Fraud Compensation Fund to meet their expenses from their respective general funds. PPF administration costs could instead be recovered from the wider protection fund, while FCF administration costs could be met from the FCF fund, funded through the FCF levy. The levy has in any case been suspended from 2023 to 2025. Many in the industry expected that this would lead to full abolition, especially given the clear recommendation from the DWP review in 2022.
The Society of Pension Professionals, which originally composed this amendment, remains a strong supporter, and its view is widely shared across the pension sector. Discussions with the PPF indicate that it has no objection to this proposal and would be content for its administration costs to be met from general reserves. Given industry support and PPF agreement, we feel that the Government should implement this change without any further delay.
The levy raises only a relatively small amount, but it adds unnecessary complexity and confusion to scheme finances and risks undermining broader reforms, especially efforts to reduce the risk-based levy to zero, which have been widely welcomed.
Overall, this amendment provides the Government with the necessary powers to eliminate an outdated levy, which would streamline pension scheme funding. It is a small but meaningful reform that aligns with wider pension reforms that are all aimed at reducing red tape, simplifying funding and ensuring efficient use of scheme resources.
Torsten Bell
I am grateful to the hon. Member for the new clause. I acknowledge the concerns surrounding the abolition of the Pension Protection Fund admin levy. This is not a new issue; it has obviously been raised significantly by parts of the industry. I broadly support the intent of the new clause. It provides for the expenses of the PPF board and the Fraud Compensation Fund to be met by the PPF levy and the Fraud Compensation Fund levy, instead of the PPF administrative levy. The amendment to section 116 of the Pensions Act 2004 is unworkable as it is currently drafted, but more importantly, I give the hon. Member our assurance that we intend to lay amendments at a later stage that will achieve the same aim. On that basis, I hope that the hon. Member will withdraw the new clause.
John Milne
I thank the Minister for his reply. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 45
Transfer of British Coal Staff Superannuation Scheme investment reserve to members
“(1) Within 3 months of the passing of this Act, the Secretary of State must by regulations make provision for the transfer of the British Coal Staff Superannuation Scheme investment reserve to members of the scheme.
(2) Those regulations must include—
(a) a timetable for transferring the total of the investment reserve to members of the scheme, and
(b) plans for commissioning an independent review into how future surplus will be shared.
(3) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”—(Kirsty Blackman.)
This new clause would require the Secretary of State to set out in regulations a timetable for transferring the whole of the BCSSS investment reserve to members and committing to review how future surplus will be shared.
Brought up, and read the First time.
Kirsty Blackman
I beg to move, That the clause be read a Second time.
New clause 45 is about the transfer of the British Coal staff superannuation schemes’ investment reserves to members. I am aware of what the Minister said earlier about the various schemes where there have been unfairnesses and the fact that the Government generally do not make commitments about trying to overcome some of the unfairnesses in historical schemes. However, exactly those kinds of changes were made to miners’ scheme in the autumn Budget last year—the investment reserves were transferred to members and changes were made in relation to the future surplus—yet that has not happened for those who were in the British Coal staff superannuation scheme.
I will not push the new clause to a vote, although my Plaid Cymru colleagues might do so on Report. It would be helpful if the Minister confirmed that he is aware that although the miners’ scheme has been changed, there is still an issue with the British Coal staff superannuation scheme, and that the Government are keeping that under review and considering what they can do to ensure that the surplus is transferred to members.
John Milne
Any changes to the BCSSS pension scheme rules require Government action; trustees can only act within their current rules.
I pay tribute to my hon. Friends the Members for Brecon, Radnor and Cwm Tawe (David Chadwick), who has been working hard to raise his constituents’ voices in relation to this urgent issue, and for North East Fife (Wendy Chamberlain). This is another one of those cases where time is not on the side of the claimants. We believe that six members are dying every day in relation to illnesses contracted from mining. Time is literally running out for members, so this is an urgent issue.
Torsten Bell
I am grateful for this new clause, which was tabled by one of my neighbours in south Wales, the hon. Member for Caerfyrddin (Ann Davies). It is obviously an important issue for many ex-mineworkers and for families across Great Britain. It is basically straightforward: I want to reassure the Committee that the Government have been discussing the transfer with the scheme trustees for many months. Those discussions are actively under way. We expect to be able to make an announcement about the way forward in reasonably short order.
I am glad that the new clause will not be pushed to a vote—because if anything, it would risk slowing down the implementation of an agreed outcome—and I totally appreciate the point that the hon. Member for Aberdeen North has made. Any proposal for change will need to be consulted on with the scheme’s trustees on behalf of their members, but that will be coming forward. I hope that provides the Committee with the reassurance it is looking for.
Kirsty Blackman
I appreciate the reassurances that the Minister has given me. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 46
Trustees: independence
“(1) The Pensions Act 1995 is amended as follows.
(2) In section 29 (Persons disqualified for being trustees), after subsection (d) insert—
‘(da) he has a personal or financial interest in the pension scheme, except for member nominated trustees.’”—(John Milne.)
This new clause makes pension scheme trustees truly independent of the sponsoring companies so that they can protect scheme members’ interests without any conflict of interest.
Brought up, and read the First time.
John Milne
I beg to move, That the clause be read a Second time.
The new clause would have the effect of making pension scheme trustees truly independent of the sponsoring companies so that they can protect scheme members’ interests without any conflict of interest. Trustees should act solely in the best interests of their members, not those of the sponsoring employer.
Currently, conflicts of interest can arise where company-appointed trustees also have personal or financial ties to the scheme sponsor. The new clause seeks to strengthen independence, excluding conflicting trustees while still allowing member-nominated trustees. Members deserve trustees who are free to challenge employers and prioritise pensions over corporate interests. Having strong, independent trustees means stronger protection for savers’ retirement security.
Torsten Bell
I will remark briefly on the new clause. To state the obvious, the quality and independence of trustees is an integral part of our trust-based pensions system. It is very important, and it is right for the hon. Member to highlight it. Within those schemes, there are a range of trustee models. I would not want to put a blanket regime in place within the currently varied landscape. I want to give the hon. Member some different reassurance on this point. We are committed to strengthening scheme governance, including for some of the issues that he has raised. I have already announced my intention to consult later this autumn on measures to improve the governance of trust-based schemes. That work will consider again some of the exact issues that he raises. That is the right way forward, because there are lots of strengths to our current system. The quality of our trustees, their independence and everything they bring to their role are all valuable, but it is important that we maintain that as the best it can possibly be. I hope that the hon. Member will enjoy the consultation later this year.
John Milne
I thank the Minister for his encouragement. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 47
Report on Pension Scheme Eligibility and Access
“(1) The Secretary of State shall, within 12 months of the passing of this Act, lay before Parliament a report into the operation of occupational pension schemes where certain categories of employees have been excluded on the basis of job classification or employment start date.
(2) The report must examine the case of employees and former employees of Fife Joinery Manufacturing (a subsidiary of Velux), including—
(a) whether affected workers were provided with opportunity to join existing pension schemes,
(b) the adequacy of record-keeping and employer accountability, and
(c) potential remedies to ensure equal access to workplace pensions.”—(John Milne.)
This new clause would require the Secretary of State to report on the Velux Pensions case.
Brought up, and read the First time.
John Milne
I beg to move, That the clause be read a Second time.
The new clause would require the Secretary of State to report on the Velux pensions case. It would require him to report within 12 months on how occupational pension schemes exclude certain employees based on job classification or their start date. The report would specifically
“examine…employees and former employees of Fife Joinery Manufacturing (a subsidiary of Velux)”.
It would review whether affected workers were genuinely offered the chance to join the pension scheme. The report would assess
“the adequacy of record-keeping and employer accountability”
and explore possible
“remedies to ensure equal access to workplace pensions.”
The measure addresses concerns from shop-floor employees who joined before 1998 and were denied pension access despite repeatedly asking for it. The workers dispute claims that they declined pension membership and say they were told that they were not eligible. Attempts to engage Fife Joinery Manufacturing management have been unsuccessful. Workers have been advised to consider approaching the ombudsman, although none has done so yet. The new clause would hold the Government accountable to investigate and push for fairness and transparency. It is supported by my hon. Friend the Member for North East Fife and my Liberal Democrat colleagues.
To summarise, the new clause is a key step to ensure fairness and equality in workplace pension access and to prevent similar exclusions in the future.
Torsten Bell
I am grateful to the hon. Member, as always, for raising those specific issues in this debate. It has been a good opportunity to raise such cases, as he regularly does.
The hon. Member will be totally unsurprised that the Government cannot support the new clause, because it is the Pensions Regulator’s role to regulate occupational pension schemes and, as he mentioned, it is the Pensions Ombudsman’s job to investigate individual complaints from members. We do not want the Government to step over the top of those organisations. I encourage those who think that they have a case to approach the ombudsman, if they have not already—given the hon. Member’s remarks, it sounds like they have not done so. I should add that I am not aware of the details of that individual case.
To be clear, if individuals have concerns about their workplace pension scheme that relate to their employer and the running of the scheme, they should take the issue to the Pensions Regulator, which will investigate. Individuals who think that they should have been a member of a pension scheme can also go to the Pensions Ombudsman, if that makes sense. Depending on the nature of an individual’s complaint, two routes are available. I ask the hon. Member to withdraw his new clause.
John Milne
I thank the Minister for his words. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
Clause 98
Regulations: general
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 99 stand part.
Government amendment 241.
Clause 100 stand part.
Torsten Bell
Clause 98 is a standard provision setting out how regulation-making powers in the Bill may be used. It confirms that all regulations will be made by statutory instrument and allows them to be tailored to different situations and scheme types. The clause ensures that the Bill can work effectively in practice.
Clause 99 sets out how regulations under the Bill will be scrutinised by Parliament, using either the affirmative or negative procedures—we were discussing a particular case relating to clause 38 just now. The clause also allows that regulations that would otherwise be subject to the negative procedure can be made as part of a joint package of regulations under the affirmative procedure.
Government amendment 241 is a technical amendment. The new provisions in chapter 1 of part 4 about changes to Northern Ireland salary-related, contracted-out pension schemes apply specifically to schemes in Northern Ireland. The rest of the provisions in chapter 1 apply to schemes in England, Wales and Scotland. Clause 100 is a standard legislative provision confirming the territorial extent of the measures in the Bill.
Question put and agreed to.
Clause 98 accordingly ordered to stand part of the Bill.
Clause 99 ordered to stand part of the Bill.
Clause 100
Extent
Amendment made: 241, in clause 100, page 98, leave out line 10 and insert—
“( ) Subject as follows, this Act extends to England and Wales and Scotland only.
(1A) Sections (Validity of certain alterations to NI salary-related contracted-out pension schemes: subsisting schemes) to (Powers to amend Chapter 1 etc : Northern Ireland) extend to Northern Ireland only.”—(Torsten Bell.)
This amendment secures that the new clauses inserted by NC28 to NC30 extend to Northern Ireland only. Northern Ireland has its own pensions legislation, but in view of the retrospective provisions in those new Clauses it is considered appropriate to include material in the Bill for Northern Ireland corresponding to the new clauses inserted by NC23 to NC26.
Clause 100, as amended, ordered to stand part of the Bill.
Clause 101
Commencement
Mark Garnier
I beg to move amendment 255, in clause 101, page 98, line 22, leave out “Chapters 1 and 2” and insert “Chapter 1”.
The Chair
With this it will be convenient to discuss the following:
Amendment 256, in clause 101, page 98, line 23, at end insert—
“(aa) Chapter 2 comes into force six months after Chapter 4 comes into force.”
Government amendments 225 to 228, 242 and 243.
Amendment 263, in clause 101, page 99, line 5, at end insert—
“(d) section [Administration levy] comes into force on 1 April 2026.”
This amendment is consequential on NC44 and would ensure the amendment to abolish the PPF administration levy should come into force on 1 April 2026 (at the start of the 2026/27 levy year).
Clause stand part.
Clause 102 stand part.
Mark Garnier
Amendments 255 and 256 relate to the value-for-money framework timeline that we discussed when we considered clause 41 on Tuesday and are related to Conservative amendment 257, which was withdrawn. When we considered amendment 278, which was tabled by the hon. Member for Tamworth, the Minister committed to consider the matter on Report, so I will not press those amendments today.
This is, however, because I think it is the last time that I will speak in this Committee—or I hope it will be—a good opportunity to thank everyone. I say a huge thank you to everyone who has worked incredibly hard: the Clerks; you, Ms Lewell, and your fellow Chairs; and all the DWP officials who have supported the Minister who, frankly, with his not inconsiderable inexperience and youth, has done a magnificent job of working in his first Bill Committee. I think we can all agree that he has a terrific future in front of him as an individual who can get stuck into really quite dry, anodyne Bills. Of course, I also thank the members of my office staff, who have worked extraordinarily hard. I had not quite realised how difficult it is to be in opposition and up against the might of the Government, but my office staff have done very well, so I thank them all very much indeed.
Kirsty Blackman
I would similarly like to offer thanks, particularly to Hansard colleagues and the other House staff who have had to put up with us. This has been a particularly well-natured Bill Committee. I appreciate that the Whip had to change during it, and I do appreciate the fact that both Government Whips had to carry the Committee a little to make sure that everything worked. I am not going to agree with how young the Minister is, although I do agree that all the Front Benchers who have spoken, as well as all the Back Benchers who have spoken, have done an excellent job. It is nice to be part of a Committee that is cross-party in that we agree on a lot of positives in the Bill, and we have also disagreed very agreeably throughout.
Unfortunately, I do not have much in the way of staff members to thank, because this has been a one-woman band. However, I very much appreciate the hard work that everybody has put in to make sure that we can ask the Government lots of questions on the Bill so that the Government can do their best to answer us, even if we do disagree with the answer sometimes.
John Milne
I feel I ought also to thank everyone, and the Minister especially for a superb performance. I think we can all agree that this is a very good Bill, with lots of really good things in it. I am particularly interested in the investment side of it, with the greater resources to invest in UK plc, which we certainly do need.
Sadly, I expect the Bill will not receive the publicity that many do—it has not been in the headlines so far—and that is a pity. Much more trivial and ephemeral stuff, frankly, gets all the headlines, while something that is interesting and dynamic, like the measures in this Bill, will probably be displaced by the latest resignation.
Torsten Bell
I thank all Opposition Members for those reflections. I will come to my own after I have dealt with the remaining clauses and amendments—we must finish the job.
On the Opposition amendments, I am grateful to the hon. Member for Wyre Forest for his words. I am firmly committed to writing to both him and my hon. Friend the Member for Tamworth, which I shall do before Report. I am glad that the hon. Member will not press his amendments on that basis.
Amendments 225, 227 and 228 address the timing of the implementation of the provisions introduced by clause 38. Amendments 225 and 227 make it clear that the relevant master trusts and GPPs will not have to comply with the scale requirement until 2030. That is a point of clarification. In response to industry concerns, elements of the provision, such as the transition pathway, can be commenced and become operable prior to the scale requirement itself being active. We are responding to those concerns, and the amendment achieves exactly that. Amendment 228 provides clarification on the asset allocation elements of clause 38 by making it clear that those requirements will fall away if not brought into force by the end of 2035. Amendment 226 provides for the commencement of new chapter 3A, which will be inserted by new clauses 12 to 17.
On amendment 263, we have just discussed the PPF admin levy question. Given what we have just discussed about new clause 44, I ask the hon. Member for Torbay not to press the amendment.
Government amendment 242 introduces a commencement provision for the new chapter 1 of part 4 of the Bill on the validity of certain alterations to salary-related contracted-out pension schemes for both Great Britain and Northern Ireland. This measure means that two months after the Bill receives Royal Assent, effective pension schemes will be able to use a confirmation from their actuary obtained under this part of the Bill to validate a previous change to benefits—this is the Virgin Media discussion we had earlier today. Two months after the Bill becomes law, a previous change to benefits under an effective pension scheme will be considered valid if the scheme actually confirms that it met the legal requirements at the time of the change. This measure means that this part of the Bill will come into force two months after the Act receives Royal Assent and is a necessary accompaniment to new clauses 23 to 30.
Turning to the clauses, clause 101 is a standard commencement provision that details the timetable for bringing the Bill’s measures into operation and allowing transitional and saving provisions to ensure orderly implementation. Clause 102 is crucial, because it gives the Bill its short title. I commend those clauses to the Committee.
I will finish by adding my support to the comments made by all hon. Members about the proceedings of this Committee. I thank all hon. Members from all parties for their support—broadly—and also for their scrutiny, which is an important part of everything we do in this place. The Bill is important, but the debate around it is also important, both so that the legislation can be improved and in its own right. Such debate makes sure that issues are brought to the attention of the House and are on the record. I also thank this Chair, as well as several others, including those who have stood in at short notice at various phases of the Bill’s consideration. I am particularly grateful to one individual, and I am also grateful to the Clerks for all their work.
Most of all, I put on record my thanks to all the civil servants in the Department for Work and Pensions, His Majesty’s Treasury, the Financial Conduct Authority and the Pensions Regulator. Many of them have been working on the content of this Bill for many years, far longer than I have been Pensions Minister and, as many hon. Members have kindly reminded me, far longer than I may end up being the Pensions Minister, given the high attrition rate over the past 15 years in modern British politics. I thank them for the warning, and will take it in the way it was hopefully intended.
To be slightly worthy at the end of my speech, it is probably true that pensions legislation does not get the attention it deserves, but looking back over the 20th century, nothing was more important to the progress that this country and others made in delivering leisure in retirement. That very big win was delivered not only by productivity growth, but by Government decisions and collective decisions made by unions and their employers. The Bill goes further in that regard and, on that basis, it deserves all the coverage it gets.
Mark Garnier
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: 225, in clause 101, page 98, line 24, leave out “after 31 December 2029”.
This amendment, together with Amendment 227, means that relevant Master Trusts and group personal pensions will not have to comply with the scale requirement until after 2030, but that Chapter 3 of Part 2 (including provision relating to the scale requirement, such as the application can otherwise be brought into force at any time in accordance with regulations.
Amendment 226, in clause 101, page 98, line 25, at end insert—
“(ba) Chapter 3A comes into force on such day as the Secretary of State and the Treasury jointly may by regulations appoint;”.
This amendment provides for commencement by regulations of the new Chapter referred to in the explanatory statement to NC15.
Amendment 227, in clause 101, page 98, line 30, leave out subsection (5) and insert—
“(5) Regulations under subsection (4)(b) may not provide for the following to come into force before 1 January 2030—
(a) section 38(4), in respect of the insertion of Condition 1 in section 20(1A) of the Pensions Act 2008 (Master Trusts to be subject to scale requirement);
(b) section 38(8), in respect of the insertion of section 26(7A) of that Act (group personal pension schemes to be subject to scale requirement)
(but nothing in this subsection prevents section 38 from being brought into force before that date in respect of the insertion in that Act of other provision related to that mentioned in paragraph (a) or (b)).”
This amendment ensures that schemes will not be legally subject to the scale requirement before 1 January 2030. It allows, however, for provision relating to that requirement (e.g., provision around applications for approval) to be commenced before that date in anticipation of the requirement itself taking effect.
Amendment 228, in clause 101, page 98, line 34, at end insert—
“(5A) If section 38 has not been brought into force before the end of 2035 in respect of the insertion of—
(a) Condition 2 in section 20(1A) of the Pensions Act 2008 (asset allocation requirement: Master Trusts), and
(b) subsection (7B) in section 26 of the Pensions Act 2008 (asset allocation requirement: group personal pension schemes),
section 38 is repealed at the end of that year in respect of the insertion of those provisions.”
This amendment transposes and clarifies the provision currently in clause 38(16). It provides for the key provisions imposing the asset allocation requirement to fall away if they are not brought into force before the end of 2035.
Amendment 242, in clause 101, page 98, line 37, at beginning insert—
“( ) Chapter 1 of Part 4 comes into force at the end of the period of two months beginning with the day on which this Act is passed.
( ) Chapter 2 of”.
This amendment provides for the commencement of the new Chapter relating to the consequences of the Virgin Media case .
Amendment 243, in clause 101, page 99, line 5, after “section 96” insert
“and (Information to be given to pension schemes by employers)”.—(Torsten Bell.)
This amendment provides for the commencement of NC20.
Clause 101, as amended, ordered to stand part of the Bill.
Clause 102 ordered to stand part of the Bill.
The Chair
I also thank all hon. Members, Committee Clerks and officials, and our Doorkeeper team.
Bill, as amended, to be reported.