Arrangement of Business
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, in the admittedly unlikely but none the less possible event of a Division in the Chamber, the Committee will adjourn for 10 minutes from the sound of the Division Bells.
Pension Schemes Bill
Thursday 22nd January 2026
(1 day, 12 hours ago)
Grand CommitteePension Schemes Bill 2024-26 View all Pension Schemes Bill 2024-26 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 152-IV(a) Amendment for Grand Committee (Supplementary to the Fourth Marshalled List) - (22 Jan 2026)
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, the noble Baroness, Lady Bennett of Manor Castle, who has tabled the lead amendment in the first group, is not currently here. Before I call it, I ask whether any other Member present wishes to move her amendment. I give the Committee a moment to think about that, because if no one wishes to move it, I will have to regard it as not moved. Given that the next amendment in the group is, helpfully, consecutive to the first, with the permission of the Committee I will move to the next amendment, having called the amendment in the name of the noble Baroness, Lady Bennett, which we have to assume will be not moved. Does the Committee accept that as a way forward?
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
I thank noble Lords.
Clause 11: Relevant schemes: value for money
“(4A) Value for money regulations must take account of—(a) a VFM assessment over 3, 5 and 10 years;(b) the nature and spread of assets and their purpose in the portfolio including diversity, stability and risk management;(c) the characteristics of the members of the scheme;(d) whether comparisons, benchmarking, scaling and advisory consensus risk herding, market movements, lack of diversity or systemic risk;(e) fee structuring, including performance fee management and inter-cohort fairness, including managing how the J-curve effect and consolidation can shift costs or benefits between different cohorts of pensioners.”
Baroness Bowles of Berkhamsted (LD)
My Lords, those noble Lords who have examined the Marshalled List will know that Amendment 46A constitutes what was in Amendment 46 but with an extra paragraph (e) in the proposed new subsection; that is the difference. The amendment proposes a small number of matters that value for money “must”, rather than merely “may”, take into account. The Bill ultimately leads to schemes being graded as performing or non-performing, so the framework must be sophisticated enough to reflect long-term investment reality, not just short-term metrics.
Value for money is a judgment about appropriateness, risk, purpose and fairness. Paragraph (a) of the proposed new subsection is based on long-term assets requiring a long-term view. I suggest assessments over three, five and 10 years, but that is to illustrate the point, rather than being a fixation. Private assets often show negative early returns and we need a way of understanding valuations through the cycle, especially where valuations drive fees. As more investments are moved into private assets, especially if back books have to be adjusted to meet authorisation percentages, there will be cluster effects. I worry about that and its effect on value for money.
How can we check valuations in the private equity context as well? There is a lot of literature around how it is useful to have a market price comparator for what is an otherwise opaque and infrequent exercise. Listed investment companies are routinely used in institutional analysis as a valuation cross-check for private assets because they provide daily pricing for similar underlying exposures and frequent net asset value valuations. For example, the ICAEW’s 2020 report, Fair Value Measurement by Listed Private Equity Funds, notes that listed funds provide observable market prices for benchmarking unlisted investments. The Bank of England has noted in several financial stability reports that market price vehicles, including listed funds, provide useful information about liquidity conditions and valuation dynamics in private markets, particularly when model-based valuations adjust slowly. These valuation and transparency credentials make it all the more extraordinary—and, I dare say, suspicious—that the Bill shuts them out.
My second point—paragraph (b)—is that value must be assessed in the context of the nature, spread and purpose of the assets. Long-term infrastructure behaves differently from assets for liquidity or inflation protection. The question is whether the assets are good value for what they are meant to do. Some assets, or the way in which they are packaged, serve hybrid purposes—as listed investment companies have long done—combining private asset exposure with market liquidity. Directly held assets have fewer fees, but selection and achieving wide diversity are more challenging. LTAFs will package a mix of illiquid and liquid assets and it will be interesting to see how it works over time.
My third point—paragraph (c)—is that value must be seen in the context of the characteristics of members. Those on lower incomes cannot afford excessive risk or prolonged losses; they are more likely to remain in default funds, and trustees will be mindful of that. A more cautious strategy in lower returns may be entirely legitimate for value for money. Trustees must retain the ability to choose strategies that are appropriate for their members, not strategies that score well on a narrow template. This is particularly relevant because assessments created for the DC default funds may well be adopted more widely.
My fourth point—paragraph (d)—concerns the risk of herding. Too much measurement, comparison and advisory consensus can drive correlated strategy. The Bank of England has repeatedly warned about pro-cyclical behaviour and systemic vulnerabilities. A value-for-money framework must not unintentionally reinforce those behaviours; not going with the crowd is sometimes the value-preserving strategy. If we reduce value for money to consensual metrics, we will distort behaviour and risk repeating the mistakes of the charge cap era.
My final point—this is the new one, paragraph (e)—concerns fairness between cohorts. Private assets, especially private equity, typically follow a J-curve: early losses or flat value followed by rising value and, often, high late gains. Gaming or late realisation of value scores high in performance fees. That can be emphasised deliberately or just through the valuation timetable. Thus early cohorts end up bearing the set-up losses while later cohorts—these are long-term assets, so it may be 10 or 20 years later—are the ones that benefit from the late-stage gains. This will be exaggerated, too, if there is back-book adjustment. Performance fees and valuation-linked fees distort fairness over time. If value for money is to be fair, these effects need to be managed—as, indeed, they do for the payment of the pensions.
Additionally, as funds scale, investment will shift from external vehicles to internal management—the models used in Australia and Canada and, increasingly, by Nest and USS in our own pension funds. It will be important to observe how that affects fees and performance.
I strongly support the amendment tabled by the noble Baroness, Lady Altmann, on member services, which I would have added to my essential list if I had thought of it first—but I did not steal it. I have added my name to the amendment of the noble Viscount, Lord Younger, on fee transparency, with the caution, again, that we must not repeat the mistakes of the current cost disclosure regimes, which do not properly recognise where costs are borne. I note that it will take more ingenuity than fee percentage transparency to get the full picture out of private equity. I beg to move.
Baroness Altmann (Non-Afl)
My Lords, I strongly support Amendment 46A from the noble Baroness, Lady Bowles, to which I have added my name and which she so eloquently explained. I will speak to my own Amendment 47, which she referred to and which looks at the value-for-money ratings from the point of view of members. For me, that is an extremely important element that is often overlooked when concentrating on the investment side alone—not that that is not important.
I draw the Committee’s attention to some of the specifications that I have made in my Amendment 47, which I think are crucial to understand when one is choosing a pension scheme for one’s workforce. The quality of service for members can be extremely important and can indeed drive adequacy in ways that are not recognised by the investment side. The investment side is of course important, but if quality of service and the education, guidance and support provided to members are working well, that can be a driver to encourage members to increase their contributions. Ultimately, that can be at least on a par in importance with investment performance over time. If members gradually build up their contribution levels to, say, twice what they were before by adding 1% a year every time they get a bonus, that combined with the investment performance can be an extremely powerful driver for value for money over the long run, which is of course where we are meant to be examining and assessing the schemes.
On communications with members, I have specifically included in that what I call “jargon-light” communications, because I have not yet seen a communication with members about pensions that does not include baffling or off-putting terms, including—I will come to this later—the very term “default funds”. We all know what this refers to, but if you are talking to a young worker or someone in later life who is not on a high salary and does not know a lot about pensions and you tell them that what they are supposed to do with their money is to put it into a default fund, that may not sound terribly attractive to them. The last thing that most people want to do with their money is default.
The Minister is looking somewhat askance at my remarks, but this is just one example. I apologise—perhaps she is just looking at something in her notes. Certainly, those are the kind of looks that one sometimes gets from the pensions industry, which does not tend to understand that the ordinary person has never heard of a default fund and it does not sound particularly attractive. If we can include, in communications, words in plain English that may sound more enticing than the usual pension jargon, I think it could be helpful. I would argue that that is potentially a measure of the value offered in a workplace scheme, which is what the ratings are going to be looking at. I hope that the Committee will understand the aims of my specifications in Amendment 47 and, perhaps as we go through, Members of the Committee may suggest other elements.
Baroness Kramer (LD)
My Lords, I will be exceedingly brief. I may participate on an occasional basis on this Bill, despite the fact that it is very important. However, we have many people with exceptional expertise in the Room, for which I am extraordinarily grateful.
I have Amendment 167 in a later group on its own, which has relevance to one of the issues raised by my noble friend Lady Bowles in Amendment 46A, in which she introduces the concept that value-for-money regulations must take account of certain factors. Proposed new paragraph (c) particularly interests me, on
“the characteristics of the members of the scheme”.
In all the discussions that I have heard in the Mansion House compact and in the Bill, very little attention is paid to the characteristics of the members of the schemes, because they differ widely. I am particularly concerned that people on low salaries, whose primary savings for pensions and then investment is through auto-enrolment and default funds, have a very different risk profile from those of many people who otherwise engage in pension savings.
This is a group for whom the downside has far more serious consequences than for other groups. Many of us can afford to take a chance with parts of our pensions: if we lose some money, we are still going to be in relative comfort. That is essentially not true for this group. The upside benefit of taking risk and doing well from that risk is nice, but the consequences of taking risk and losing because of that risk are far more serious. I want to draw the Committee’s attention to that issue. As I said, I will pick it up again in Amendment 167, because to me it has been overlooked.
It is key that, when we devise pension arrangements, we recognise the very different risk profiles of members, so that what they are required to do—auto-enrolment and default schemes are in effect a requirement—matches their risk profile. I hope that we will begin to start to shift some of our thinking. There are amendments, in this group and in others, that could help very much with that issue.
Baroness Coffey (Con)
This group of amendments is quite interesting in starting to sketch out what is important in the value-for-money approach that is being adopted through the Bill. I did not know when the noble Lord, Lord Palmer of Childs Hill, would speak to Amendment 49 and I will be interested to hear what he has to say on this, because the only other form of occupational pension is, in effect, the defined benefit, where you know what you are getting. I was a bit surprised that he felt that that would need to go further, because that is a direct relationship between somebody and their employer. Nevertheless, I am sure he will explain further.
The noble Baroness, Lady Bowles of Berkhamsted, has tabled Amendments 55 and 56 to Clause 12, which are sensible, but one thing that concerns me at the start of that clause is the word “may”. We should be beyond that at this stage, which is why I also support my noble friends on the Front Bench in opposing Clause 13 standing part of the Bill. There are just too many ifs, buts and maybes, but when it comes to Clause 13 there is nothing at all. It is just a blank cheque for the future. I am conscious that things can vary over time, but we should be in a position where we are getting some clarity on what will be in these value-for-money assessments so that people can make choices. We should be getting that clarity now. If necessary, we can put down regulations for affirmative procedures but, candidly, I do not think it is good enough that we have this sort of approach to defining what is there for the future.
I say to the Minister that I appreciate that this is a real step forward and I welcome that. People put their money in, they are not exactly sure what return they are getting and they might look every now and again at where it is coming out. I appreciate that there is a whole journey to go on in pensions education, as well as for the trustees, in terms of what is really happening with their advisers who continue to do low-risk, low-reward. I encourage the Minister, however, to come back on Report with a much stronger sketching out of what will be in these assessments, as required by Clause 13. For example, instead of just having the word “may”, have some “must” in there and then open up the power later to adjust as necessary. It is also valuable to be able to repeal.
Amendment 74 concerns the “Duty to formalise the Value for Money framework”; I know that my Front Bench will speak to that shortly. It is a useful exercise to check whether it is working. There are other amendments which basically make comparisons with other pension providers. That gets trickier if it is done at such a detailed level because, again, people might want some basic information on what is happening with their money. To pick at random, they might want their money with Standard Life instead of Scottish Life; if there is some variation, they might want to make a change. It is those sorts of things that I encourage the Minister to have more detail on by the time we reach Report.
Lord Palmer of Childs Hill (LD)
My Lords, as has been expressed, this group establishes the foundation of the value-for-money framework. We welcome the ambition to improve outcomes for savers. However, the effectiveness of value for money will depend on how it is defined, measured and implemented, and I welcome the comments from the noble Baronesses, Lady Bowles, Lady Altmann and Lady Kramer, which elaborated on these points.
I shall concentrate on Amendments 49 and 54 and I hope I can persuade the noble Baroness, Lady Coffey, that they are of value. These amendments will extend the scope of the Bill’s value-for-money provisions. They ensure that they apply not only to defined contribution schemes but defined benefit occupational pension schemes as well.
The arrangements make it clear that regulations can make different provision for different types of scheme. Critically, however, all schemes must be covered by the value-for-money assessment, with a proper value-for-money rating. Members of DB schemes deserve the same transparency and assurance about value for money as members of DC schemes. DB schemes still represent a significant part of the pensions landscape. Excluding them risks creating an uneven playing field and less scrutiny where it is still needed.
A single, consistent framework across occupational pensions improves comparability, avoids regulatory gaps and ensures that all savers benefit from the same standards of accountability. The two amendments in my name would ensure that the Bill delivers on its promise of value for money across all pension schemes. The measure is simple: every saver in every scheme, whatever its type, deserves value for money. Other noble Lords have expressed this in detail.
The noble Baroness, Lady Altmann, spoke about pensions jargon. We are here in a very rarefied atmosphere, where people have some knowledge—I have less than many in the Room—of what pensions are about and what phrases such as “default pensions” mean. We need to make it clear to people who have no interest in pensions other than receiving a cheque at the end of the month at a certain age what it all means. Some people need to be clear about the choices they make, and we need to do as much as we can. These amendments, both those that have been spoken to already and the two in my name, seek to protect people’s interests.
Baroness Stedman-Scott (Con)
My Lords, we come again to a varied group. I shall focus my remarks on the amendments in my name and that of my noble friend Lord Younger of Leckie. I welcome the contributions from other noble Lords and I look forward to the Minister’s response. We have a few amendments in this group: Amendments 50, 51, 52, 53, 57 and 74, and the Clause 13 do not stand part proposition.
Before I turn to the amendments in my name and that of my noble friend Lord Younger of Leckie, I will say a few words about the value-for-money framework that sits at the heart of the Bill. The introduction of a value-for-money framework has the potential to be genuinely transformative for workplace pensions if it is designed and implemented well. We support the principle of value for money. However, much of what this legislation seeks to achieve will stand or fall on how the framework is designed, applied and enforced.
As drafted, the provisions are relatively skeletal, despite the pivotal role that value for money is expected to play. If value for money is to drive real improvement rather than box ticking, it must be transparent in its methodology, robust in its metrics and genuinely comparable across schemes. Cost alone cannot be the determining factor. A scheme that is cheap but delivers persistently weak net returns does not represent good value for money for savers. Comparability will be key. Without clear, standardised metrics, there is a risk that value for money simply reinforces price-chasing behaviour rather than improving outcomes. My amendments are therefore intended not to oppose the concept of value for money but to strengthen it, to ensure that it is implemented in a way that improves saver outcomes, respects fiduciary duty and avoids unintended consequences.
I turn to the amendments in more detail. Amendments 50 to 53 in my name and that of my noble friend Lord Younger of Leckie, and the noble Baroness, Lady Bowles of Berkhamsted in the case of Amendment 53, are probing amendments that go to the heart of whether the value-for-money framework established by Clause 11 will operate as a genuinely effective tool for improving saver outcomes.
Clause 11 creates a very broad enabling power. It allows for the creation of a value-for-money framework, but is largely silent on what value for money should actually consist of. Given the centrality of value for money to the Bill as a whole, it is important to test the Government’s intentions on the minimum elements that will underpin the framework.
Amendment 50 would require value-for-money regulations to include publication of a fees-to-returns ratio. The purpose here is straightforward: cost on its own is not value. As I have said, a scheme that is cheap but delivers persistently weak net returns cannot sensibly be said to offer good value to members. If value for money is to be outcome-focused, it must show what savers are receiving relative to what they are paying, rather than allowing headline charges to dominate decision-making.
Baroness Warwick of Undercliffe (Lab)
My Lords, I am sympathetic to the probing amendments in the names of the noble Baroness, Lady Altmann, and the noble Viscount, Lord Younger—Amendments 47 and 51 respectively—on value for money, which I alluded to at Second Reading. With any Bill or set of regulations, it is important to have clarity on the intentions and in minimising any unintended risk. That is particularly so when looking at the protection of citizens’ lifetime pension savings.
The FCA, the DWP and TPR have just published their consultation on their detailed proposals for the new value-for-money framework for DC schemes. These proposals come with real bite. When introduced, all relevant DC schemes will have to report on the value that they provide to members across a range of metrics. That assessment report will provide the basis for comparing the value that the scheme provides against other schemes. If a given scheme offers poor value, the firms and trustees must deliver improvements or otherwise transfer their members to a scheme that does provide good value. The framework requires an online central database to capture the disclosure of value-for-money data.
The Bill mandates the framework for contract-based schemes regulated by the FCA. The DWP and TPR will consult on draft regulations for the trust-based schemes. The first value-for-money assessments are expected in 2028. The framework provides for consistent measurement and disclosure on investment performance, costs and service quality; objective and consistent comparison against the market; transparency and disclosure; and action to be taken where a scheme is not delivering value. However, there are clearly concerns—we see them expressed in the briefings that noble Lords have received—that the framework could give rise to problems, which I, too, would like to probe.
The VFM framework provides for forward-looking metrics to be considered alongside backward-looking metrics, with the stated aim of allowing for
“a holistic approach to investment to deliver the best possible long-term outcomes”.
There is a risk that the value-for-money framework could result in herding, as others have alluded to, as schemes seek to avoid poor value assessments. There is also a risk of forward-looking metrics being used to game a scheme’s assessment. I ask the Minister: what guardrails are explicitly allowed for in this Bill to control these risks?
On quality of service, the recently published VFM framework takes a more limited approach to quality service and administration metrics. Furthermore, metrics on how members engage with their pensions have not been included in the framework, but they will be important in informing schemes’ responses to changes, such as guided retirement and the targeted support regime.
Looking ahead, how will these concerns be addressed? Poor-performing schemes that are rated “red”—meaning that they cannot be improved—must transfer out members where it is in their best interests. This is stronger than the originally proposed wording to consider a transfer. It is made possible by the Bill’s provision for a contractual override to allow transfers for contract-based arrangements without members’ consent. However, it is worth noting that some members will have safeguarded benefits. My final question to the Minister is: what will happen to those benefits? It is not clear what mitigations this Bill provides to protect members.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I am grateful to all noble Lords for introducing their amendments and for the debate that followed. The amendments rightly seek an assurance that the VFM framework is strong and effective and they try to clarify how it will take account of a range of important factors that can affect the value that a scheme provides. I regret that I cannot accept them, but I am going to go through the reasons why, as some interesting issues are being raised. Obviously, if I told the Committee that I was going to accept them, noble Lords would all fall over in shock, but this is a good opportunity to get these issues out there.
Let me say at the outset that the aim of the VFM framework is simple: we want to ensure that all savers are in schemes that deliver the best possible long-term outcomes for their retirement. The framework seeks to raise standards across the DC market by driving transparency, comparability and competition on genuine value rather than just on cost—a point made by the noble Baroness, Lady Stedman-Scott.
Clause 11 is deliberately drafted to provide enabling powers that allow the regulations establishing the VFM framework to be developed in consultation with industry and to be adapted as markets evolve. However, the VFM framework must be able to adapt to future financial market developments and to align with the FCA requirements for contract-based schemes. The risk is that hard-wiring any detailed technical criteria or rigid deadlines into primary legislation takes away the flexibility that is genuinely needed. It could get in the way of effective regulation and risks locking in concepts that could become outdated. However, I accept that there is a question around how Parliament gets to scrutinise the detail.
Clauses 11 and 14 set out key features of the VFM regime and provide enabling powers for the Secretary of State to make regulations on how VFM assessments will operate, including the metrics, the benchmarks and the processes that they will have to follow. The regulations will be subject to formal consultation with industry and regulators before being laid in draft for parliamentary approval under the affirmative procedure. In our view, this strikes the right approach: the Bill has the overarching framework in primary legislation while the technical detail is developed transparently through secondary legislation.
However, the noble Baroness, Lady Coffey, made an important point: Parliament needs to be able to understand what the assessment process will look like. A joint consultation was launched in early January by the FCA and the Pensions Regulator; it will run until 8 March. This consultation is the next step in the process of consultation on the technical-level detail of the framework, which will help to inform development and consultation on draft regulations and draft FCA rules—those are, of course, legal instruments.
I am conscious that some of the amendments were tabled before that consultation was launched. Those noble Lords who are up to their ears in the pensions world will no doubt have read the consultation in detail, but I will make sure that we send any noble Lord who has not done so a summary of, as well as a link to, it. I would be happy to answer any questions, if that would be helpful, but I will unpack the basics of this now.
The consultation sets out updated proposals and detailed draft FCA rules for implementing the VFM framework in the workplace DC pensions market and it reflects stakeholder feedback from the previous FCA consultation. FCA rules will apply to contract-based schemes, whereas regulations made under the powers in the Bill will apply to trust-based schemes. By bringing them together, responses to the consultation will help to inform both the draft DWP regulations and the FCA rules, with the obvious aim of ensuring consistency across trust-based and contract-based schemes. We do not want to end up with any kind of regulatory arbitrage in this or any other area. It is important that we do not pre-empt the outcomes of that process to make sure that we get the details right. Draft regulations will be consulted on.
Baroness Bowles of Berkhamsted (LD)
My Lords, it falls to me to do the summation as a stand-in. I thank the Minister for her comprehensive reply. I wish I could speak that fast. It answered quite a lot of the points that I raised. It is obviously quite irritating for us when we commence a Bill and then consultations that provide a lot of the key points and information trail behind the Bill. We spend some time thinking about it and then discover we have to do a consultation response. I do not know how the timings for these things would fit together. Nevertheless, it would be quite nice for some of those key points that are being consulted on to perhaps find their way into the Bill somehow. I just point that out.
What is an Act of Parliament supposed to do? It is supposed to give you the front-end lead-in to what people’s expectations are. They cannot easily be expected to go wandering around on regulator websites and rulebooks, because, my goodness, I find those difficult. Talking about finding things difficult, when I retired from being a Member of the European Parliament, I got a booklet sent through because, for some of my time there, I was in the UK pension fund that applies to MPs and MEPs. This was just after I had finished negotiating all the post-financial crisis financial services legislation. I looked at the scheme rules and I gave up. I lost the will to live and thought, “Well, I’ll just take what comes, thank you very much”. If it is going to do that to me, what is it going to do to the ordinary person? We have to take a lot more care about more gentle lead-ins and simple ways of explaining things. Of course, that was some time ago.
I think we have had quite a good trot around the factors. I would still like to see something distilled from the work that has gone on which is accessible and where people might look for things if they are curious—they might be people representing people—and not have to resort to complicated scheme books and complicated regulator rules. Maybe we will have an update by the time we get to Report on the timings and dates and what has come out of these consultations. I suppose it will be a bit early for that. For now, I beg leave to withdraw the amendment.
Baroness Altmann
Member's explanatory statement
This amendment seeks to simplify the language in Value for Money assessments, to make them more intuitively understood by members, especially as 'fully delivering' may give an expectation that all required metrics are being fully met.
Baroness Altmann (Non-Afl)
My Lords, I will speak to my Amendment 58. My remarks will apply to all the other amendments in this group, apart from Amendments 64 and 65, to which I will speak shortly, and Amendment 69 in the name of the noble Viscount, Lord Younger, which I also support.
My views on this group of amendments follow on from the comments I made earlier about jargon and trying to make pensions more member-friendly—more intelligible to the ordinary person. I believe that this is an extremely important area, having met so many members who simply do not understand what they are being told. The remarks from the noble Baroness, Lady Bowles, encapsulate some of that: if we cannot understand what we are being told in the communications, neither can members.
It was interesting to see that the original consultation suggestions of red, amber and green, which people would have at least a good chance of understanding, have instead been put into the Bill as “fully delivering”, “intermediate” and “not delivering”. Delivering what? We are talking about value; this is not Ocado or Amazon. The noble Baroness, Lady Warwick, in her remarks on the first group used the terms “good value” and “poor value” as if they were in the Bill—but they are not. My proposals in these amendments—to change the term “fully delivering” to “good value”, and “not delivering” to “poor value”—simply respond to what most people would expect this clause to tell them. I hope that the Minister understands that. Obviously, this is a probing amendment, so she may prefer other ways to express what we are trying to achieve here, but I hope that the intention behind these amendments will, in some way, feed into both the Bill and how the value-for-money framework will be considered when we develop it. It is a very sketchy framework at the moment.
I take the point about the consultation, but I have a related question. The critical players in moving away from the idea of cost to value, when assessing the merits of any particular scheme being used for the workforce in auto-enrolment, will be the employee benefit consultants. They advise the employers that they currently simply use cost as their major recommendation metric. They are not, in any way, properly scrutinised or regulated. Having done all this work to develop a value-for-money framework, will any attention be given to ensure that the people advising the employers on whether a scheme should be used will properly use the value-for-money framework that we will devise?
Amendments 64 and 65, which are also probing amendments, specifically address the “intermediate” rating, which is designed to have many levels or gradations. However, it seems that all of them could lead to scheme closure. They will all certainly lead to significant costs for a scheme rated “intermediate” due to the extensive reports and explanations that need to be given. My amendments simply seek to avoid significant extra costs, or the risk of scheme disclosure, for schemes that receive an “intermediate” rating on a shorter-term basis. It seems that it is almost possible that a “not delivering” rating will have a similar outcome to an “intermediate” rating because of how the Bill is phrased.
My suggestion is—and it is, as I said, probing and open for discussion and change—that you have to have an intermediate rating every year for, say, four years before the extensive requirements of this section kick in, so that in cases of up to five years you would need to notify the employer if you have changed from a good value to intermediate and the scheme would need to explain why this rating has been given and what plans it has for improvements. That would not be an extensive report, but it would obviously be helpful and would focus the minds of the scheme without the draconian implications that seem implied by the consequences of the intermediate rating as specified in the Bill. That brings me briefly to my support for Amendment 69, tabled by the noble Viscount, Lord Younger, and the noble Baroness, Lady Stedman-Scott, which probes what the penalties are, how they have been assessed and whether they are appropriate. I beg to move Amendment 58.
Baroness Coffey (Con)
My Lords, this is an interesting group of amendments. My noble friend has explained the importance of clarity in who decides whether something is fully delivering. I want to ask about the different assessments being made at this point. We are now, effectively, on Clause 15 onwards. We have the ratings coming through. My noble friends on the Front Bench will explain why they do not agree with certain elements. There is merit, however, in trying to work out whether something is taking a nosedive and whether it is it fixable, but we need to be more specific about a reasonable period, and then a prescribed number of VFM periods needs to be put in the Bill, which it is not at the moment.
Thinking through what has been suggested, I am trying to understand how this will work. Clause 13, which we have discussed briefly, has a certain amount of potential calculations. We then have the trustees doing their own assessment, and then we jump forward to Clause 18 and the Pensions Regulator may check. This is all feeling quite random. Normally when we do ratings, the CQC or Ofsted make that judgment, so I am trying to understand how this will work in practice. Are the guidelines going to be fixed—for example, the average or the benchmark across all pension schemes is this, or the FTSE 100 index has changed this much, or the costs are this percentage? It would be helpful to start to get a proper pitch. I appreciate that the consultation may have gone out, but there must be thinking in the Government’s mind, not just the regulator’s, on what “good” looks like. There are risks, as identified by my noble friends, that we may be overburdening to the point that the minutiae become an industry in their own right. I am surprised to see the penalties put in primary legislation, which is unusual nowadays, although I agree that we need a better sense of how that compliance element, as set out in Clause 18, will work alongside the other amendments. My noble friend is right to say that we need to keep this straightforward and simple for people to be able to understand.
Lord Palmer of Childs Hill (LD)
These are obviously probing amendments. They are all to do with the jargon: if we are arguing about the jargon, how much more confused will the normal punter be in trying to understand the jargon. This group focuses on how value for money is expressed, enforced and communicated.
We support the principle that members should be able to understand whether their scheme is performing well. However, value-for-money ratings also carry significant power. They will influence trustee behaviour, in particular, as well as employer decisions and market structure. That makes proportionality and precision essential.
I am particularly concerned about overreliance on short-term performance metrics. Saving for a pension is, or certainly should be, inherently long-term. Schemes should not be penalised for temporary underperformance driven by market cycles or responsible long-term investment strategies.
We also question whether compliance mechanisms become blunt instruments. Labelling schemes “poor value” without clear context may drive consolidation for the wrong reasons, reducing competition without improving outcomes. Clear language matters—I use the word “jargon” once again—but so does nuance. Members need information they can trust, not simplified labels about market complexity.
I have some questions for the Minister. How will this regime distinguish between persistent structural failure and short-term variation? How will it use this intermediate rating? How will it encourage genuine improvement rather than defensive behaviour by trustees? Trustees are meant to be very careful; they will be cognisant of the intermediate position. I will be interested to hear the Minister’s views on that.
Baroness Stedman-Scott (Con)
My Lords, again, this is a substantial group. I will not detain the Committee for too long but, before I turn to my amendments, I briefly welcome those tabled by the noble Baroness, Lady Altmann. As she set out so clearly, her amendments seek to simplify the language used in value-for-money assessments so that they are more readily and intuitively understood by scheme members. This goes to a point that has arisen repeatedly during our discussions in Committee: many of the concepts in this Bill, as well as the language used to describe them, are dense, technical and difficult to grasp. A considerable level of prior knowledge is often required simply to understand what is being proposed, let alone its practical effect. I am reminded of a remark attributed to Joseph Pulitzer. He said that information should be put before people,
“briefly so that they will read it, clearly so that they will understand it … picturesquely so that they will remember it, and, above all, accurately”.
Surely that is the standard to which we should aspire, in not only this Bill but more broadly in our legislative work. Clarity, intelligibility and accessibility should be central objectives. The language we choose and the way in which we define key terms in legislation are fundamental, yet they are too often treated as secondary concerns.
I therefore warmly welcome the amendments in the name of the noble Baroness, Lady Altmann, precisely because they address this issue head-on. Jargon is easy to reach for, but it is also, in a sense, lazy. When we are constructing a value-for-money framework whose purpose is to communicate value for money, we must be vigilant about terminology that obscures rather than illuminates and about euphemisms and phrases that sound authoritative but fail to convey real meaning. Many noble Lords will be familiar with Eric Blair’s essay, Politics and the English Language, and the amendments tabled by the noble Baroness serve as a timely reminder of some of the lessons it contains.
The first amendments in this group to which I have added my name—Amendments 60 and 61—would remove sub-paragraph (ii) from Clause 15(1)(b) as well as subsection (2). These amendments speak to a simple point: where responsible trustees or managers have determined that a scheme is not delivering value for money, that judgment should be sufficient to justify a rating of “not delivering” without the need to satisfy additional statutory conditions that risk being overly prescriptive.
Trustees already sit at the centre of this framework. They are charged with assessing investment performance, costs, charges, service quality and long-term member outcomes. They are subject to fiduciary duties and regulatory oversight. It is therefore entirely reasonable to trust their professional judgment when they conclude that a scheme is failing to deliver value for money. As the Bill is currently drafted, that judgment must be supplemented by one of a series of defined conditions, whether persistent intermediate ratings, a lack of realistic prospect of improvement or regulatory non-compliance. While well-intentioned, those conditions risk turning what should be a principles-based regime into a mechanistic one, encouraging trustees to focus on meeting thresholds rather than acting decisively in members’ best interests.
Baroness Sherlock (Lab)
My Lords, I again thank the noble Baronesses, Lady Altmann and Lady Stedman-Scott, and all noble Lords who have spoken. Let me start with the amendments from the noble Baroness, Lady Altmann. I completely appreciate her desire to make the VFM framework easier for everybody to understand. I recognise there is a need for clarity here and a role for regulators to support member engagement with something as complex as this, but our concern with her proposals is that they would reduce precision and could unintentionally weaken regulatory accountability and undermine comparability across schemes, and those are three pillars on which the VFM framework depends. There is a genuine challenge here, which is to balance technical accuracy with clarity for members. Obviously, the latter will help to overcome the kind of behavioural inertia that we all see and so will ensure that VFM assessments result in meaningful action, not just awareness.
That is distinct from the regulatory precision required for the VFM system, which is why these terms are in the Bill. That current wording of “fully delivering” and “not delivering” is not accidental: it is designed to reflect objective compliance with all the mandated metrics: costs and charges, investment performance, governance and member outcomes. The terms provide clarity for trustees and regulators about whether a scheme meets the required standards. Replacing them with “good value” and “poor value”, even if it sounds attractive on the surface, would introduce subjectivity. Good value is not a regulatory test. It risks creating ambiguity about what triggers action when a scheme falls short.
Members deserve clarity and I absolutely agree that language should be understandable. However, the right place for explaining concepts to members is in disclosures and guidance, not primary legislation. We intend to work with the Pensions Regulator, the FCA and industry to ensure that member-facing communications such as rating notifications to employers and the regulator-supporting guidance, which will be aligned with the implementation of VFM, explain these outcomes in plain English that is suitable for its intended audience. I take the challenge from the noble Baronesses, Lady Altmann and Lady Bowles, about how to make sure that happens. That is something I am really happy to reflect on quite carefully. However, changing the statutory terms dilutes precision, creates inconsistency and risks uncertainty. Our approach preserves enforceable standards while committing to clear, accessible explanations for members.
Amendments 64 and 65 from the noble Baroness, Lady Altmann, would limit the powers the Government have to specify the consequences for pension schemes that have had an intermediate VFM rating for fewer than five years in a row. Let me pause before I answer that to come back to the noble Baroness, Lady Coffey, who always asks clear questions. One of her questions was “How is this going to work, anyway?” Let me give a very quick rundown, subject to time. The consultation sets out updated proposals—they were updated in response to the previous consultation—and draft FCA rules, showing how the VFM framework will work. The paper sets out the proposed metrics for performance, costs, charges and service quality. It outlines how the assessment process will work. It gives more details around the ratings structure and the consequences associated with each rating. Basically, trustees of in-scope DC workplace pension schemes and arrangements will have to publish standardised performance metrics and follow a consistent and comparative assessment of value to assign an overall VFM rating. The regulator will ensure compliance with those obligations and will have the ability to enforce transfer of savers—I will come back to that in a moment—from consistently poorly performing arrangements.
I said that the consultation had changed. There were five key changes from the previous consultation. The most relevant one here proposes, in response to feedback, the adoption of a four-point rating system: red, amber, light green and dark green. There was strong pressure to have more granularity, so that it was not quite as stark. I make it clear that it is only amber that could lead to possible enforced transfer. I hope that is helpful.
A good question is “How will members know what ‘fully delivering’ means?” Obviously, we are not proposing to use the Bill’s terminology when communicating ratings to members. Instead, the schemes will use the four-point RAGG rating. Red corresponds to not delivering, amber and light green to intermediate performance and dark green to fully delivering. It is proposed that this more accessible and granular terminology will be used in the assessment reports published by all schemes at the end of 2028, and the reports will be made publicly available. Guidance will also include plain English explanations and a summary of metrics so that members understand what the outcome means for them.
Baroness Altmann (Non-Afl)
In what the Minister has just described, I do not quite understand how dark green and light green fit with “fully delivering”. Only dark green would be fully delivering, so why is light green not in the intermediate category? To me, this is quite confusing. I understand what the Minister is saying, but I urge her to work with whoever is devising this to iron out this kind of confusion at this stage, rather than running with it, as seems to be the intention here.
Baroness Sherlock (Lab)
We are still consulting on this. We consulted on the initial proposal and the response came back that more granularity was needed. We have to accept that clarity pulls in one direction and precision and granularity pull in the other, so the job of the Government is to support the regulator in making sure that we end up with a framework that does its primary job, which is not just to work out where a scheme is now but what the right consequences are for that scheme and then to make sure that is communicated to those who need to know in ways that are appropriate. On the one hand, the noble Baroness wants clear, strict categories, and on the other she wants to have different consequences for schemes depending on their circumstances. We think it is important to be able to judge appropriately and come up with a scheme. I would be happy to write to point out all the areas and explain more about how this works, but the point is that this needs to be understood by those who will do the assessments and the communication of the results of that has to be in the right language for those who need to understand them. As the noble Baroness knows as well as I do, it is the nature of pensions that the challenge is that marketing simple language does not map neatly onto precise legal language. I hope that at least explains what we are trying to do on that.
Baroness Altmann (Non-Afl)
My worry is we have a term “fully delivering” in this legislation. It does not seem to me that very many schemes are likely to be fully delivering, even in a light green capacity. Therefore, I think we are already sowing the seeds of confusion if we go along this route. That is all.
Baroness Sherlock (Lab)
I am going to explain a little bit about the consequences because the thing that matters most is the consequences. Amber schemes may be required to close to new employers. Red schemes must close to new employers. I am just getting that down for the record, which suggests that I probably did not say that a moment ago. Just to be really clear, amber schemes may close to new employers; red schemes must close to new employers. Much nodding, I hope, from behind me. Great sighs of relief all round. Excellent.
Let me come on to the consequences of this. On Amendments 64 and 65 from the noble Baroness, Lady Altmann, we think that making reporting less comprehensive, even for schemes with intermediate ratings, could reduce the early warning signals on which regulators will rely to protect savers. I fully understand her desire to make this reporting proportionate. The current framework is designed to strike a balance. Powers are designed to enable the Government to ensure that trustees keep sponsor employers informed and that any issues are addressed promptly via the improvement plan without putting unnecessary burden on schemes. The noble Baroness may want to note this bit. The Secretary of State has discretion under Clause 16 on the consequences of an intermediate rating and could require different consequences to flow from different levels of intermediate rating. It is not the intention that a requirement to close the scheme to new employers would necessarily flow from all intermediate ratings. I think that is what she is shooting at, so I hope that helps to reassure her. That enables some flexibility around the consequences for pension schemes that have, for example, received an intermediate rating for fewer than five years, which is the space that she was shooting into just now.
Changing the powers as suggested risks missing the signs that a scheme may be heading into trouble. Early sight of any negative impact on a scheme’s performance and value really matters. I am sure that the Committee agrees that it is better to catch problems sooner rather than later and to put in a plan to remedy things, ensuring that schemes provide value and avoiding harm to members and greater costs in the long run.
The amendment suggests that schemes should face full reporting only if performance issues continue for five years or more, but five years is a long time for problems to go unchecked. I think members deserve better protection than that. We certainly would not want to see situations where savers are left in a poorly rated scheme for many years. That is why we propose to give schemes in the intermediate rating a period of up to two VFM assessment cycles to make the improvements needed to provide value to their savers.
I know that Amendments 60, 61 and 69 from the noble Baroness, Lady Stedman-Scott, are probing amendments that want to challenge and clarify the terms “reasonable period” and “relevant period”. The relevant period is the VFM period, or rather the annual reporting timescale for data collection assessment against VFM metrics, which we expect to run from January to December of the preceding calendar year. We expect to set that out in regulations following consultation. The reasonable period is a period during which the regulator would normally expect the scheme to deliver value for money. Due to the level of detail this will involve, this will all be outlined in regulations. We will, of course, formally consult on draft regulations, and I am more than happy to make sure that we engage with interested noble Lords during the consultation to provide an opportunity to feed thoughts into that. The finer proposals behind the VFM ratings, such as the conditions under which each rating will apply and when they should be used, are outlined in the joint consultation which is currently open and will be provided in full in regulations.
Turning to Clause 18, Amendment 69 seeks to understand the rationale for the maximum penalty levels for non-compliance set out in subsection (5). As pension schemes grow in size, it is vital that the fines we impose on schemes carry real financial weight. This ensures that compliance and enforcement remain effective, safeguard members’ interests and, of course, maintain confidence in the system. These figures represent a significant deterrent against non-compliance while not being overly excessive in the current market landscape. We have worked closely with regulatory bodies and taken care to ensure the penalties align with other powers taken in Part 2 of this Bill. We believe the figures are proportionate to both the current and future scale of schemes.
Baroness Coffey (Con)
I am keen to get a sense of what the Government think the current spread is between the different ratings. For example, what proportion might be red? Is there any sense of this at all?
Baroness Sherlock (Lab)
I am absolutely not going to answer that. If there is answer which is known to me, then I will be happy to share it with her, but it certainly not known to me.
Baroness Altmann (Non-Afl)
My Lords, I thank all noble Lords who have spoken and the Minister for her responses and patience with the comments made, especially by me. I have ongoing reservations but will obviously look carefully at the consultation. I would be grateful if we might have a further discussion before Report, because this is a crucial area, for employers and members. Perhaps we can bring this back in some form to iron out this huge intermediate range that could have a wide variety of implications that might be quite costly—I know how much these reports cost when you try and commission them—to schemes that may be having a bad performance patch for a year or two, but for understandable reasons. I thank the Minister and I beg leave to withdraw the amendment.
Member’s explanatory statement
This probing amendment would replace the 12-month dormancy period with an 18-month period in order to test the rationale for the Government’s chosen timeframe.
Viscount Younger of Leckie (Con)
My Lords, supported by my noble friend Lady Stedman-Scott, I am glad to be leading off in another group of amendments, largely designed to probe the Government and clarify their thinking, plans and rationale on the small pots regulations in the Bill. Indeed, I know that many industry bodies are watching our proceedings with interest and will be taking note of what the Minister says. This is after we had a series of meetings with those at the sharp end in the industry, as she will probably guess.
I will speak briefly to the other amendments in this group before turning to my own. First, I speak to the amendment in the names of the noble Lord, Lord Vaux, who is not in his place, and the noble Lord, Lord Palmer. Ensuring that a qualifying dashboard service has been available for a period before small pots can be consolidated seems an entirely sensible and proportionate measure. If we are to move pension savings automatically, often without an active decision by the member, it is surely right that individuals should first have a practical opportunity to see and trace their pots in one place and to engage with them themselves.
I also welcome Amendment 81 from the noble Baroness, Lady Bowles, which, as I understand it, would ensure that a pot is not treated as dormant where contributions have ceased for a legitimate and expected reason, such as a temporary break from employment with an intention to return. This strikes me as a pragmatic refinement that would better reflect real-world working patterns and help to ensure that consolidation targets genuine dormancy rather than planned inactivity. I have no doubt the Minister will explain that in more elegant terms than me.
Amendment 88, in the name of my noble friend Lady Noakes, addresses the definitions set out in Clause 34, which itself gives the Secretary of State a broad power to alter the definition of a “small” pension pot, including increasing the threshold, with no upper limit set in the Bill. The amendment would retain flexibility but place a clear ceiling on how far that power could be used. I look forward to my noble friend’s remarks. I know that my noble friend will expand on that point, but I would be grateful if the Minister could also explain why an upper limit is not currently included and how the Government envisage safeguarding against this power being used to capture significantly larger costs in the future. That is an important question that I hope will be raised.
I turn to my first amendment in this group, Amendment 79, which would replace the 12-month dormancy period in Clause 22 with an 18-month period. This is a probing amendment intended to test the rationale for the Government’s choice of a 12-month timeframe. The definition of “dormant” is critical, because once a pot meets that definition it may become eligible for automatic consolidation with no active decision by the member. Many savers engage with their pensions only intermittently, often on an annual basis, and employment patterns do not always follow neat or predictable cycles. Therefore, extending the period to 18 months would allow the Committee to explore whether a full year of inactivity is genuinely sufficient to infer disengagement, or whether it risks capturing individuals who are simply between roles or engaging on a longer cycle.
I want to be clear that this amendment does not seek to undermine the policy of small pots consolidation, which, as the Minister knows, we broadly support. Rather, it is intended to probe how the Government have balanced administrative efficiency with member protection, and what evidence has informed the choice of a 12-month period rather than a longer one. I would therefore welcome the Minister’s explanation of how this timeframe was determined, and whether alternative periods were considered.
Amendment 80 would leave out Clause 22(3)(b). This too is a probing amendment; it is intended to explore what the Government mean by the reference to “prescribed exceptions” in the definition of a dormant pension pot. As drafted, Clause 22(3)(b) assumes that a pot may be treated as dormant not only by reference to contribution inactivity but by whether a member has taken steps to confirm or alter how their pot is invested, subject to exceptions that are left entirely to regulations. Many savers remain in default investment arrangements by choice and engage with their pensions only intermittently, often in ways that are not easily captured by scheme records. Therefore, it is not clear what types of member action the Government intend should prevent a pot being treated as dormant, nor what kinds of behaviour might be carved out as exceptions.
This amendment is intended to prove whether investment-related actions are an appropriate proxy for engagement, how prescribed exceptions will operate in practice and whether the approach adequately reflects real-world member behaviour. I would welcome the Minister’s clarification on how these exceptions are envisaged and why this test has been included in the definition of dormancy.
Finally, my Amendment 82 concerns the level of parliamentary scrutiny applied to regulations made under Clause 22. As drafted, the Bill applies the affirmative procedure to only the first set of small pots regulations or regulations that meet certain specific triggers. Thereafter, changes to the consolidation regime may be made under the negative procedure. This amendment is probing and is not dissimilar to one raised previously in Committee. It is intended to test whether that approach provides sufficient ongoing parliamentary oversight. The regulations made under Clause 22 will govern when and how small dormant pension pots may be consolidated, often without an active decision by the member, and they therefore go to the heart of member protection and confidence in the system itself.
The amendment would require all such regulations to be subject to the affirmative procedure, ensuring that Parliament has the opportunity to scrutinise and approve changes to this framework wherever they are made, not just at first use. I would be grateful if the Minister could explain why the Government consider the negative procedure appropriate for subsequent regulations in this area, and whether there are safeguards to prevent significant policy changes being made without fuller parliamentary scrutiny. I thank in advance the Minister for her comments and answers and all other noble Lords for their contributions on this group, which I feel concerns an important matter. I beg to move.
Baroness Bowles of Berkhamsted (LD)
My Lords, my Amendment 81 is very small; I hardly need to say anything about it. It came from one of those occasions when you are going through the Bill and you write a little query which you then convert into an amendment. It concerns Clause 22(3)(b), which says that a pension pot can be moved into a consolidator 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”.
There are instances in which a person may want to stay attached to a pension fund they have in a workplace, particularly if they do not necessarily have a long relationship with an employer or have done some intermittent work and then gone off to have a family, because they may have an informal agreement to go back. How do you cater for that? I realise that it might just fall under “any prescribed exceptions”, which you write in a note to deal with, but that is the basis of the amendment. I am sure it will be very simple for the Minister to say, “Yes, that is covered”.
While I am on my feet, I support Amendment 83. I also support Amendment 88 from the noble Baroness, Lady Noakes, because it is worth having some guardrails for things that are doing very well.
Baroness Noakes (Con)
My Lords, my Amendment 88 proposes to limit the power in Clause 34 to increase the size of the pot classified as small so that it is limited to £10,000. I welcome the fact that the power to make regulations under Clause 34 has to be consulted on and that they will be subject to the affirmative procedure, but we know that Parliament has close to zero power to alter the content of regulations, so it is important that the guardrails around the power are sufficiently strong.
There is widespread acceptance in the industry that there should be consolidation of small pots of £1,000 or less. I understand that there are already around 13 million pots of that size, and that is predicted to rise to over 30 million in only a few years’ time, so this is clearly an important issue. There is a concern, however, that the Clause 34 power could be used beyond its core purpose, which is to ensure that multiple small pots do not accumulate within pension providers and that individuals do not lose track of their own pension pots. It is one thing to use the power for sensible tidying up, but it would be quite another if the power were used to drive further consolidation, for example, which would not necessarily be in the interests of either savers or pension providers.
Baroness Coffey (Con)
My Lords, this is an interesting part. It recognises a lot of our labour market, where people are working with multiple employers over a variety of time periods. Even those young people who were on the Kickstart scheme will have got contributions to a pension scheme, which they may completely forget about once they go to their next, perhaps longer-term, job.
I remember a few years ago the lovely people over in the Department for Culture, Media and Sport. They have a “good purposes” fund where they go after dormant assets all over the place and take them away, with a general promise that the money will come back if somebody tries to get it. I seem to recall telling them to jog on when it came to pension funds, although some negotiation might have been arranged.
I am just trying to understand how all of this is going to fit together. That is why I think Amendment 83 is particularly helpful; basically, it says that the pensions dashboard must be in place. This is about making an informed choice. One of the things I am trying to understand is whether Clause 22(3)(b), which my noble friends on the Front Bench have suggested should be removed, is passive and non-engaged. Will the trustees running the scheme be required to make some effort to try to contact that person so that it does not just slide away without people even realising?
In terms of the other aspect, I assume, under Amendments 80 and 81, it is right to try to get into some more detail about prescribing, which could perhaps be further enhanced by just getting to understand in Clause 25 what the Minister is thinking at this point, especially when it suggests that the trustees or managers of a scheme can determine whether it is the best interests for this to transfer or not. Are we talking about, say, people who are in prison, people who have gone abroad or people who are on a career break? It would be helpful to have a sense of what Ministers are thinking in terms of having this variety of powers, first, to be able to do it, but then to say, “Actually, we’ll leave it to the managers or trustees of the scheme to determine whether it is that person’s best interests”. I would be grateful for some understanding, again, of how this might work in practice, but the solution will definitely be Amendment 83 and I hope that the Minister will give that consideration for Report.
Lord Palmer of Childs Hill (LD)
My Lords, this is an appropriate time to stand, because Amendment 83 is signed by the noble Lord, Lord Vaux, and by me. In the absence of the noble Lord, Lord Vaux, today, and having discussed the matter with him, I speak on my behalf and his to Amendment 83. As has been stated, it is intended to deal with the risk that consolidating small pots might worsen the problem of lost or forgotten pensions.
We are all aware of the problem of people losing track of small pension pots: a problem that has increased in recent years as people tend to move between jobs more frequently, and may therefore end up with several small pensions, perhaps from many years ago. Chapter 2 of the Bill allows the Government to make regulations to consolidate small, dormant pension pots. I, and indeed the noble Lord, Lord Vaux, and the noble Baroness, Lady Coffey, support this as we believe that providing additional scale to small, dormant pots should enable greater efficiencies and a reduction in costs.
However, a possible unintended consequence could be to make it more difficult for a person to trace a forgotten pot if it is moved to a consolidator without their knowledge: for example, if any notice is sent to an old address. The introduction of a pension dashboard, as enabled by the Pension Schemes Act 2021, was intended to make it easier for people to identify pensions that they have lost track of or even forgotten. This has been somewhat delayed, but progress does, at last, seem to be happening. The connection deadline is October 2026, so hopefully people may start to be able to access the dashboard in the not-too-distant future.
In order to avoid making the problem of lost pensions worse, Amendment 83, in the name of the noble Lord, Lord Vaux, and myself, simply says that the regulations that would mandate the consolidation of a dormant, small pot could not be made until the dashboard had been available for at least three months. The three months is designed to give a bit of time to ensure that it is actually working and that any teething issues have been resolved. I think it prudent to ensure that we do not cause unintended consequences from what is otherwise a good policy, I hope the Minister will be sympathetic to the intention of the course outlined in Amendment 83.
Baroness Altmann (Non-Afl)
My Lords, I support the amendments in this group, particularly Amendment 83, which has received wide support. I think it is really important, as is the idea of lengthening the 12-month period for so-called dormant pots, and Amendment 81 from the noble Baroness, Lady Bowles, where, for example, a woman may take time off to care for children or other loved ones and intends to return, but her pension will have been moved before she gets back. Those are distinct possibilities under this scheme. We are talking about moving somebody’s savings—or investments; I am doing it myself—from one place to another, just because they have not done anything with their pension for a while. The pension fund is not meant to have anything done with it when you are younger; it is meant to just sit there and stay there.
Of course, the big problem that needs to be solved here is the costs to providers of administering all these very small pots. But the aim of the dashboard itself is meant to be to help people move their pots from one place to another. It seems to me that this particular section of the legislation is trying to deal with something that is meant to be dealt with by a different policy area. The consolidators, of course, will be attractive to providers to establish, and the money saving from not administering these small pots will also be attractive to the providers. But have the Government given any consideration to the idea of making, for example, NEST the consolidator? That is a Government-sponsored scheme. It has obviously had to have reasonable charges. Any transfers do not incur an upfront fee. That would run less of a risk of having consolidators that end up perhaps not performing well.
Baroness Coffey (Con)
I understand what the noble Baroness is saying about NEST. It is a brilliant organisation. But my recollection is that it does charge 2% on the transfer of assets into it. That is not something we should be particularly encouraging.
Baroness Altmann (Non-Afl)
No. I was just saying, if you transfer assets in, that 2% charge does not apply and will not apply. Otherwise, obviously, it would be uneconomic. But I understand that the idea of NEST is that the transfer in of a pension from another provider does not incur the upfront charge of, I think, 1.8%. So that would not be an issue. It is just a 0.3% flat fee. I hope the Minister will be able to respond on that element. There is a residual risk to government in moving somebody’s long-term assets from one provider to another if the other provider eventually proves not to deliver good value.
Baroness Sherlock (Lab)
My Lords, I am grateful to all noble Lords who have spoken on this. I will start by addressing the proposed amendments to Clause 22. I will say at the start that we regard this clause as being a vital measure to tackle the structural inefficiency caused by the ever-greater proliferation of small, dormant pension pots in the auto-enrolment market. It empowers the Secretary of State to make regulations to consolidate these pots into authorised consolidator schemes, improving outcomes for pension savers and reducing unnecessary costs to providers.
Amendments 79 and 80, from the noble Viscount, Lord Younger, seek to extend the dormancy period for a pot to be considered eligible for automatic consolidation from 12 months to 18 months. We concluded that the 12-month period strikes the right balance between legislative clarity and administrative practicality. The timeframe was consulted on extensively with industry in 2023, under the previous Government. I suspect the noble Viscount was the Minister, so he may recall this well. Twelve months represents a supported middle ground: long enough to ensure that pots are genuinely dormant but not so long as to delay consolidation unnecessarily. Extending the period to 18 months would create inefficiencies and higher costs for both savers and providers, and slow progress towards consolidation.
Amendment 80 proposes removing subsection (3)(b) from Clause 22 as a means of probing the circumstances in which a pot should not be treated as dormant. This was picked up, slightly glancingly, by the noble Baroness, Lady Coffey, as well. I make it clear that the scope of the policy is deliberately aimed at unengaged savers in default funds, where fragmentation poses the greatest risk to value for money and retirement outcomes. It is not designed to consolidate pots from those who are engaged and have made active decisions about their pension.
The exceptions provision is designed for cases where investment choices have been made that are driven by factors other than active financial management, such as religious belief. For example, following the consultation in 2023, sharia-compliant funds emerged as a suitable case for this. The aim was to ensure that savers in those funds remain eligible for consolidation and the benefits it brings, because, even though they have made a choice to be in a sharia-compliant fund, Clause 22 would allow schemes to differentiate that choice from other forms of pension engagement which might indicate that the member would not want their pot to be moved. I make it clear that anyone brought into scope under these exceptions will retain the option to opt out, so member autonomy is preserved, and consolidated schemes would need to offer a sharia-compliant option for consolidation to ensure that members’ wishes continued to be recognised and respected.
Although the power allows for wider exceptions in future, proportionality is key. For example, it would not be appropriate to consolidate members in ethical funds into a default fund; nor is it feasible for consolidators to cater to every ethical fund in the market. However, this flexibility would ensure that the framework could evolve if another religious or other fund reached sufficient scale. It balances the inclusion of disengaged savers with the need to limit complexity, cost and operational burden for authorised consolidator schemes; that is crucial to ensure that the automatic consolidation model remains viable.
Again, to be clear, this is not about bringing into scope people who do not want to be consolidated; it is about ensuring that those who are likely disengaged on pension saving are not automatically excluded from consolidation and its benefits simply because of their religious beliefs. For clarity, I note that, similarly, this clause does not allow or compel a pension scheme to move someone who has not selected a sharia-compliant fund into a sharia-compliant fund.
Viscount Younger of Leckie (Con)
My Lords, I will conclude fairly briefly. I thank all noble Lords for their contributions and the Minister for her reply. I thank in particular the noble Baroness, Lady Bowles, my noble friends Lady Noakes and Lady Coffey, and the noble Lord, Lord Palmer. I see, as the Minister pointed out, that the noble Lord, Lord Vaux, is in his place, which has, if I may put it this way, hitherto been dormant.
As we have discussed, the amendments in this group are designed to test how the framework will operate in practice and whether the balance struck is the right one. In particular, they probe how dormancy is defined; how member behaviour is interpreted; and how far Parliament will continue to have oversight as the regime evolves.
I have a few points to make in winding up. First, it would be helpful to hear from the Minister more details about how members can be reunited with their dormant pots—or, indeed, find their missing pots. I particularly look forward to hearing an update about the dashboard. May I make a request? It would be helpful to have more granular detail on how it would work and the different aspects of an individual’s experience in using the dashboard service. I remember that, when I was in the department, I was thoroughly briefed on it; it is a very big, important and interesting project. I am sure that the Committee would appreciate that particular type of update.
My second point was made by my noble friend Lady Noakes when she said that Clause 22 gives significant powers. She was right in saying that there is no real underlying purpose and that there are concerns around the constraints. More granular detail on the definition of small pots is required; as my noble friend said, bearing in mind their value and growth in future, more clarity needs to be given.
Finally, I want to make two points about the 12-month dormancy period that the Minister raised. We will consider what she said about 12 months being the right balance rather than extending, as we proposed. I will also read Hansard concerning her points about the affirmative procedure versus the negative one; I carefully noted what she said.
To conclude, the powers in this chapter are substantial. The point we are making—and, indeed, the points that other noble Lords have made—is that clarity around definitions, proportionality in timeframes, transparency, and how exceptions and future changes will be handled will be essential if members are to feel secure, rather than sidelined by the process. With that summary, I beg leave to withdraw my amendment.
“(6) Transfer notices must be clear, concise, and accessible to all members, including those with low financial literacy or limited digital access.(7) Transfer notices must also be provided in prescribed alternative formats for digitally-excluded, visually-impaired, or otherwise vulnerable members.”Member’s explanatory statement
This amendment ensures transfer notices are easy to understand and available in alternative formats so that all members, including vulnerable or digitally-excluded individuals, can engage meaningfully with transfer decisions.
Viscount Younger of Leckie (Con)
My Lords, I shall address each amendment in this group briefly in turn to provide some of the context and rationale for why we have introduced them. First, Amendments 84 and 85 relate to Clause 24. These amendments are concerned with how this policy will operate in practice and whether it does so in a way that is fair, comprehensible and properly accountable. Clause 24 places significant weight on the transfer notice. It is the principal mechanism by which an individual is informed that their pension pot may be transferred automatically if they do not respond. In many cases, silence will result in action, which makes the quality and accessibility of that notice critical.
Amendment 84 therefore seeks to ensure that transfer notices are clear, concise and accessible to all members, including those with low financial literacy or limited digital access. It also requires that notices be available in prescribed alternative formats for members who are digitally excluded, visually impaired or otherwise vulnerable. I took note of the Minister’s remarks about definitions that may need to be properly defined—better defined than I can define them—in legally recognisable terms, and I recognise that.
As we discussed earlier today, we are all aware that pensions communications can be complex and intimidating, even for those who are relatively engaged. We need only to remind ourselves of the challenges experienced in recent years over pension credit communications. I think my noble friends Lady Coffey and Lady Stedman-Scott have had some experience of that. I will leave it at that.
For individuals with small dormant pots, often lower earners, those with fragmented work histories or those disengaged from pensions altogether, the risk is that they simply do not understand what is being proposed or do not realise that inaction has consequences. Often, it is fair to say that pension communications, when received, are by default put in the too-difficult box or the another-day box or in a convenient receptacle placed on the floor—I will leave it at that. The noble Baroness, Lady Altmann, made a similar point in her remarks on an earlier group, but it is a serious point. If the policy depends on member engagement, it is only reasonable that the communication is genuinely capable of being understood. Amendment 84 would simply put that principle in the Bill.
Amendment 85 addresses a different but related concern about oversight and accountability. As drafted, the clause requires transfer notices to be issued, but does not require anyone to monitor how many notices are sent, how members respond or what outcomes are produced. Amendment 85 would place a duty on the Secretary of State through regulations to record and report annually on the number of transfer notices issued and the outcomes arising from them. This matters for two reasons. First, it allows Parliament to assess whether the policy is working as intended. Are members actively choosing options or are transfers overwhelmingly occurring by default? Are certain cohorts disproportionately disengaged? Without data, we simply cannot know. Secondly, it ensures that responsibility for this policy does not rest solely with schemes and regulators but remains subject to ministerial oversight and parliamentary scrutiny, which is particularly important where automatic processes affect individual savers. I hope the Minister will see these amendments as seeking to address important points that will make this part of the Bill work more effectively, and I look forward eventually to hearing her response. I listened very carefully to her remarks on communications and customer service in an earlier group.
Let me now address our Clause 31 stand part notice; noble Lords will be aware that, as set out in its explanatory statement, this is intended as probing. This clause contains a wide enabling provision that allows Ministers, through regulations on small pots, to confer functions; create appeal rights; require extensive data processing; amend primary legislation; and, most notably, authorise the Pensions Regulator to charge prescribed fees in connection with authorisation under the regime. My concern is not that these powers exist at all but that the clause gives us little indication of how they will be constrained in practice. In particular, can the Minister explain how the fee-charging power for the Pensions Regulator will operate? Will fees be strictly limited to cost recovery? How will their level be set? What parliamentary scrutiny will apply?
Baroness Altmann (Non-Afl)
My Lords, the noble Viscount, Lord Younger, and the noble Baroness, Lady Stedman-Scott, have done the Committee a great service. I wish to flag up that these amendments are really important for us to consider before we come back on Report.
The noble Viscount’s comments on Clause 31 potentially being dangerous are right on the mark. Many of the wide powers suggested here should say “must” rather than “may”, but they say only “may”. We are talking about moving somebody’s money, potentially without their knowledge; yes, we will have to write to them, but we know very well that many schemes have dormant pots because either they have lost track of the members or the members have lost track of the scheme. There is a danger here in public policy terms.
In connection with this policy area, the Minister mentioned at the beginning of the debate that there are risks to members and providers. I understand the risks to providers of having small pots, as well as the costs of administering them being higher than the fees they receive from managing them, but what is the risk to the member of having their money stay where it is until they come along and ask for it to be moved? There are risks in leaving as well as in staying if they are moved into a scheme that is less suitable for them, performs less well or has a different charging structure.
What if the member is away for a couple of years on a secondment, for example? What kind of protections will there be? Pensions are typically designed to be left alone. Having default funds, making regular contributions and not being able to take any of your money back until you are 55, for example, are part of the whole structure—indeed, the intention—of private pensions. Is there any intention to ensure, for example, that the member and the dashboard have been operational? I know the Minister said—we talked about this in the previous group—that there might be conflicts between the intention of the small pots legislation and the timing of the requirements relative to the timing of the dashboard, but if a member is moved and it is discovered that they are suffering a loss as a result of the move because their scheme was better or because they have come back to that scheme after a temporary absence, is there any consideration of who might be responsible for any compensation due for money that was moved when the member might well have known nothing about it?
Baroness Sherlock (Lab)
My Lords, I thank the noble Viscount, Lord Younger of Leckie, for introducing his amendments. I should have said at the beginning of the previous group that I thank him for his support for this policy. I recognise that he has tabled his amendments in the spirit of exploring how best to make this work.
Let me start with the proposed amendments to Clause 24, which is a key part of the framework to enable the consolidation of small dormant pension pots. It sets out requirements for transfer notices: communications that inform members when their pot is due to be moved into an authorised consolidator scheme. These notices are an important safeguard, ensuring transparency and giving members the opportunity to opt out if they wish to. Amendment 84 proposes that the transfer notices must be clear, concise, accessible and so on and must be provided in prescribed alternative formats for digitally excluded or visually impaired members.
I fully support this principle, but we think the amendment is not needed because the objectives are already embedded in the Government’s approach. The Bill provides powers to set detailed requirements for transfer notices in secondary legislation, and we have committed to consult to ensure that notices are simple, jargon-free and easy to understand. Moreover, existing regulatory standards and guidance already require schemes to provide communications in accessible formats for vulnerable members, including those who are digitally excluded or visually impaired. We do not think that overlaying additional prescriptive requirements in primary legislation is helpful, but the underlying point is very strong. We need a framework that can evolve as technology and members’ needs change. Locking rigid requirements into the Bill could hinder that process, so we think the right place for these detailed standards is in guidance and regulation, where they can be updated as best practice develops.
Amendment 85 would require the Secretary of State to record and report annually on the number of transfer notices issued and the outcomes arising from them. Again, although I understand the intent, we do not think this amendment is proportionate, given the administrative burden that it would impose. The DWP already has robust mechanisms for monitoring the implementation and effectiveness of pensions policy, including through regular engagement with the Pensions Regulator and industry reporting. We will continue to publish updates on the progress of small pots consolidation as part of our wider reporting on pensions reform. The focus should remain on ensuring that the policy delivers better outcomes for members, reducing fragmentation, improving value for money and supporting a market of fewer, larger schemes. We believe that this can be achieved through existing oversight arrangements and targeted evaluation, rather than setting rigid reporting requirements in primary legislation.
I recognise that the Clause 31 stand part notice has been tabled to probe the extent and scope of the small pots regulations enabled by this clause, with particular focus on the powers conferred on the Pensions Regulator to levy fees. For clarity, Clause 31 does not create new powers beyond those already set out within the small pots measure. Its purpose is to provide clarity and detail on how those powers can be exercised to deliver the small pots consolidation framework effectively. This mirrors the approach taken with the authorisation of master trusts, for example, under the Pension Schemes Act 2017, where fees were introduced to ensure that the costs of regulatory oversight are borne by those seeking authorisation, not by the taxpayer. This is a well-established and proportionate mechanism that supports robust regulation while maintaining fairness.
As already discussed elsewhere, we believe that the clauses within this chapter strike a careful balance. They ensure that key regulations get full parliamentary scrutiny through the affirmative procedure, while allowing the Government to act quickly on minor or technical changes via the negative procedure when necessary.
Clause 31 sets out the circumstances where the use of a Henry VIII power may be required. To be clear, this is about ensuring that the legislation delivers a workable and proportionate framework. The Henry VIII power provides necessary flexibility to apply existing technical and procedural legislation to small pots regulation in order to ensure the effective implementation of the small pots regime. I shall give an example. It may be necessary to make consequential amendments to the Pensions Act 2004 so that the Pensions Regulator’s existing administrative powers can extend appropriately to the small pots framework. An example in the Bill is the amendment to Section 146 of the Pension Schemes Act 1993 to ensure that the remit of the Pensions Ombudsman is broad enough to investigate complaints or disputes in relation to the destination proposer, but this cannot be legislated for before final decisions around the delivery model are made. That is a good example of why this would work. Of course, any regulations made under this power will be subject to the affirmative procedure.
We think that that flexibility is essential for the effective implementation of the small pots regulations. Any regulations made under this power will be affirmative, but it is also worth noting that, given what I have said, removing Clause 31 would reduce the clarity for members and pension schemes on how the power to make small pots regulations may be used.
Finally, I will address the proposed amendments to Clause 32. Clause 32 is essential to maintaining trust and integrity in the small pots consolidation framework. It ensures that the Pensions Regulator can take direct action to uphold compliance with the regulations, protecting members and supporting the volume of transfers required accurately. Amendment 86 seeks to remove subsection (2) as a means of probing the expansion of regulatory powers conferred on the Pensions Regulator. Subsection (2) provides transparency for stakeholders by setting out the types of enforcement tools that may be included in regulations, such as compliance notices, third-party compliance notices and penalty notices. These are not new concepts; they align with the Pensions Regulator’s existing practices and procedures in other areas of pensions regulation. Removing this provision would not prevent enforcement powers being introduced in regulations, but it would remove clarity for schemes and members. Without it, we risk creating ambiguity and undermining confidence in the framework. This clause is not about overreach, but about ensuring that the regulator can act proportionately and effectively where schemes fail to meet their legal duties.
Finally, Amendment 87 seeks to remove Clause 32(4) to probe the rationale behind the maximum penalty limits. Subsection (4) provides clear, proportionate caps on financial penalties: £10,000 for individuals and £100,000 in any other case. These limits have been increased compared to existing frameworks to reflect the importance of compliance in this area. As pension schemes grow in size, it is vital that the fines we impose on schemes carry real financial weight. This ensures that compliance and enforcement remain effective, safeguard members’ interests and maintain confidence in the system. These amounts align with the wider compliance regime across the Bill. Without this subsection, regulations could still introduce penalties, but without any statutory cap. That would create uncertainty for schemes and could lead to disproportionate outcomes. By contrast, the current approach provides transparency and safeguards, ensuring penalties are significant enough to deter non-compliance but not excessive. It also enables appeals to the First-tier or Upper Tribunal, guaranteeing procedural fairness and accountability.
In conclusion, Clause 32 is not about granting unchecked powers; it is about providing clarity, proportionality and effective enforcement to protect members and deliver the outcomes this policy is designed to achieve. Removing this provision would create uncertainty and risk undermining confidence in the system.
The noble Baroness, Lady Altmann, asked me a question that I think related more to the previous group, but let me see what I can do. Why do we need small pot consolidation if we have the pensions dashboard? I think her question was slightly underpinned by the question, why do we need this at all, why can we not just use dashboards? We think they serve different but complementary roles in strengthening the system.
Viscount Younger of Leckie (Con)
My Lords, I will be pretty brief in closing. Across this group, the common theme is not opposition to the direction of travel—I give further reassurance to the Minister on this point and I appreciate her remarks—but a desire for clarity, proportionality and accountability as these powers are taken and exercised. I am very grateful for the support of the noble Baroness, Lady Altmann, and indeed for her extra questions on this group. The small pots regime will rely heavily on automatic processes, regulatory discretion and secondary legislation, which makes it especially important that Parliament understands how these measures will work in practice and where the guardrails sit.
The amendments that we have brought forward are deliberately probing, as I said at the outset. They seek reassurance that members will be able to engage meaningfully with decisions that affect their savings, that Ministers will retain visibility and responsibility for how the system operates once it has gone live, and that the regulators’ powers, whether in relation to fees, enforcement or penalties, will be used in a way that is targeted, proportionate and subject to appropriate oversight. I respect the fact that the noble Baroness has given much time to addressing the amendments, and indeed those particular points, for which I am very grateful. It has been a short debate, and I hope a helpful one, and we will consider the responses given. But, for the moment I beg leave to withdraw my amendment.
Member’s explanatory statement
This amendment seeks to scrutinise the scale of the Secretary of State’s powers to exempt schemes from Conditions 1 and 2 set out in subsection (4), and to probe whether these exemption powers are intended to apply to Collective Defined Contribution (CDC) schemes.
Viscount Younger of Leckie (Con)
My Lords, this is a busy group and I shall not detain the Committee by speaking to all the amendments therein, but I do want to welcome the amendments that have been tabled by other noble Lords, which will allow us to have a detailed and, I hope, fruitful debate and discussion on these important matters.
Amendment 89 is a probing amendment. It would leave out new subsection (1B), which allows the Secretary of State, by regulations, to exempt descriptions of relevant master trusts from the approval requirements in conditions 1 and 2, covering both the scale default arrangement and the asset allocation approvals. The purpose here is to understand the intended scope of this power and the safeguards that will govern its use. As drafted, new subsection (1B) is very broad: it permits exemptions for
“any description of relevant Master Trusts”
and gives examples, including schemes designed to meet the needs of those with protected characteristics and hybrid schemes.
I have three straightforward questions for the Minister at the outset. First, why is it necessary to take such wide exemption powers in the Bill, rather than tightly defining the circumstances in which exemptions may be granted? Secondly, how will the Government ensure that exemptions do not create a route by which schemes can avoid the central policy intent of this chapter: namely, improving outcomes through scale and an appropriate approach to asset allocation?
Thirdly, can the Minister clarify whether these exemption powers are intended, in whole or in part, to apply to collective defined contribution schemes, or other non-standard money purchase arrangements? If so, what is the rationale; and if not, will she put that clearly on the record? I am mindful of the recent debate that we had in this Room on the CDCs. I hope the Minister can respond to those points.
I know that the noble Baroness, Lady Bowles, will set out her reasoning for Amendment 92, so I do not wish to pre-empt or emulate what I know will be a very well-reasoned and informative set of remarks. But, as I have added my name to the amendment, I will briefly say that I welcome this proposal. It would put in the Bill a clear signal that a trust which provides “exceptional” value for money—as assessed by the regulator under its VFM framework—could be a legitimate basis for exemption from the new approval requirements. It seems sensible that trusts that already provide exceptional value for money should be trusted to carry on their good work under the established framework in which they are already operating.
Amendment 100, in my name and supported by the noble Baroness, Lady Altmann, to whom I am grateful, seeks to provide helpful clarity, not to weaken regulation, by making clear that schemes offering genuinely specialist or innovative services can demonstrate that they meet the exemption. This is important because innovation in pensions does not always mean novel technology alone; it can include specialist provision for particular workforces, new approaches to member engagement or delivery models that better serve groups who might otherwise be poorly catered for. Without clarity, there is a risk that worthwhile innovation is discouraged simply because schemes are uncertain about how the exemption will be interpreted.
The amendment also gives the Secretary of State the power, through regulations, to define “specialist or innovative services”. That provides appropriate flexibility, allowing the definition to evolve over time, while ensuring proper scrutiny and regulatory oversight. The amendment supports innovation without undermining member protection, and it gives both trustees and regulators greater certainty about how the exemption is intended to operate. I therefore hope the Minister will look favourably on it and speak to the point that is raises.
Amendments 105 and 107 are intended to ensure that group personal pension schemes are treated fairly and proportionately under the new scale requirements in Clause 40. We are clear that scale alone is not always a reliable proxy for quality or value. There are group personal pension schemes that are smaller by design yet provide highly specialist or innovative services, for example, to particular sectors, workforces or member needs, and that deliver good outcomes despite not meeting a blunt asset threshold. Amendment 105 creates an additional route for relevant GPPs to meet the quality requirement, by allowing those that satisfy an innovation exemption not to be automatically required to meet the scale requirement.
Amendment 107 provides the necessary framework for that exemption. It allows a GPP to demonstrate that it offers specialist or innovative services, and gives the Secretary of State the power, through regulations, to define what those terms mean. That ensures flexibility as the market evolves, while retaining appropriate regulatory and parliamentary oversight. I hope the Minister will see these amendments as a constructive way of balancing scale with innovation, competition and member outcomes, and I look forward to her response.
Amendment 135 would revert the eligibility test for new entrant pathway relief under Clause 40 to the simpler principle-based formulation contained in the Bill as introduced. The purpose of the new entrant pathway is clear: to ensure that credible, innovative schemes are not locked out of the market simply because they are new and have not yet had the opportunity to build scale. As the Bill is currently drafted, that test has become more prescriptive, with a risk that genuinely innovative entrants could struggle to qualify despite having strong growth potential. By refocusing the test on whether a scheme can demonstrate strong potential for growth and an ability to innovate, this amendment would restore the original balance between safeguarding member outcomes and allowing healthy competition and innovation in the market. This amendment would simply ensure that the pathway for new entrants remains realistic and proportionate and is aligned with the policy intent.
Finally, Amendments 165 and 166 are probing amendments about parliamentary scrutiny—back to that subject. Clause 41 gives the Secretary of State the power to make regulations setting out how the Pensions Regulator will assess whether master trusts meet the scale requirement and have sufficient investment capability. These assessments will have a direct bearing on which schemes can operate, which must consolidate and how the market develops over time. As drafted, the Bill provides that the first set of regulations is subject to the affirmative procedure, but all subsequent regulations may be made under the negative procedure. I think we have heard this before. Amendments 165 and 166 would remove that distinction, so that any regulations in this area would require affirmative approval.
The question that these amendments pose is simple: if the initial framework is considered significant enough to warrant full parliamentary scrutiny, why should later changes, potentially just as consequential, receive a lower level of oversight? These regulations are not mere technical updates; they go to the heart of how scale and capability are judged, and therefore to the structure of the pensions market itself. It therefore seems reasonable that Parliament should retain the guaranteed opportunity to debate and approve changes of that kind whenever they are made. I look forward to the Minister’s explanation of why the negative procedure is considered sufficient for subsequent regulations and whether there is scope to strengthen ongoing parliamentary scrutiny in this area. I look forward to contributions from other Members of the Committee and particularly to the Minister’s response. I beg to move.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will speak very briefly to Amendment 92 because it is a “what it says on the tin” amendment. It arose during a conversation. Somebody asked me what happens if a scheme is doing very well but is forced into consolidation because it does not meet the scale requirements. Would there be any legal consequences if it did not do quite so well under consolidation? On whom would those legal consequences fall if, as a result, somebody received a worse pension? Is there any comeback on the scheme because it was not big enough and so got consolidated? Is there any indemnity? Is there any making up? Let us take a theoretical situation in which the consolidator it goes into ends up doing very badly—I would hope that would never happen, but this is just to probe the safeguards around such circumstances. I could not answer the questions. It may be that there is something in the vast number of papers I have not read and the Minister can advise me. There is nothing terribly special or secretive behind it, it is just something that could happen, and can I obtain clarity about what comeback there may or may not be?
Baroness Noakes (Con)
My Lords, Amendments 134, 137 and 138 in this group are in my name. I thank my noble friend Lady Neville-Rolfe for adding her name to Amendment 137; unfortunately, she needs to be in the Chamber imminently so was unable to stay in the Committee.
I support the other amendments in this group. I am very sorry that the noble Lord, Lord Davies of Brixton, is not in his place; I hope he has not been silenced by his Front Bench. On our first day in Committee, I found myself in near agreement with the noble Lord—that is quite unusual for me—when he said that he was not totally convinced by the Government’s line that big is necessarily beautiful. He said that he was open to that debate, but my position is less nuanced: I am absolutely certain that big is not always beautiful. There are plenty of examples of big being beautiful. The US tech industry is probably a good example of that, at least from a shareholder perspective. On the other hand, there are many examples of where being big is not good. Big can be bureaucratic and low-performing. It can be hampered by groupthink, unresponsive to customer needs and hostile to innovation and competition; we can all name organisations in that category, I am sure.
I buy, as a general proposition, that an investment management scale has many attractions, including efficiency of overhead costs and the ability to diversify into a wider range of asset classes in order to achieve superior investment returns, but I have absolutely no idea whether £25 billion is the right threshold for forcing people into certain kinds of investment. I am absolutely certain that we should not dogmatically force all organisations towards that asset threshold in order to leave the door wide open for new entrants and players who can demonstrate good returns for savers and innovation.
My Amendment 137 would widen the qualification for the new entrant pathway relief so that it can include schemes that will produce above-average performance. If smaller, more agile providers can provide equal or better returns than the big boys, why should they be excluded? If a provider has a winning formula, why must it also demonstrate that it will achieve scale? What benefit is there for pension savers in restricting the market in this way? Noble Lords should also ask themselves why the big providers in the market, in their emails to us, have generally not challenged the scale proposals. The answer is very simple: this Bill acts as a barrier to entry, and large players love barriers to entry. We must not let them get away with it.
Amendment 134 probes why subsection (2)(a) of new Section 28F, which is to be inserted into the Pensions Act 2008 by Clause 40, restricts new entrant pathway relief for schemes that do not have any members. The main scale requirement is to have assets of £25 billion under management by 2030. The transitional pathway is for existing smaller players, provided they have assets of £10 billion under management by 2030 and have a credible plan for meeting £25 billion by 2035. The new entrant pathway relief is available only to completely new schemes—that is, those with new members—and only if they have strong potential to reach £25 billion. This leaves a gap in which new players that have been set up very recently, or will emerge between now and when this bit of the Bill comes into force, will not qualify for new entrant pathway relief and may also not qualify for transitional pathway relief. They may well have strong potential to pass the new entrant test—that is, if they were allowed to because they had no members—but they would not satisfy the regulator that they have a credible plan for transitional pathway eligibility.
Growing a business is not a linear matter. At various points, additional capital will generally be needed, but the Bill will make it difficult to raise funds because of the significant uncertainty about whether a pension provider would satisfy the transitional pathway test; and failing that test would mean that the business could not carry on and would thus be very risky for investors or lenders. Do the Government really intend to drive out of the market new providers that have only recently started or will start between now and the operation of the scale provisions? I am completely mystified by this.
My Amendment 134 deals with the substance of Amendment 136 in the name of the noble Baroness, Lady Altmann, which she has degrouped into a separate group and which will not come up until later. I think they deal with the same issue, but I will wait to see what she has to say on her amendment in due course.
Finally, my Amendment 138 seeks to delete subsection (4) of new Section 28F in order to probe why the Government need a regulation-making power to define “strong potential to grow” and “innovative product design”. The Government are probably the last place I would go to find out about growth or innovation. The regulators that will implement the new entrant pathway are, or ought to be, closer to their markets and therefore will understand in practice how to interpret the terms for the providers they regulate. Why can the Government not simply leave it to them? What value can the Government possibly add to understanding how these terms should be implemented in practice? I look forward to the Minister trying to convince me that the Government know about growth and innovation.
Baroness Altmann (Non-Afl)
My Lords, as the noble Baroness, Lady Noakes, said, my Amendment 136 is in a later group and was degrouped deliberately to explore the issues that she has just raised. If the Committee is comfortable for me to deal with Amendment 136 here today, I do not mind doing so, but that would potentially cause a problem for the Ministers or other Members of the Committee. May I do so? Alternatively, I could speak to it later; whatever the Committee decides is fine with me.
Baroness Altmann (Non-Afl)
Okay. I have not fully prepared for it, but I am happy to do that; it will save us time later on.
The concerns expressed in Amendment 136 and the amendments that the noble Viscount, Lord Younger, mentioned—some of which I added my name to—revolve around schemes that are already established. There is uncertainty about whether the schemes that are currently below the level will be permitted as new entrants or be able to access new business.
I am already being told that advisers are opting to advise employers only to join schemes that are already almost at or above the current £25 billion default fund threshold, which is creating market disruption and preventing schemes currently below the scale threshold from growing, as they cannot access the amount of new business they would otherwise have anticipated. Therefore, the risk is that these schemes will close prematurely but could offer good value to members who would otherwise be able to benefit from a scheme that is potentially on track to enter the transition pathway but will not quite be there.
I will offer the Committee an example. One of the recent new entrants, Penfold, which was established in 2022, will not have the time that other new entrants, established a few years before it, will have—such as Smart Pension, which may well be on track to reach the goal by 2030. Penfold faces a cliff edge because it launched only in 2022, has already surpassed the £1 billion asset-under-management mark and could well quadruple business over the coming few years, which would be an extremely positive achievement, but it will not qualify it not to have to close.
There are other new potential entrants that were planning to enter the market in the next three or four years, but they cannot now do so unless they are able to enter the pathway. That is why Amendment 136 suggests that schemes that have been established for, let us say, less than 10 years—again, that is a probing figure—would be able to enter either the transition or new entrant pathway if there is a demonstrable case that they will be able to grow. However, I am completely aligned with the noble Baroness, Lady Noakes, that big is not necessarily best and that there are risks of an oligopoly developing in this connection, which I hope the Government would not have intended. I am convinced that that would not necessarily be in the interests of the market, innovation or pension savers more generally.
Baroness Sherlock (Lab)
My Lords, I am grateful to all noble Lords for introducing their amendments. As this is the first time we are going to debate scale, let me first set out why we think scale matters. I hope to persuade the noble Baroness, Lady Noakes, with my arguments, but she is shaking her head at me already, so my optimism levels are quite low given that I am on sentence two—I do not think I am in with much of a chance.
Scale is central to the Bill. It adds momentum to existing consolidation activity in the workplace pensions sector and will enable better outcomes for members, as well as supporting delivery of other Bill measures. These scale measures will help to deliver lower investment fees, increased returns and access to diversified investments, as well as better governance and expertise in running schemes. All these things will help to deliver better outcomes for the millions of members who are saving into master trusts and group personal pension plans.
Baroness Noakes (Con)
Will the Minister say what the evidence base is for the assertions she just made?
Baroness Sherlock (Lab)
I was going to come on to that, but I am happy to do so now. Our evidence shows that across a range of domestic and international studies, a greater number of benefits can arise from scale of around £25 billion to £50 billion of assets under management, including investment expertise, improved governance and access to a wider range of assets. This is supported by industry analysis, with schemes of this size finding it easier to invest in productive finance. International evidence shows funds in the region of £25 billion invested nearly double the level of private market investment compared to a £1 billion fund. Obviously, we consulted on these matters and we selected the lower band, but there is further evidence that demonstrates the greater the scale, the greater the benefits to members. We did go for the lower end of that.
I turn to the amendments to Clause 40 from the noble Viscount, Lord Younger. This probing of how exemptions might operate, especially in relation to CDC schemes, is helpful. Our intent is clear: to consolidate multi employer workplace provision into fewer, larger, better run schemes. To support this, exemptions will be very limited and grounded in enduring design characteristics; for example, schemes serving protected characteristic groups or certain hybrid schemes that serve a connected employer group. I can confirm that CDC schemes are outside the scope of the scale measures. Parliament has invested considerable effort to establish this innovative market, and we will support its confident development while keeping requirements under review.
I turn to the broader point about why the exemptions are intended for use for schemes for specific characteristics; for example, those that solely serve a protected characteristic or those that serve a closed group of employers and has a DB section—hybrid schemes. I agree with the noble Lord that, if we were to have too many exemptions, it would simply mean the policy had less impact, but we need to have some flexibility and consultation.
Amendment 92 from the noble Baroness, Lady Bowles, proposes that master trusts delivering “exceptional” value under the VFM framework could be exempted from scale and asset allocation requirements. Exemptions listed in new Section 20(1B) relate to scheme design and are intended to be permanent. Introducing a performance based exemption tied to ratings would be inherently unstable for members and would risk blurring two parallel policies. Scale and VFM complement each other, and both support good member outcomes. However, we do not agree that VFM ratings should be used to disapply structural expectations on scale, and we do not wish to dilute either measure.
Baroness Noakes (Con)
I am struggling to understand why the Government are setting their face against good performance. They seem to be obsessively pursuing scale and consolidation of the industry, unable to see that, for pensioners and savers, equally good or better returns can be achieved from sub-scale operators. That is a question of fact. The evidence that the Minister gave earlier merely points to there being a correlation between size and returns; it is not an absolute demonstration that, below a certain scale, you do not achieve good returns for savers. I hope that the Minister can explain why the Government are so obsessed with scale rather than performance for savers.
Baroness Sherlock (Lab)
I feel that we will have to agree to disagree on this point. The Government are not obsessed with scale; the Government believe that the evidence points to scale producing benefits for savers. We find the evidence on that compelling. I understand the noble Baroness’s argument, but the benefits of scale are clear. They will enable access to investment capability and produce the opportunity to improve overall saver outcomes for the longer term.
I cannot remember whether it was this amendment or another one that suggested that a scheme that did well on value for money should be able to avoid the scale requirements; the noble Baroness, Lady Altmann, is nodding to me that it was her amendment. The obvious problem with that is that schemes’ VFM ratings are subject to annual assessment and, therefore, to change. It is therefore not practical to exempt schemes from scale on the benefit of that rating alone.
We are absolutely committed to the belief that scale matters. It is not just that we think big is beautiful—“big is beautiful” has always been a phrase for which I have affection—but I accept that it is not just about scale. It is not so for us, either. We need the other parts of the Bill and the Government’s project as well. We need value for money; we need to make sure that schemes have good investment capability and good governance; and we need to make sure that all parts of the Bill work together. This vision has been set out; it emerged after the pension investment review. The Government have set it out very clearly, and we believe that it is good.
Baroness Altmann (Non-Afl)
The remarks that the Minister is making are of concern to me—and, I think, to other Members of the Committee—because they are just what the big providers would say. They have the power. I have seen this in the pensions landscape for years: the big players have this incredible advantage and lobbying power and the power to get their way on legislation somehow. That is not always bad for members; I am not saying there is something terribly wrong with the big providers. What I am saying, though—this is an important point—is that there is a real need for innovation, new thinking and new ideas in this space. Huge sums of money are under discussion here. If we are bowing to the existing incumbents and not making provision even for those small businesses that are currently established but will not necessarily reach that scale in time, I am not convinced that we are improving the market overall. I would be grateful for a thought on that, or for the Minister writing to me.
Baroness Sherlock (Lab)
I am going to push back on the premise of the noble Baroness’s comments. I understand that she feels very strongly about this, but the Government are not doing this to benefit large pension schemes. The Government are doing this to benefit savers. The Government established an independent pension investment review, looked carefully at the evidence and reached the view that the best thing for savers is, via these measures, to encourage and increase the consolidation that is already happening in the marketplace. It is our view that that, combined with the other measures in the Bill, will drive a better market for savers and better returns for savers in the long term. That is why we are doing it—not because we want to support any particular players in the market; that is not what we are about.
The noble Baroness mentioned her Amendment 136; I want to respond to that as well as to the noble Baroness, Lady Noakes. There is an issue around whether schemes already in the market have enough time to make scale. From when the Bill was introduced in 2025, schemes have up to 10 years, if we include the transition pathway, to reach scale. We project that schemes with less than £10 billion in assets under management today could still reach the threshold based simply on historical growth rates. For example, a £5 billion fund today, growing at 20% a year, broadly in line with recent growth in the DC market, could reach £25 billion within 10 years—and that does not take account of the impact of consolidation activity, which we expect to see within the single employer market as a result of reforms brought forward in the Bill, such as VFM, which we expect to lead to poorly performing schemes exiting the market.
Baroness Altmann (Non-Afl)
Is there a reason why the Government will not even consider allowing some transitional entry for schemes that are already established, such as the one I mentioned, which may or may not reach that number? This is not a magic number—£10 billion or £25 billion are not magic numbers—but these are businesses that are already established. It will put people off entering the market if suddenly, with no warning, a company that started in 2022 is under pressure. Let us say that there are bad markets or that it takes longer; as I was saying, at the moment, employers are not going to give these companies new business. If the Government could look at some minimum period of establishment that could get new entrants into the 2010 transition, that would be good.
Baroness Sherlock (Lab)
The important thing here is clarity. The noble Baroness mentioned a single scheme. I am not going to comment on individual schemes, for reasons she will appreciate—she would not expect me to do so, I know—but we have to set some clear boundaries. The boundary has to be somewhere. As I said, we have actually gone for the bottom end of what was consulted on. We have created a transition pathway precisely to give schemes the opportunity to grow; they need to be able to persuade us that they have a credible path to do that.
In the case that the noble Baroness mentioned, if there were some particular market conditions that caused problems across a sector, she will be aware that in the Bill there is something called a protected period. There are powers in Sections 20 and 26 of the Pensions Act 2008 that give regulators the ability to delay temporarily the impact of the scale measures. That is to ensure that the consequence of a scheme failing to meet the scale requirement—having to cease accepting any further contributions—is planned and managed. There is a range of reasons why that might happen. It might be about an individual scheme that has been approved as having scale but has failed to meet the threshold or it might be a market crash that affects all schemes. There is flexibility there for the Government.
However, the principle is that we have to set some boundaries around that. The Government have reviewed the evidence carefully, and we have concluded that the point that we have chosen is appropriate. We have created a transition pathway in order to do that, and we have created new entrant pathways in order to accommodate those situations. We believe that that will protect members’ interests.
Baroness Bowles of Berkhamsted (LD)
The Minister has not yet mentioned whether there is any kind of indemnity or legal consequence. What the legislation does is not neutral in the sense that it provides cut offs and reasons not to invest. Is a company doing something wrong by continuing when it should say that it will not be able to make £25 million and it should roll up now? These are issues about which questions have come to me. It has not been looked at in the research. Could the Minister write to me to say whether there are any legal dangers for either side and whether there would be any compensation if the value of the pension becomes less than expected?
Baroness Sherlock (Lab)
We expect schemes with scale in a future landscape to deliver better outcomes for members. Consolidation is not created by the scale measures. It is already happening in the market, but we expect it to accelerate. Those running schemes are expected to carry out due diligence and act in the interests of their members in any consolidation activity. If there is anything else I can say on that, I will write to the noble Baroness. I am happy to look at it. The core question is whether it is a matter for those running schemes to make those judgments.
Baroness Noakes (Con)
Does the Minister understand that if you are currently a small scheme, unless you have certainty about being able to qualify to go into transitional relief, you will not be able to raise any money to facilitate your growth? It becomes a Catch-22. The Bill is creating uncertainty, which is destroying the businesses of those who might well be able to come through, but will not be able to convince equity or debt providers that they will be a viable business at the end because of the hurdles that the Government are creating in this Bill.
Baroness Sherlock (Lab)
I understand the noble Baroness’s concerns, but I contend that we are doing the opposite. We are creating certainty by being clear about what the intention is, what the opportunities are and where we expect schemes to be able to get to and in creating transition pathways but making it clear that people will have to be able to have a credible plan to do that. We are making that clear now. I have given the reasons why I anticipate that there is a pathway to scale for schemes that are around at the moment, but that is a judgment that schemes will have to make. If they do not believe that they can make scale, they will need to look at alternative futures in a way that is happening in the market already through consolidation. I accept that it may accelerate it, but it is not creating it.
Amendment 134 seeks to remove the no-members requirement entirely, accepting that it would potentially allow any existing DC workplace scheme to claim new entrant status, circumventing the scale policy, which, while contested, is the point of our proposal. Our inclusion of the no-members provisions in Committee in the Commons clarified the original intent and prevented a loophole.
Amendment 137 would mean that existing schemes would be able to access the new entrant pathway if they had stronger investment performance than can be achieved by schemes with scale, which we have touched on. While I understand the intention to reward and maintain strong investment performance, the focus there would be on short-term rather than long-term outcomes. There are various practical problems with doing that in any case, but I am also conscious that there will be occasions where a scheme that depends on its investment performance does not deliver and no longer qualifies on the pathway. That is then not a stable position for employers that use the scheme or its members. At the heart of the requirement is the need to create buying power for schemes to drive lower fees and increase returns. A small scheme simply cannot generate the same buying power, and schemes with scale are expected to deliver better outcomes over the long term.
Amendment 138 would strip the power to define “strong potential to grow” and “innovative product design” in regulations. The Government believe that these are key attributes of a successful new entrant in the market. Like other noble Lords, I know about the importance of ensuring that the measures we implement will be clearly understood and workable in the complex pensions landscape. The form that innovation will take is, by definition, difficult to predict; we would not seek either to define its meaning without input from experts and industry or to fix that meaning in law without retaining some flexibility. Consultation with industry will be important in ensuring that schemes can demonstrate these attributes; to be clear, we will consult on this and other aspects of the new entrant pathway relief first, before regulations determine the meaning of these terms.
Viscount Younger of Leckie (Con)
My Lords, I will be brief in closing as I suspect that the Committee is keen to get on to the next group.
Across this group, with the focus on scale—looking at both the merits and the demerits—the consistent theme has been a desire to ensure that the framework we are putting in place is proportionate, intelligible and capable of accommodating diversity in the pensions market. There has also been the theme of “big is not necessarily beautiful” in the course of this debate. My noble friend Lady Noakes was supported in particular by the noble Baroness, Lady Altmann; they were assiduous in their questions on scale.
I should just remind the Committee that the Minister for Pensions has stated that return on investment is paramount, so this has been a very interesting debate. What if suboptimal scale produces better returns than merely big scale? That was one of the themes in this debate. Is there not a tension here? I would say that there clearly is.
From the remarks made by a number of Peers in this Committee, I think that more thought needs to be put into the threshold, including the criteria for reaching the threshold and whether the threshold level is right in itself. As the noble Baroness, Lady Bowles, pointed out, a question on legal dangers has been posed.
A number of issues here absolutely need to be explored further. I have no doubt that this will be done prior to Report—indeed, we will look at what we might bring back on Report. Several of these amendments seek reassurance that sensible exemptions will be exercised narrowly and transparently without undermining the policy intent; others are concerned with ensuring that innovation, specialisation and strong value for money are not inadvertently crowded out by rigid thresholds.
Finally, there is an understandable concern that, where regulations will shape market structure and regulatory judgment over time, Parliament should retain meaningful oversight in how these powers are exercised.
I am grateful to noble Lords for their thoughtful contributions on this group. I thank the Minister for her attempts to answer the questions covering the CDCs on exemptions criteria and on innovation. With that, I beg leave to withdraw my amendment.
Member's explanatory statement
This amendment, linked to others in the name of Baroness Bowles of Berkhamsted, is consequential on an amendment leaving out the inserted section 28C from Clause 40. That amendment removes the Government’s broad mandation power.
Baroness Bowles of Berkhamsted (LD)
My Lords, I did not expect to lead this group, but due to the diligence of the Public Bill Office in tracking down consequential amendments, my Amendment 90 has come to the top.
My Amendment 110, which is my main amendment in this group and on which I will focus my remarks, seeks to delete new Section 28C of FSMA. At the heart of new Section 28C is the asset allocation definition, which is flawed not because of its aspiration but because it rests on a complete misunderstanding of what investment trusts or listed investment companies actually invest in, and it excludes them.
Last Monday, I explained the anti-competitive and reputational effects of encouraging the flow of investment exclusively via the new LTAF vehicle and excluding the long-standing listed investment company structure. Today I have touched on the role that they play in valuation. Before turning to the wider reasons why this clause is fundamentally flawed, I will dispel another misconception I hear in circulation: “Investment trusts do not do infrastructure”. Well, I do not know what you call the Thames Tideway Tunnel, Sizewell C, utility-scale onshore and offshore wind, schools, hospitals, hydroelectric schemes, solar and nuclear energy, space, communications and satellites—but I call them infrastructure. All are substantially invested in, at the building stage, by investment trusts. Perhaps the Minister would accompany me to see some of these, although maybe not in space.
I also hear the claim that they do not do the big infrastructure projects that the Government are focused on. That is not really true, but there is nothing in the asset list of private equity, private debt, venture capital and interests in land that says, “Only the mega size”, or that stops them being qualified assets when held by another route. Anyway, we all need all scales of infrastructure investment and ongoing funding for expansion.
On Monday this week, our much-vaunted new prospectus rules came into effect; they make it easier, cheaper and faster to raise both IPO and follow-on capital. This applies to listed investment companies, too. What was this for? It was precisely so that companies can grow faster, bigger pools of capital can be raised more efficiently and larger infrastructure projects and bigger funds can be built. What is the point of celebrating our new financial market regulation if the Government then block the very vehicles it was designed to support? Why are some people in charge of investment—yes, some of them are to blame, too—still of the mindset that investment trusts do not do primary investment, at the very moment when rule changes are being made to build on the boom in primary infrastructure investment that has come through this route in recent years?
I come on to mandation more generally. I am not against the underlying intent of encouraging more pension investment in private assets. However, there is already a far greater awareness of the need to do that. The policy argument is won, but we have only just got to setting up LTAFs and the listing rule changes. The Government have not given the financial industry the chance to show what it can do. It is hardly a vote of confidence in our largest industry—financial services. What message does that send to the world? It says, “Go somewhere else; we have to bully to get things done in London”. What does it say about our famous and canny asset management in Edinburgh? If the Government want to add encouragement, use “comply or explain”—or, better still, “always explain”—to add transparency and understanding to the system. My goodness, neither the Government nor parts of the pensions industry seem to know what goes on in the wider asset management industry. Do not just ask the same people who have driven the old pension investment strategies.
Then we come to trustees. I have amendments elsewhere in the Bill aimed at clarifying that they can and should look to wider systemic and economic effects, but they should not be overridden. At their core, members’ interests are paramount for trustees. New Section 28C does not have members’ interests paramount. It threatens deauthorisation and the disruption and cost that that would cause if, in the judgment of trustees and in full knowledge of the characteristics of their members, they consider that a little less infrastructure or private equity is appropriate. What if the phasing of big projects means that there is a dip when investments exit? What if you are still in the J-curve dip? If some things perform badly, or the rush to invest exaggerates prices, do trustees have to keep pumping money in at poor value? No, that is the moment for explanation and perhaps a modification of strategy, not compulsion or deauthorisation.
Let us be clear: a deauthorisation power of this kind is not neutral. It creates a structural pressure towards consolidation. If a scheme risks losing authorisation simply because its trustees judge that a different phasing or balance of assets is appropriate for its members, they get closed down or forced to merge. That is backdoor consolidation, not member-focused governance.
These are some of the reasons why I want to remove new Section 28C entirely. It does nothing but harm. It is economically inept, competitively unfair, legally unprincipled and blind to the regulatory opportunities that have only just come on stream. I beg to move.
Lord Sharkey (LD)
My Lords, it is a pleasure to follow—and I did—my noble friend discussing the reserved mandatory powers in the Bill. I will speak to my Amendments 111, 161 and 162. I thank the noble Lord, Lord Vaux, for adding his name to all three and the noble Lord, Lord Sikka, for adding his name to the first.
The purpose of these amendments is to remove the reserve power of mandation from the Bill. The case against these reserve mandatory powers has been set out by a large number of important institutions. Most criticism seems to focus on the issue of conflicts with fiduciary duty. Critics of mandation have argued, correctly in my view, that directing trustees to hold a fixed share of specified assets conflicts with the trustees’ duty to act solely in the interests of their members. Mandation of investment in specific asset classes for policy reasons rather than on a risk/return consideration risks subordinating members’ interests to political objectives.
This also exposes trustees to legal liability for breaching their duty, especially if the investments are seen as politically motivated or fail to deliver competitive returns. The lack of legal clarity around the scope of fiduciary duty, particularly regarding systemic risks or broader economic impacts may well exacerbate trustees’ concerns about litigation and regulatory risk.
I know that the Government are alive to the fiduciary duty issue and have promised to produce statutory guidance to help. At our meeting before Second Reading, I asked the Minister whether this guidance would have binding provisions. The answer was no. The guidance will have, apparently, the same force as the many other “have regards” in our financial services sector. I also asked the Minister whether we could see a draft of this guidance before the end of Committee, but I have not had a reply to date. I therefore ask the Minister again whether we will see draft guidance so that we may scrutinise it before the end of Committee, or at least on Report. It is easy to understand, in these circumstances, why some legal experts and industry groups have called for a statutory clarification of fiduciary duty and argue that only primary legislation can provide the cover that trustees need to invest confidently, as the Government wish, without breaching their duties.
There is also the question of definition. What is the appropriate test for “productive” when applied to mandated assets? What is the appropriate test for “UK investment”, or even “qualifying assets”? Can the Minister say what these tests are and when they are likely to be available to Parliament for examination? There are other significant concerns with mandation. For example, it may produce lower returns and higher costs if it drives crowded trades, pushing schemes into lower-quality or overpriced assets simply to hit targets. As the large DC providers have noted, if there are not enough good-quality opportunities in the mandated classes, schemes may be forced into illiquid or sub-optimal funds. This concern has been made clear as a condition of voluntary participation in the Mansion House Accord. Then there may be a risk in reducing diversification. Concentrating pension assets in restricted geography or restricted asset classes inevitably increases vulnerability to UK-specific economic shocks.
Lord Vaux of Harrowden (CB)
My Lords, before I start, I apologise to the Grand Committee for failing to be here to speak a previous amendment. It was unavoidable, unfortunately. I am very grateful to the noble Lord, Lord Palmer, for stepping into the breach. I have had an exciting afternoon moving from R&R to pension schemes. I apologise that I am afraid I am going to be in the same position next week, so it will not be me speaking to my Amendment 119. Anyway, there we go.
I speak in support of Amendments 111, 161 and 162, tabled by the noble Lord, Lord Sharkey, to which I have added my name. To be honest, I support all the amendments in this group that seek to remove the asset allocation mandation powers, which is probably the most controversial part of the Bill. The trustees or managers of pension schemes have an obligation to act in the best interests of scheme members. That is their fiduciary duty. It is not their job to carry out government policy and they should not be forced to act in a way that they may believe is not in the best interests of scheme members. That is the clear implication of mandation. If the assets that the Government wish to mandate are so suitable or attractive for the relevant scheme, the trustees would presumably already be investing in them. If mandation is required to force trustees to invest in such assets, it implies that they have decided that they are not suitable assets for the scheme. That drives a coach and horses through the whole fiduciary principle. As we will come to in a later group, personally I would feel very uncomfortable about taking up a trustee role in such circumstances.
It begs a range of questions. Who will be liable if the mandated assets perform poorly? The Bill is silent on this. Why should scheme members take a hit because of government policy? Are the trustees liable for any below-par performance? Why do the Government feel they know better than professional managers and trustees? I do not see any evidence at all that the Government are a better manager of investments. Who will decide on the asset allocation, and based on what criteria? There is nothing in Bill that sets out the purpose or criteria for the asset allocation: just some examples, including private equity, which the noble Lord, Lord Sharkey, mentioned, which will be looked at in a different group. All the Bill says specifically is that the allocation may not include securities listed on a recognised exchange. How will the impact be measured and reported? The Bill does require the Secretary of State to publish a report setting out the expected impacts on scheme members and UK economic growth, but there are no reporting requirements on the actual outcomes.
Surely it would be better to try to understand why pension schemes are not currently investing in these so-called productive assets. What are the barriers to them doing so? That is not a rhetorical question; I would very much like to hear why the Minister thinks this has not been happening. What is, or has been, stopping the pension schemes investing in those assets they believe are so desirable? Surely, the better answer must be to try to remove those barriers, to make the assets more investable, rather than mandating, perhaps by refining regulation or adjusting tax—Gordon Brown’s dividend tax raid has, I am sure, quite a lot to do with this—or taking whatever other actions may be required to remove or reduce the identified barriers. Mandation is, frankly, the lazy option. We should identify and deal with the root causes if we want a sustainable solution.
The Government say they do not intend to use the mandation powers and, in some ways, that is worse than using them. The powers are there as a stick in the background, to force trustees to invest as they want, but without giving the trustees any of the protections that might exist if they could at least show they were acting as required by law. In any case, as a matter of principle, Governments should never take powers that they have no intention of using. This mandation power drives a coach and horses through the fundamental fiduciary duties of trustees. The Government say they do not intend to use it; it should be removed.
Baroness Altmann (Non-Afl)
My Lords, I support all the amendments in this group. I echo the words of noble colleagues in the Committee about the dangers of the Government mandating any particular asset allocation, especially the concerns about mandating what is the highest risk and the highest cost end of the equity spectrum at a time when we are aware that pension schemes have probably been too risk-averse and are trying to row back from that.
What is interesting, in the context of the remarks made by the noble Lord, Lord Vaux, is that I was instrumental in setting up the Myners review in 1999, which reported in 2001, under the then Labour Administration. As Chancellor, Gordon Brown’s particular concern was about why pension funds do not invest much in private equity or venture capital. That was the remit of the review. The conclusions it reached were that we needed to remove the investment barriers, to change legislation, to encourage more asset diversification, to have more transparency and to address the short-term thinking driven by actuarial standards—at the time, it was the minimum funding requirement, which was far weaker than the regime established under the Pensions Regulator in 2004.
So this is not a new issue, but there was no consideration at that time of forcing pension schemes to invest in just this one asset class. The barriers still exist. In an environment where pension schemes have been encouraged, for many years, to think that the right way forward is to invest by reducing or controlling risk and to look for low cost, it is clear that the private equity situation would not fit with those categories. Therefore, I urge the Government to think again about mandating this one area of the investment market, when there are so many other areas that a diversified portfolio could benefit from, leaving the field open for the trustees to decide which area is best for their scheme.
I am particularly concerned that, as has been said in relation to previous groups, private equity and venture capital have had a really good run. We may be driving pension schemes to buy this particular asset class at a time when we know that private equity funds are trying to set up continuation vehicles—or continuation of continuation vehicles—because they cannot sell the underlying investments at reasonable or profitable prices and are desperately looking for pools of assets to support those investments, made some time ago, which would not necessarily be of benefit to members in the long run.
Baroness Noakes (Con)
My Lords, I support all the amendments in this group. When I came to draft my own amendments, I discovered that this area of mandation was a rather crowded marketplace, so I decided not to enter it. I will not speak at length on the subject, but I endorse everything that has been said so far and wish to commit my almost undying belief that mandation must not remain in the Bill.
Viscount Younger of Leckie (Con)
My Lords, my noble friend Lady Stedman-Scott and I have only one amendment in this group: Amendment 109, which would remove the Government’s broad mandation power. That has been very much the theme of this debate, of course. I want to be absolutely clear at the outset that we are also seriously and fundamentally opposed to investment mandation in the Bill, which I sure will come as no surprise to the Minister.
Baroness Sherlock (Lab)
My Lords, the broad, combined effect of these amendments would be to remove from the Bill the ability of the Government to require certain pension schemes to hold a prescribed percentage of their assets in qualifying assets. I confess that, after Second Reading, the reaction of some noble Lords has not been entirely a surprise to me. However, I have to say at the start that, although the provisions divide opinion, they deliver an important element of the pensions investment review that the Government concluded last year.
I will make two headline points. First, as I have said, we do not presently expect to have to use the powers, as we are confident that the industry will deliver voluntarily on its commitments made under the Mansion House Accord. Secondly, the Government would not be proposing these powers if there were not strong evidence that savers’ interests lie in greater investment diversification than we see today in the market. DC pension providers recognise that a small allocation to private markets can improve risk-adjusted returns as part of a diversified portfolio. Despite this, in many cases providers are holding back, not because it is necessarily in savers’ best interests but, among other reasons, because of a lack of scale or because of competitive pressure to keep fees low. That problem, alongside the potential economic benefits of this sort of investment, is why we have made investment diversification such a big focus of these reforms and why we have welcomed the Mansion House Accord. It is also why it is so important that the industry is pulling in the same direction and why it is necessary that the Government have taken reserve asset allocation powers as a backstop to be used only if necessary.
Noble Lords have raised various concerns about the powers, which we will no doubt explore in much more detail on Monday—I look forward to that. However, as an opening point, I emphasise that the Government have taken care to build in appropriate guardrails. First, the power is time limited. It will expire in 2035 if it has not been used, and any percentage headline asset allocation requirements that are in force beyond that date will be capped at their current levels.
Secondly, the Government are required to establish a savers’ interests test, in which pension providers will be granted an exemption from the targets, where they can show that meeting them would cause material financial detriment to savers. The Government will need to consult and publish a report on the impacts of any new requirements on savers and economic growth, both before exercising the power for the first time and within the five years following the power being exercised. The regulations implementing this framework will be subject to parliamentary scrutiny.
A number of points have been raised. I will keep my response fairly high level; I know that some of those points will come up again next week, so I will return to them then, given that we have limited time before the Grand Committee must end. I start with the question of whether this is necessary. The Government are strongly encouraged by the Mansion House Accord, which is an industry-led, voluntary commitment by 17 of the UK’s largest pension providers to invest 10% of their default funds in private markets, with at least half of that in the UK, by 2030. It means that savers will benefit from greater diversification and the potential for better long-term returns. In view of this progress, the Government do not currently expect to need to use these powers.
In response to the noble Viscount, Lord Younger, and the noble Lord, Lord Vaux, I note that there is a continued risk of a failure of collective action here. Individual providers are under competitive pressure to keep costs as low as possible, which can discourage them from investing in the full range of asset classes, even where it may be in savers’ interests to do so. The reserve powers signify to the industry that change is happening across the market, and in that way—together with our other reforms—they support the transition to which the industry has itself committed. That is the top line as to why we are taking the power and the circumstances in which we think we would use it. I will come back to the issue of private markets when we have a debate on private markets next week.
We will have a longer debate on trustees and fiduciary duty, particularly the issues around regulations, when we come back next week, if that is okay with the noble Lord, Lord Sharkey. However, the Government do not accept that this proposal cuts across fiduciary duty. There is widespread recognition of the benefits that a diverse investment portfolio can bring for savers. Indeed, that is exactly why the signatories to the Mansion House Accord are committing to investing in private markets. However, if the reserve powers did come to be used, the Bill provides for a savers’ interest test to ensure that schemes can deviate from any asset allocation requirements where they can demonstrate that savers would suffer material financial detriment. The Minister for Pensions has committed to working with the sector to ensure that guidance gives trustees the confidence they need to invest in the best interests of savers and the UK economy. A stakeholder-wide round table will begin this work early next month, and I will keep noble Lords informed on that.
The noble Lord, Lord Vaux, asked what happens if a scheme makes losses. Trustees continue to be responsible for investing in their savers’ interests. We will come back to this in more detail, but the headline is that this means savers would continue in all circumstances to be protected by the core fiduciary duties of trustees. Trustees would also continue to be subject to a duty to invest in savers’ best interests in line with the law. We would expect that duty certainly to apply to the selection of individual investments in a portfolio, the balance of different asset classes in a portfolio and to any decision to apply for an exemption under the savers’ interest test.
The noble Lord, Lord Vaux, asked about sorting out other barriers first. Last year, we completed a comprehensive review of pensions investment, which identified that greater scale, as well as a greater focus on value rather than cost, has the potential to unlock significant additional investment that benefits both savers and the economy. The measures in the Bill tackle that. However, that does not mean that the work stops on barriers and investment opportunities. For example, the FCA announced last month that it will consult on rolling out to the pension funds it regulates a target exemption from the 0.75% charge cap, to accommodate the sorts of performance-based fee structures often used in private market investment. The signatories to the accord have explicitly called for that.
The noble Lord, Lord Sharkey, asked about enablers and whether there are enough investment opportunities. The answer is yes. We will continue to engage closely with the industry on the steps it is taking and any obstacles it is encountering. At this point, we are encouraged by early signs of progress and are confident that the momentum will continue. On future investment opportunities, I draw the noble Lord’s attention to one example of the role that the Government are playing: the Sterling 20 Group of leading pension providers launched by the Chancellor at the October regional investment summit. That group, convened by the Office for Investment, includes all the Mansion House Accord signatories and has already met twice to discuss specific investment opportunities in venture capital and energy generation.
The noble Lord, Lord Sharkey, asked about the consumer duty. The FCA’s consumer protection objective will continue to apply to FCA-regulated schemes. The FCA will apply it in parallel to any asset allocation requirements: in other words, where it does not believe there is a conflict. Or at least, where we do not believe there is a conflict. Or someone does not believe there is a conflict. Savers’ interests tests will be available for FCA-regulated firms, just as for TPR firms.
Lord Sharkey (LD)
Can the Minister respond to the point I made about statutory guidance?
Baroness Sherlock (Lab)
I will answer that next week, if that is okay, when we discuss the issues of fiduciary duty.
Viscount Younger of Leckie (Con)
I have a couple of points to raise. The Minister mentioned that the reserved power was designed to be a signal, and I would argue that it is a pretty strong signal to put in the Bill. Will she strongly consider whether there are other ways to encourage investments in the UK other than using this, and what might they be? This is one of the things that we will want to press.
Secondly, she did not answer my question about the dangers of a future Government taking up these powers, even though she mentioned the sunset clause of 2035, which is, frankly, some time off.
Baroness Sherlock (Lab)
I am sorry I did not namecheck the noble Viscount in responding to the second point. I intended to respond by pointing to the safeguards and the guardrails that have been built in. That was the nature of the response to that.
In response to the first question, I thought I said that the Government accept that this is not the only issue and that we are addressing the other ways. We have been looking at the other barriers and investment opportunities. We also mentioned that the FCA has looked at examples. It is not the only thing; we are looking at the other things as well. We think there is already significant progress, but we think this reserve power is a way of ensuring that progress goes forward and not backwards on this issue.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will be brief. There is a lot that could be said, but we will have other opportunities later on in this Bill.
This should have been a happy Bill, doing good for ordinary workers and building the economy, looking after the future in two interconnected ways. For the main part, we had cross-party policy consensus and continuity. We had public and industry support, which is just what you need for issues such as pensions and long-term investment, aided by significant and consensual regulatory changes—culminating this week—that should enhance diversity, choice and transparency in investment decisions.
However, at the heart, we got this devil’s clause. The Government have not given development a chance and such a reserve power is a massive intervention. It is a clause that, where there was unity, brings division; where there was trust, brings doubt; where there was confidence, brings concern; and where there was hope, brings despair. No wonder noble Lords oppose it. It ticks every bad box. I urge the Government to think again. They have not given policy and process any due regard and therefore I am sure that many of us will return to this on Report. But, for now, I will withdraw my amendment.
The Deputy Chairman of Committees (Viscount Stansgate) (Lab)
That concludes the business of the Committee today. However, I will say that we have had a distinguished young visitor with us for most of today’s Committee: a school student who is learning about pensions at school. I thank the Committee for presenting such a very good example of the serious way in which this House deals with public Bills. The Committee stands adjourned.