Arrangement of Business
The Deputy Chairman of Committees (Baroness Fookes) (Con)
My Lords, I am obliged to remind the Committee that, if there were to be a Division in the Chamber, we will adjourn for 10 minutes. It seems highly unlikely.
Pension Schemes Bill
Monday 26th January 2026
(1 day, 11 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-V(a) Amendment for Grand Committee (Supplementary to the Fifth Marshalled List) - (23 Jan 2026)
Baroness Noakes
“(c) able to demonstrate that they deliver investment performance which exceeds that achieved by the average of all Master Trusts which hold an approval under section 28A in respect of a main scale default arrangement.”Member’s explanatory statement
This amendment allows Master Trusts which deliver good investment performance to be excluded from the scale requirements.
Baroness Noakes (Con)
My Lords, I will speak to my Amendments 91 and 95. I thank my noble friend Lady Neville-Rolfe for adding her name to them. Having had a little detour into asset mandation in the last group, we now return to scale. My Amendments 91 and 95 relate to master trusts and group personal pension plans, respectively, returning to the theme of size not being everything. They are intended to exempt from the scale requirements those schemes that deliver investment performance which exceeds that achieved by the average of all master trusts or all group personal pension plans.
We debated the general theme of size not being everything on the last day of Committee. I firmly believe that we should not let an obsession with size squeeze good performers out of the market. The Minister’s arguments on that day, despite protestations to the contrary, show that the Government have an obsession with size that overrides their professed desire for better outcomes for savers. If they really care about outcomes for savers, they should not be fixated on structural issues such as the size of assets under management, because good investment returns are not the exclusive preserve of schemes that reach the magic £25 billion of assets. The evidence for the Government’s policy cited by the Minister last week merely indicates that there is a correlation between size and returns achieved. That evidence, however, categorically does not demonstrate that good returns are obtained only by those which pass a size threshold.
At the heart of this debate is the problem that the Government are trying to use this Bill to force pension schemes to divert investment resources into things that the Government think will improve the UK economy, while at the same time claiming the objective of good outcomes for savers. I remind the Minister of Tinbergen’s rule: if policymakers wish to have multiple policy targets, they must have an equal number of policy instruments under their control. One instrument—mandating the size of pension provider—will not achieve the separate targets of improving savers’ outcomes and increasing UK productive investment without risking policy effectiveness and reduced transparency and accountability. By ignoring Tinbergen’s rule, the Government are actively inviting policy failure in this area.
I also strongly support Amendment 98 in the names of my noble friends Lord Younger and Lady Stedman-Scott. Innovation will not thrive in the pension sector if it has to pass arbitrary size tests. We should do everything that we can in this Bill to promote innovation. I beg to move.
Baroness Altmann (Non-Afl)
My Lords, I, too, have a number of amendments in this group and I will address my remarks mainly to them. Amendments 99 and 106 recommend removing the specific figure of £25 billion from the Bill and replacing it with a figure to be determined by the Government nearer the time, I hope, after detailed consultation.
On the last day in Committee, when we debated Amendment 88 on small pots, in the name of the noble Baroness, Lady Noakes, which proposed a monetary limit of £10,000, the Minister rejected the amendment on the grounds that
“the Government are not persuaded that it is sensible to hardwire the cap in primary legislation”.—[Official Report, 22/1/26; col. GC 188.]
Quite right. The same applies here: my amendment follows exactly that principle. I am concerned about the risks involved in tying primary legislation to a fixed monetary sum.
First, a change in market conditions could render it inappropriate. Secondly, such a large sum risks stymieing the development of newer companies and gives an exceptional competitive advantage to those providers already of the required scale. There is no evidence—I have been searching—to suggest that big is always best and there is certainly no academic proof that £25 billion, £10 billion or any other number is the right dividing line between successful funds and failing funds.
Newer entrants with an interesting approach to member service, digital engagement or innovative investment may well take time to break into the market, but just because they have not reached what the Bill determines is the magic number should not mean that they are forced to close, which is what the Bill would do, in effect.
The Minister said that consolidation and scale will mean
“better outcomes for members … lower investment fees, increased returns and access to diversified investments, as well as better governance and expertise in running schemes”.—[Official Report, 22/1/26; col. GC 202.]
That may well be the case for many, but deliberately disadvantaging innovation and putting up barriers that damage recent or newer entrants, regardless of their merits, runs counter to those intended outcomes over the longer term. Using collective vehicles, for example, run by already established experts such as closed-ended investment companies, can replace the need for in-house expertise at each of the big pension funds. Indeed, that option is already available but is being discouraged by the Bill.
As the noble Baroness, Lady Noakes, said, a correlation is not the same as a causative impact. Putting £25 billion into the Bill creates a big issue with some of the newer companies that will fall into the vacuum between the new entrant pathway, which does not start until a scheme is established after 2030, and the transitional pathway, which requires this fixed £10 billion—I could have tabled amendments on that, but £25 billion is the same principle—if they have not reached that level.
What is worse—I tried to indicate this last week—is that, although I know that the Government want to inject certainty by including these numerical figures, unfortunately they are also blocking the progress and potentially forcing the closure of a number of schemes that have digital-first methodologies right now but have not been established long enough to reach the required scale and to which the market to raise growth capital is currently shut. Who would lend money to a newer company that may or may not reach the scale required by the particular date?
The Government need to think again about the merits of using a fixed number, as the Minister mentioned last week. I would be happy to meet officials or Ministers to go through the rationale that has had this damaging effect in the market. I hope that we will not give a hostage to fortune by specifying a particular number in the Bill that may or may not prove to be right, wrong or damaging. I hope that the Minister will help the Committee to understand whether the Government might consider this principle.
Baroness Neville-Rolfe (Con)
My Lords, I support Amendments 91 and 95 in the name of my noble friend Lady Noakes, to which I have added my name. I apologise for not being able to contribute to the Committee’s discussions on Thursday because of competing business on the Floor of the House. I have read Hansard and I should record that I share the reservations expressed about mandation, a subject on which I have received many well-argued requests and emails. I commend the arguments that have been well put by my noble friend Lord Younger of Leckie on the amendment from the noble Baroness, Lady Bowles. I particularly dislike powers delayed into the future. If the Government decide that they need to legislate later, they can bring in another Bill that the House can scrutinise in the light of contemporary evidence.
I turn to the amendments in this group, so well argued by my noble friend Lady Noakes. I am uneasy, as others are, about the overemphasis on creating size and scale in the Bill: £25 billion is a big fund and, as my noble friend Lady Altmann said, it does not seem to be well evidenced. It is a Labour trend that needs to be treated with some scepticism. We see it in local government reorganisation, in rail nationalisation and now in the proposals for the police. I know from my business experience, which noble Lords know I always come from, that mergers of any kind always have substantial costs and that you need smaller, pushy innovators to keep sectors competitive. This might be contentious, but Aldi was good for Tesco because it kept us on our toes—and even better for the consumer, the equivalent of the saver in this case. The point is that reorganisations of any kind always have costs and only sometimes have benefits.
We have seen the growth in recent years of money purchase funds that are almost entirely digital, and they have brought beneficial competition to the market. We risk eliminating the next generation of innovation, real value creation and indeed British unicorn funds, generated by competition, if we leave the Bill as it is.
We must not allow good performers to be snuffed out by the movement to bigger schemes. That is why we are asking the Minister to look at excluding master trusts and group pension plans that deliver good investment performance from the scale and size requirements. Performance is, after all, what matters to those saving for a pension. Size, scale and growth are not everything, popular though they tend to be with the fund managers who benefit. Returns matter more, but the Bill at present rather underplays them in favour of scale. My noble friend Lady Noakes’s amendments are just what is needed, and I look forward to hearing how the Minister is going to solve the problem that she has identified.
Lord Fuller (Con)
My Lords, I will speak to Amendment 99 in particular but I generally associate myself with all the amendments in this group, including Amendments 95 and 98 in the names of my noble friends.
As we have heard, there is no conclusive evidence that bigger is best when it comes to investment management. Of course there are some large funds that do rather well, but, as I explained on a previous day in Committee, within the Local Government Pension Scheme it is the smallest fund in the Orkneys that has outranked the performance of all the 88 other schemes in the LGPS, and there is something to be said for that. It has never changed its investment manager, and there is a lesson there.
In my experience, the best returns are to be made in investing in companies where you either buy the product or know the management—not so that you can tap them for inside information, of course, but because it hardly ever pays to invest in bad people. I also like to buy when prices fall because, let us face it, buying high and selling cheap is never a good investment strategy. But there is no evidence at all that scale in and of itself is good. There is plenty of evidence that it is worse. As they say, the larger they are the harder they fall, and small ones are more juicy.
Viscount Trenchard (Con)
My Lords, I will not go into too much detail. I should, because I was not here last week, declare an interest, in that I am a director of a Guernsey-based, open-ended protected cell company and a London-listed, closed-ended investment company. Neither of them begins to approach the necessary size to qualify under the scale criteria that this Bill introduces.
I agree entirely with the points made by my noble friends Lady Noakes, Lady Neville-Rolfe and Lord Fuller and the noble Baroness, Lady Altmann. Scale is nothing to do with this. I find it quite extraordinary that the Government assume that big is good and small is bad. All big funds were once small: they started with nothing and built up. There is also some evidence that, if you get really big, you become a big complacent and do not have to be quite as sharp as you do when you are making a small fund bigger and more successful and establishing its reputation.
Interfering with the fiduciary duties of pension fund trustees in this way is risky, bad, potentially dangerous and unlikely to be in the interests of the pension beneficiaries, so I strongly support all the amendments in this group. I do not think that the minimum size of a master trust should be specified in the Bill. Trustees will have their own criteria for the maximum proportion of funds that they may own in any one fund, and for the maximum percentage of their funds’ assets that may be invested in any one fund. I think these are better ways to achieve the obvious need to reduce risk, and pension fund trustees are the right people to deliver them.
Lord Ashcombe (Con)
My Lords, I remind the Committee of my interest as an employee of Marsh, which owns Mercer, a pension and investment advisory management company.
I did not intend to speak on this group but I do not believe that financial size is the be-all and end-all. In my world, working for a very large insurance broker, we think we have advantages in the marketplace. However, it would be remiss of me to ignore not only the smaller operations but the many small boutique entities that are experts in a very narrow and small field. It is very unlikely that they will ever become one of the large operations. Although size can be useful, the smaller experts are essential to the marketplace and, you might argue, keep the larger operations honest.
I do not believe this picture is anything different from that of the pensions industry. These amendments address the benefits of the new and smaller entities being a necessary part of the market, and should be welcomed.
Lord Palmer of Childs Hill (LD)
My Lords, I thank all noble Lords who have contributed to this debate. As we know, this group addresses the use of scale, as measured by assets under management or monetary value, as a determinant of scheme quality.
The noble Lord, Lord Fuller, gave the example of the Orkney trust. I ask myself: what is the reason? Is it size? Personally, I think it is the calibre of the single malt whisky. Then we go to the other end of the country, to Guernsey. Is it because trusts are at the extremes of the country that causes the good benefits, or is it something else? You can always look for a reason: it could be size, location or anything else—or, indeed, the quality of the whisky.
We accept that scale can bring efficiencies, but there is a strong question over whether size alone is a reliable proxy for value. Amendments 91 and 95 recognise that some master trusts and group personal pension schemes deliver strong investment performance despite being below prescribed thresholds. Amendment 98 similarly acknowledges that innovation and specialism do not always depend on scale, location or whatever else.
We are also concerned about the rigidity of fixed monetary thresholds in the Bill. Amendments 99, 101, 106 and 108 in the name of the noble Baroness, Lady Altmann, are concerned about the rigidity of fixed monetary thresholds in the Bill. These amendments probe whether the figures chosen are evidence-based and future-proofed, or whether they risk being outdated—that is the point—as the market evolves. It is not cast in stone, and we should not try to see it as such.
Amendments 101, 104 and 108 in the names of the noble Baroness, Lady Altmann, and others, raise an additional concern: the risk of mandating common investment strategies. Diversity of approach is a strength of a pension system. Forcing schemes into uniform strategies risks herding behaviour and systemic vulnerability. My question to the Minister is this: is the Government’s objective genuinely better member outcomes—which I believe we all want—or prioritising administrative simplicity at the expense of innovation, competition and resilience? All the amendments in this group tackle this problem, and those in the name of the noble Baroness, Lady Altmann, particularly stress that. I hope we will continue to push these through to the next stage of the debate on this Bill.
Baroness Stedman-Scott (Con)
My Lords, today’s groups build directly on the issues explored in last Thursday’s debate. That discussion was both stimulating and constructive, and the contributions made, particularly on mandation, highlight the value of the scrutiny that this Bill continues to receive in Grand Committee. On this group, in the interests of brevity—I am sure that will please the whole Committee—I shall keep my remarks focused on the amendments in my name and that of my noble friend Lord Younger of Leckie. A number of significant and related issues have been raised by other noble Lords, and we will wish to return to these later today. We will listen carefully to the Minister’s response to the points made on this group.
Amendment 98 would introduce a clear and proportionate innovation exemption for relevant master trusts under Clause 40, so that schemes delivering genuinely specialist or innovative services are not automatically required to meet the scale threshold simply because of their size. We have been challenged today not to be obsessed with size. We recognise the policy aim of improving outcomes through scale. However, as I said, size is not always a reliable proxy for quality or value: there are master trusts that are smaller by design yet deliver strong member outcomes through innovation, whether in investment approach, governance or engagement with particular workforces. As the Bill is currently drafted, such schemes risk being forced to consolidate or exit, not because they are failing members but because they do not meet a blunt asset size test.
Amendment 98 provides a sensible alternative route, recognising that innovation and specialisation can also deliver high-quality outcomes. This amendment simply ensures that size alone is not determinative. I hope the Minister will see this as a constructive amendment that supports innovation and choice while remaining fully aligned with the Bill’s objective of improving outcomes for savers.
Amendment 102 is, again, a probing amendment. Clause 40 gives the Secretary of State the power to determine by regulations the method for calculating a master trust’s total assets for the purposes of this provision. That is a potentially significant power, because the way that total assets are defined and measured will determine which schemes fall within scope and which may benefit from exemptions.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
I am grateful to noble Lords who have introduced and spoken to amendments. Clause 40 delivers the Government’s commitment to ensure that DC workplace pension savers benefit from the advantages that flow from scale and consolidation. It establishes a clear, measurable threshold and a framework centred on a single main scale default arrangement—MSDA—so that governance and investment decisions can be applied consistently across large pools of assets. This approach is integral to securing better member outcomes, improved access to productive investment and stronger in-house capability.
We had a preliminary conversation about all this on Thursday, but I know that not all noble Lords were there so, before I dive into specific points on the amendments, I will pick up a couple of the headlines. In response to the noble Lords, Lord Ashcombe and Lord Palmer, the UK’s workplace pension industry accounts for more than £2 trillion in assets, serving more than 16 million savers who have been automatically enrolled and are not engaged in pension savings. It is particularly important that these assets are working as hard as possible to provide better saver returns and security in retirement and, to do that, scale and provision really matter.
Evidence suggests that there are direct benefits derived from scale; they include better governance and economies of scale, whereby greater size reduces average cost per member and creates the ability to move investment in-house, which reduces investment costs in turn. It also enables access to a wider range of assets, including diversification and the ability to invest directly in assets rather than having to be part of a pooled fund. With improved bargaining power, schemes can negotiate lower investment fees, improving net returns.
There is a lot more that I could say, but I have said quite a lot of this before. I will say just a word just about the level of scale and why it is £25 billion. As I explained last week, our evidence shows that, across a range of domestic and international studies, a greater number of benefits can arise from a 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.
That is supported by industry analysis, showing that schemes of this size find it easier to invest in productive finance. International evidence shows that funds in the region of £25 billion invest nearly double the level of private market investment compared to a £1 billion pound fund. We selected the lower band, but there is further evidence that demonstrates that the greater the scale, the greater the benefits.
I can point to a range of studies. Analysis from Australia’s pensions regulator found that funds with around £25 billion were able to spread costs over their membership, keeping fees lower. Pensions UK reported that schemes with £25 billion to £50 billion of assets have considerable governance capability and find it easier to invest directly. The Conexus Institute again found in favour of funds of £25 billion to £50 billion. We have been transparently reporting the evidence via the impact assessment and the previous publication of Pension Fund Investment and the UK Economy, which outlined the evidence.
The noble Lord, Lord Fuller, will have to forgive me; I am not going back to LGPS. We spent two entire days in Committee on the first 10 pages of the Bill and I am not going back there. We can do it on Report. He is not going to stand up; I have not responded to a word he has said yet. Give me a moment. The noble Lord’s point is about scale. The evidence shows that larger schemes are better placed to invest—
Lord Fuller (Con)
The Minister invites me to stand up. The only reason I mentioned the LGPS is because the LGPS funds have been put into pools of £25 billion to £50 billion. We have a real economy experiment of what might happen if these provisions are enacted on the rest of it. The noble Baroness said that there are lower costs of investment. Then she went on to say, just now, that it is transferred with in-house teams. You will therefore have to substitute an externalised team for an in-house team at a scale of £25 billion. You are trying to compete with Fidelity, which has £900 billion in its team. You are setting these people up to fail; you have got the wrong scheme. You need the ability to go to the largest fund managers with the hugest assets under management, not try to recreate the City in aspic on footprints of £25 billion by duplicating all the procedures, staffing, HR and everything else. You have the B team and, guess what, they are always away on holiday in the first two weeks of August when the last three market crashes have happened and there is no one to answer the phone. That is the problem. You are saving one risk and applying the other.
Baroness Sherlock (Lab)
My Lords, I made these arguments at some length on Thursday. I have made them again now. The noble Lord disagrees with them; I can tell from his tone. He can read Hansard and pick up the relevant bits with me if he would like to.
Let me come back to the amendments. I will start with Amendments 91 and 95 from the noble Baroness, Lady Noakes. I thank her for introducing them with her customary clarity and brevity. These would create an exemption from the scale of requirements for master trusts and GPPs that can demonstrate investment performance exceeding the average of schemes that meet the scale conditions. I recognise the intent to reward strong performance, but obviously I am concerned the proposal would undermine the Government’s objective, which is a market of fewer, larger, better-run schemes, where economies of scale deliver sustained benefits to savers.
I should clarify the point about objectives. The Government’s primary objective is saver outcomes. I want to be clear about that. While I am here, I say to the noble Lord, Lord Palmer, that this is not about administrative simplicity but about member outcomes. At the centre of our policy is the drive for better membership outcomes. That does not mean a simple scheme, but one that has strong governance and is well run, including strong administration, because scale supports the scheme to have the resources and the expertise to do this.
To respond to the noble Baroness, Lady Noakes, in considering scale in the pensions landscape today, we have all shapes and sizes of schemes, in which value for members is important. We know that performance can be delivered across different sizes of scheme, but scale changes the landscape. Schemes that have scale will have the tools to deliver on value and performance in a way that a small scheme will not be able to in this future landscape. That is because scale enables greater expertise, efficiencies and buying power than a small scheme. That is the landscape we need to deliver for members because we want better outcomes for them. In considering the issue, it is therefore important to focus on the future landscape, the market at scale, and not the current landscape. In our view, there is not sufficient evidence that other approaches can deliver the same benefits for members and the economy.
On the specifics of the noble Baroness’s amendment, there are also some concerns around the impact; it could create an unstable landscape if we were to focus on the performance at any point in time. Of course, the intention for any exemption is that it is a permanent feature of the scheme and is not subject to regular assessment. As we all know, past investment performance is not a guarantee of future success. If we went down this road, there would be times when exempted sub-scale schemes found that they were no longer delivering investment performance that exceeds the average of those at scale. That is not stable for members or employers, and does not support their interests.
Amendment 98 proposes an innovation-based exemption from the scale requirement for master trust schemes offering specialist or innovative services. I agree with the noble Baroness, Lady Stedman-Scott, that innovation really matters; that is precisely why the Bill provides for a new entrant pathway so that novel propositions can enter the market and scale responsibly. But creating a parallel innovation pathway as an alternative to scale would dilute the fundamental objective of consolidation and risk maintaining a long tail of small schemes, with fragmented governance and limited access to productive investment.
I should say a few words on competition. Actually, I might come back to that.
Amendments 99 and 106 from the noble Baroness, Lady Altmann, would remove the £25 billion threshold from the Bill. We believe the threshold is a central pillar of the policy architecture. It has been set following consultation with industry and government analysis of the emerging evidence, to which I referred earlier, on the point at which the benefits of scale are realised. We believe that this is a key policy decision that should be in the Bill. We also believe, as the noble Baroness indicated, that it is very important that there is certainty for industry on this threshold at the earliest possible point. Putting the £25 billion on the face of the Bill assures industry that it cannot be changed without full parliamentary engagement.
I know the noble Baroness wants me to reassure her that this matter is open for further discussion. I regret that I will have to disappoint her. The Government are committed to this and have put it in the Bill for the reasons I just explained.
Baroness Altmann (Non-Afl)
If the intention is to maintain these specific limits in the Bill, I hope that consideration will be given to an existing new entrant pathway—rather than only a new entrant pathway from 2030 onwards—and some kind of innovation pathway, as suggested by my noble friends Lord Younger and Lady Stedman-Scott, so that schemes that either are already in existence or will come through over the next few years, if they are able to do so, will not be forced out of business or prevented even beginning.
Baroness Sherlock (Lab)
The noble Baroness makes an important point about innovation. We recognise the importance of a proportionate approach to scale, which is why we created the transition pathway. I know that the noble Baroness thinks the number or scale is not right, but that is the purpose of the transition pathway: to give schemes that can reach scale within a reasonable time the chance to do so.
On innovation, although we want to see a market of fewer, larger pension schemes, the policy still encourages competition through allowing innovative schemes, such as CDCs, to develop and by enabling brand new innovative schemes to enter the market via the new entrant pathway. I know the noble Baroness is not satisfied with that, but that is our answer to her question: the new entrant pathway.
Amendment 102 from the noble Baroness, Lady Stedman-Scott, would delete the regulation-making power on what values can be counted towards the scale threshold in order to probe how assets will be calculated. The market contains varied and complex arrangements. It is both prudent and necessary that affirmative regulations, consulted on with industry, set out the assets that may be included or adjusted when calculating the total value in the MSDA, with a focus on assets where members have not made an active choice.
Let me be clear on that point: the choices that will be made here are the ones that will create the big fat wallet, if you like, which will in turn drive the benefits of scale. The intent is that the regulations will focus on the default arrangement that the vast majority of members will be in. We want to see members of the same age who join the scheme at the same time get the same outcome, but the regulation-making power enables practical realities of how the market operates now—especially at the margins. We know that there is a variety in practice in the market, so engagement and consultation are crucial.
Amendment 104 from the noble Baroness, Lady Stedman-Scott, would remove the regulation-making power to define “common investment strategy” and to set evidentiary requirements for the scale condition. I understand that the aim here is both to probe this power and to require the Government to define “common investment strategy” prior to Royal Assent. A common investment strategy will help to deliver a single approach to maximise the buying power of a scheme in terms of fees and the diversification of its investments. We think that is crucial because allowing, for example, multiple potentially divergent strategies within the MSDA would maintain fragmentation and drive away from the consolidation that we want members to benefit from.
Baroness Noakes (Con)
My Lords, I thank all noble Lords who took part in this debate, which has demonstrated that there is unanimity on this side of the Committee on scale not being the most important thing—in direct contrast to the Government’s dogged attachment to scale.
We will probably return to innovation next week, so the Minister will not escape it, but I do not think the Government yet understand how innovation works and what it takes to scale a business: the timescales involved, the way you need to raise finance during the growth of a business, and the impact that what they have put in the Bill will have on those processes. We will need to explore that in much more detail. The noble Baroness, Lady Altmann, who wished to do so, is absolutely right, because I do not think the Government really understand what is involved in this area.
On “big is best”, which we on this side of the Committee certainly do not subscribe to, the Government said that the primary objective was savers’ outcomes, but a couple of minutes later the Minister said that the objective was consolidation. Is there a hierarchy of objectives in this Bill? It is not clear to me that there is. A few sentences away, she talked about the benefits that derive from scale, but the Government seem to have closed their mind to this: if you can get equivalent benefits without scale, why should you not?
That was immediately followed by the Minister saying that when you are in a £25 billion-plus fund, you put double the money into productive finance. There we are into the real objective of this Bill: to funnel savers’ money into productive investment. I refer the Minister to my comments on each policy objective needing a policy instrument and getting into terrible trouble when you try to get one policy instrument to meet more than one objective. I was reminded of this by one of her Back-Benchers, who kindly pointed out that clear rule, which is well evidenced. I will not disclose his identity, and he is not going to get up and say it, but I really think the Government should look again at how they are using the instruments in this Bill to achieve what are clearly multiple objectives, not disclosed in a hierarchy and not even acknowledged as being potentially in conflict. We will clearly not progress any further in Committee, but the Minister should be in no doubt that this will be a feature of our discussions on Report. I beg leave to withdraw.
Baroness Altmann
Member’s explanatory statement
This probing amendment seeks to ensure that this legislation does not exclude Master Trusts or other pension funds from offering members the chance to invest in default pension arrangements which are more suited to their own circumstances, including age, retirement intentions, health conditions, plans for future retirement income options etc.
Baroness Altmann (Non-Afl)
My Lords, I will speak to all the amendments in this group, which are basically on exactly the same topic. I hope that the Minister understands the spirit in which they are all intended. I also hope that the Committee will be minded to support them. In a way, they follow from my Amendment 108 in the previous group, which sought to get away from the idea that one size fits all in pensions and that a common investment strategy is a recipe for success for either a group of members or all members.
My concern is that the approach to auto-enrolment pensions hitherto was to assume that there is a standard fund that is suitable for all classes of members, which can then be safely invested in by everybody. Of course, it is easiest for providers to have a common investment strategy or a common investment approach in the default fund, but enforced uniformity does not mean that all groups of members are served well.
These amendments seek to anticipate the possibility that some of the large pension providers, either existing ones or, I hope, new ones, will follow an approach in which they have a number of default funds that can be suited to different classes of member on the basis of three or four basic questions that might be relevant to their circumstances. I hope that we get to a position—I know some of the new providers intend to do this—where the pension provider does not look just at your chronological age, for example, and make an assumption about what investments suit you, but asks you whether you intend to stop working at a particular date, whether you have other pension funds and what your state of health is. Just those three basic questions can be critical to the success of an investment strategy for that group of members, but they are all lumped together at the moment.
In addition, it would be helpful to use the Bill not to close down the option of a scheme offering a number of default funds. At the moment, the danger is that everybody thinks that we have to get to £25 billion, even if it is by a range of different approaches. I know that there is an option potentially to aggregate assets, but my amendments seek to ensure that, if the £25 billion number stays in the Bill—the noble Baroness unfortunately seems intent on that being so—the Bill directly allows for a number of default funds to be added up.
I say that because we have seen in recent years the “lifestyling” approach, for example, in which all members are put into one default fund with a lifestyle approach, or a target date fund approach. This has let members down significantly. Although it is not widely reported, I am sure that many other noble Lords have had emails or letters from people coming up to retirement in 2022, who had a pension fund statement that told them they were in a safe fund and the size of the pension they could expect to receive in a few months’ time. By the time they came to, let us say, later in 2022, however, their so-called safe fund had lost up to 30% of its value. Suddenly, they were unable to stop work because they had been put in an approach that was not suitable in the end or did not do exactly what it said on the tin in its results.
If the current approach is that, just because you are 50 or 55, no other questions are asked and you are in a big default fund that says you will be stopping work within the next five to 10 years, and therefore you should not be invested in high-risk assets, which is another name for higher expected return assets, but should be moved into low-risk assets, which is another name for low expected return assets, you are not necessarily being provided with a suitable option. One size fits all does not work if, for example, the member is 55 or even 60, has no intention of stopping work in the foreseeable future, perhaps has a guaranteed defined benefit pension somewhere else that they can rely on, or, at the other end of the scale, is in very poor health and may have to stop work soon, so should be in a different pool. I hope that the Minister will understand that the intention is to anticipate innovation in that regard. I feel that, at the moment, pension companies are not even asking members what their intentions or circumstances are, or even the basic three or four questions.
I declare an interest as an adviser to Cushon, which is looking to introduce an approach of that nature. Other innovative companies also intend to improve member engagement by reaching out to members and trying to put them in segregated pools, rather than just one big pool. The Bill, using just one default fund, or a standard fund, as I prefer to call it, will preclude that kind of development, which could be in members’ interests, could have avoided the catastrophes that we saw with the current one-size-fits-all approach and could encourage providers to explain more clearly what exactly is happening to the members’ money in the investment pools that they are in, which currently does not take place—low risk is not explained, nor is high risk. Therefore, I hope that this principle can be put in the Bill. It is a very minor change, to talk about more than one default fund for a provider, rather than saying “the” default fund. I beg to move.
Lord Fuller (Con)
My Lords, I will speak only briefly, because the noble Baroness, Lady Altmann, has put her finger on it. There is a choice here—the choice of the members. If we believe that the members have a say in their own retirement, having saved for it, so that they are stakeholders in that respect, they have a choice, or they are forced into groupthink. It is masterfully explained. The nonsense that gilts are low risk is a fantasy. We heard how the move into gilts resulted because the markets moved into a 22% loss in the underlying asset value.
But the groupthink in the pensions industry is that you have to go to gilts as you approach retirement. As you approach retirement nowadays, you have 30 years to go—30 years of growth. Yes, I do not deny that you need something in gilts and bonds, but there is still a long way to go. Especially in an inflationary period, as we have been through, cash, cash-like and bond/gilt-like investments will not be enough.
Lord Palmer of Childs Hill (LD)
My Lords, I congratulate the noble Baroness, Lady Altmann, on having a group of nine amendments all on her own. We normally share groups rather than have them all on our own. This group considers how scale requirements interact with default pension arrangements where most savers remain invested. I have listened to the debate and, having spent a large part of my career in accountancy and advising clients, I know that the trouble is that the majority of clients are not expert enough to know what they should do with their pension. They seek advice from various organisations on what they should do. We should make sure that the quality of the advice they get suits their position in life. As other noble Lords have said, we are concerned about the overly rigid scale test, which could unintentionally narrow choice within defaults and push schemes towards one-size-fits-all designs.
Amendment 97 highlights the importance of allowing defaults that reflect members’ differing ages, health conditions, retirement plans and risk profiles. Amendments 97A to 101B probe—this is the point—whether the authority can take account of the combined value of assets across multiple default arrangements, rather than assessing each in isolation. Without this flexibility, schemes that offer well-designed cohort-based defaults could be penalised simply for tailoring provision.
Amendments 168A and 170A reinforce this point, seeking to ensure that schemes are not excluded from the market for moving beyond crude uniform defaults. Our concern is that defaults should be designed around member needs, not regulatory convenience. I hope the Minister will explain how the Bill avoids pushing schemes towards uniformity at the expense of suitability and long-term outcomes.
I hope the Minister does not regard the series of amendments in this group as combative. They are meant to try to help pensioners or future pensioners. It is wrong if the Government look for a simple process but do not look at the benefit for the people concerned. I think it was the noble Lord, Lord Fuller, who talked about what happens in gilts and the like. I come from a period in the chartered accountant profession when you always went into gilts in what you thought were the last few years of your working life. Now, things have changed. We have to look at what you do and when you do it, and those things depend on the people involved.
I hope the Minister will see that these amendments are trying to say that things should not be too prescriptive. They are not against what the Government are trying to do, which is look after people. But are doing it on a one-size-fits-all basis, which does not work in the real world that we are in. I hope the Government go back and think about this a little more so that, when we come to Report, we can be a little more innovative.
Baroness Stedman-Scott (Con)
My Lords, I wish to speak briefly in support of this group of amendments in the name of my noble friend Lady Altmann. She has once again demonstrated her expertise and the value that she brings to our scrutiny of these important issues. Most importantly, she explained the spirit in which these amendments were tabled.
Throughout our proceedings on this Bill, a consistent theme across the Committee has been the need for proportionality in the steps we are taking on scale and value for money, and for definitions that are sufficiently comprehensive to reflect how the market actually operates in practice. I do not intend to repeat the points already made by the noble Baroness or ask the questions she has posed, but we will listen carefully to the Minister’s response on these issues.
Clause 40, as drafted, risks applying the scale test in an overly narrow and mechanical way by requiring the regulator to assess each default arrangement in isolation without regard to the wider context in which it is offered. That approach is not necessarily proportionate; nor does it reflect the economic reality of how master trust providers operate. This amendment would allow the regulator to take into account the combined assets of several non-scale default arrangements offered by the same provider. In doing so, it would not dilute the principle of scale; rather, it would ensure that scale is assessed in a comprehensive and realistic way, focusing on the resilience, governance and efficiency of the provider as a whole.
That matters because, without this flexibility, we risk forcing consolidation for its own sake and potentially requiring well-run, well-performing defaults to be wound up simply because they fall on the wrong side of an arbitrary threshold—even where the provider clearly operates at scale overall. This amendment therefore speaks directly to the principles that we have already raised in Committee: that regulations should be outcome-focused rather than box-ticking, and that they should avoid unintended consequences that could undermine member confidence rather than enhancing it. For those reasons, I believe this is a sensible and proportionate refinement of Clause 40, and I hope the Minister will give it serious consideration.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Baroness, Lady Altmann, for the clarity of the exposition of her amendments, and I thank all noble Lords who have spoken. I will try to explain what the Government are trying to do here and then pick up the specific points that the noble Baroness raised.
To maintain the policy on scale and secure its benefits for pension scheme members, there will need to be centralised decision-making over a large pool of assets. The Bill sets out that this will be delivered by the main scale default arrangement, which is subject to a common investment strategy. I recognise that the noble Baroness has raised concerns about the common investment strategy being able to accommodate different factors, but I will tell the Committee why it is there. A key purpose of the policy is to minimise fragmentation in schemes and to have a single default arrangement at the centre of schemes’ proposition. Fragmentation is an issue, not because it is a piece of government dogmatism but because it is in the interests of members that those who run their schemes have a big wallet at the centre to give the scheme the buying power and expertise they need, because that enables them to deliver on the benefits of scale.
When we consulted, the responses told us that there were schemes with hundreds of default arrangements that have been created over a long period of time and that this is a problem. Members in these arrangements get lower returns and pay higher charges, which some consultation responses also told us. It is important that we deal with that fragmentation and that we improve member outcomes.
However, the Government also recognise that there are circumstances where a different default arrangement is needed to serve specific member needs only—for example, for religious or ethical regions. These will be possible through Chapter 4 but they will not count towards the main scale default arrangement. If the scale measure encompassed multiple default arrangements or combined assets, as these amendments would allow, it would not drive the desired changes or support member outcomes derived from the benefits of scale. Following consultation, there was clear consensus that scale should be set at the arrangement level as that is where key decisions about investments are made. Simply put, centralised scale is the best way to realise benefits across the market for savers.
The pensions industry has told us there are too many default arrangements in some schemes, and that fragmentation—
Baroness Sherlock (Lab)
I am going to answer the point and then come back, if that is okay. Just give me another two minutes.
That fragmentation does not benefit savers but can lead to increased charges and lack of access to newer, higher-performing investments. The Government are committed to addressing this fragmentation, which exists predominantly in DC workplace contract-based schemes.
To prevent further market fragmentation, Clause 42 allows for regulations to be made to restrict the creation of new non-scale default arrangements. To be clear, this is not a ban nor a cap on new default arrangements. There will be circumstances where they will be in saver interests and meet the needs of a cohort of members. As the noble Baroness says, this is not a one-size-fits-all approach.
On the point about choice, auto-enrolment has moved many members to save for the first time. The vast majority enter the default fund and do not engage in their schemes. Those who do can choose their own funds, and these measures do not interfere with that, but they are a minority, and these measures aim to support the millions who do not engage.
The noble Baroness is right that one size of default arrangement does not fit all, but the Bill requires a review to consider the existing fragmentation and why multiple default arrangements exist. That will inform us of which default arrangements should continue and the characteristics they possess that deliver better member outcomes or meet a specific need.
Baroness Altmann (Non-Afl)
The Minister has raised many points that I would like to ask further about, if that is okay. The fragmentation applies to legacy schemes: the contract-based schemes, as she says. These are the old personal pension-type arrangements—SIPPs, GPPs and so on—which were developed a long time ago. Typically, the more modern schemes have just one default, with one investment approach that is meant to suit all members. It is that approach that I hope and expect to be refined as we move forward so that there can be different types of default fund for different types of member. I do not anticipate that they will be people choosing their own. It will be on the basis of information that the provider seeks from its members, using that to send them down a slightly more appropriate investment route for their money. That does not stop the providers having large pools of money that they allocate members to, but it would not be in just the one central fund, as I say. Of course that is easier for the provider, but I think the providers owe members a different duty, which is to try to tailor a little more for those who do not choose, based on wider circumstances than just their chronological age, what is best for their investment and pension outcomes.
Baroness Sherlock (Lab)
I have heard the noble Baroness’s explanation and understand the point she is making. The point about choice was not actually directed at her; it was directed at a colleague who mentioned choice and I was trying to explain that this is not about choice. I accept the point the noble Baroness is making that this is for those who do not engage.
If having a single default fund were simpler for the pension schemes, and that is what drove this, we would not have the number of defaults we have at the moment. We have huge numbers of defaults. I accept that many of those are the product of history, but the key is that we have to consolidate. To be clear, as I have said, we are not banning or capping the new default arrangements, but we want to ensure that any new arrangements meet the needs of members, so any new non-scale default arrangements will have to obtain regulatory approval before they can accept moneys into them. We have said that we are going to consult and we need evidence to look at whether anything else should be included, and that will come up when we consult.
I understand the point that the noble Baroness is making and I am happy to reflect on it, but we need consolidation and we need to consult to make sure that we have allowed for the right things. With that reassurance, I hope she feels able to withdraw her amendment.
Baroness Altmann (Non-Afl)
I thank the Minister for her constructive engagement on these issues. There is something slightly missing here because, if one consults before this approach enters the market, one will not know that that might be the appropriate approach. Indeed, the providers that one would consult will not necessarily recommend more than one approach, because that does not necessarily suit their business interests, and members will not know what it is because by definition they are not particularly engaged.
I am trying to address this issue and I very much appreciate that the Minister is engaging constructively and has listened carefully. Perhaps we can continue this at some point. This would be a very small change to the Bill; it would not stop the unsuitable dispersion of numerous different legacy funds from being consolidated, but it would potentially stop these new approaches entering the market. That is the concern. I beg leave to withdraw my amendment.
Baroness Sherlock
Member’s explanatory statement
This amendment corrects an error.
Member’s explanatory statement
This amendment seeks to align provisions in the Bill with the Mansion House Accord definition used for UK private markets to mean the underlying assets.
Baroness Bowles of Berkhamsted (LD)
My Lords, Amendment 111A would add the words
“as determined by the underlying assets in any structure or fund”
after “qualifying assets” in new Section 28C(1). Its purpose is simple: to ensure that when measuring investment in private markets via collective investment vehicles, we look at the underlying assets, not the wrapper in which they are held; we look at where the money goes, not the route it takes.
In debates on the Bill, I have been tracing the consequences of the Government’s approach to private markets. On the first day, I set out the competition concerns inherent in the Mansion House Accord as transposed in the Bill. Last Monday, I explained the role that listed investment companies play in transparency and valuation of private equity, as recognised by the Bank of England and the ICAEW. On Thursday, I explained the range of infrastructure that they fund and the regulatory changes that are designed to make investment easier but that have not been given time to work.
Today, I turn to the policy history of how long-term asset funds, LTAFs, were developed as an open-ended alternative to the closed-ended listed investment company and what was and was not agreed. The LTAF was developed through the productive finance working group, co-chaired by the Governor of the Bank of England, the chief executive of the FCA and the Economic Secretary to the Treasury. It was supported by senior representatives of the PRA, pension schemes and investment managers. It was an unusually high-level and accelerated process, driven in part by the then Chancellor’s public commitment to have the first LTAF launched within a year.
Precisely because of that elevated framework and compressed procedure, it is all the more important that we adhere to what the working group actually agreed. The record is remarkably consistent. Across almost every meeting of the working group, the minutes recognise that there were two established routes for accessing long-term illiquid assets: the new LTAF and the long-standing listed investment company. From the very first steering committee meeting on 26 January 2021, the minutes record that
“closed-ended funds facilitate investment in productive finance assets … Some members believed existing fund structures, such as investment trusts, were sufficient … several members suggested … adapting existing vehicles, such as investment trusts, rather than developing a new open-ended fund structure”.
At the first technical expert group meeting on 12 February 2021, the Investment Association stated explicitly:
“The proposal does not intend to replace existing structures”.
At the technical working group on 20 April 2021, it was confirmed that the LTAF was to
“complement, rather than replace, existing structures”.
Later in the process, on 4 May 2021, the steering committee agreed:
“The LTAF is not the only structure for investment in less liquid assets”.
The final road map, published in September 2021, reinforces this, stating:
“There are a range of ways to invest in less liquid assets, and all of them play important roles”.
In practice, for DC schemes and retail investors, those routes are the LTAF and listed investment company. Nothing in this policy process—not the minutes, road map, FCA contributions or the IEA’s own presentation—ever suggested that Parliament should legislate a single wrapper preference or exclude the listed wrapper route to private assets. On the contrary, the working group recognised two parallel structures capable of holding productive finance assets. It was explicit that the LTAF was to complement not replace the existing one.
When the public policy process is this clear, it is difficult to see why a private agreement should be allowed to override it. Yet the Bill does that, and the Minister says it is because of the Mansion House Accord. The effect of the Bill is therefore threefold. It is anti-competitive because it removes a functioning structure from the market and mandates a single route for accessing the same underlying assets. It is anti-policy, because it contradicts the working group’s own record—a record developed by the Bank of England, the PRA, the FCA and the Treasury, all of which recognise that listed investment companies already perform this role and were never intended to be displaced. It is anti-transparency, because it excludes the only structure where private assets are accessed, with all the benefits of public market transparency, daily market valuations, regular auditor disclosure and shareholder engagement, including AGMs and independent boards to hold managers to account.
The consequences do not stop at the DC default funds. Last night, one of the most senior asset management figures emailed me to say that this is not just a matter for pension schemes. Excluding listed investment companies will widen discounts to net asset value, with direct detriment to retail investors.
Next, let us examine the evidence of the origin of this exclusion. At Second Reading, the Minister said,
“we have aimed to stick closely to the scope of the Mansion House Accord, which itself is limited to investments made by unlisted funds”.—[Official Report, 18/12/25; col. 938.]
That is at best an approximation and, in substance, not true. There is no such definition in the accord. It points to underlying assets, explicitly defining that:
“UK private markets means where the underlying assets are based in the UK”.
It knows the difference between an asset and a wrapper.
The Minister’s letter after Second Reading says that the exclusion is to support the Mansion House agreement. That is even more approximate and perhaps an admission that it is not in the accord after all, but something done afterwards and now being justified in its name.
Treasury officials have said in meetings that the pension funds want it, but there is no public record of any such request. If the accord itself does not say it, the Government are doing it on the basis of something else. I must ask again: who asked for this exclusion? Where is the written evidence? It is not in the accord, any consultation or any published policy. It is not in the working group minutes, the road map or any regulatory framework on LTAFs or listed investment companies by the FCA. I have elaborated publicly available evidence showing that the policy process recognised two parallel structures. What written evidence can the Minister show the Committee that supports the exclusion of one of them? If the Government are relying on private representations, Parliament is entitled to know what they were and who made them.
I have written evidence from DC default pension providers and Mansion House Accord signatories, representing a substantial majority share of the auto-enrolment market. They say that the exclusion of listed invested companies was not something they agreed to or understood to be part of the accord. Some have been going back through their meeting records to check. Others have said that they had not realised that this was a provision in the Bill; that they are neutral on the wrapper; and that they thought that the exclusion meant only listed equities, not investments within a wider listed investment company wrapper, and would be against that exclusion. Others said that they use listed investment companies and would not want this.
I have my evidence and more is still coming. Where is the Government’s? This exclusion was devised within government without a proper evidential basis, or it is being done to please interests that have not been put on the public record, or Ministers have simply not appreciated the implications of what is being proposed. None of those possibilities is a sound basis for legislating away a long-standing structure with a clear history of positive economic outcomes.
It is explained as suitably targeted guard-rails. These are the kind of guard-rails over which you are thrown to the lions. We are being asked to legislate a single-wrapper mandate on the basis of assertions not supported by the public record. If the Government wish to exclude a structure that the Bank of England, the PRA, the FCA and the Treasury itself recognised as valid, they must show the evidence.
My amendment would restore the position that the working group adopted: what matters are the underlying assets, not the wrapper in which they are held. I beg to move.
Baroness Altmann (Non-Afl)
My Lords, I support every word that the noble Baroness, Lady Bowles, has said. I hope the Minister understands that this series of amendments is designed, once again, to help the Government.
The policy of excluding the very asset classes that the Government want to promote and want pension funds to invest in, just because they are held in a particular form, seems irrational. The process used to introduce it, as the noble Baroness, Lady Bowles, outlined, was materially flawed. There was a lack of consultation and the policy is directly contrary to some previous ministerial Statements and to the stated policy intention. I cannot see how any reasonable person could argue that excluding these companies is a legitimate means of achieving the stated policy objective. The decision goes against common sense and defies economic logic. It opens pension scheme members up to less choice, higher long-term costs and, potentially, new risks such as gating or frozen investments.
Amendments 122 and 123 are designed specifically to ensure that, if a closed-ended investment company holds the assets in which the Government want pension funds to invest as a result of the Mansion House Accord, they can do so. Amendment 123 includes these as qualifying assets under the Bill and Amendment 122 talks about ensuring that, if securities are
“listed under Chapter 11 of the UK Listing Rules or the Specialist Fund Segment that provide exposure to the qualifying assets”,
they too can be included.
These amendments would not change the intentions of the Bill or the Government’s policy; they would reinforce them. If schemes cannot invest in listed securities, we will exclude the closed-ended funds that hold such assets, for no obvious reason other than, perhaps, the fact that the pension funds or asset managers that are launching the long-term asset funds will obviously prefer to have their own captive vehicle under their direct control, rather than those quoted freely on the market.
I would argue that, by excluding investment trusts and REITs as qualifying assets, we will fetter trustees’ discretion as to what assets they can invest in and how they can do so. I do not believe that the Government want to do this. I think this is an unintended consequence of wanting not to allow schemes just to say, “Well, I invest in Sainsbury’s and it has a lot of property in the UK, so that’s fine”. But this is a very different argument. I hope that the time spent by this Committee on these funds will prove worth while and that this dangerous, damaging exclusion can be removed from the Bill.
If the Government want—as they say they do—pension schemes to invest in UK property, the amendments on this topic would allow them to choose to hold shares in Tritax Big Box, for example, which is a listed closed-ended fund. It is a collective investment REIT, not a trading company, and UK regulators, the stock market and tax regulation recognise its functions as a fund. It is just like a long-term asset fund, but it is closed-ended instead of open-ended. Under the Bill, pension funds would not be able to invest in it, even though it holds precisely the type of private assets targeted by this section of the Bill.
The amendments would maximise schemes’ choice of investable assets within the target sectors. This would widen competition, which should bring downward pressure on asset management costs; it would reduce the risks of inflating asset prices, by channelling demand into fewer investment pathways; and it would enhance potential risk-adjusted returns. There is simply no reason why master trusts and other pension schemes should object to being given additional freedom to make investments to meet the requirements of these reserve powers. Why are we discriminating against a particularly successful British financial sector offering a proven route to holding the assets in which the Government want pension funds to invest? I have not seen any argument to say that, if we include these amendments, pension funds would have to invest in these companies, but they could use them if it suited their needs.
I look forward to the Minister’s answer. I know and accept that she is in a difficult position, but I have not heard a coherent answer as to why we are going down the route that we are. Tritax Big Box is just one example. It owns and develops assets worth £8 billion and controls the UK’s largest logistics-focused land platform, including data centres, which the Government designated as critical national infrastructure in 2024. Tritax Big Box announced that its data centre development strategy will be partnering with EDF Energy, which manages the UK’s nuclear power, to develop such infrastructure. It is remarkable that such a homegrown success story should be excluded from the opportunities available to pension schemes.
This sector has reinvented itself over the past few decades, from being a holder of diversified quoted equities to managing real illiquid assets. It is generally recognised that it is an ideal structure for holding illiquid assets—it has renewable assets, wind farms, solar farms and National Health Service GP surgeries. All these elements of the economy need significant investment and pension funds could be using their assets to support them. Surely that should be part of the Government’s intention for the Bill. I hope that this possible error in the Bill can be recognised and corrected so that we can move forward without further discussion on this topic.
Lord Davies of Brixton (Lab)
The noble Baroness, Lady Altmann, called on the support of reasonable people. I think of myself as a reasonable person, and I support her. I find the Government’s position on this totally inexplicable. I say in all honesty to my noble friend the Minister that the reasons given so far for these provisions do not in any way explain their position. It is inexplicable.
In my view, it is possible to make an argument that closed-end funds of this sort are more suitable than some other sorts of investments for pension investment because of the possibility of there being additional liquidity. That makes it even more inexplicable. A further problem is that pension funds could invest in an investment company that is not a closed-end fund but holds these investments. However, if it decided to float on the stock exchange, it could not do so because it would lose all the pension fund investments. So there is not logic at all to the Government’s position. There may be some logic, but we have yet to hear it.
Lord Remnant (Con)
My Lords, I very much support the amendments in this group, tabled variously in the names of the noble Baronesses, Lady Altmann and Lady Bowles of Berkhamsted. They all seek to ensure that closed-ended funds, in the form of UK-listed investment companies, are not disqualified from being eligible to invest in the private market assets targeted by the Bill, alongside open-ended funds. I say this not only as a private investor in both types of funds but as one who has sat on and chaired boards responsible for managing both types of investment.
They each have their relative advantages and disadvantages, which I will not enumerate here, but it is in fact investment companies that, over the long term, tend to have lower fees and better performance records, to the advantage of their investors. It seems perverse to exclude them from the Bill, seemingly solely on the grounds that they have listed status, when the nature of their underlying investments is identical to those held by open-ended vehicles. Indeed, investment trusts are particularly suited to the type of investments envisaged by this Bill and the Mansion House Accord—namely, assets that are essentially illiquid. Investment companies hold well over £100 billion-worth in private assets, and unlisted infrastructure and renewables have been among the fastest growing segments in recent years.
As the noble Lord, Lord Davies of Brixton, indicated, it is this ability more effectively to offer liquidity in illiquid assets that particularly distinguishes closed-ended vehicles from their open-ended cousins. It is in times of stress, whether within the investment vehicle itself or more broadly due to general economic or financial conditions, that some of the more unfortunate investment failings occur. They tend to relate to liquidity or lack thereof, they have happened in the recent past and they have occurred in open-ended structures.
Noble Lords will need little reminding of the demise of the Woodford Equity Income Fund. Suffice to say that, in two years, it lost two-thirds of its value; it became increasingly and disproportionately reliant on unlisted investments, which could not be sold to meet investor redemptions; and it was suspended in June 2019, leaving investors unable to access their money.
Noble Lords may be less familiar with the travails afflicting open-ended property funds. Property is an asset class specifically targeted by the Mansion House Accord. The writing was on the wall for them ever since they suspended in the depths of the Covid crisis. That triggered funds in the sector to begin to close down, given the evident problems with liquidity that resulted in a fundamental mismatch in the demands of investors against the liquidity of the underlying asset. These investors are mainly not faceless institutions but retail investors—the same individuals who save for their pensions. The only way in which the managers of the fund can mitigate these liquidity issues is by holding substantial cash holdings, which cuts across its investment objectives and dilutes returns. Once an announcement to close is announced, properties are likely to be sold at fire sale prices into difficult markets, and investors may have no access to their money for well over 12 months.
Institutions running open-ended funds attempted to address these liquidity problems by establishing the long-term asset funds referred to earlier, but their structure is still such that they cannot solve the problem but only rather crudely mitigate it through having more restricted dealing windows than the daily dealing offered by more traditional open-ended funds. They have been authorised by the FCA only since 2023 and are unproven. They are described by one prominent investment platform as high-risk investments recommended for experienced investors who have already accessed the more traditional investment options, yet they qualify under this Bill to the exclusion of investment companies which have proved their worth for over 150 years. I do not understand the rationale for this.
Lord Fuller (Con)
My Lords, the noble Lord, Lord Davies, found the Government’s position inexplicable such that these amendments have become necessary. I can understand that. The point is that the Government do not—they do not understand finance. Perhaps they should have had a few more prawn cocktails before the election; they might have got some learning inside them. This group demonstrates that there is ignorance in this Bill about investment, asset classes and asset allocations.
New Section 28C(5) treats private equity as if it is just one class, but it is not. That is why I welcome Amendment 121, specifically proposed new paragraphs (f) and (g), which would lay out the appropriateness of scale-up capital and quoted and unlisted companies.
There is no doubt that you can make a lot of money in private equity. High risk leads to high rewards; the big hitters can and do make money. The early backers of Revolut turned a million into a billion, as the FT reported last week. On that basis, everybody should be having a go. What could go wrong? We all know that, in many cases, companies get loaded with debt and dividends are extracted; we have ended up with serial bankruptcies in the casual dining sector, for example, and Claire’s has gone bust twice in the last four months. I am not exactly sure the Government should be mandating this sort of thing by statute.
Putting that to one side, I have some experience through my membership of the Norfolk Pension Fund in private equity investment. I have been a board member since 2007. There are some big firms in this space; HarbourVest might be a name familiar to noble Lords but others are available, as it says in the adverts.
To participate in this space, you typically enter a 10-year commitment for quite a lot of money as a fund. You provide the fund manager cash certainty. He can go ahead and acquire smaller firms within the fund. You do not pony the money up front necessarily; it just needs to be available when the fund manager calls you to chip in. By and large, the fund manager finds the firms and invests that money, typically over the first four years of the indicative 10-year period. They then grow and nurture those firms until they can be sold for a profit—unless they go bust in the meantime, which many do.
At some point, 10 to a dozen years later, after all the surviving companies have passed on and the fund closes, all the money is returned to the pension fund. It is a well-trodden path and a proper asset class. This is why proposed new paragraph (g) in Amendment 121 is so important. These opportunities should be available to pension funds, but the Bill as currently constructed excludes them. It is madness. This is not what we need as a nation.
We need to go further. We need to be able to step in and help those founder-owned companies, together with local business angels, their families and friends, to get to the stage where HarbourVest can have a nibble. We need to make the small nibbles into larger fish. It is the scale-up issue. The exam question here is to identify good founder-led businesses locally and grow them. I declare an interest; I have been a director of New Anglia Capital Ltd, which was public sector, 100% owned by councils in Norfolk and Suffolk for the purposes of investing in early stage companies, taking them from a glint in the eye to the stage at which private equity might get involved. My goodness, it is hard. We have invested in bright prospects in life sciences, engineering, medical technology and clean energy. It is high risk, and I am told it carries the opportunities to make big returns—not that we have found them yet. But at least it carries that opportunity. As a nation we need to turn those cygnets into swans and those small acorns into mighty oak trees. The Bill should aim to do that, but it does not.
The conflict is with the press release that accompanied the Mansion House announcement. The Government’s own presser boasted:
“More than 50 scale-up businesses have signed a joint letter to the Chancellor welcoming the reforms as a ‘significant milestone in ensuring British institutions back British businesses at the scale required to generate growth, employment and wealth’”.
I feel sorry for the people who signed up that letter, because they were suckered. The Bill does little to scale up businesses and it has taken the noble Baroness, Lady Altmann, to put proposed new paragraph (f) into the amendment so that the Government’s own press release can form part of the law.
Forcing everything to be large, as we have heard, makes it harder to get the boost for start-ups. Amendment 121 would remedy this. We need it not just for those start-up businesses: the founders, their families and friends and all those angels—important though they are. We need it for our provincial cities and market towns. These are the places with the gems that need to grow in pursuance of
“UK growth assets rather than wider overseas assets”,
as it says in the Member’s explanatory statement.
Without this amendment, Mansion House is a mirage. By this Bill the Government have done a confidence trick on those who believed there would be a flow of capital to these businesses. It is not too late to change course. I echo strongly the comments of the noble Baronesses, Lady Bowles and Lady Altmann, and note that we are in Committee. I think this Committee is doing valuable work, because it has set up the conversations we all need to have between now and Report. The Government can reflect on what they are trying to achieve and recognise that it will not be achieved by the Bill as currently constructed. We may then need to have a compromise that will actually do the thing we are here to do, which is to invest in Britain and have better, more secure futures for people who want to invest in pensions, not Lego sets or Star Wars characters.
Baroness Noakes (Con)
My Lords, I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, for her forensic analysis of both the Mansion House Accord and the ways in which there is a significant mismatch between what is in that accord and what is in this Bill. I confess that I was not aware of the extent of that, so that analysis is really important; I look forward to hearing what the Minister has to say.
I would like to comment on whether investments in listed securities should be excluded; here, I will part company with many of my colleagues on this side of the Committee. I understand why they are excluded. It is because buying and selling shares in listed companies is just buying and selling a financial asset. The buying and selling of shares in UK-listed assets does nothing to put money into the UK economy.
However, the way in which this measure is drafted probably goes too far, because it is possible that companies could raise new capital—for the purpose of investing in some of the things where the Government wish to encourage new investors—and that those vehicles could be listed. The way in which the Government have approached this is possibly too extensive, but I certainly do not think that the simple buying and selling of financial assets aligns with getting productive investment into the economy. As the noble Baroness, Lady Altmann, knows, I do not think that is a valid objective for this Bill—certainly not one that should override the need to get good returns for savers.
Baroness Altmann (Non-Afl)
I apologise, but I think that the noble Baroness’s characterisation of the impact of buying and selling, as she said, on listed companies—whether that puts money into the economy, to use her words—does not necessarily apply in the way she believes, particularly with closed-ended investment companies.
One of the problems with which they have had to deal, because of the regulatory constraints that we have been trying to help the Government address over the past two or three years, is that if people are selling these closed-ended investment companies but no one is buying them, they sink to a discount to their net asset value. At that point, they cannot invest in new opportunities; they cannot IPO or raise new capital. That has had a dramatic impact on the economy because these closed-ended companies, which were investing significantly in infrastructure across the country, have been unable to raise new money to invest in new opportunities.
Lord in Waiting/Government Whip (Lord Katz) (Lab)
If this is an intervention, it is quite a long one. I ask that interventions be kept brief; they should just be questions, really.
Baroness Noakes (Con)
The noble Baroness knows that she and I disagree on this subject. I hold to my view that the buying and selling of shares is simply the exchanging of financial assets.
Baroness Bowles of Berkhamsted (LD)
May I intervene so that I do not have to take up time later? I cannot see the difference between the follow-on funding that you get with a listed investment company, if you have an IPO, and the subsequent follow-on funding rounds. With an LTAF, you have initial fundraising and subscriptions. With a listed investment company, you buy and sell on the market. With the open-ended LTAFs, you have redemptions, purchases and flow matching. If you are watching the money, those are equivalent processes.
Baroness Noakes (Con)
If the noble Baroness, Lady Bowles, had listened, she would know that I said I thought what the Government were doing had gone too far, because there were instances where there was a necessary flow between the raising of funds and that flowing into new investment.
A number of noble Lords on this side of the Room have been talking as though this Bill stops pension schemes investing in listed assets or investment companies. It certainly does not; it merely says that they do not qualify if asset mandation is introduced. We ought to be concentrating on whether this is a valid policy objective—the Minister knows that I do not subscribe to that—to get money out of pension funds and into the real economy. We then ought to concentrate on which flows achieve that; certainly not all flows of buying investment trusts or other listed vehicles will achieve that.
Viscount Younger of Leckie (Con)
My Lords, I rise to speak in strong support of a number of carefully drafted amendments tabled by the noble Baroness, Lady Bowles, and once again ably supported by the noble Baroness, Lady Altmann. I will also speak to my Amendment 127.
Baroness Sherlock (Lab)
That was fun. I will have a go at explaining the Government’s narrative on this, which is an alternative to the narrative that has been established so far. I will then try to go through and answer as many of the questions as I can.
Let me start by stating the obvious. The amendments relate largely to the part of Clause 40 that determines which types of investment are deemed as qualifying assets for the purpose of meeting any asset allocation requirements were we to use the power. I stated in my opening reply to the noble Viscount, Lord Younger, that he said “when” mandation comes in, but it is very much “if”; we do not anticipate using this power but, if it were used, we would need to be clear about what happens next.
The most relevant provisions are found in new Section 28C(5). This broadly limits qualifying assets to private assets. The subsection provides by way of example that qualifying assets may include private equity, private debt, venture capital or interests in land—that is, property investments. It also clarifies that qualifying assets may include investments and shares quoted on SME growth markets, such as AIM and Aquis.
In contrast, according to this subsection, qualifying assets may not generally include listed securities, defined as securities listed on a recognised investment exchange. That approach reflects the aim of the power to work as a limited backstop to the commitments that the DC pensions industry has made, which relate to private assets only.
That brings me to the subjects of the amendments from the noble Baronesses, Lady Bowles and Lady Altmann. I start by reminding the Committee of the rationale for this approach, because it stems from the Mansion House Accord. The accord was developed to address a clear structural issue in our pensions market. DC schemes, particularly in their default funds, are heavily concentrated in listed, liquid assets and have very low allocations to private markets. That is in contrast to a number of other leading pension systems internationally, which allocate materially more to unlisted private equity, infrastructure, venture capital and similar assets.
The reason the Government are so supportive of the accord is that it will help to correct that imbalance and bring the UK into line with international practice. A modest but meaningful allocation to private markets can, within a diversified portfolio, improve long-term outcomes for savers and support productive investment in the real economy, including here in the UK.
The reserve power in Clause 40 is designed as a narrow backstop to those voluntary commitments. For that reason, any definition of “qualifying assets” must be clear, tightly focused on the assets we actually want to target and operationally workable for schemes, regulators and government. That is the context on the question of listed investment trusts and other listed investment companies.
I recognise the important role that investment trusts play in UK capital markets and in financing the real economy. Pension schemes—as the noble Baroness, Lady Noakes, pointed out—are, and will remain, free to invest in wherever trustees consider that to be in members’ best interests.
However, the clear intention of this policy has been to focus on unlisted private assets. This is reflected in industry documentation underpinning the accord, which defines private markets as unlisted asset classes, including equities, property, infrastructure and debt, and refers to investments held directly or through unlisted funds. That definition was reached following a number of iterative discussions led by industry, as part of which the Government supported the definition being drawn in this way.
Bringing listed investment funds within the qualifying asset definition would be out of step with the deliberate approach of the accord and its focus on addressing the specific imbalance regarding allocation to private assets. It would also raise implementation challenges, requiring distinctions to be made between the different types of listed companies that make or hold private investments or assets. It would introduce uncertainty about what we expect from DC providers. We might justly be accused of moving the goalposts, having already welcomed the accord, with its current scope, in no uncertain terms.
But the line has to be drawn somewhere. This is not a judgment on the intrinsic qualities or importance of listed investment vehicles, nor does it limit schemes’ ability to invest in them. It is simply about structuring a narrow, targeted power so that it does what it is intended to do: underpin a voluntary agreement aimed at increasing exposure to unlisted private markets in as simple a way as possible and without cutting across schemes’ broader investment freedoms.
The legislation draws a general distinction between listed securities and private assets; it does not single out investment trusts. Any listed security, whether a gilt, main market equity or listed investment company, is treated in the same way for the purposes of this narrow definition.
Crucially, this concerns only a small proportion of portfolios. Under the accord, the remaining 90% of default fund assets can continue to be invested in any listed instrument, including investment trusts, where trustees and scheme managers judge that that would benefit their members.
I am just coming to the answers, but please ask some more questions.
Baroness Altmann (Non-Afl)
I am very grateful to the noble Baroness for giving way. In a situation where trustees do not wish to put more than the prescribed amount in the qualifying assets, and they want to hold those through a listed closed-ended company because they are concerned about the structure of an open-ended fund and do not have the ability to invest directly, why would the Government want to fetter their choice in that way? I thank the Association of Investment Companies, which has helped me to understand some of the things that these companies do.
Baroness Sherlock (Lab)
My Lords, trustees will have to make their own decisions on that. I understand that, were mandation to come in, there would be constraints on this, but let me see whether I will pick up some answers to help with that as we go.
The noble Baroness, Lady Altmann, and, I think, the noble Viscount, Lord Younger, suggested that the Bill explicitly discriminates against listed investment funds. The noble Baroness, Lady Bowles, made this point previously. That concern is perhaps reflected in Amendment 124, which would remove the language that in general serves to exclude listed securities. Nothing in this language refers directly to investment funds or should be construed as a signal of discrimination, but I have listened carefully to the arguments made and I recognise that some people clearly feel otherwise. I am happy to take that away and consider further the arguments about signalling.
A number of noble Lords, starting with the noble Baroness, Lady Bowles, emphasised the issue of underlying investments, pointing out that the Mansion House Accord includes specific language on this. It defines UK private markets as meaning
“where the underlying assets are based in the UK”.
Accordingly, new Section 28C(6) provides the mechanism to reflect this aspect of the accord. Amendment 127 relates to this point, and I will say more when I return to it. I have already recognised that DC funds may invest directly or through funds. That means that, if we ever came to exercise these powers, we would need to implement the regulations under new Section 28C in a way that suitably reflects this. However, we do not consider it necessary to amend the clause to achieve this, since there is sufficient flexibility in new Section 28C to prescribe descriptions of qualifying assets in a way that reflects this, subject to the constraints in new Section 28C(5).
On the matter of competition, the noble Baroness, Lady Bowles, made a more constrained speech than she did last week, and I commend her for that. The question of competition law was raised. For the record, there has been no breach of competition law by the Government, nor are we encouraging a breach of competition law. We strongly welcome the Mansion House Accord; I make that clear for the record.
I turn back to Amendment 127 in the name of the noble Viscount, Lord Younger, because it picks up some of these points. This amendment would remove the provision that allows the Government, if exercising these powers, to specify that a proportion of assets subject to an asset allocation requirement should be invested in the UK. This aspect of the clause was developed with the Mansion House Accord firmly in mind. Under the accord, half of the 10% of default fund assets committed to private markets is intended to be invested in the UK. This provision simply ensures that the powers can operate as a backstop to that commitment. What constitutes a UK investment will vary by asset and will be set out in due course, with new Section 28C(6)(b) making it clear that this can be done through regulations.
Amendment 121, tabled by the noble Baroness, Lady Altmann, also relates to the definition of qualifying assets. Its effect would be to add to the list of examples of private asset classes that may be prescribed as qualifying assets in regulations made under new Section 28C(4). As the noble Baroness is aware, the Government have designed these provisions to mirror closely the asset classes covered by the Mansion House Accord. The clause does not perfectly correspond, word for word, with the drafting of the accord, but the effect is the same. To be clear, I can confirm that UK infrastructure assets, UK scale up capital and UK SME growth market shares, which I assume is what the noble Baroness meant when she referred to quoted companies, are all capable of being designated as qualifying assets, provided that they are not listed on a recognised investment exchange. They are very good examples of the sorts of assets in which these reforms should encourage investment; none the less, it is not necessary to list them individually in the Bill.
I have listened carefully to the many considered points and arguments that have been made in relation to qualifying assets. I recognise that there is not unanimity in the Committee, although it is always interesting when my noble friend Lord Davies agrees with the noble Baroness, Lady Altmann, and, at least in part, the noble Baroness, Lady Noakes, agrees with me; all things are possible, we discover, in Committee in the House of Lords. Given that, and given the arguments that have been made both here and previously, I hope that noble Lords will feel able to withdraw or not press their amendments.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank all noble Lords who have participated in this debate; I also thank the Minister for, from my perspective, attempting to defend the indefensible.
The Minister mentioned the industry documentation underlying the accord. I would be grateful if that could be forwarded to me, made a matter of public record and, perhaps, placed in the Library. As I said in my opening speech, if noble Lords want to know, I have had some 70% of the people representing the default funds—if you take their turnover—say that they did not think that they have agreed to the exclusion of listed investment companies. So something is going wrong here.
Baroness Sherlock (Lab)
I should have quoted what I was referring to; I meant to do so but forgot, so I apologise. I was referring to the question and answer materials that accompany the accord on the ABI’s pensions website, which I am sure the noble Baroness has read. They say:
“The definitions of both global and UK private markets assets include directly held, or via investment through unlisted funds in property, infrastructure, private credit, private equity and venture capital”.
The Government understand that this reflects the intention of the accord to exclude investment in listed investment funds. I would be happy to send these materials round to noble Lords.
Baroness Bowles of Berkhamsted (LD)
I am not sure that “directly held” applies to an LTAF either. The fact is that you have wrappers and underlying assets. It is discriminatory, and that should be tested. I still do not see how, when you have the public policy laid out by the high-level working group set up to create LTAFs, you can then say, “A private negotiation overrides that”. I stand by that.
I know that the Pensions Minister received a letter from a past lord mayor, Alastair King, who is one of the architects of the Mansion House initiatives, on 22 October last year. He relayed that he had encountered both support for the investment trust market and concerns that the Bill did not acknowledge the potential of the investment company structure. That evidence—one of the architects asking, “What’s going on here?”—also seems to have been ignored.
I come to the same basic point: for me, the Government have not provided a clear, public or specific rationale for this exclusion. I would say that neither has the ABI, but I did not know that it runs the country. All of the evidence points the opposite way to what the Government have done. Officials have confirmed in meetings that no assessment of using listed investment companies has been carried out, despite the clear steer of the policy in the working group to do so. It seems that this Q&A from the ABI overrides a Bank of England/FCA/government working group. That cannot be so. The only explanation ever offered is that there are “suitably targeted guardrails”—a phrase that has never been defined, evidenced or justified. What do you have to guard from in a listed investment company? Competition? Transparency? That is a very strange thing to say; it is an instrument of division and discrimination, protecting secrets.
Let us remind ourselves of what we are dealing with: two collective investment vehicles, each of which is a wrapper holding protected assets of net asset value for the pension scheme. That is where they differ from an ordinary equity. An ordinary equity does not have any protection for the assets; if the company goes bust, it is bust. If the listed investment company goes back to the net asset value, the assets are still there for the pension fund. That is the difference, which is why a collective investment vehicle such as a listed investment company belongs with the LTAF; it does not belong with an equity.
I still do not see why they stick so closely to some Q&A but, whether by design or by accident, they have produced a proposal that I still say is without foundation, without evidence and, frankly, without integrity. It is irrational and procedurally unfair, and it fails to take account of relevant and public considerations, relying instead on things that have not been consulted on and that have been presented through private industry discussions. I have never seen anything like this before. There are simple ways to make it fair in various proposed amendments in the rest of this group, spoken to by the noble Baroness, Lady Altmann—
Lord Katz (Lab)
The noble Baroness has spoken for five and a half minutes now. Whether she is pressing or withdrawing her amendment, this should be brief.
Baroness Bowles of Berkhamsted (LD)
I have only two more lines. I will just remind noble Lords that there are simple ways to make this fair and reasonable, as spoken to by the noble Baroness, Lady Altmann. These give a free choice of instrument, with no compulsion—and yet there is still resistance, with no rational explanation. This is, of course, not the end, unless the Government see their error, but for now I beg leave to withdraw my amendment.
Baroness Altmann
Member’s explanatory statement
This amendment and others to Clause 40 in the name of Baroness Coffey seek to cap the prescribed/mandated asset allocation to 10% and limits the time for this power till the end of 2032.
Baroness Altmann (Non-Afl)
On behalf of the noble Baroness, Lady Coffey, who is unable to be here today, I am happy to move her Amendment 112 and speak to the others in this group. My remarks on Amendment 112 also apply to the noble Baroness’s Amendment 117 and Amendment 114 tabled by the noble Baroness, Lady McIntosh.
The aim of this amendment is merely to ensure that, in new Section 28C, which says that master trusts or GPPs will require regulatory approval of their asset allocation—and that that will require that at least the prescribed percentage by value of the assets held in the default funds of the scheme are qualifying assets—the maximum value should be no greater than the Government’s expressed aim of 10%. As far as Amendment 114 is concerned, the UK element of that should not be more than 5%. The aim is to avoid policy creep. If there is mandation and it prescribes a percentage in particular assets, this should not then be used as the basis for perhaps increasing the element of mandation, given that there is no figure in this instance in the Bill.
My Amendment 113 is on a slightly different aspect. In the case of regulatory approval being required for asset allocation and a prescribed amount of qualifying assets being required, I would like to add the possibility—this is a “may” not a “must”—of the minimum amount in prescribed assets being part of the flow rather than the stock. My concern—it has been mentioned on other groups, and I am sure we will come back to it—is that, by prescribing a percentage of assets in a very illiquid range of assets as the proportion of the already-existing stock of funds in a default fund, there is a danger that all the new contribution flows will need to be directed to that particular type of asset to end up with an overall percentage of the whole fund in the required prescribed assets. My suggestion is that the Government might want to have the option of just mandating—if they do so, which they may or may not—a proportion of the new contributions, which will perhaps be less disruptive to the market in the underlying assets.
I support all of the amendments in this group. I am also supportive of the idea that the noble Viscount, Lord Younger, and the noble Baroness, Lady Stedman-Scott, are recommending and which the noble Lords, Lord Vaux and Lord Palmer, are suggesting, of moving away from the idea of mandating just private equity—or, indeed, just private equity and private debt—and having a wider range of options for meeting the Government’s intention, which I support, of bolstering pension fund support for new companies and growth assets in the UK that can help support and boost both the long-term growth of this country and the returns of the UK’s pension funds over the long term. I beg to move.
Baroness McIntosh of Pickering (Con)
My Lords, this is the first time I have been able to speak on the Bill. I am delighted to follow my noble friend, who I still consider the pension tsar and who is so knowledgeable in this field. I apologise for being absent when Amendments 132 and 133 were reached; unfortunately, with all the business in the House, there are inevitable clashes, and we cannot be in two places at one time.
I thank the ABI and others who have briefed me in advance of the Bill proceedings. I have to say, I agree with their conclusions. I believe that they are right when they say that the Government are right that it is not necessary to mandate asset allocation by pension funds.
This amendment is intended as a probing amendment for debating purposes; I am sure that the debate will represent the broad consideration of views in Committee this afternoon. The aim, really, is to provide reassurance to pension providers by capping the mandatory asset allocation at a total of, say, 10%, which is a figure that my noble friend Lady Coffey and I independently happened upon; I also added 5% for geographical locations, such as the UK, as a proportion either of total assets or of a subset of assets.
It is true to say that the industry is generally opposed to mandating asset allocation at all. This amendment would provide some reassurance, which is what I shall seek from the Minister when she comes to respond to this debate, to pension providers of that by capping the mandatory asset allocation to a total of these two figures—10% and 5%—as a proportion either of total assets or of a subset of assets.
There has been much talk of the Mansion House Accord this afternoon. I would like to chip in also and say that this power would align with the accord, which had widespread support across the industry—as well as from government, as it was supported by the Chancellor. I understand that the accord was led jointly by the ABI, Pensions UK and the City of London Corporation. It followed extensive discussion between the industry and the Pensions Minister and had a 17 signatories, who committed
“to the ambition of allocating at least 10% to private markets across all main DC default funds by 2030; and … within that, at least 5%”—
and I have now lost my briefing, so I am completely at sea.
I hope that I have given a little taste of where we are. I am not saying that these are the definitive figures; I am just throwing into the wash that this afternoon would be a good opportunity to give some reassurance to the pension providers in the way I and my noble friend Lady Coffey have sought to do.
Baroness Penn (Con)
My Lords, I will speak briefly in support of Amendments 112, 114 and 117 in the names of my noble friends Lady Coffey and Lady McIntosh of Pickering, which aim to set a cap on asset allocation.
In response to our debate on the previous group, the Minister consistently described the mandation power as seeking to achieve a “modest but meaningful” investment in private assets; and said, importantly, that it was designed as a “narrow backstop” to delivering the Mansion House Accord. If that is the case, why is the proportion of assets that can be mandated under this power not capped in line with that accord? Indeed, as I read it, it could be up to 100% of assets. Why is that? The Minister may point to consultation and other measures that will constrain the use of the power but, for something so controversial and which the Government say they do not want to use, I cannot understand why they are not constraining it in primary legislation.
I will touch on timescales in our debate on the next group, but the Minister says that this Government do not want to use this power. However, as things currently stand, it would be open to the next Government to use the power, and the one after that—as well as a couple of Governments in between if we do not go to full Parliaments, as we have not always done in recent years. In those circumstances, it would also be sensible to limit the power to delivering what the Government say they want it to do.
Why do the Government not want a maximum limit in primary legislation? What is their objection to it? The cynic in me wonders whether the power is so widely drawn that, when we remove mandation on Report—I might be getting ahead of myself but that is on the cards—the Government could bring forward a series of concessions at ping-pong to limit the use of the power to what they say they want it to do. I am sure that that is not the case, but it might be better than the position in which the Government think that this power, as it appears in the legislation, has been drawn appropriately. I am really interested in the Minister’s response on this.
Lord Palmer of Childs Hill (LD)
My Lords, I will come in at this moment because I wish to speak in favour of the amendment from the noble Lord, Lord Vaux, which I have co-signed, because he is unable to be with us today. These words are both mine and the noble Lord’s, more or less.
I am not in favour of the asset allocation mandation clauses generally. Amendment 119, however, seeks to probe the reasons why the Government have chosen a particular asset class for mandation: private equity. I have no problem with pension schemes choosing to invest in private equity; historically, it has generated good returns, in large part because of the use of debt to leverage those returns. Private equity may be a good investment for pensions schemes, and this amendment would not prevent that.
However, my understanding is that the principal motive of the Government for mandating asset allocation is to drive greater economic growth. I agree that venture capital and private debt—two other asset types listed in the Bill—may indeed create growth, but I do not understand why the Government believe that private equity is a growth driver. I have to assume that this is because the Government have fallen for the story that the private equity industry often tells about how much investment it makes, how many people it employs, what great returns it generates, and so on. What private equity actually does is buy existing companies or assets, allowing the previous owners to cash out.
Very rarely, I believe, does a private equity company provide new equity into a company. Rather, it typically does the opposite: it funds the acquisition with a very high proportion of debt. The leveraged buy-out is the basic model of most private equity activity. That debt is not borrowed by the private equity itself; rather, it is pushed down into the underlying company, and the interest and any debt repayments are made from that company’s profits.
One effect of this is to reduce the taxable profits—in other words, the debt interest is tax deductible—and therefore the tax is payable by the company. The debt itself is often located in offshore low-tax locations, so tax is not paid on the interest by the private equity or the lender, which may well be related. This is a direct loss to the Exchequer. I hope the Minister can reply to that.
The high leverage also has the effect of reducing investment by the company in its products or services. Instead of investing in its future growth, the company now has to use much of its cash flow to pay the interest. What often happens is that the private equity undertakes a cost-rationalising exercise so that the profits are improved in the short term with a view to selling the business again as soon as possible. The leveraged effect of the debt means that private equity can make a substantial gain even if the underlying business grows only in line with inflation.
The cost rationalisation often invokes workforce reductions. Studies indicate that private equity-owned companies typically have lower levels of employment even five years after the original buy-out. This certainly tallies with my experience, although I have not had the benefit of the experience of the noble Lord, Lord Vaux, who worked for private equity-owned companies during his career.
In the meantime, if there are any profits left, rather than being invested in growth they are usually paid out as dividends. In fact, it is not uncommon, if a company has managed to reduce its debt ratio, for a PE to recapitalise the company to put in more debt in order to allow the payment of a dividend. Of course there are exceptions, but, as many examples show, such as Thames Water—indeed, much of the water industry—Debenhams, Southern Cross and Silentnight, private equity cannot legitimately claim to be a force for growth. Are there good returns for its investors, and particularly its partners? Yes—but is it a force for growth? It is not really. It is said that £29.4 billion was invested in UK firms by private equity in 2024. Yes, but that investment was almost entirely in buying out existing businesses, which is very different from providing capital for growth.
So the noble Lord, Lord Vaux, and I are baffled as to why the Government think that mandating pension funds to invest in private equity will be good for the country. It may be good for someone but not necessarily for the country. I repeat that I have no problem with a pension fund investing in private equity if the trustees believe it is right for the fund and its members, but I see no benefit, and probably a downside, for the country as a whole. If we must mandate allocation, let us at least target it to asset types that generate growth, such as venture capital or infrastructure. If the Government’s primary motive for mandation is to drive UK growth, we should exclude private equity from the list. I hope the Minister and her colleagues will give thought to this, because we are on the same wavelength and we want the same answer, but not in the way that the Bill proposes at the moment.
Lord Davies of Brixton (Lab)
I wanted to speak after the noble Lord, Lord Palmer of Childs Hill, because, while I agree with what he said, I slightly disagreed when he talked about the favourable returns achieved by private equity. There is a massive problem with survivorship bias in those figures because the ones you never hear of again do not enter the figures.
I have a question for my noble friend the Minister. It seems an odd bit of drafting to say: “may for example”. Is “for example” doing anything in that sentence? Clearly it is not intended to be all encompassing, so others must be possible; it suggests that the person doing the drafting was not really sure that they liked what they were doing. It is pussyfooting about a bit. Secondly, what do these terms actually mean? I have an idea about “private equity”, but what about “private debt”, “venture capital” and “interests in land”? Goodness knows what the last one means. Are these terms defined anywhere? Can we get a clear definition of these things before we confirm this part of the Bill?
Lord Remnant (Con)
My Lords, I will comment briefly on the amendments in this group, tabled by several noble Lords, relating to the suitability of private markets and a potential cap on the allocation of funds to those markets. Equity and debt markets often now tend to be positively correlated; in other words, they move in the same direction. That was not normally the case in the past, when negative correlation brought better balance to a portfolio and to its risk and reward characteristics. So-called alternative investments—of which private markets form a part—that fall outside the traditional investments of stocks, bonds and cash can offer a sensible diversification.
The Mansion House Accord refers to the higher potential net returns that can arise from investment in private markets, but that comes with higher risks, less liquidity and, typically, less regulation. Given the disadvantages of the open-ended nature of the vehicle that would deliver such investments, to which I referred on an earlier group—and given that private markets, however defined, should be part only of a portfolio’s allocation to the alternatives class—I would certainly be in favour, as a matter of principle and practice, of a cap not exceeding the 10% mooted by my noble friends Lady Coffey and Lady McIntosh of Pickering. I cannot envisage any well-run, prudently managed and appropriately diversified pension fund wishing to exceed such a percentage in normal circumstances.
Viscount Trenchard (Con)
My Lords, briefly, it is not appropriate for legislation to tell the trustees of pension funds, in any case, that they can make investments in some types of structure but not in others. It should be entirely up to the trustees, in exercising their fiduciary duties, to determine what investments they make and the structures through which they make them to deliver a maximum level of risk that they are happy to accept.
The Government will succeed in realising their target of increasing pension fund investment in UK infrastructure by adopting fiscal and economic policies that encourage growth. We will then see a natural return to the much higher levels of UK equity investment by pension funds that used to obtain many years ago. If the Government require, nevertheless, some potential or possible mandation, it is right that there should be a cap. But, as my noble friend Lord Remnant said, it is inconceivable that any pension fund manager would be likely to invest more than 10%—I would say considerably less than that—in asset classes traditionally defined as alternative assets.
Viscount Younger of Leckie (Con)
My Lords, briefly, this group again underlines a central point that we have been making: mandation should not be in the Bill. Time and again, we have heard concerns about the risks of picking winners and the unintended consequences that inevitably follow. I raised these issues on the previous group, and the noble Baronesses, Lady Bowles and Lady Altmann, have today and previously put those concerns firmly on record.
However, I am grateful to noble Lords for their thoughtful efforts to limit or mitigate the impact of the mandation power. I thank my friend, the noble Baroness, Lady Altmann, supported by my noble friends Lady McIntosh of Pickering and Lady Penn in particular, for their remarks on these issues. However, our view remains unchanged and, for reasons already rehearsed at length, asset allocation mandates have no place in this legislation. There is no compelling evidence that they are either necessary or effective in increasing productive investment in the UK.
If we are serious about addressing the barriers to UK investment, we must be honest about where those barriers lie. They include governance and regulatory burdens; risk-weighting and capital requirements; liquidity constraints and scheme-specific funding; and maturity considerations. None of these challenges is addressed, let alone solved, by mandation. If, notwithstanding these concerns, the reserve power is to be retained, significantly stronger safeguards are essential: a clear cap on the proportion of assets that may be mandated; more robust reporting and evidential requirements before regulations are made; explicit conditions for access to any transition pathway relief; a strengthened savers’ interest test; and rigorous post-implementation review. The question of when and on what basis the power should be sunsetted is one that we will return to on the next group, but the fundamental point must be clear: mandation is the wrong tool and the Bill risks embedding unjustified and anti-competitive discrimination between equivalent investment vehicles, driven not by evidence or public interest but by a narrow and self-interested approach. I will address those issues in more detail in a later group but, for now, I look forward to hearing the Minister’s response to the specific amendments raised.
However—before she gets up—I wish to turn to Amendment 118 in my name. It probes the power that allows regulations made under new Section 28C to include assets of various classes under the broad heading of private assets and to permit the future inclusion of additional asset classes. I appreciate the support of the noble Baroness, Lady Altmann, on this part.
I touched on this matter in some detail in the previous groups, so I will not repeat those arguments here. However, this amendment once again draws attention to our concern about the specific types of asset that the Government have chosen to list on page 46 of the Bill. It remains an issue about which we are deeply concerned, and one on which we will continue to work closely with other noble Lords though to Report.
Baroness Sherlock (Lab)
My Lords, I apologise to the noble Viscount for jumping up prematurely. These amendments relate to the level of any asset allocation requirements and the potential treatment of investments in private equity and private debt as qualifying assets for the purpose of any asset allocation requirement.
I will start with the with the level of any asset allocation requirement, a question raised by the noble Baroness, Lady McIntosh in her Amendment 114 and the noble Baroness, Lady Altmann, on behalf of the noble Baroness, Lady Coffey, in Amendment 112. Both would cap the percentage of default fund assets that could be required to be invested in qualifying assets. I understand why noble Lords were keen to table these amendments and to look for a cap. I have to say to the noble Baroness, Lady Penn, that I am shocked by such cynicism in one so young. I will explain the—perfectly rational—reason the Government have not done this; I hope that she will find it very satisfying and feel suitably chastened at that point. We do not expect to need to exercise the power, but to do so would be a significant step and, as noble Lords may have picked up by now, the Government’s general approach has been to design the power so that it can be used as a backstop to the commitments used in the Mansion House Accord. I underscore that point.
The aim has been to create a backstop to that rather than to fix a numerical cap in primary legislation. That is what it is designed to do. The accord is not a legal document, and its terms and definitions are not of a kind that could simply be lifted into statute. If the Government were ever to exercise these powers, we would need to define key terms precisely, and it is at least possible that those definitions might have some bearing on the precise percentage levels that are appropriate. We have therefore not taken the step of hard-wiring a fixed cap, although I underline that we have included various other safeguards, which I have repeated more than once, so will not repeat again in the interests of time.
In relation to Amendment 113 in the name of the noble Baroness, Lady Altmann, the Mansion House Accord commitment has informed the design of these powers, including the ability for government to require a proportion of assets to be invested in specified qualifying assets. I understand the point that she was making, but our approach has been deliberately limited, going no further than necessary to support the commitments already made. That caution is important, given that this is a novel—and, I discern, a not entirely uncontroversial—part of the Bill. Although we are aligned on the objectives, I would not want to suggest a change in policy direction where none is intended. Our aim is to give the DC pensions industry reasonable clarity about our expectations.
Amendment 119, tabled by the noble Lord, Lord Vaux, and spoken to by the noble Lord, Lord Palmer, interrogates the inclusion of private equity as an example of a qualifying asset. Its effect would be to remove private equity from the illustrative list in new Section 28C(5). Amendment 120 from my noble friend Lord Sikka would do the same, as well as removing private debt.
Baroness Altmann (Non-Afl)
I thank the Minister and all noble Lords who have spoken in this debate. We have had a good rehearsal of the views and concerns about mandation and the need for a specific limit. I understand that the Minister is not keen on having a specific limit, but I hope that we can meet ahead of Report to go through some of these issues, which are keenly felt by many noble Lords in Committee.
The same is true of the concern about private equity or private debt and the dangers of being invested in them. It strikes me as rather strange that the Government think that the risk-return opportunities in private equity are suitable for mandation but that that would not extend to quoted listed investment companies, which have long proven their track record without the disasters that we have often seen with private equity. With that, I beg leave to withdraw the amendment.
Member’s explanatory statement
This amendment probes the reasons behind the provision allowing the Secretary of State until 2035 to exercise the mandation power.
Viscount Younger of Leckie (Con)
My Lords, it is a pleasure to open what I hope and assume will be another interesting debate. Once again, I hope it will shine a light on the flaws of mandation from new and specific angles that merit discussion.
Amendment 115 in my name is a probing amendment, which goes to the architecture of the power itself. The Bill allows the Secretary of State to exercise the mandation power up until 2035. Why has 2035 been chosen for sunset? Why is it that particular year? Was that date chosen because it aligns with some evidenced policy rationale, a defined market transition or a known obstacle that is expected to have fallen away by then? A sunset date sets the constitutional balance between Parliament, Ministers and the pensions industry. A sunset clause extending to 2035 runs beyond the life of this Parliament and would allow very broad discretion for a Secretary of State, not merely to encourage investment but to direct it, in effect, by setting targets and conditions. That is an extraordinary proposition when we are dealing with the retirement savings of millions of people.
I put a simple set of questions to the Minister. What analysis underpins the choice of 2035? Was it recommended by the department’s own evidence base? If the concern is a temporary set of barriers, for instance, a collective action problem, why is the power not time-limited to a shorter period, with a requirement for Parliament to renew it if, and only if, the evidence remains compelling? If the Government believe the power is genuinely a reserved power, why does it need such a long reserve? If the Minister cannot explain the logic of the date, it becomes harder to accept that the scope of the power has been calibrated with care.
Amendment 152 relates to the review process following the exercise of powers under Section 28C—the mandation power. This is another probing amendment intended to test why the Government consider a five-year period an appropriate timeline for regulations to be reviewed and why an earlier review has not been proposed. Five years is a long time in pensions and financial markets. It is a very long time in the life of a saver, because compounding does not wait politely while Whitehall decides whether its intervention has worked. If an allocation has been distorted, returns have been impaired, costs have risen or liquidity has been compromised, five years is long enough for the damage to become embedded in outcomes. It is also long enough for market conditions to have changed so significantly that any review risks becoming a rear-view mirror exercise rather than a real safeguard.
I ask the Minister directly, why five years? What is the justification? Is there evidence that a shorter review period will be impractical? Why are the Government not willing to commit to a more immediate post-implementation assessment, perhaps—let me be helpful to the Minister—within 12 months or two years, to ensure that any harm to savers is identified early? If Ministers believe the power is low risk, surely a quicker review should not trouble them.
There is a further point. The Bill speaks of not only assessing the effect on the financial interests of members of master trusts and savers in group personal pension schemes, but of such other matters as the Secretary of State may consider appropriate. What precisely do the Government envisage falling within those other matters? Does it include costs to schemes, liquidity, operational complexity, market impact and whether compliance has forced schemes away from diversified strategies that would otherwise have been in members’ best interests? Does it include, as many fear, political metrics dressed up as economic analysis, such as whether a mandated allocation has supported a preferred sector or class of domestic asset?
Most importantly, what happens if the review reveals that the financial interests of members have been harmed? What is the mechanism for redress and the practical remedy? Do the Government anticipate compensating schemes or savers? As the Committee will appreciate, we will return to the question of redress later in our proceedings.
I now return to the subject of market risk through Amendment 115, which is intended to ensure that any review explicitly considers two linked dangers. The first is that mandated investment requirements may become misaligned with economic conditions. The second is that directing multiple schemes into the same assets could cause market distortion or asset price inflation.
Mandation can distort markets in ways that are entirely foreseeable. If multiple large schemes are required, either explicitly or implicitly, to invest in the same asset class, the demand shock can inflate prices. If market participants interpret government direction as a signal of future price support, price movements can be amplified further; these arguments have been rehearsed not only in Committee but at Second Reading. Artificial price inflation then risks reducing long-term returns for pension savers because you are requiring schemes to buy after prices have been driven up, rather than allowing them to invest on value and fundamentals. It is picking winners and losers, not through the discipline of markets but through the blunt force of regulation.
So I have further questions for the Minister, I am afraid. Has the department modelled the potential for asset price inflation in any asset class that might be subject to a mandated allocation? Has the department assessed the risk of crowded trades in which schemes find themselves paying more for the same exposure because the Government have forced them to compete with one another? Has the department consulted the Bank of England or the FPC on the risk that mandated flows could contribute to procyclicality or instability, particularly in less liquid markets? What is the Government’s plan if mandated allocations coincide with an already elevated valuation environment?
There is a second risk: that of regulation falling behind economic reality. Mandated asset allocations risk becoming misaligned with economic conditions because compliance takes time. Requirements to hold a specified percentage in a particular UK asset class within a fixed timeframe may no longer be appropriate by the time schemes comply. Economic conditions, market valuations and government priorities can change far more quickly than regulatory mandates. This creates a real risk of locking savers into allocations that are no longer in their best financial interests.
So, again, what mechanism will ensure that mandated requirements remain compatible with changing economic conditions? Will there be a duty to pause or suspend requirements when market conditions deteriorate? Will there be an explicit test that requires Ministers to show why a mandated allocation is consistent with the fiduciary duty at the point when it is imposed, not merely when it is first conceived? If Ministers insist that their fiduciary duties remain paramount, how do they reconcile that with a policy that, by design, substitutes government preference for trustee judgment? I am reverting back to that argument.
Amendment 209 would require the Government to review the barriers that may prevent pension and investment funds investing in the UK, including regulatory, tax and fiduciary constraints; and to report their findings to Parliament. Instead of beginning with mandation then asking later whether it has caused harm, the Government should have started here. If Ministers genuinely wish to increase productive investment in the UK, their first duty is to diagnose the barriers properly. Stakeholders have emphasised repeatedly to us that limited UK investment by pension schemes is not a failure of willingness but reflects real constraints: government and regulatory burdens; risk weighting and capital requirements; liquidity constraints; scheme-specific funding and maturity considerations; fixed fees; and the economics of administering more complex, perhaps even less liquid, investments at scale. Many of those may be solvable issues but they require the hard work of reform, not the easy headline of compulsion. Addressing these barriers is far more likely to increase investment sustainably than imposing mandation, and care should be taken to avoid adding further unintended obstacles through legislation.
Baroness Penn (Con)
My Lords, my noble friend Lord Younger has asked many of the questions that my Amendments 116A and 130A seek to probe on the rationale for the Government’s timescales in the Bill. They are also intended to shorten those timescales and implement an absolute sunset; I want to be clear to the Minister that I do not think that a deadline by which the maximum asset allocation cannot be raised further is a sunset.
I heard what the Minister said in our debate on the previous group about introducing a maximum allocation cap. I am not sure that I really buy into that argument but, if that is the rationale, are the Government really saying that it might take 10 years to work out what the definite figures agreed under the Mansion House Accord are and that that is why they have their timescales in place? Are the Government really saying to those who signed up to the Mansion House Accord—or, indeed, to those who did not—that the figures that could be mandated under this power could go above 10% and 5%? That would make it an even harder power for people to swallow. Further, this could be over by an unlimited amount—not even a variance of maybe up to 15%, but up to any level.
The Government have used the argument for the mandation power that it creates certainty for those pension funds but, the more we discuss it, the more uncertainty there seems to be. The figures of 10% and 5% do not seem to be the figures of 10% or 5% any more. Under the Government’s approach, we will get a cap, but maybe in 10 years’ time, while the assets required to be invested under that cap can still change in perpetuity. I used the example at Second Reading of one Government wishing to mandate investment in net zero and the other wishing to mandate investment in defence assets; both are conceivable things that we might see happen in the longer term. The point is that, the longer this power is in place, the greater the risk that it is used not for this Government’s intention but for something else.
On the guardrails outside of the primary legislation, which the Minister referred to but rightly did not go into in our debate on the other group, I have a question about one: the requirement to consult. At Second Reading, the Minister said that the Government would be required to consult before using these powers for the first time. I want to check whether this means that they will not be required to consult when amending them subsequently or they will be required to consult each time they bring forward regulations under this power. I had thought that it was the former—consulting each time they used the powers—but, if it is not, and it is only the first time when they are used, I would be grateful if the Minister could clarify that point.
Baroness McIntosh of Pickering (Con)
My Lords, I am grateful to my noble friend Lord Younger of Leckie for introducing this group and setting the scene so eloquently, and to my noble friend Lady Penn for speaking to her amendment. I shall speak to the amendments in my name and I thank the noble Baroness, Lady Altmann, for lending her support to Amendments 129, 153 and 156. They follow on neatly from the other amendments about which we have heard. The Bill requires the Government to publish a report before the introductory regulations are brought into force to bring in the reserve powers, but it covers only how the financial interests of savers will be affected and the effect of the regulations on economic growth.
The purpose of my Amendment 129 is to set out additional items to be covered in the report, to ensure that the Government properly and comprehensively assess the impacts of any future regulations, such as, for example, the functioning of workplace pensions markets and impacts on the market of assets to be mandated and other requirements. What I am proposing in Amendment 129 is to test whether the Government have done enough to justify using such a drastic power. I am also suggesting, taking up the point of my noble friend Lord Younger, that the first report should be in less than five years: the first report should be after two years, because a lot of damage could be done in the first two years and even more damage could be done if there is no report for five years.
Amendment 156 continues on this theme, looking at a different part of Clause 40 for these purposes. Amendment 153 says that there should be a review, as I have mentioned, which should take place within at least two years, in addition to a review within at least five years. While the review in the Bill allows for mandation to be in place for five years before the Secretary of State must review its impact, I believe that that is too long and that it could potentially allow for negative effects to set in under the regulations under the Bill for affected default schemes. Taken together, Amendments 153 and 156 bring forward the review of regulations to take place within two years after those regulations have been in force, as well as after another three years to stop any further damage being done. We set out here what those reviews should look at
“the functioning of the market for Master Trusts … what effects the measures have had on that market … what effects the measures have had on the markets for qualifying assets”,
and so on, as set out in these amendments.
I hope the Minister will look favourably on these amendments, particularly since there is a mood on this side to coalesce around a review within the first two years.
Baroness Noakes (Con)
My Lords, all the amendments in this group raise important issues. I hope that none of them will be necessary, because I hope that we will have got rid of the power from the Bill, so these will become irrelevant details. I have Amendment 130 in this group, which would modify the mandation power by removing new Section 28C(15). This subsection “overrides any provision” of a trustee or scheme rules that conflicts with the mandation power. Thus, if the scheme had been set up with investment parameters that, for example, ruled out investing in private equity, and the Government then specified private equity, the wishes of the employer expressed in the scheme’s governing documents would be completely overwritten. Since there is no requirement in the Bill, as I understand it, for the Government to specify more than one asset class, it is quite possible that the Government could specify a required asset class that conflicted with things that had been deliberately set up when the scheme was set up.
I can understand, of course, why the Government want to encourage pension schemes to consider investing in alternative asset classes. I do not think you will find much resistance to the concept of investing in alternative asset classes. But I simply cannot understand why the Government think they should have a power to force schemes to invest in a particular way, if a conscious decision has already been made not to invest in that asset class. The Government might not agree with that decision, but I hope we do not live in a world where the Government can simply ignore the clearly expressed wishes of those they govern. I hope that we still live in a free society. Subsection (15) seems to me to extend the powers of the state too far, and we ought not to go along with it.
Baroness Bowles of Berkhamsted (LD)
My Lords, I have several amendments in this group: Amendments 154, 157, 158 and 159, which I will not say much about because I am fishing in the same pond as everybody else. If there is this mandation, we are anxious to know how it works, and we think the review should come earlier—I have put in some of the things that I think it should look at. I will spend more time on my Amendment 131, which is about prior steps that would have to be taken before there was any exercise of the mandation and regulations were made. It is about the prior steps that must be taken before the Secretary of State can exercise the regulation-making power in new Section 28C—what I termed the devil’s clause once before, although we now know that it is the ABI clause.
It is probably worth pausing here to remind ourselves whom the ABI represent: it is the Association of British Insurers and it represents the insurance companies, which are the manufacturers of the LTAFs, as was indicated earlier. It had a meeting in which, as usual, it displayed the slide that says, “We’re not colluding and breaking competition law, but we’re just going to agree that we won’t be investing in the other vehicle that has protected net asset value, and we’ll do a Q&A that says that’s not happening”. Interestingly, the insurers present at that meeting seem to have either forgotten about it or are telling me that they did not agree to anything. However, I leave that hanging.
If the Government wish to enforce a power of this potential scope, which, as has been explained, is much wider than the example in the Bill—a power that could reshape asset allocation across the pension sector—it must be subject to proper safeguards. These prior steps are not obstacles but constructive checks that should support the Government’s own objectives.
Proposed new paragraph (a) would require the Secretary of State to
“review the effect of any voluntary agreements or coordinated commitments relating to asset allocation”.
We have had a lot of policy alignment, pledges and so forth, and we all want the voluntary method to succeed. But if the point comes that regulations are contemplated, it is essential to understand what the voluntary route has already achieved, where the evidence points and why it did not happen.
Proposed new paragraph (b) would require an assessment of
“the impact of any such agreements on asset allocation, pricing and valuations”.
If the Government are concerned about market functioning, they should be equally concerned about how co-ordinated commitments affect pricing signals and valuation discipline. This is simply good policy hygiene because it ultimately affects workers’ pensions.
Proposed new paragraph (c) would require a review of
“the likely effect on returns to pensions savers”.
We all hope for the double benefit: better long-term returns for savers and productive investment that supports the UK economy. But we must analyse whether that is happening in practice, and if not, why not, before moving to a regulatory footing.
Proposed new paragraph (d) would require the Secretary of State to “obtain clearance” from the Competition and Markets Authority, and that is entirely consistent with the CMA’s pro-competition remit and with the competitiveness and growth objectives embedded in FSMA. Any use of this power must reinforce the UK’s competition framework, not bypass it, and where co-ordinated commitments already exist in the market, the Government must be certain that any regulations they bring forward meet a clear public interest justification.
Lord Ashcombe (Con)
My Lords, it is a privilege to follow the noble Baroness, Lady Bowles, after that. I support Amendments 115 and 152, in the names of my noble friends Viscount Younger of Leckie and Lady Stedman-Scott, concerning the Government’s draft powers to mandate. The matter before us is not, in essence, a question of technical refinement but one that touches directly upon the principles of parliamentary sovereignty and the standards of scrutiny that this House has long upheld.
As has been evident during the deliberations of this Committee, we are all acutely aware that the pensions industry forms the very foundation of the long-term financial security of millions of people across the United Kingdom. It is therefore essential that any mandates imposed upon this sector are framed with clarity, certainty and due consideration for the practical realities—of which we have heard a lot this afternoon—faced by industry participants and savers alike. The sector quite reasonably seeks early and unambiguous direction so that businesses and individuals may plan prudently and with confidence. Ambiguity serves only to sow uncertainty and to heighten risk; it also almost always reduces the probability of the desired outcome.
Clarity alone, however, is insufficient. The process by which such mandates may be introduced or amended must itself be transparent, accountable and subject to full and proper parliamentary oversight. Under the current provisions, potentially substantial changes to the scope of mandation powers could be affected through negative secondary instruments. Such a mechanism falls short of the constitutional rigour expected in matters of this significance. These instruments, as the Committee well knows, may pass with limited visibility and without the robust debate and testing that both Houses are uniquely equipped to provide.
The amendments before us seek to remedy that shortfall by requiring that any future changes to mandation rules receive the express consent of Parliament, rather than proceeding without a vote. This proposition is not, I emphasise, a question of party-political alignment but a question of sound governance, institutional responsibility and public trust.
We must not lose sight of what is fundamentally at stake. Effective parliamentary scrutiny protects not only the interests of the industry and the Government but, most importantly, the millions of individuals, including myself, who have saved faithfully into the pension system and rely on its long-term stability. I therefore urge the Committee to lend its support to these amendments. In doing so, we would strengthen the clarity and certainty required by the pensions and lifetime savings sector; uphold the enduring principle of parliamentary consent; and ensure that the governance of our pension system reflects the transparency, diligence and integrity that the public rightly expects and deserves.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Viscount, Lord Younger, for his introduction to his amendments in this group and all noble Lords who have spoken.
I will start with the sunset provisions. Amendment 115, from the noble Viscount, Lord Younger, would remove one element of these, but I understand that it is obviously tabled for probing purposes. There are two distinct elements to the sunset provision. The first is the element identified in the amendment: the provision in new Section 28C(3), which means that if percentage asset allocation requirements have been brought into effect by the end of 2035, they cannot be increased beyond that date. The second is what I call the “main” sunset provisions, in Clause 122(6), which automatically removes the power from the statute book altogether if it has not been used by the end of 2035. I fully recognise that there is a legitimate debate about where to set those sunset dates. Through her Amendment 116, the Baroness, Lady, Coffey, would prefer it to be shorter. The noble Baroness, Lady Penn, proposes bringing forward to 2030 the date beyond which the requirements cannot be raised. Her Amendment 130A would ensure that not only the enabling powers but any requirements in effect would expire in 2035. This is a significant power that would potentially be at the disposal of different Governments and such restrictions would seek to ensure that it is not on the statute book any longer than required.
The noble Viscount made the point about this being in a subsequent Parliament. In a sense, that is inevitable, because the Mansion House commitments are only to make those commitments by 2030 and, because this is meant as a backstop to the Mansion House Accord, the timeframe is shaped by the timescale within the Mansion House agreement and the Government’s own reform plans. We obviously do not want it on the statute book for longer than it is needed but, on the other hand, the Government do not want—nobody would—to create a situation in which a future Secretary of State felt compelled to use the power prematurely just to avoid it lapsing. It was therefore a genuine judgment about where to land it. In my view, it would not be logical to have the ability to implement a requirement, only for it to expire very shortly afterwards, as Amendment 130A might permit. The Government had to make a judgment between those competing considerations and we came down on 2035. I accept that it is matter of judgment and the Government’s may differ from that of noble Lords, but I hope that explains the competing pressures that made us land in that space.
The Committee has also focused, through a series of amendments, on the requirements for reviewing any asset allocations before and after they are implemented. The Government are acutely aware of the need to both design any regulations with great care and ensure that, if they are every introduced, they work as intended. That is why we have embedded not one but two statutory reporting requirements in Clause 40. The first is the ex ante report, which must be published under new Section 28C(12) before the power is exercised for the first time. In response to the noble Baroness, Lady Penn, her first understanding was correct. The requirement to consult is on first use. This requirement arises from a combination of new Section 28C(12) and (14), but the approach was designed so that the compulsory report and the critical first use of the power are informed by the consultation, and that is why it was put up front.
The second is the post-implementation review, which must be carried out and published under new Section 30A no later than five years after the first regulations come into force. Amendment 154 tabled by noble Baroness, Lady Bowles, would bring forward the mandatory post-implementation review of any asset allocation requirements from five years to three. The noble Baroness, Lady McIntosh, would require an additional review within two years as well as the existing five-year review. The amendment tabled by the noble Viscount, Lord Younger, would remove the time limit altogether.
I understand why noble Lords would want a shorter deadline for the post-implementation review, especially as many have strong reservations about the power in general. Again, the five-year deadline is a matter of judgment, and I accept that we may land at different points, but our concern is to allow enough time for the arrangements to bed in, so that their effects can be properly understood. Markets can take time to adjust. It is possible, for example, that some providers might seek an exemption under the savers’ interest test. Those applications might be granted on a time-limited basis or be subject to an appeal process. That all means that the full impacts of the measure might not be visible after only a short period. On the other hand, by choosing 2035, we have deliberately kept the deadline short enough that it serves as a meaningful check.
I turn now to the content of the pre-implementation and the post-implementation reports. A number of amendments, in the names of the noble Baronesses, Lady McIntosh and Lady Bowles, and others, seek to specify additional matters that the Government should be obliged to review. In the main, I do not demur from the importance of any of the topics that noble Lords have identified; they cover many of the kinds of issues that any responsible Government would want to consider either before or after using a power of this kind. Indeed, it is worth recalling that the Government have already conducted a wide-ranging review of pensions investment that considers many of these topics. The review reported last year and, as noble Lords know, led to many of the measures in the Bill.
However, the Bill already places clear duties on the Secretary of State to look at the key overarching questions: how many measures are expected to affect, and then have actually affected, the financial interests of members in the relevant schemes, and how they affect economic growth in the UK? Both the ex ante and post-implementation reports must cover those core matters, and both are expressly permitted to cover “any other matters” the Secretary of State considers appropriate. That formulation is designed precisely to allow the Government to take account of the kinds of issues included in many of these amendments, but to do so in a way which can be adapted to circumstances at the time, rather than being hard-wired into primary legislation.
I stress that these reporting requirements are not the only safeguards built into the framework. The savers’ interest test provides a route by which providers can apply to the regulator for an exemption, where they consider that complying with the asset allocation requirements would cause material financial detriment to their members. If, for example, the kinds of market distortions or misalignments described in Amendment 155, from the noble Viscount, Lord Younger, were to arise in such a way as to raise material concerns about the impact on savers of meeting the targets, providers might well choose to apply for an exemption.
The issue of transparency was raised by the noble Baroness, Lady Bowles, and implicitly by the noble Viscount, Lord Younger. I absolutely agree that it is good practice to be clear about the evidence and submissions that have informed policy decisions in this area. That has been the Government’s practice to date. In taking forward the pensions investment review, from which these measures have arisen, the Government consulted extensively and then published a 47 page response, including a full list of the 107 organisations that responded. If further formal consultations are carried out to inform the work required under the Bill, they will be conducted in the same spirit of openness. However, I do not think that we need detailed prescriptive publication requirements in primary legislation to achieve that.
Amendment 131 from the noble Baroness, Lady Bowles, would impose a further list of “prior steps” that the Secretary of State must take before using the power. One is a requirement that the Government must obtain clearance from the Competition and Markets Authority prior to exercising the powers. I will not rehearse the debate on investment trusts; we have done that already today. However, I stress again that this mandation clause is neither the work of the devil nor the work of the ABI; it is the work of the Government acting as a backstop to a voluntary Mansion House Accord, which is an industry-led initiative by 17 pension providers, aimed at securing better financial outcomes for DC savers and boosting investment in the UK. It is for the participants of the Mansion House Accord to ensure that they comply with competition law, and I have no reason to believe that they are not doing so. For our part, the Government will of course continue to comply fully with competition law in relation to any actions taken under these powers. I do not think a statutory requirement to seek specific CMA clearance is necessary or justified.
Amendment 130 from the noble Baroness, Lady Noakes, is a probing amendment to understand why we need to override any contrary provisions in scheme trust deeds. New Section 28C(15) simply clarifies that, where there is a conflict between the statutory asset allocation requirements and restrictive provisions in a trust deed, the statutory requirements take precedence. It is designed to give trustees legal certainty, not to dilute their general duties. As I have said, we do not expect to have to use this power but, were it to be exercised, we would want to ensure that there is certainty for trustees that these requirements may be met without inadvertently causing a conflict with a provision in a trust deed or rules.
Obviously, we do not have sight of every set of deeds or rules that schemes operate under, and it may well be that no relevant conflicting provisions exist. The provision is essentially a precaution. It means that it is not necessary for trustees or providers to spend time or money to scrutinise the interaction between the asset allocation provisions and their deeds. It also addresses the risk that a scheme might find itself at risk of closure to new auto-enrolment business due to a trust deed provision that prevents it from complying with the asset allocation requirements, which it may well want to do.
However, I want to draw a clear distinction between any specific provisions within the trust deed and the broader responsibility of trustees to select investments that operate in the best interests of members. That does not change, and trustees would continue to be subject to a duty to invest in savers’ best interests in line with the law.
Viscount Younger of Leckie (Con)
My Lords, I will be brief in closing this debate; I am conscious that I spoke at some length when opening this group.
First, the point raised by my noble friend Lady Noakes was a sound one. Amendment 130 probes the extent to which it is appropriate for regulations to override the trust deed or rules of a pension scheme. I listened carefully to the response from the Minister but I think—my noble friend may agree with me—that this is a fundamental issue that goes to the heart of scheme governance and trustee responsibility. I know it is an issue that she feels strongly about, and we do too, because it is vital that trustees retain clear and accountable responsibility for investment decisions made in members’ best interests. I will reflect on Hansard, as I am sure my noble friend will too.
I also just touch briefly on Amendment 153, tabled by my noble friend Lady McIntosh. As she highlighted, this amendment seeks to ensure that a review of the asset allocation mandation powers takes place within at least two years, as well as within five, and of course it reflects the same concern that I raised. I also listened when the Minister said that it was a matter of judgment by the Government. I take note of what she said—I will not give a view on that but, again, we will reflect carefully on it. Despite the best efforts of the Minister, I remain with the feeling that there is not a clear rationale or sufficient assurance, but we will reflect.
The noble Baroness, Lady Bowles, raised a number of technical and specific points. Taken together, this group once again demonstrates the complexity of this particular area, the necessary safeguards and the prior steps required, and the degree of intervention that the Government risk embarking upon through this mandation power. Once mandation is introduced, it inevitably draws policymakers into ever more detailed interventions, and with that comes a cascade of unintended consequences, as I said before. We will therefore reflect on the Minister’s responses but, in the meantime, I beg leave to withdraw my amendment.
Member's explanatory statement
This amendment seeks to remove the time limit for savers’ interest exemptions to the asset allocation requirements that would be set by the Authority.
Baroness McIntosh of Pickering (Con)
My Lords, I hope that this little group is fairly self-explanatory.
In Amendment 141, I am again seeking to provide more certainty in relation to the savers’ interest test for exemptions to the asset allocation requirements and ensure that providers are not required to alter their asset allocation until the authority has made its determination or they have received the outcome of the referral to the Upper Tribunal. This is a probing amendment for debating purposes. I hope that we will get further light from the Minister when she replies.
My noble friend Lady Noakes has just reminded me that I would also like to speak to Amendment 140, the “starter for 10” in this group. Here I am seeking to remove the time limit for savers’ interest exemptions to the asset allocation requirements that would be set by the authority. I thank the Committee for its forbearance in allowing me to speak to Amendment 141 as well.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will speak to Amendments 146 to 150. This group of amendments is all about trustees. Although I submit that nothing in this Bill should unsettle the basic foundation of our trustee law, there remains extensive debate in the courts and academic literature, and among trustees, on how far wider policy objectives and emerging risks can be taken into account. I am trying to address some of those.
Amendment 146 would simply reinforce the obvious: fiduciary duty remains the overriding principle of pension governance and trustees must act in the best financial interests of members. That is the cornerstone of trust law. The courts have been clear for decades that trustees must prioritise members’ financial interests above all else. Yet the combination of the Mansion House rhetoric, promotional language in the Bill and the possibility of future regulations has created real anxiety among trustees about whether they are expected to prioritise government preferences over member outcomes. This amendment aims to remove that ambiguity. It would restate the law, reassuring trustees that their primary duty has not changed.
Amendment 147 follows on from that in seeking to introduce a safe harbour. Trustees are increasingly worried about being second-guessed, not for misconduct but for failing to meet expectations that are not clearly defined. Many are lay trustees. They act in good faith, take professional advice and follow their fiduciary duties. They should not face penalties or adverse consequences because they did not meet a quota or chose a different route to the same underlying assets. A safe harbour is a standard legal mechanism used in other regulatory regimes. It protects trustees who do the right thing, prevents retrospective reinterpretation of policy signals and ensures that trustees can make decisions based on evidence, not fear.
Amendment 148, also tabled by the noble Baroness, Lady Altmann, addresses systemic risk. Trustees already consider systemic risks: climate change, economic resilience, supply chain fragility and other long-term factors that materially affect pension outcomes. The Pensions Regulator already expects trustees to consider these issues, but the statutory framework is uneven and expectations are not always clear, so this amendment would codify best practice. It would ensure that trustees consider systemic risks as part of their fiduciary duties, while making it explicit that this does not mandate investment in any particular vehicle. It is about risk management, not direction of capital. Trustees are careful and sensible people and will observe the policy direction, including on private assets. As I said last week, before we had the devil’s clause, there was broad agreement that it would be far better to trust the trustees.
Amendment 149, again from the noble Baroness, Lady Altmann, addresses structural discrimination. I have already dealt extensively with how the Bill risks creating unequal treatment between different collective investment structures. Trustees should be free to choose the most appropriate structure for their scheme, whether listed or unlisted, based on liquidity, valuation, discipline, governance or member outcomes. The amendment would simply ensure a level playing field. It would prevent distortions, protect competition and ensure that trustees are not nudged away from structures that have served savers well for over a century.
Finally, Amendment 150 deals with herding risk. Regulatory herding is a known danger, which we have seen most recently and dramatically with LDI, where regulation, guidance or professional advice pushes everyone in the same direction at the same time and systemic risk increases, not decreases. The Mansion House agenda, if interpreted too narrowly, risks creating precisely that kind of clustering. This amendment would require the Secretary of State to avoid mandating or promoting investment in a way that induces herding and ensure that any guidance emphasises diversification and risk management. It is a simple “Do no harm” provision which learns from recent history. It is also embedded in the terms of the Mansion House Accord, as spoken to last Thursday by my noble friend Lord Sharkey. Trustees must not be forced to purchase assets that do not exist, do not exist safely or do not exist at a fair price.
None of these amendments would obstruct the Government’s objective. None would prevent investment in productive finance. None would limit trustee discretion. What they would do is ensure that trustees remain protected, that their duties remain clear and that the Bill does not inadvertently distort markets, undermine competition or create new systemic risks. These amendments are modest, sensible and protective. They would strengthen the Bill, support trustees and safeguard the long-term interests of pension savers. It is what we should all be thinking about.
Lord Davies of Brixton (Lab)
I support mandation. I am in favour of the Government introducing the measures in this Bill, in principle. All Governments have a duty, not just a right, to deal with market failure. If the current investment advice and structures that we have are failing to deliver investments in the growth that we need in our economy, then the Government have a duty to act. I am not yet convinced that they have all the mechanics of mandation right, but that is the process we are going through at the moment in investigating how it will be achieved.
I am not so sure—I ask my noble friend the Minister to guide the Committee on this—about a question raised at Second Reading to which there was no answer, which applies to this part of Bill. Do the Government understand that the inevitable corollary of mandation is responsibility for the outcome? Outcomes may be better. We are told at length that this will improve things; the aim is to grow the economy to achieve good investments.
The Government may not have a legal responsibility to make sure that happens, but they certainly have a moral responsibility when they are saying how members’ money should be invested and they also, inevitably, have a political responsibility to ensure that they produce a system that enjoys broad public trust. A failure to achieve the Government’s objective will break that trust. Do the Government appreciate and understand the implications of what they are doing?
Lord Sharkey (LD)
My Lords, I will speak briefly under the auspices of Amendments 146 and 147 when we resume some of the discussions the Minister promised last week to continue, notably on mandation and statutory guidance. In our debate last week, I tried to establish the evidence base for the Minister’s assertion that
“the Government would not be proposing these powers”—
mandation—
“if there were not strong evidence that savers’ interests lie in greater investment diversification than we see today in the market”.—[Official Report, 22/1/26; col. GC 218.]
The key words here are “strong” and “evidence”. There are certainly those whose opinions would align with the Minister’s assertion, but opinion is not the same as evidence and not nearly the same as strong evidence.
As I said last week, the DWP recently commissioned the Government Actuary’s Department to model four variations of pension scheme strategies. I will not list them again, but the study concluded that across a range of economic scenarios the model portfolios deliver very similar projected pension pot sizes. But it also showed that if the current underperformance of the UK versus global equities persists, UK-heavy allocations will underperform the baseline. The Government Actuary’s Department said in a post on GOV.UK on 15 November 2024:
“Our analysis showed that a greater level of exposure to private markets may deliver slightly improved outcomes to members. However, there is considerable uncertainty, particularly with the assumptions for projected future investment returns”.
That does not sound like strong evidence for anything.
The Institute and Faculty of Actuaries makes the same point. It says that, based on the Government’s own impact assessment, “We do not think there is strong, clear evidence that in most foreseeable scenarios savers’ interests lie in greater investment in private markets and infrastructure”. It believes that there exists a very uncertain central estimate of an extra two percentage points over 30 years, equivalent to 0.066% a year compounded. It goes on to say: “Given the inherent uncertainty in such estimates, this is almost negligible and could easily turn out to be negative over the next 30 years or indeed much higher”. The IFoA goes on to say: “The point is that it is far from clear that there would be a material benefit”. That does not sound like strong evidence commendation either, yet this is the basis on which the Government seek to mandate investment, which raises as a consequence significant concerns about the operation of fiduciary duty.
The proposals in this Bill, for there is a power to mandate investment, cause uncertainty about trustees’ duties to their members. That uncertainty is understandable, especially because the case for mandation is weakly evidenced, if evidenced at all. The uncertainty is also unnecessary in many ways because of the existence of the Mansion House Accord for which, as others have said, 17 leading pension providers have already signed up. How will the anticipated statutory guidance, for example, contribute to the model of co-operation embedded in the Mansion House Accord? Is it no more than a useful threat? What role will the statutory guidance play in modifying the application of fiduciary duty? In fact, can the Minister confirm that the promised statutory guidance will have something to say about the possible clashes between mandated action and fiduciary duty, if only to confirm the primacy of fiduciary duty?
Minister Bell responded on 22 January to a Written Question from my honourable friend the Member for Stratford-upon-Avon about the scope of the coverage of the upcoming guidance on fiduciary duties. His reply did not refer to the mandation powers at all. Will the Minister confirm that the guidance will be non-binding and have the same have force as many other “have regards” that exist in the financial services sector? If the guidance has, or could plausibly be read as having, detectable, real-world influence, it should come before Parliament for scrutiny, and it should come before us when we can recommend changes.
Minister Bell’s Written Answer, as I mentioned a moment ago, says of the guidance that:
“Work will commence shortly beginning with an industry roundtable to gather views and technical expertise to ensure the guidance meets the identified need”.
I suppress my astonishment at this rather late start for thinking about statutory guidance. I notice that, in the reply, there was no mention of Parliament and the role it might play or of timescale in all this, except we now know that it has either just started or is about to start. In other words, as things stand, the likelihood of effective parliamentary scrutiny of anything to do with statutory guidance is unlikely. This is entirely unsatisfactory for the reasons that the noble Lord, Lord Ashcombe, has argued so forcefully.
There is no compelling evidence that mandation will work. If the Mansion House Accord is to be taken seriously and the Government play their part, mandation will be unnecessary. Mandation would interfere with or complicate the principal of fiduciary duty. It is also opposed by major stakeholders including, as I mentioned previously, the Governor of the Bank of England.
The Institute and Faculty of Actuaries ends its latest assessment of the situation by saying that trustees should not be leaned on to invest in ways that conflict with their own best judgment. Instead, those investments and markets that the Government wish to promote should continue to be made more attractive through initiatives such as LTAFs and so on. The pension schemes will freely choose to follow in a way that is right for them and their members. We agree with that and will continue to try to convince the Government that the reserve power is not necessary or desirable—activated or not—and that there is no sound basis for using it.
Baroness Stedman-Scott (Con)
My Lords, I will speak briefly on the other amendments in this group before turning to Amendment 145 in my name and that of my noble friend Lord Younger of Leckie. As noble Lords have already set out, Clause 40 represents a significant extension of regulatory influence over asset allocation in defined contribution default arrangements. Given the scale of that change, it is both reasonable and necessary that we consider carefully how risk, responsibility and accountability are apportioned within the framework the Bill creates.
The amendments in the name of my noble friend Lady McIntosh of Pickering, and the noble Baronesses, Lady Bowles of Berkhamsted and Lady Altmann, seek to introduce greater certainty and procedural fairness into the operation of the savers’ interest test. Removing an automatic time limit on exemptions, ensuring that schemes are not compelled to alter asset allocations while determinations or appeals are ongoing and requiring the authority to give reasons for its decisions are all, in my submission, entirely sensible propositions. They make the framework that the Bill creates more robust, transparent and defensible.
In a similar vein, allowing schemes to apply for the savers’ interest test over a limited number of consecutive years, while demonstrating a credible pathway to compliance, reflects a realistic understanding of how long-term investment strategies are developed and implemented. It recognises that good outcomes for savers are not always delivered by abrupt or mechanically imposed changes.
Several of the amendments in this group speak directly to the core point of fiduciary responsibility, which, as was powerfully reinforced during our debate on the final group last Thursday, is an absolutely central point to the approach being adopted by noble Lords across the Committee. The amendments reinforcing fiduciary duty and proposing a safe harbour for trustees acting in good faith on professional advice and in accordance with their duties are an attempt to clarify that nothing in this Bill should place trustees in an impossible position, caught between regulatory direction on the one hand and their fundamental obligation to act in the best financial interests of members on the other.
Related to this, the probing amendment from the noble Lords, Lord Vaux of Harrowden and Lord Palmer of Childs Hill, asks an important and unresolved question: where investment decisions are mandated by the state, in effect, where does liability sit if those investments underperform? Even if the Government do not accept the mechanism proposed, the question itself cannot simply be wished away; I hope that the Minister will address it directly.
I also wish to touch on the amendments that deal with systemic risk, structural neutrality and herding behaviour. Requiring trustees to have regard to long-term systemic risks, including economic resilience and climate change, is entirely consistent with existing best practice and does not mandate investment in any particular asset or vehicle. Ensuring that listed investment funds are not structurally disadvantaged helps preserve choice and diversification. The amendment on regulatory herding speaks to a well-understood risk: overly prescriptive frameworks can drive homogeneity of behaviour, amplifying systemic risk rather than mitigating it.
I hope, therefore, that the Minister will engage seriously with the questions these amendments ask around process, liability, fiduciary duty and risk. Even where the Government may not be minded to accept the amendments, as drafted, they highlight issues that, given the provisions in the Bill, deserve clear and careful answers.
As has been our consistent approach throughout these days in Committee, my own amendment seeks to probe the Government on a key question: why have they provided for a maximum civil penalty of £100,000 for failure to comply with the mandation requirements set out in this chapter? Given the nature of those requirements and the breadth of discretion that they confer on the authority, it is not at all clear in the Bill how the Government have arrived at that figure or why it is considered proportionate. We are dealing here with decisions around long-term asset allocation in pension default arrangements—areas where reasonable, professional judgment may legitimately differ and where the consequences of regulatory direction may not be apparent for many years. In that context, a six-figure penalty is not a trivial matter.
This amendment is designed to invite the Government to explain the rationale for the level of the penalty; how it is expected to be applied in practice; and whether sufficient regard has been had to scheme size, intent and the nature of any alleged breach. I hope that the Minister can set out clearly why £100,000 is the appropriate ceiling; how proportionality will be ensured; and what safeguards will exist to prevent penalties being applied in a blunt or mechanistic way.
Lord Katz (Lab)
We have to have a hard stop at 8 pm, I am afraid, so I move that the Committee do now adjourn.