Pension Schemes Bill

Monday 20th April 2026 Lords Chamber

Commons Reasons and Amendments

18:36

Motion A

Moved by

[Lord Katz]

That this House do not insist on its Amendment 1, to which the Commons have disagreed for their Reason 1A.

1A: Because the Commons consider that it is not necessary to include the asset and location provisions mentioned in the amendment.

[Lord in Waiting/Government Whip (Lord Katz) (Lab)]

My Lords, in moving Motion A, I will also speak to Motions B, B1 and C. The Commons have disagreed with Amendment 1 on the grounds that it could introduce, rather than mitigate, risks that the provision in Clause 2 could be used in unintended ways. Amendment 1 would place an explicit prohibition on regulations made under Clause 2, including any provision requiring investment in particular assets or asset classes, or in particular locations.

I acknowledge the concern that lies behind this amendment, and I wish to reiterate the Government’s position clearly for the benefit of the House. The Government have no intention of using the powers in Clause 2 to require asset pool companies to invest in specific assets, asset classes or locations. The Bill, as drafted, does not provide a legal basis for the Government to tell asset pool companies what investments should be made or where those investments should be located. Indeed, by expressly setting out particular matters that regulations may not address, the amendment risks introducing ambiguity about the scope of the regulatory making power. It could invite the inference that matters not explicitly excluded are in fact permissible; such an approach could therefore weaken the clarity of the legislative framework and increase the risk of misinterpretation or challenge.

I note that, in 2020, the Supreme Court ruled that the powers to make LGPS regulations had to be interpreted in line with Parliament’s intention, which was that LGPS investment decisions should be made in a way consistent with funds’ fiduciary duties. Although the Bill provides for asset pool companies to take investment decisions rather than funds, there is nothing in the Bill that overrides this broader intention, meaning there is nothing in the Bill that allows Government to tell asset pool companies to invest in specific assets, asset classes or locations. For these reasons, the Commons were of the view that Amendment 1 is both unnecessary and potentially counterproductive. The Government agree with that assessment.

Motion B sets out that this House do not insist on its Amendment 5 because the Commons consider that it is not appropriate to impose the publication requirements mentioned in the amendment, and that any additional requirements should be considered after the next report under Section 13 of the Public Service Pensions Act 2013 has been prepared. I thank the noble Viscount, Lord Younger, for his amendment in lieu in Motion B1, the intent of which, I believe, is already substantively met by the Government Actuary’s statutory Section 13 review of the LGPS valuations and the consultation on Regulation 64A, which relates to interim valuations, that MHCLG has already committed to running later this year.

The 2025 LGPS valuation has recently concluded. I am pleased to note that, taken across the whole scheme, the average employer contribution rate reported at the 2025 valuations of the LGPS in England and Wales has reduced by slightly less than 5% of pensionable pay, relative to the equivalent amount quoted for the 2022 valuations. This figure has been confirmed by the GAD’s analysis of the published valuation reports. There is of course variation to this across the country, and I understand the concern with ensuring that valuations are balancing stability for the scheme with value for money for the taxpayer.

As I have referred to both in Committee and on Report, under Section 13 of the Public Service Pension Schemes Act 2013, MHCLG appoints the Government Actuary to undertake a review of the valuation. As part of this review, I have already committed that the department will ask the Government Actuary for a consideration of the issue of prudence. Specifically, the Government Actuary’s Department will look at the levels of prudence inherent in the contribution rates set by funds, to ensure that a balanced view of liabilities is being taken in the context of an open scheme. This will include any prudence margins used within the discount rates, as well as other sources of prudence, such as the stability buffers and stabilisation mechanisms used by funds. While the Government Actuary’s Department does not believe that any of the actuarial firms would characterise their valuation methods as being gilts-based, they recognise that some of the rates used by funds in the 2025 valuation are similar to prevailing gilt yields at the valuation date. Discount rates have therefore been set by reference to the long-term investment horizon and characteristics of the actual assets backing funds’ liabilities, but are then reduced by some funds to gilt-rate levels by the inclusion of prudence and stability margins.

I further commit that the department will ask the Government Actuary to consider the methods being adopted by fund actuaries for managing risk and reflecting the long-term funding objectives of the scheme. It will ask whether there would be benefit to including additional illustrative valuations in valuation reports, and, if so, what they should be based on. It will also ask whether pension funds and their actuaries are engaging effectively with employers on the setting of contribution rates, including whether the information is being provided in a way that is comprehensible to the lay reader. The Government Actuary has already committed to publishing its Section 13 report next spring, an acceleration of previous timetables.

In addition, the department committed to consulting on interim contribution rates later this year. This consultation will consider how and when it might be appropriate for an employer to use this review mechanism, including significant shifts in financial pressures on local authorities and other employers. It will also consider whether there should be a link to the Section 13 review of the valuation.

I trust these points give reassurance that the Government take noble Lords’ concerns seriously and that the Section 13 review will address them. I respectfully ask that the noble Viscount does not press his amendment.

Finally, I turn to Motion C. Amendment 6 seeks to update the current regulation that allows employers to seek an interim review of contributions within the three-yearly cycle of valuations. As I said previously, on the question of access to interim reviews of contribution rates, the department has already committed to consulting on interim contribution rate reviews later this year. This consultation will consider how and when it might be appropriate for an employer to use this review mechanism, including whether there should be a link to the Section 13 review of the valuation, and the relative balance of responsibility between the fund actuary and the administering authority. Any such changes would then be brought forward by the Government in regulations, having followed the proper process and met the statutory requirement to consult.

Noble Lords will be pleased to hear that departmental officials have already made clear to administering authorities that, should they receive requests for an interim review of their valuations, they need to engage with their substance, communicating clearly and transparently the process, and that any review must be in line with the policies set out in the funding strategy statement.

I urge all noble Lords to support Motions A, B and C, and that the amendment in lieu in Motion B1 is not pressed. I beg to move.

18:45

[Viscount Younger of Leckie (Con)]

My Lords, in speaking to Motion B1, I welcome that the Government have committed to a review of Regulation 64A of the Local Government Pension Scheme Regulations 2013. That is an important and necessary step, and their further commitments today are most welcome.

However, if the GAD review is to be meaningful, it must first focus on the factors that directly drive employer contribution rates. In particular, it should examine the effectiveness of consultation between fund actuaries, administering authorities and scheme employers.

Secondly, the GAD review must examine outliers in valuations. There is increasing evidence that some funds are applying discount rates that are significantly more prudent than those implied by gilt yields or insurer pricing, despite the Local Government Pension Scheme being an open, funded and asset-backed scheme.

Thirdly, Section 151 officers are rightly expected to scrutinise expenditure rigorously, including pension contributions, just as they would any other area of spending. When budgets are tight and local taxpayers are under strain, those responsible must be able to understand the methodologies being used, weigh the trade-offs and, where necessary, challenge the conclusions reached by fund actuaries.

It was with these concerns in mind that amendments were tabled in Committee, as the Minister is aware. Where such issues arise of the kind that I have outlined there is currently little recourse. Employers may be forced to wait up to three years for the next valuation cycle before any action can be taken. That is a considerable period to carry contribution rates that may be excessive or difficult to justify. The principle in our amendment is simple: the review identifies the problem and the interim review under Regulation 64A provides the remedy.

On these points, I am glad that the Government have broadly recognised the concerns I have raised in my amendment. I shall listen to the remainder of the debate on this group, but I am more reassured now that this is a priority for the Government and that they are aware of the concerns that we have been outlining. I thank the Minister for his movement on this.

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank the Minister for explaining things in great detail from the Government’s perspective.

I will speak to Motion B1, which the Minister said has already been met. The Local Government Pension Scheme already has mechanisms to review and amend employer pension contributions and funding practices; for instance, under Regulation 64A of the Local Government Pension Scheme Regulations 2013. There is even an existing GAD reporting mechanism under the Public Service Pensions Act 2013, which reports on compliance, consistency, solvency and long-term cost efficiency, with such reports having been carried out in 2018, 2019 and 2024. Therefore, we on these Benches think that the Government’s efforts should be focused—as they are, I think—more on implementing the recommendations of those reports, rather than duplicating efforts. We will probably abstain on Motion B1; we recognise its importance but think it is already being met.

Motion C is a government Motion, so I come to Motion D. Amendment 13 would extend the period before a pension pot is classified as dormant, increasing the threshold from one year to three years. We supported this increase earlier in the passage of the Bill, as it would provide greater flexibility for savers such as mothers, those on sabbatical or mature students. Motion D1, from the noble Baroness, Lady Altmann—

[Lord Katz (Lab)]

Motions D and D1 are the opening Motions of the next group.

[Lord Palmer of Childs Hill (LD)]

Have they been moved?

[Lord Katz (Lab)]

Not yet.

[Lord Palmer of Childs Hill (LD)]

It says “D1” on the Order Paper.

[Lord Katz (Lab)]

It is in the second group.

[Lord Palmer of Childs Hill (LD)]

I see. I am sorry. Forgive me, I was going on to the next group.

On Motion B1, we will abstain rather than vote against it, because we think that these things are already in process, if dealt with properly.

[Lord Katz (Lab)]

I am glad that, for once, our debate on the LGPS has been short and sweet. I thank both opposition Front Benches for their engagement on this issue. I am glad that the noble Viscount, Lord Younger, recognised that there has been movement. We understand the importance attached to the nature of the reviews. I hope that what I said has met his need for us to demonstrate that we are taking it seriously, which, of course, we are.

In response to the noble Lord, Lord Palmer, I hope that he will be in a position where his abstinence will not be needed because the noble Viscount will not be testing the opinion of the House, but we shall see. I beg to move.

Motion A agreed.

Motion B

Moved by

[Lord Katz]

That this House do not insist on its Amendment 5, to which the Commons have disagreed for their Reason 5A.

5A: Because the Commons consider that it is not appropriate to impose the publication requirements mentioned in the amendment; given that the next report under section 13 of the Public Service Pensions Act 2013 will be prepared in the near future.

[Lord Katz (Lab)]

I have already spoken to Motion B. I beg to move.

Motion B1 (as an amendment to Motion B) not moved.

Motion B agreed.

Motion C

Moved by

[Lord Katz]

That this House do not insist on its Amendment 6, to which the Commons have disagreed for their Reason 6A.

6A: Because the Commons consider that it is not necessary to include the interim review provisions mentioned in the amendment; and the Government has committed to carrying out a consultation on this topic.

Motion C agreed.

Motion D

Moved by

[Baroness Sherlock]

That this House do not insist on its Amendment 13, to which the Commons have disagreed for their Reason 13A.

13A: Because the Commons consider that it is not appropriate to increase the length of the dormancy period as this would be detrimental to members of pension schemes.

[The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)]

My Lords, I shall speak also to Motions J, J1, K, K1 and L.

As I have previously outlined, we cannot accept Lords Amendment 13 on small pots or Amendment 13B within Motion D1, tabled by the noble Baroness, Lady Altmann, which would extend the dormancy period for automatic consolidation from 12 months to 36 months or 24 months respectively. Extending the threshold would materially lengthen the period for which a pot remained dormant. This would be detrimental both to individual members, who would incur multiple sets of charges for longer, and to the wider scheme membership, which, in effect, subsidises the small deferred pots, which are uneconomic for schemes to administer. We estimate that extending the dormancy period from 12 to 24 months would generate additional industry costs of around £25 million a year, which would most likely simply be passed on to members.

The Government did not invent this scheme. The 12-month timeframe formed part of the proposal that was consulted on in 2023 with stakeholders across the pension industry and consumer representative bodies, and it reflects a supported middle ground. The previous Government concluded that a period of 12 months struck the appropriate balance, allowing eligible pots to be identified for consolidation while seeking to avoid certain situations; for example, where individuals who, for a range of reasons, may have temporarily ceased pension contributions but remain with their existing employer and are likely to return to pension saving. The 12-month figure was not plucked out of thin air; it was a judgment underpinned by consultation and evidence, not speculation. It is supported by a strong set of safeguards, most notably the individual’s right to opt out of consolidation.

Throughout the development of this policy, my department has engaged with a range of stakeholders, including consumer representative bodies. For example, Which? was part of our small pots delivery group, and it welcomed the safeguards that we have put in place, which it agrees are sufficient.

I understand from previous debates that noble Lords, including the noble Baroness, Lady Altmann, have concerns that 12 months might be too short for certain individuals, particularly those who take career breaks, say, for maternity leave or caring responsibilities, and experience fluctuating earnings. But the 12 month dormancy period is triggered only where no contributions have been made for a full year. Periods of paid maternity leave, for example, would see contributions continue, and a pot would become dormant only after 12 months of unpaid leave.

Currently, only pots worth £1,000 or less will be eligible for consolidation. For context, a full-time worker on the national living wage would typically exceed that threshold after nine months of saving. That means that individuals with longer periods of continuous employment are unlikely to have pots that fall into scope. It cannot be a common occurrence that someone who has saved less than £1,000 and then had no contributions for at least 12 months would recommence saving with the same employer once it had entered dormancy. Nevertheless, we recognise that such circumstances could occur. That is why we have built strong safeguards into the policy. Most importantly, every member will receive a transfer notice ahead of any consolidation, giving them a clear opportunity to opt out if they judge that consolidation is not in their best interests.

Finally and crucially, the Bill already requires regulations to set a minimum 12 month period for a pot to be classified as dormant. That threshold could be set at a longer period or extended in future through secondary legislation if the evidence justified such a change.

I think we all agree on the need to consolidate small pots to protect savers and all other members from multiple years of charges on multiple pots eating away at their savings. I hope that the noble Baroness, Lady Altmann, can see that extending the dormancy period would harm the vast majority of members in a known and avoidable way to add further protection for a very small number of hypothetical cases. The best way to protect those cases is through building full and proper safeguards into the policy, which is what this Bill does. After that compelling argument, I hope that she will be willing not to press her amendment, when we come to that point.

Lords Amendment 77 would require the Secretary of State for Work and Pensions to conduct and publish a review of the long-term affordability of public service pension schemes. The Government cannot accept the amendment as it is unnecessary and technically defective. It is unnecessary, as detailed information about the cost of the unfunded public service pension schemes is already publicly available. The OBR undertakes analysis of both the near-term and long-term cost of the schemes, including the Treasury’s central measure of affordability: 50-year projections of pension payments as a proportion of GDP. Contrary to suggestions made in Committee and on Report, the cost of the schemes is forecasted to fall under this measure, from 1.9% to 1.4% of GDP.

On Report, we heard suggestions that savings arising from the Hutton reforms had not and would not materialise. That is simply incorrect. The coalition Government forecasted savings of around £400 billion by 2065 as a result of the substantial reforms made to the schemes in 2014-15, but implementation of the reforms was, in effect, set back because the courts found that the way in which the coalition Government had introduced them was discriminatory on grounds of age. That incurred costs of around £17 billion, but crucially, it will not impact the savings going forward. Those are the key drivers behind the fall in costs over the long-term.

Every four years, detailed actuarial valuations of each of the schemes are undertaken and published. They set out the cost of providing benefits to current staff and the cost of meeting all accrued liabilities. The valuations test the cost of the schemes against the cost control mechanism, introduced by the coalition Government as part of the Hutton reforms, and they provide for benefits to be adjusted if those have deviated from target levels. Pension costs are also set out in the financial accounts for each of the schemes and collectively in the whole of government accounts. This information is produced in accordance with international accounting standards.

The amendment is not necessary because the risks arising from changes to longevity are already managed in the design of the schemes. This came up on Report. The retirement age in the schemes, except those for police, firefighters and the Armed Forces, is the state pension age. In any case, the cost control mechanism would be triggered if costs rose due to longevity improvements that were not managed by changes to state pension age.

The suggestion made on Report was that the fact that some of the public service schemes are operated on a pay-as-you-go basis means that they must be unaffordable, but “unfunded” does not mean “unaffordable”. In general, the Government do not pre-fund future liabilities by holding assets at all. Details of the Government’s policy on whether to hold assets in relation to specific liabilities is set out clearly in Annex 4.16 of Managing Public Money, should anyone want to look it up.

There is clearly an opportunity cost to holding assets in a fund, which are invested with the sole objective of having enough returns to meet future liabilities. Holding funds can create technically allocative inefficiencies across the public sector. The liability can clearly be more efficiently managed in the round with other unfunded liabilities, met out of general taxation as they fall due.

The amendment would not work, because it would require the Secretary of State for Work and Pensions to undertake a review on a matter that does not fall within their responsibilities and for which statutory responsibility sits elsewhere, including with the devolved Administrations.

Comprehensive information is already available, published and regularly updated on the cost of public service pensions. There is demonstrably already transparency on all the points raised by noble Lords during the debates, and the amendment is, in the Government’s view, therefore unnecessary. We will continue to ensure that public service pensions are properly costed, transparently reported and kept under review through existing mechanisms. So, I hope that the noble Baroness will not press her amendment.

I turn to Amendments 78 and 86. These amendments engage Commons financial privilege. The House of Commons has therefore disagreed with the amendment and has not offered any further reason. As noble Lords will know, it is a long-standing convention that this House does not insist on amendments which the other place has rejected on grounds of financial privilege. But I will briefly explain why the Government do not agree with the policy intent. These amendments would not do what I suspect the movers hoped they would, which is to enable the PPF to pay lump sum payments to its members on top of the periodic compensation it provides.

19:00

Amendment 78 would simply commence Section 169(2)(d) of the 2004 Pensions Act without requiring regulations to be made outlining the actual circumstances in which the power would be used. If regulations were made, they could not require the payment of retrospective pre-1997 lump sums because Section 169 applies to the discharge of liabilities to provide compensation, and there is no requirement for the PPF to pay compensation in respect of retrospective pre-1997 increases. Therefore, Section 169 cannot be used to increase the amount of compensation a PPF member would receive.

Amendments 86B and 86C would require the Secretary of State to conduct a review of the impact of commencing the provisions in Section 169(2)(d) of the Pensions Act 2004 within three months of the Bill receiving Royal Assent. I think I understand the intention behind these amendments from the noble Viscount, Lord Thurso, because he has shared his concerns with us at previous stages of the Bill. I know he is particularly concerned about the position of members of certain schemes, especially those members of the Atomic Energy Authority Technology pension scheme, whose scheme transferred into the PPF; and AEAT members now receive compensation from the PPF.

We have discussed previously that these complaints that have been about the circumstances of the transfer have been looked at by different bodies, and they have been debated in Parliament. I sympathise with affected AEAT pension scheme members. No one wants to see an employer become insolvent, the scheme subsequently transfer to the PPF and its members have to adjust to benefits lower than those that they would have expected from their former scheme.

I know, from having heard him throughout our debates, that the noble Viscount, Lord Thurso, has looked into this matter carefully. He has looked at the concerns of affected members, and he has even been through scheme documentation. My colleague the Minister for Pensions would be happy to meet with the noble Viscount, Lord Thurso, to discuss the AEAT case and his concerns, and I hope that will be enough to satisfy him.

Finally on this point, at earlier stages of the Bill, noble Lords have also reflected on the impact that the absence of pre-1997 increases has had on PPF members over the years. As I have set out in previous debates, I recognise that prospective increases do not go as far as some people would want. But let us not lose sight of the fact that the Government’s reforms will make a meaningful difference to over 250,000 affected members, while balancing the impact on levy payers, taxpayers, affordability for government and the ability for the PPF to manage future risk. Given all of that, I hope that the noble Viscount feels able not to press his amendment.

Finally, I turn to Lords Amendment 79, which would require the Secretary of State, within 18 months of Royal Assent, to

“conduct a review of all legislation, regulation and guidance governing marketing, financial promotion and member communications”,

which might restrict the ability of pension schemes to communicate with their members. The Government share the interests of noble Lords in ensuring pension schemes can provide high-quality support to their members. But a formal review as set out in the proposed amendment would not be an effective or timely approach. The Government are acting to improve the support available for pension members, reducing complexity and strengthening support through a combination of the guided retirement provisions in the Bill and the rollout of targeted support. A formal review as proposed by this amendment is not necessary and would duplicate work done across government on pensions communications, so I hope that amendment will not be pressed for those reasons. I beg to move.

Motion D1 (as an amendment to Motion D)

Moved by

[Baroness Altmann]

At end insert “and do propose Amendment 13B in lieu—

13B: Clause 22, page 24, line 19, leave out “12” and insert “24””

[Baroness Altmann (Non-Afl)]

My Lords, I thank the Minister for her introduction and her helpful remarks relating to Motion D, which is mostly what I will speak to in my remarks.

The Government say that allowing small pots to be moved without member consent after just 12 months is essential because, otherwise, any longer period would be detrimental to scheme members. I do not think that would stand up to market scrutiny. This is about providers not wanting to have to administer small pots, the economics of which they find rather challenging. As to the idea that if people with small pots move somewhere else or are moved somewhere else, that will lead to lower fees being charged by the pension providers, I think the providers simply making higher profits is the far more likely outcome.

It will not particularly be detrimental to most members, but for those whose money is moved, without their consent and potentially without their knowledge, I have concerns that allowing just 12 months and then shipping the money off elsewhere to another scheme, which could be worse and could perform worse but just happens to be an approved scheme under the regulator’s supervision, would be a rather dangerous thing to approve after such a short space of time. Members may have paused their contributions temporarily, and I point out to the Minister that members who have decided to opt out of auto-enrolment, who will then be re-enrolled after three years, may decide not to opt out but the money that they previously put into the scheme will have gone somewhere else. This to me suggests that the policy needs to be reconsidered.

Yes, of course, we need to look at the economics of auto-enrolment but we have to also balance fairness to members who have paused temporarily, whether it is for unpaid carers’ leave—perhaps a relative who is terminally ill and it has gone on for slightly over the one year, but their money may have been moved before they get back to their employer—with the costs to providers of administering small pots. I do not believe 12 months is the right balance. It is too short.

I just ask noble Lords whether they feel we should allow a bank to move somebody’s money in their account to a different bank because they have not got a lot in there and the bank cannot make any profit on keeping that current account. I do not think we would feel the same—that after just 12 months, without member consent, their money could be shipped off to another bank.

I agree that we have to find some way of administering small pots. I hope that, when the noble Baroness points out that there is a minimum of 12 months being provided for in the Bill and that regulations will set the required time period, after further consultation there is a chance that we will perhaps have a longer period than the current 12 months. On that basis, I hope that the situation for small pots will turn out to be better after regulations than it currently would seem. I will not press my amendment tonight.

Very briefly on Motion K1 in the name of noble Viscount, Lord Thurso, I too am extremely concerned about the problem of the AEAT pension scheme members. I feel that there is an obligation in some way on government to look more carefully and to take careful consideration of the findings of the various inquiries that have happened more recently. I hope that, when the meeting takes place, those of us who are particularly interested in the AEAT situation will be able to have a proper discussion with the Ministers on that issue. I beg to move.

[Baroness Neville-Rolfe (Con)]

My Lords, Motion J1 reintroduces my proposal for a review of the long-term affordability, intergenerational unfairness, fiscal sustainability and accounting treatment of public service pension schemes. I am trying to help the Government to fill a lacuna in their important work on pensions, so I was taken aback by the Commons’ reason for rejecting it—namely,

“that it is not necessary to duplicate existing information regarding public sector pension schemes”.

The presentation of the liability represented by public sector pensions is widely seen as inadequate, and the PAC itself has expressed concerns—in particular that pension liabilities are not being presented in a way that allows Parliament properly to understand their real costs in the long term.

I will highlight four reasons why a review is needed. First, the cost is huge. As we have heard repeatedly, unfunded pension liabilities represent the second-largest government liability after gilts. Currently, we commit future taxpayers to about £60 billion of new expenditure every year, in the form of a stream of index-linked new expenditure. According to the OBR, the long-term liability is £1.4 trillion, but it may be more as a lot depends on the assumptions made.

Secondly, it is an unfunded pay-as-you-go scheme. The problem with that is that the current generation of older and former public sector workers are taking money from younger generations of workers already weighed down by trying to finance housing, young families and, in some cases, repaying student loans. This is unfair, and it is why I put intergenerational unfairness at the heart of the review.

Thirdly, the coalition did well to reform some public sector pensions following the Hutton review, as the Minister acknowledged, but the new arrangements have turned out to be more costly than expected. Sadly, growth, which helps to ease things, has been modest. Moreover, substantial increases in the pay and size of the public sector make things look better in the short term, as employer and employee contributions increase. However, this is a mirage, as it stores up even more trouble for the future, as greater payouts on higher salaries will be needed as those people in the system retire.

Fourthly, there are serious accounting issues, as we know from the PAC. The scale of liabilities is not clearly visible from the public accounts. Moreover, as I have learned from my unique experience as a civil servant and a Cabinet Office Minister, the costs of future pensions are not properly taken into account in decision-making across the public sector—for example, on restructuring or adding to the workforce. In conclusion, there is a real need to establish whether the system is fair and sustainable, and whether anything could be done to improve things.

I emphasise that I support the work of public sector workers and that I am not making any recommendations. That is for the experts, who would look at the whole area objectively, and it is for the Government to decide what, if anything, needs to be done.

[Lord Vaux of Harrowden (CB)]

My Lords, I want very quickly to ask the Minister a question on Motions D and D1. I say at the outset that I agree with almost every word that the noble Baroness, Lady Altmann, said. I entirely agree that one year is too short. I have at least two pensions that have not been touched for that long, which would fall into the dormant category; I would not consider them dormant, but there we go.

My concern is that if we start moving people’s small pots around, potentially without their knowledge, we increase the problem of lost pots. The answer to that is the pension dashboard. So my question to the Minister is: will we have the pension dashboard in place, as a method of being able to retrace a lost pot, before we start moving people’s pots around?

[Viscount Thurso (LD)]

My Lords, I will speak on Motion K and my Motion K1. I have rehearsed the arguments around this question fully both in Committee and on Report, so will therefore not do so again. I listened very carefully to what the Minister said and I am extremely grateful to her for the engagement that I have had with her on several occasions, when her sympathy was obvious, even if her ability to do something about it was clearly limited.

When the time comes I will not move that amendment, but I will certainly take up the offer of a meeting. I hope I can move from the tea and sympathy that have been so evident to having a little power of persuasion over the Minister and demonstrating that this is a particularly exceptional case that needs to be dealt with. I thank the Minister and her team for their engagement, and I will not be moving my Motion when the time comes.

19:15

[Lord Davies of Brixton (Lab)]

I note that my noble friend the Minister went out of her way to mention pre-1997 increases, even though they do not come up in any of these amendments. The House will welcome future increases being paid, but the failure to do anything about lost increases is still a big topic that is not going away.

I share many of the concerns about small pots expressed by the noble Baroness, Lady Altmann, on Motion D1. However, I was reassured by the comments that my noble friend the Minister made in introducing this group about the flexibility inherent in the proposals in the Bill. I hope she will reassure us that the issue will be kept under review and that, if the problems that some of us worry about arise, the necessary action can be taken without the need for primary legislation.

I also support the concerns of the noble Viscount, Lord Thurso. I am glad to hear that the issue is being taken forward—more power to his elbow.

I could speak at great length on the issue of Motion J1, picking up the points raised by the noble Baroness, Lady Neville-Rolfe, in her speech introducing it. However, I very much welcome what my noble friend said in introducing this group. I fully agree with all the arguments she made, so I will leave it there.

[Lord Palmer of Childs Hill (LD)]

My Lords, prior to this debate we had a Statement showing what can be done in haste, when you should stop and think, in the appointment of Lord Mandelson as the ambassador to the United States of America. I use that analogy here, because one year to move pots is a miniscule amount of time.

The noble Baroness, Lady Altmann, said that two years would also be short but would be more appropriate. I hear that she has decided not to press this Motion. If she had, we on these Benches would have supported it because one year is not enough, just as a flick of the Prime Minister’s eye was not enough to appoint Lord Mandelson as the ambassador to the United States. We need two years. I understand that it is not going to happen here today but, before the Bill is finalised, I ask the Minister and her colleagues in the House of Commons to consider tweaking it to make one year two years. It would please a lot of people and would be a safeguard for people with small pots, who are the least interested in how their pensions work until they find that they are not what they thought they were, they cannot find them or whatever it is. The point about the pensions dashboard was well made.

I welcome the consultations that we have had with Government Ministers. In many ways, we have worked together on this Bill, and we have managed to make some of the points about which we feel strongly. On the pots, I hope that one year could be two years. It does not have to be done now; it could be done quietly, with no fuss at all.

Motion J1, the Conservative Motion, would insist on Amendments 77 and 85. We on these Benches supported these amendments on Report, because we agreed that it would be important for the Government to comment on this issue. However—and I think this shows what I was saying before—we have been convinced by the arguments made by the Government on the content of these amendments overlapping with existing reporting mechanisms. We are happy that that has happened.

I hope that the Government Ministers will take cognisance of the fact that we are not making problems just for the sake of debate in this Chamber. We think that, for small pots, it should be one year, not two. We will be talking in the next lot of amendments on mandation and we hope to convince the Government on that and on the size and range of pension funds.

We will not be voting on the Motion by the noble Baroness, Lady Altmann. If the Conservative Benches call a Division on Motion J1, we will probably quietly abstain.

[Viscount Younger of Leckie (Con)]

My Lords, I thank the noble Baroness, Lady Altmann, my noble friend Lady Neville-Rolfe and the noble Viscount, Lord Thurso, for their Motions in this group. In the interest of brevity, I shall focus my remarks only on Motion J1.

My noble friend Lady Neville-Rolfe is fundamentally asking the important question of whether we are being sufficiently clear about the long-term sustainability and transparency of the system as it currently stands. The central concern is this: unlike funded schemes, these pensions are not backed by accumulated assets. They are paid out of current taxation, and that means that the cost is not contained within a fund but passed forward, year by year, to future taxpayers. As the number of public sector employees grows, and as people live longer, those obligations grow with them.

There is also a question of incentives. Decisions about expanding the public sector workforce or adjusting pay inevitably carry pension implications that stretch decades into the future, yet those costs are often diffuse, uncertain and ultimately borne by the Exchequer. Without a clear and accessible understanding of the long-term consequences, it is difficult, if not impossible, for decision-makers to weigh those trade-offs properly. A review would allow us to bring together the evidence, to test the assumptions and to ensure that policy is being made on the basis of a clear and realistic understanding of the facts.

For those reasons, including the four key reasons outlined by my noble friend, I believe that there is a strong case for the review proposed, and I am very pleased to support this Motion.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords for their questions and comments. I spoke at some length at the start, and I think I answered most of the questions pre-emptively—or tried to—so I will not dwell on them.

On a couple of specifics, and to reassure the noble Baroness, Lady Altmann, and the noble Lord, Lord Palmer, as I stressed, the Bill says a minimum of 12 months simply because we want to be able to respond to any changes. If there is evidence that we need to make it longer, we can; if there is evidence we need to extend it later, we can do so in secondary legislation. It is set up to do that, and I can give her that assurance.

I am not going to get into America. For me, as parallels go, whether we have one or two years’ opt-out and who is the ambassador to the United States are probably slightly separate categories of decisions. Noble Lords will forgive me if I do not go there.

In response to the noble Lord, Lord Vaux, the two policies operate independently but the intention is that dashboards will be available before the small pot consolidation. I reassure the noble Lord, with the small pots he has scattered around, that he will be written to and given the opportunity to opt out, so that they will not be consolidated without his knowledge or against his will. I hope he will look out for that in due course and can then make appropriate decisions.

The noble Baroness, Lady Neville-Rolfe, asked about the presentation of information. The Treasury is exploring options to present pension liabilities on a constant basis. It is important to be clear that any such presentation would be supplementary. It would not affect the underlying liability, as the noble Baroness knows well, or the way they are presented in financial statements, but it would help to add an extra level of clarity to those who are reading them. I think I have made all the arguments around affordability and the nature of them.

I have one final word for the noble Viscount, Lord Younger, who feels there is no way for decision-makers to make appropriate judgments about the affordability of pension schemes without a review such as this. I think he should have more confidence. The coalition Government, of which his party was the leading member, reformed almost all the public service pension schemes and created a new system, and that is what we now have. A lot of work was done then and is being done now. The measures of affordability that I have described are such that the schemes have that corrective factor straight in them. The fact that the information is out there and published will, I hope, be enough. I therefore urge noble Lords not to press their Motions.

[Baroness Altmann (Non-Afl)]

My Lords, I thank all noble Lords who have spoken. As I said, I will not press Motion D1 to a Division. I beg leave to withdraw the Motion.

Motion D1 (as an amendment to Motion D) withdrawn.

Motion D agreed.

Motion E

Moved by

[Baroness Sherlock]

That this House do not insist on its Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88, and do agree with the Commons in their Amendments 88A to 88C to the words restored to the Bill by the Commons disagreement to Lords Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88.

88A: Clause 40, page 46, line 16, at end insert—
“(5A) Regulations under subsection (4) must secure that a description of asset is prescribed under that subsection in respect of each example mentioned in subsection (5)(a) to (d).”

88B: Clause 40, page 46, line 22, at end insert—
“(6A) Regulations under this section may not have the effect of requiring, as a condition of a scheme’s approval under subsection (1)—
(a) more than 10% (by value) of the assets held in default funds of the scheme as a whole to be qualifying assets, or
(b) more than 5% (by value) of the assets so held to be of a UK-specific description.
(6B) In subsection (6A)(b) “UK-specific description” means a description framed by reference to whether an asset is located in the United Kingdom or meets any other condition linked to economic activity in the United Kingdom.”

88C: Clause 40, page 46, leave out lines 31 and 32

[Baroness Sherlock (Lab)]

My Lords, in moving Motion E, that this House do not insist on its Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88 and do agree with the Commons in its Amendments 88A to 88C, I will speak also to Motions F, F1, G, G1 and H.

Motion E deals with Amendment 15 and those connected with it, which sought to remove the reserve power on asset allocation from the Bill. The case for removing the power was pressed firmly in Committee and on Report, led by the noble Baroness, Lady Bowles, and supported by a number of other noble Lords. The Government have always taken those arguments seriously, and I hope our response demonstrates that. However, the Government continue to believe that the reserve power is necessary.

The collective action problem in the defined contribution market, where competitive pressure on costs discourages providers from diversifying even when they recognise it would benefit their members, is well-evidenced and has been acknowledged by the industry itself. The Mansion House Accord represents a welcome voluntary commitment, but the risk is real that individual providers defer action until others move first. The reserve power exists to underpin those commitments, giving each provider confidence that the rest of the market will move too.

This collective action problem is not simply a theoretical concern or a government preoccupation. Last autumn, signatories to the Mansion House compact—a predecessor agreement on private markets investment, negotiated under the previous Government—published their own progress update. What was the single biggest barrier to delivering on their commitments? In their words,

“market dynamics continue to focus on minimising cost instead of maximising long-term value”,

and that without intervention to shift that culture,

“‘too much focus on cost’ remains the key barrier”.

That is the collective action problem in a nutshell: providers recognise that greater diversification can benefit their members but competitive dynamics hold them back from acting on it.

However, I gave undertakings during the passage of the Bill to reflect on the concerns raised by noble Lords, and I have done so. The amendments in lieu before the House today respond directly to those concerns in two important respects. First, the Government have placed a cap in the Bill so that regulations may require not more than 10% of default fund assets to be held in qualifying assets overall or more than 5% to be of a UK-specific description. This is a significant step. The Government have always been clear that the power is a backstop to the Mansion House Accord, which applies those specific targets to DC providers’ main default funds and no more.

I heard the argument—pressed particularly by the noble Viscount, Lord Younger of Leckie, and the noble Baroness, Lady Stedman-Scott, in amendments that they tabled, with the support of others—that that commitment should be written into primary legislation rather than resting on ministerial assurance alone. This amendment does exactly that. It gives the industry and savers alike the confidence that no Government can use these powers to go beyond the accord’s percentage commitments.

Secondly, the Government have established a principle of neutrality between asset classes. These amendments remove the ability for regulations, should they try to do so, to weight the requirement towards any single category of private asset, and require that qualifying asset descriptions are prescribed across each of the private market categories set out in the Bill—so the Government could not, for example, concentrate the entire requirement in infrastructure, still less direct it into a particular sector or company. This responds to a type of concern expressed by noble Lords during the Bill’s passage about the breadth of the power and the risk that a future Government might use it for purposes unrelated to the accord. The neutrality requirement, taken together with the established principles of public law to which any secondary legislation must conform, provides a robust constraint against such misuse.

19:30

Those amendments sit alongside the safeguards already in the Bill: the time limit, the savers’ interest test, the statutory reporting requirements and the affirmative procedure. Taken together, they ensure that this is a carefully bounded power, designed for a specific and limited purpose. I hope the House will accept that the Government have listened, reflected and responded with significant changes.

I turn to the issue of scale and Motion F on Lords Amendments 26 and 37. These amendments, together, would grant powers to the Government to make regulations that would allow regulators to exempt a master trust or a group personal pension—GPP—from meeting the scale requirement where the relevant regulator is satisfied there is no reasonable evidence that consolidation would be in members’ interests. Although I understand the intent of Amendment 26, and the consequential Amendment 37, they are likely to undermine the policy intent for scale, which is a market of fewer, bigger and better-run schemes which, crucially, can deliver better outcomes for members. That is because they risk an unstable landscape for members and employers, as well as creating significant difficulties for regulators.

The likely effect of Amendment 26 would be to allow some small schemes, and potentially any scheme in scope, to avoid reaching scale altogether. That would undermine the intended reform which I hope we broadly agree, across the House, would benefit members. We want scale not for the sake of it but to improve the outcomes for those who save into schemes. I should also alert the House to the fact that both regulators have expressed their strong concerns to the department about this amendment. Put simply, they think it is inoperable and exposes them to risk. Working out exactly what the standard is that a regulator is supposed to apply could ultimately be a matter for the courts, adding years to the process and, ultimately, leading to increased costs for members while not delivering the benefits of scale.

I turn to Amendments 37B and 37C, tabled in lieu by the noble Viscount, Lord Younger. During earlier debates, we heard concerns being raised about existing, smaller schemes potentially not having the opportunity to get to scale where they otherwise might have expected their business to grow with more time in the market. I understand the reasons behind this amendment for exemptions from the scale requirement, but I think the House has broadly agreed that scale really matters. The Government have provided and published evidence of the benefits that larger schemes can bring: their ability to diversify their assets through a wider range of investment strategies, reduce costs and keep fees lower. This is all to ensure better outcomes for members.

The Government’s firm view is that any exemptions to the scale requirement should be limited to enduring scheme design and purpose. We believe they should be tightly drawn to deliver the policy intent, but Amendment 37B would enable a regulator to exempt any size of scheme for an undefined period from the scale requirement, where there is no reasonable prospect of improved outcomes through consolidation or that innovation delivers good member outcomes. I recognise that this amendment appears to have more focus on members. Unfortunately, the nebulous nature and number of the tests may mean that it could, in practice, still open the floodgates to all schemes in scope and deny members better outcomes. The amendment risks delivery of the policy intent because it seems to offer wide and ill-defined exemptions to any scheme within scope of the scale measures.

In Committee, some noble Lords sought reassurance that any exemptions would be narrow and transparent, while not undermining the policy intent. That is the Government’s position and the reason why we cannot accept this amendment. It is so wide-ranging that it is not clear where the primary concerns lie. I think we broadly agree on the principles and benefits of scale, and the underpinning evidence base and impact assessment support this. It would not be in the interests of members and their retirement outcomes to prevent its delivery now. The regulators also continue to express concerns about the operability of this clause and the fact that it exposes them to risk of legal challenge. We do not want to end up in a situation where challenges are brought in court and take years to resolve. That is not an abstract risk and it will benefit no one, least of all members, who will be stuck in underperforming schemes.

Let me raise a few specific points on this amendment. Looking at the innovation condition, what would robust evidence be that a scheme is delivering good outcomes because of innovation? Would an app for members suffice? Would members using that app to log on and view their benefits be enough, or would they need to take action or do something different? To be clear, the Government’s position is that simply offering an app will not deliver the benefits for members that evidence shows will follow from scale. These are difficult questions but, before we legislate to require regulators to make these major decisions, we need to be clear what we expect innovation to deliver for member outcomes if a scheme is to be exempt. That is what matters: innovation delivering for members.

I am also curious about the apparent difference in the innovation needed for a master trust and a group personal pension plan. Subsection (3) of proposed new Section 28BA says that trustees will need to demonstrate that innovation leads to “good outcomes for members”, but the managers of a GPP would have to demonstrate only that it provides “specialist or innovative services”. Why should a GPP not also have to deliver good member outcomes? The Government’s position is clear: all schemes need to deliver good member outcomes, and the evidence tells us that scale is key to that. It would not be appropriate to hold trust-based schemes and contract-based schemes to different standards.

I turn to the proposed matters to which regulators must have regard in considering an exemption. These are wide-ranging and do not seem to be relevant to why a scheme should be exempted from being at scale. They also seem to suggest that a scheme could be exempt if it uses the scale of another scheme. Why would an employer choose this smaller scheme if the benefits of scale all derive from a different scheme? What is the smaller scheme adding in member outcomes? It will have no real control over the investment strategy of the pooled vehicle; it will not benefit from the economies of scale that come from having a large asset base. Critically, members will not benefit from their scheme paying for the privilege of being a passenger in another larger scheme’s strategy.

These are matters of principle. The intent is to deliver a market of schemes that can all deliver better outcomes for members. We all agree that there are limited circumstances where the purpose and delivery of a scheme mean that it should have an exemption, but this amendment offers a wide range of factors that could lead to an exemption with no clear rationale.

I turn to Motions G and H on Amendments 35 and 43. Amendment 35 would require the Secretary of State, when making regulations across the scale measures, to have regard to “the encouragement of innovation” and “the benefits of competition”. Amendment 43 would insert a new clause into the default arrangements chapter and require regulations dealing with non-scale default arrangements to have regard to innovation and competition.

The Government support an innovative and competitive market, but these amendments are not needed to achieve this once the scale measures commence. We are already creating space in the market for innovation through the new entrant pathway, and schemes in the market will still need to be competitive to retain and grow their market share, leading to innovation. I said on Report and say again: we will look at innovation and competition as part of the scale measures and the review of non-scale default arrangements. The outcomes of that review must be taken into account when making regulations about consolidation of non-scale default arrangements.

I turn to Motion G1 and Amendment 35B in lieu from the noble Baroness, Lady Noakes. That would require the Secretary of State, when making regulations across the scale measures and the review of default arrangements, to

“have regard to the benefits of competition”.

The Government’s focus in bringing forward the measures in the Bill on scale and default arrangements is firmly on improving outcomes for members. The Government will need to consider a range of factors when making regulations in relation to measures on scale and default arrangements to ensure we deliver on that aim.

Although I agree that maintaining a competitive market is part of that, we must also have regard to the policy intent and desired outcomes, including improving member outcomes. If we were to accept this amendment, it may have the effect of elevating competition above other, equally important matters in the design of those regulations. We do not believe that would be desirable. It would not be appropriate to elevate the needs of the market over those of the members it serves. What we all want is to deliver the best outcomes for members.

However, we do not disagree with the principle and we share the desire of the noble Baroness, Lady Noakes, to maintain a competitive market. I assure her that the Government will consider the benefits of competition when designing regulations, but we do not believe her amendment is necessary and, for this reason, I must reject it.

In closing, I urge noble Lords to support Motions E, F and G and not to press Motions E1, F1 and G1. I beg to move.

Motion E1 (as an amendment to Motion E)

[Baroness Bowles of Berkhamsted]

Moved by

As an amendment to Motion E, leave out from “House” to end and insert “do insist on its Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88, and do disagree with the Commons in their Amendments 88A to 88C to the words restored to the Bill by the Commons disagreement to Lords Amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88.”

[Baroness Bowles of Berkhamsted (LD)]

My Lords, the Commons has asked us to accept a clause that reintroduces strict mandation of pension scheme asset allocation, traducing trustee fiduciary duty. There are two problems with the clause: the mandation itself and the discriminatory definition of investment vehicles that excludes listed investment companies—one of the two vehicles explicitly endorsed by the productive finance working group, composed of regulators, HMT and the wider investment industry.

Both defects are fundamental. Until this clause appeared, there was broad political and industry alignment on the direction of travel, supporting trustees to consider a wider range of assets and ensuring that the Government play their part through the enablers set out in the Mansion House Accord. Nothing in that shared approach required coercion.

Further, the Government’s own consultation evidence contradicts the justification for mandation. Ministers say that employers choose schemes based on cost and that private asset investment is too expensive. But the DWP’s own data, quoted in the consultation document, shows that investment charges are not in the “top three factors” for employer decisions. The top factors are convenience, professional advice and employer fees.

Most schemes are already priced well below the charge cap and only 5% of employees ever switch schemes at all. The consultation stated that investment charges are not likely to feature heavily in employers’ decision-making. If that is so, the rationale for strict mandation simply does not stand, although I can see how the allegation helps to escape competition policy concerns about strategy co-ordination. But do not forget that value for money is meant to solve the focus on cost.

There can be perfectly good reasons why a scheme has not invested in a particular asset or asset class—reasons recognised explicitly in the Mansion House Accord itself. Ministers say that this clause is just a back-up to the accord, but it does not reflect the accord’s own terms: its dependence on government actions and the critical enablers. Instead, the clause is a doubling down, not a codification. The Government admit that it is intended to be and will be coercive merely as a reserve power.

Ministers have also spoken often about crowding in investment and using pension capital to give confidence to the wider market, but coercion does the opposite. If investment has to be compelled, the signal to the wider market is not confidence but doubt—crowding out, not in. Wider market effects have consistently been overlooked in the drafting of this clause, but it is not something that this House should ignore.

The overriding principle is that government must not undermine fiduciary duty, whether by mandation or coercion. Therefore, we should continue to insist on our amendment and disagree with the Commons. I intend to test the opinion of the House at the appropriate time. I beg to move.

[Baroness Stedman-Scott (Con)]

My Lords, it is beyond doubt that mandation is, rightly, the most serious and contentious issue in the Bill. We have made our views on this very clear, as have many other noble Lords. The state should not be directing the investment of assets held by private funds. The power that the Government are setting out in the Bill directly undermines the principle of fiduciary duty on which the entire pensions system relies. It must by now be plainly obvious to the Government and the Minister that any investment that has to be forced by the Government is not in the interest of savers.

We are absolutely opposed to this power, in principle and in practice. We have met with many representatives from industry, including signatories to the Mansion House Accord, to which the Minister claims this power is designed to be a backstop. They have been crystal clear that this power crosses a line and must not proceed. We will support the noble Baroness, Lady Bowles, if she seeks the opinion of the House on this Motion.

On Motion F1, the argument for scale exemptions is now well rehearsed and I will not repeat it today. Our amendment would preserve the policy intent and provide two clear and targeted routes through which a scheme may qualify—both tightly drawn and firmly anchored in member outcomes—that introduces a rigorous evidential threshold and places the responsibility firmly with the regulator, who must be satisfied not only that the conditions are met but that any claimed benefits are material and demonstrably in the interest of members. The Government committed through the Mansion House Accord to taking a pragmatic approach to scale. This amendment gives effect to that commitment. I put on notice that I will seek to test the opinion of the House on this Motion when it is called.

19:45

Finally, Motion G1 contains a welcome amendment in lieu from my noble friend Lady Noakes that rightly raises the importance of competition. We are dealing with private markets, where one of the most fundamental principles is the benefit of competition. It is competition that drives choice, sharpens incentives and, ultimately, delivers better outcomes for members. That point also goes directly to the argument that we on these Benches have made on scale. As the Government bring forward significant changes to the structure of this market, competition and innovation must be treated as central considerations, not afterthoughts. The Government must not sacrifice these principles in pursuit of scale alone. Competition and innovation translate directly into better performance, better service and better value for those saving for retirement. We will support my noble friend if she seeks to test the opinion of the House.

[Baroness Noakes (Con)]

My Lords, I tabled Motion G1 in this group. The Bill will consolidate today’s pensions market into a small number of large firms. It may well bring benefits, but it also carries the risk that the market will ossify around those large firms. Healthy markets need to be open to the challenge of new entrants, which can provide healthy competition to the incumbents. In turn, that has the potential to deliver for pension savers in the long run. At the end of the day, the only thing that matters is what is good for savers. I agree with the Minister on that.

In rejecting my Amendments 35 and 43, the other place said that

“it is not necessary to impose further requirements relating to innovation and competition”.

The Bill does not mention competition at all. It talks about restricting new entrants, and it mentions innovation only once. Innovation and competition are absolutely central to markets that work for consumers. My noble friend Lady Stedman-Scott’s Amendment 37B in lieu now incorporates innovation, so I have confined my Amendment 35B in lieu to the broader concept of competition. My amendment would require only that regulations have regard to competition among providers of pension schemes; it is no more onerous than that. It would apply to the several regulation-making powers of the Secretary of State attached to Clause 40 and to the powers of the regulators to make regulations under Clauses 42 and 44.

Regulations can create barriers to entry, which is why large firms love them. I believe that the Secretary of State and the regulators should use their powers to foster competition so that barriers to entry are not erected and new entrants are given a proper chance to flourish. If those making the regulations do not secure this for the benefit of pension savers, no one else will. My amendment in lieu would help to ensure that the scale provisions in the Bill deliver long-term benefits for pension savers.

[Lord Vaux of Harrowden (CB)]

My Lords, I offer Motion E1, in the name of the noble Baroness, Lady Bowles, my wholehearted support. I also say in passing that I wholeheartedly support Motion G1 in the name of the noble Baroness, Lady Noakes.

The Minister has once again explained that the mandation powers are intended to backstop the voluntary Mansion House agreement. She has tabled an amendment that simply limits the amount of assets the allocation of which may be mandated to no more than 10% by value and 5% in the UK, with the UK to be defined later. The Mansion House agreement is a voluntary agreement. If the Government have a mandation power, they are basically saying, “If you do not do this, we will force you”, which would mean that it is not, in reality, voluntary. The trustees would be forced to act against what they believe is in the best interests of scheme members. Why else would they not want to invest in these apparently fantastic assets?

Under the Bill—and the Minister’s amendment in lieu does not change this—the only exemption to that would be if the trustees could prove that the mandated asset allocation would cause,

“material financial detriment to members of the scheme”,

not just that it would not be in their best interests, but would cause material financial detriment. It cannot be right to force trustees to invest in a way that they would feel would cause any financial detriment, let alone material financial detriment, even if limited to just 10% by value.

The Minister’s amendment still does not put any restrictions around the type of assets or, indeed, specific assets that can be mandated. Here I very much disagree with what she said earlier. It does not limit it to the assets in the Mansion House agreement. Despite the proposed new subsection (5A), which requires the regulations to describe the examples that are listed in subsection (4), these remain just examples. Subsection (5) remains very clear that a qualifying asset does not have to be one of the examples. The Minister’s amendment does not change that in any way. I do not agree that the deletion of subsection (8) has any such effect. The Bill will now just be silent on the allocation of assets within the 10%. There is nothing here that stops mandation in a single asset type or class.

There is nothing here to prevent any future Government mandating any assets they please. While the Minister might point to the report that the Secretary of State must publish under subsection (12), which, among other things, sets out how the financial interests of members would be affected, it is important to note that that applies to only the first set of such regulations under this subsection. Any further future mandation, perhaps under a different Government, is subject to no such safeguard, just the negative process. Such assets could be mandated for any reason they wish to give. As an example, what if Nigel Farage were to find himself in a position of influence? He is a well-known enthusiast for and investor in cryptocurrencies. There is nothing in this Bill that would stop him mandating that the relevant funds should have 10% invested in cryptocurrency. Any Government could use this power to mandate whatever pet project they wanted. Let us be clear that the definition of assets in the Bill is sufficiently wide that it could be mandation into specific assets, specific projects, rather than a class, if that is what they wanted to do.

Even if it is to be used only as a backstop to the Mansion House agreement, is that such a good thing? Let us look at the example assets set out in the Bill. One is private debt. You do not have to be an avid reader of the financial pages to know that there are growing concerns about whether private debt may be the cause of the next big financial crisis. Many investors are trying to get out, which is why many large funds are now restricting redemptions. When someone like Jamie Dimon starts talking about cockroaches, we should take notice. Any sensible pension fund would be treating private credit with huge caution at the moment, but this is specifically one of the asset classes that the Government want to encourage and mandate. Government mandation of asset allocation has no place in the regulation of pensions. The fiduciary duty should remain sacrosanct. I urge all noble Lords to support the noble Baroness, Lady Bowles, in her amendment.

[Baroness Altmann (Non-Afl)]

My Lords, I agree with every word that the noble Lord, Lord Vaux, has just said. I declare my interests as a non-executive director of a pension administration company and a board adviser to a master trust. I support all the amendments in this group, but I shall speak particularly to Motion E1 so ably moved by the noble Baroness, Lady Bowles.

A fiduciary obligation is one of the highest standards of duty in common law, yet this Bill would override the best judgment of trustees. Although the 5% and 10% amendment laid by the Government is welcome, it does not deal with issues such as those outlined by the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux. If trustees do not believe that the case for, for example, private assets is strong enough, they will still have to buy them or they will not be able to participate in auto-enrolment. This is not incentivisation. Incentivising financially, perhaps via tax reliefs, would change the calculation of the potential outcomes, but mandation does not do that.

The dangers of mistiming are clear. A McKinsey study published in February shows that, for example, private equity is under structural strain with constrained liquidity, valuation uncertainty and returns that have been weaker. As the noble Lord, Lord Vaux, outlined, the same applies to private credit, particularly that held in open-ended fund structures. In infrastructure, we have recently seen the returns offered for solar power degraded from in line with RPI to in line with CPI, which has put international investors off some of the infrastructure opportunities in the UK.

If the Government persist in their idea that closed-end funds, which are much more appropriate and have their own diversified, expertly managed portfolios of qualifying assets cannot qualify, that simply further reinforces the idea that the Government does not know best and that it is not safe for this House to authorise the Government to mandate these investments. Not all pension funds have the in-house capability to manage alternative or illiquid assets. Just being large does not give them instant expertise. Australian and Canadian funds have taken decades to build up this kind of ability. A strict time limit simply does not and cannot fit with the requirements that the Government seek to impose on pension schemes. I hope that noble Lords will stand firm in the resolve to send this back to the other place.

[Lord Remnant (Con)]

My Lords, this is probably the final time that noble Lords will have the dubious pleasure of hearing from me, and I assure the House that I will be brief. I wholeheartedly support Motion E1 in the name of the noble Baroness, Lady Bowles, and all the remarks that have been very supportive of that that noble Lords have made to date for the reason that she has so eloquently expressed. I also very much support her remarks about the unwarranted discrimination in this Bill against investment companies. Suffice it to say that a provision that is wrong in principle is not rectified or remedied by restricting the width of its application in the Government’s amendment.

I would like to venture just one additional observation. As we have heard, the Mansion House Accord is a voluntary agreement specifically targeted at UK assets to drive growth and improve returns. It aims to improve financial outcomes for savers while supporting UK economic growth, one of the Government’s core objectives. It is necessarily a voluntary initiative expressly subject to fiduciary duty and consumer duty, and it is dependent on implementation by the Government and regulators of critical enablers. Yet here is the rub: had the industry’s best intentions towards investing in private markets not been formalised in this way, there would be nothing for us to discuss here today. There would be nothing for this reserve power to backstop, so it would be redundant. Given the Government’s expressed intention never to use a reserve power, they would hardly be putting forward a primary power to compel institutions to invest moneys in ways in which they—the Government—see fit. At the time of the signing of the Mansion House Accord, there was no indication that the agreement would be anything other than voluntary and that the Government were proposing to take the powers of compulsion now proposed. I believe that the signatories entered into this accord with the best of intentions and with every expectation of meeting their commitments, and I believe that they will do so, but there is no certainty that they will not be blown off course, whether through scarcity of available opportunities or otherwise.

Should that happen, this or any future Government could undoubtedly consider the use of the reserve power that the Bill grants them. There is every reason to believe that the industry’s perhaps justifiable reasons for falling short would not find favour with the Government, and that the interpretation of the caveats built into a voluntary accord in terms of fiduciary duty, consumer duty and regulatory and governmental enablers would be disputed and the caveats overridden. All in all, it would be a mess, and City institutions would rue the day they had tried to be helpful towards the Government in playing their part in meeting their growth objectives.

20:00

My wider question to the Minister is this: if the Government take this reserve power, how can she expect anyone or any group of people in future to enter into voluntary agreements designed to be supportive of government policy if, subsequently and unexpectedly, the Government can unilaterally render such voluntary commitments mandatory, with all the angst, uncertainties and disputes that that will likely entail?

[Lord Lucas (Con)]

My Lords, it is utterly ridiculous that only 5% of UK pension funds are invested in the UK. The figure was 50% when I was a pension fund manager. The difference is entirely down to us as politicians. The solution is not to compel financial managers to do things; it is to understand what we did to make this happen and undo at least some of it. If the Government want quick access to priorities, they should turn to the members. The members believe in this country. Their interest is in it being a prosperous country, with lots of investment coming into it. Give them more influence over what pension funds do. They should not go for this government mandation; it is a dead end and, at its heart, poisonous.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords for their comments. Having spoken at some length at the start, I will not respond at length. I shall just pick up a few points.

On the question on fiduciary duty, nothing in the Bill disapplies trustees’ existing duties of loyalty, prudence and acting in members’ best interests. Those continue to apply in full. Were this power ever to be used—I repeat, the Government do not expect to use it—and the asset allocation requirements were in place, the savers’ interest test allows a scheme to seek an exemption if it can show that compliance would cause material financial detriment to members. Not only would they be enabled to do that but we would expect the fiduciary duty to require the trustees to make such an application to the regulator. Trustees are not directed to invest in any specific asset or project, and if they believe that the requirements are not in the members’ best interests, again, they should apply for an exemption.

The neutrality amendments provide a meaningful constraint. The Government must prescribe qualifying asset descriptions across each of the private market categories in the Bill, so they could not load an entire requirement into a single asset class, let alone a pet project or specific investment. Any future Government who attempted to define qualifying assets in a way designed to serve their own policies or a pet project, rather than savers’ interests, would clearly be vulnerable to legal challenge on rationality grounds.

I am not going to debate this at length since the noble Lords have made clear their intention to test the opinion of the House irrespective of whatever I say. I have just two other comments, on scale. I take the point made by the noble Baroness, Lady Stedman-Scott, that the Government should be pragmatic. I completely agree. My problem with her amendment is that it is not practical, so I cannot be pragmatic in trying to apply an amendment that is really clear in the matter of scale but would simply be too difficult to apply, because it is not clear what the nature of the test would be and it would end up getting bogged down in the courts for years, giving the regulator an impossible job. That simply does not work.

I have made the point about competition in our previous, long debate, and I do not doubt we will return to it again should the Bill not all disappear tonight. In the light of that, I hope that noble Lords feel able not to press their amendments.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, we have heard continued disagreement with mandation and coercion from across the House. As the Minister has said, we do not need to re-rehearse all the things that we have already said, but something that stuck in my mind from a previous stage was when the Minister said that if we did not have mandation, it would rest on good faith alone. That is the whole point: I think there is good faith in the City to deliver on this, and not to trust it, exactly as the noble Lord, Lord Remnant, has said, damages relationships and any good faith and trust in government. This is therefore doubly, trebly and quadruply a bad thing for the Government to have suggested, and I hope they will have a change of mind. I wish to test the opinion of the House.

20:05

Division 4

Motion E1 agreed.

Ayes: 219

Noes: 144

20:16

Motion F

Moved by

[Baroness Sherlock]

That this House do not insist on its Amendments 26 and 37, to which the Commons have disagreed for their Reason 37A.

37A: Because the Commons consider that there are significant benefits to members of pension schemes from the existing scale requirements in the Bill.

Motion F1 (as an amendment to Motion F)

Moved by

[Viscount Younger of Leckie]

As an amendment to Motion F, at end insert “and do propose Amendments 37B and 37C in lieu—

37B: Clause 40, page 45, line 31, at end insert—
“28BA Exemptions from scale requirement
(1) The Secretary of State may by regulations provide that the Regulator may determine that a relevant Master Trust or a group personal pension scheme is to be treated as meeting the scale requirement in section 28A or 28B only if the Regulator is satisfied that the condition in subsection (2) or (3) is met.
(2) The Regulator may make a determination under subsection (1) where the trustees or managers of the scheme have demonstrated, on the basis of robust and independently verifiable evidence, that there is no reasonable prospect that consolidation of the scheme into another arrangement would be likely to improve outcomes for members.
(3) The Regulator may make a determination under subsection (1) where the trustees or managers of the scheme have demonstrated, on the basis of robust and independently verifiable evidence, that they are delivering good outcomes for members as a result of innovation.
(4) For the purposes of subsection (3), a relevant group personal pension scheme is to be treated as meeting the innovation condition if the managers of the scheme can demonstrate that it provides specialist or innovative services.
(5) The Secretary of State may by regulations make provision for the definition of “specialist or innovative services” for the purposes of this section.
(6) In determining whether the condition in subsection (2) is met, the Regulator must have regard to evidence demonstrating that the scheme delivers outcomes for members that are at least equivalent to, or better than, those reasonably expected from consolidation into a scheme meeting the scale requirement, including—
(a) net risk-adjusted investment performance;
(b) independently assessed governance quality and operational capability, including compliance history, trustee expertise, and administrative performance;
(c) whether the scheme derives material and demonstrable benefits for members from integrated, pooled or cross-scheme investment arrangements not reflected solely in the total value of assets counted under section 28A(4) or 28B(4), and whether those arrangements are likely to result in outcomes for members that would not be materially improved through consolidation;
(d) whether the scheme invests wholly or substantially in a default arrangement operated by another scheme or manager meeting the scale requirement and that arrangement demonstrably determines the majority of member investment outcomes;
(e) whether participation in a wider asset management group of substantial scale provides direct and measurable benefits to members, including reduced costs, improved diversification, or enhanced access to investment opportunities.
(7) In making a determination under subsection (1), the Regulator must be satisfied that any benefits identified under subsection (3) are material and demonstrably in the interests of members.
(8) Regulations under this section may make provision about—
(a) reasonable evidential requirements and assessment processes for applications under subsection (1);
(b) the duration, renewal and withdrawal of a determination under subsection (1);
(c) reporting and disclosure requirements.””

37C: Clause 40, page 54, line 18, after “28B,” insert “28BA,””

20:17

Division 5

Motion F1 agreed.

Ayes: 216

Noes: 148

20:27

Motion G

Moved by

[Baroness Sherlock]

That this House do not insist on its Amendment 35, to which the Commons have disagreed for their Reason 35A.

35A: Because the Commons consider that it is not necessary to impose further requirements relating to innovation and competition.

[Baroness Sherlock (Lab)]

I beg to move Motion G.

Motion G1 (as an amendment to Motion G)

Moved by

[Baroness Noakes]

At end insert “and do propose the following amendment in lieu—

35B: After Clause 57, insert the following new Clause—
“Sections 40, 42 and 44: regulations and competition among providers of pension schemes
(1) In section 143 of the Pensions Act 2008, after subsection (1), insert—
“(1A) In making regulations under section 20(1A), 20(1C), 26(7A), 28A, 28B, 28E, 28F and 28J the Secretary of State must have regard to the benefits of competition among providers of pension schemes.”.
(2) In making regulations under sections 42 and 44 the appropriate authority must have regard to the benefits of competition among providers of pension schemes.””

[Baroness Noakes (Con)]

I beg to move and wish to test the opinion of the House.

20:28

Division 6

Motion G1 agreed.

Ayes: 211

Noes: 150

20:39

Motion H

Moved by

[Baroness Sherlock]

That this House do not insist on its Amendment 43, to which the Commons have disagreed for their Reason 43A.

43A: Because the Commons consider that it is not necessary to impose further requirements relating to innovation and competition.

[Baroness Sherlock (Lab)]

My Lords, I have already spoken to Motion H. I beg to move.

Motion H agreed.

Motion J

Moved by

[Baroness Sherlock]

That this House do not insist on its Amendments 77 and 85, to which the Commons have disagreed for their Reason 85A.

85A: Because the Commons consider that it is not necessary to duplicate existing information regarding public sector pension schemes.

[Baroness Sherlock (Lab)]

My Lords, I have already spoken to Motion J. I beg to move.

Motion J1 (as an amendment to Motion J)

Moved by

[Baroness Neville-Rolfe]

Leave out from “House” to end and insert “do insist on its Amendments 77 and 85 to which the Commons have disagreed for their Reason 85A.”

[Baroness Neville-Rolfe (Con)]

My Lords, I beg to move Motion J1.

20:40

Division 7

Motion J1 agreed.

Ayes: 162

Noes: 151

20:50

Motion K

Moved by

[Baroness Sherlock]

That this House do not insist on its Amendments 78 and 86, to which the Commons have disagreed for their Reason 86A.

86A: Because it would alter the financial arrangements made by the Commons, and the Commons do not offer any further reason, trusting that this Reason may be deemed sufficient.

[Baroness Sherlock (Lab)]

My Lords, I have already spoken to Motion K. I beg to move.

Motion K1 (as an amendment to Motion K) not moved.

Motion K agreed.

Motion L

Moved by

[Baroness Sherlock]

That this House do not insist on its Amendments 79 and 87, to which the Commons have disagreed for their Reason 87A.

87A: Because the Commons consider that it is not necessary to carry out a review of existing legislation relating to pension communications and financial promotion rules.

[Baroness Sherlock (Lab)]

My Lords, I have already spoken to Motion L. I beg to move.

Motion L agreed.

House adjourned at 8.51 pm.