(1 day, 7 hours ago)
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23:23 - Division on Motion A1 (as an amendment to Motion A) - Ayes: 197 / Noes: 129 - Motion A1 agreed.
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, 88C, 88E to 88P and 88R to 88W 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.
“(ba) must require—
(i) an application to include a statement explaining why the applicant considers that meeting the asset allocation requirement would be likely to cause material financial detriment to members of the scheme;
(ii) the Authority to have due regard to such a statement in determining an application;”
“(ca) must require the Authority to provide reasons for any determination not to approve an application;”
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, the other place has once again considered this House’s amendments and has once again disagreed with them, tabling further amendments in lieu. I will set out in a moment what those amendments contain, but I want first to say something about where we now find ourselves.
The elected House has now voted on the reserve power three times. On each occasion it has supported the Government’s position, by large majorities. This House has every right to scrutinise what is before it, and the quality of that scrutiny has improved the Bill. But we need to be clear about the context in which we are operating: these exchanges have gone on for some time, and the Government have moved a considerable distance.
Let me trace that distance briefly. In the first round, the Government wrote the Mansion House Accord targets into primary legislation—the 10% and 5% caps—and introduced the asset class neutrality requirement. In the second round, we went further: the sunset was brought forward to 2032; the power was restricted to a single use; the application was limited to main default funds; and we provided for the full repeal of the entire asset allocation framework at the end of 2035. This was not just the enabling power, but every associated provision—the approval requirements, the penalty regime, the review obligation, and any requirements that had been brought into force—removed from the statute book entirely.
Today, the other place agreed a third set of amendments. These address the savers’ interest test—the mechanism at Section 28G by which schemes can apply for an exemption from any asset allocation requirement. I know that the operation of this test has been a source of concern in this House, touching as it does on issues around trustees’ fiduciary responsibilities to savers. The Government have listened carefully to what has been said, while explaining the reason for their own position, which is, in essence, that these fiduciary duties have not to date been sufficient to overcome the distortion of asset allocation decisions by commercial pressures.
When we debated things last Wednesday, the noble Baronesses, Lady Altmann and Lady Bowles, described our position as believing a market failure to exist, and that is a fair characterisation. The Opposition argue that decisive government action to correct this market failure is not justified. We simply disagree. We believe that it is the Government’s duty to take the steps needed to further savers’ interests.
Our first new amendment, Amendment 88U, lowers the threshold for an exemption. The Bill, as drafted, would have allowed regulations to require a scheme to demonstrate that compliance would cause material financial detriment. That language attracted close scrutiny in this House. The noble Baroness, Lady Bowles, among others, questioned whether it set the bar too high, requiring proof of certainty. The threshold is now would “be likely to” cause. A scheme will need to show that detriment is the probable consequence of compliance, not that it is certain.
The second amendment, Amendment 88T, confirms in the Bill that where the threshold is met, the regulator must grant the exemption. The Government always intended the test to work that way. The Bill now states it clearly.
The third amendment, Amendment 88V, expressly requires the regulator to have due regard to the scheme’s own assessment of why compliance will be likely to cause material financial detriment. Schemes applying for an exemption must set out their reasoning, and the regulator will be under a statutory obligation to engage with it properly.
Noble Lords have argued that trustees and scheme managers are best placed to understand the circumstances of their members and that the regulator should give proper weight to their analysis. “Due regard” is established statutory language. It carries real legal weight, and it means the regulator cannot receive a scheme’s assessment and pass over it without proper consideration. I am aware that this type of language finds favour in a number of places in the House. I hope that noble Lords will recognise that the Government have engaged with the substance of what has been asked for.
The fourth amendment, Amendment 88W, requires the regulator to provide reasons for any decision to refuse an application. The Bill already provides for a right of appeal to the Upper Tribunal. This ensures that schemes have what they need to exercise that right—a right that is meaningful only if applicants know why they were turned down.
Let me set out what the reserve power now looks like, taken as a whole. It is capped at the accord targets. Regulations cannot concentrate requirements in a single asset class. The power applies only to main default funds. The percentage can be set only once. The power lapses if not used by the end of 2032. Even if used, the whole framework is repealed at the end of 2035. It remains subject to the affirmative procedure and to statutory reporting requirements before and after any use. The savers’ interest test now provides a lower threshold, certainty that an exemption will be granted where it is met, a statutory requirement for the regulator to give due regard to the scheme’s own reasoning and transparency about decisions if the application fails.
I understand the position of noble Lords who believe that this power should not exist at all. I have listened to those arguments with care throughout the passage of the Bill, but the Government’s view remains that the risk of inaction, of allowing the collective action problem to persist while pension savers bear the cost, is the greater risk. The Government have now brought forward three successive rounds of concessions, each responding to arguments made in this House, each written into primary legislation. The power that is now before noble Lords bears the imprint of this House’s scrutiny at every turn. Given all that, I ask noble Lords not to insist on their amendments and to agree the amendments proposed by the other place in lieu. I beg to move.
Baroness Bowles of Berkhamsted
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, do insist on its disagreement to Commons Amendments 88A, 88C and 88E to 88P and do disagree with the Commons in their Amendments 88R to 88W 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, I thank the Minister, including for our meeting on Friday. For the record, we suggested a “have regard” framework, requiring trustees to consider private market investment in alignment with the Mansion House Accord and to report to the regulator. That approach would meet the Government’s stated policy aims without overriding fiduciary duty or distorting the market. It was rejected, apparently because it lacked a sufficiently heavy sanction threat. So we continue and, unfortunately, mandation remains.
At the second round of ping-pong, I dealt with the technical and market concerns, and all those concerns remain. Today, I turn to the constitutional issues. First, fiduciary duty is a foundational principle in our common law. Trustees must act solely in the beneficiary’s interests, yet this clause directs them towards particular asset classes without any statutory defence or immunity. Trustees are left in a double bind: comply and risk personal liability or refuse and face deauthorisation.
Secondly, the process has been procedurally defective. There was no consultation on mandation, discrimination between investment vehicles or the sanction. The Commons amendments this time merely add procedural language around the savers’ interest test, due regard and reasons, which public law already requires. Further, there is the coercive effect of the so-called reserve power, which is already being deployed to pressure schemes and trustees into compliance without the consultation, assessment or regulatory discipline that regulations would require. That is constitutionally improper. Policy is being pursued by threat, not by law.
Thirdly, the savers’ interest test itself is unchanged in substance. The insertion of “likely to” is trivial. The test still reverses the logic of fiduciary duty, savers have not consented to the additional risks, and the penalty of deauthorisation remains draconian and disproportionate.
Fourthly, pension savings are members’ property. A coercive statutory scheme backed by deauthorisation is an interference with property rights that requires clear justification and careful design. Neither is present.
For these constitutional, procedural, proportionality and rights-based reasons, the clause remains defective and the Government’s amendments do not cure it. This is legislation that relies on threat rather than clarity and coercion rather than properly framed substance. I therefore will ask the House to insist on our deletion and to disagree with the Government’s amendments. I beg to move.
Baroness Altmann (Non-Afl)
I support the noble Baroness, Lady Bowles. I point out to the Minister that the Mansion House Accord had two parts. The second part had government obligations, on the basis of which the industry voluntarily agreed to invest in the private assets that the Government favour. None of the Government’s obligations is enshrined in the Bill; they are hoped for. The Minister assumes that private assets will definitely outperform and that if savers do not invest in them they will be losing out somehow. There is no underpin for the losses and even if the investment experts decide that they disagree and would not normally want to buy them, they will still be forced to. This is not the way to get pension funds to invest successfully or to trust the Government in the future. I hope that the Government will think again.
Lord Ashcombe (Con)
My Lords, I declare my interest as an employee of Marsh, whose sister company Mercer is a pension consultancy, master trust provider and, importantly, a signatory to the Mansion House Accord. Firms that signed the Mansion House Accord last year in good faith, believing that fiduciary duty and trustee oversight would be preserved in order to ensure value for money for the individual pensioners whose funds they are responsible for investing, now face the prospect—or, dare I say, the threat—of mandation. This simply cannot be right, and we certainly do not think so.
Baroness Stedman-Scott (Con)
My Lords, I have little to add to the compelling case set out by the noble Baroness, Lady Bowles, and indeed by us all throughout the passage of the Bill. Our position remains unchanged: mandation has no place in the Bill and, if the Government are serious about securing its passage, they should remove it.
Baroness Sherlock (Lab)
My Lords, my speech says, “I would like to thank all noble Lords who have spoken in today’s debate”—but that will not take long.
I will not hold us here for a long time, tempting though it is to go over the arguments in considerable detail, but I will say a couple of things. We need to remember that the whole purpose of the Pension Schemes Bill is to improve outcomes for savers. Where are savers in all of this? It is their interests that are there. The reason the Government are doing this is that the evidence is clear internationally that pension funds which have a small holding in private assets as part of a diversified portfolio bring better returns.
If there were a situation where that would not be in the interests of a particular scheme, that is the point of the savers’ interest test. This does not cut across fiduciary duty because, in fact, nothing in the Bill overrides that core principle of fiduciary duty. If trustees believe it not to be in their interests, not only can they make an application for an exemption under the savers’ interest test but we would expect their fiduciary duty to guide them to make that application. That really is the beginning and end of it.
I will simply say this. The whole point of the Bill is to make pensions better. This whole Bill will transform our pensions landscape. Pensions are the promise we make to millions of people that years of hard work will be rewarded with security and dignity in retirement. Bigger, better pension schemes will drive better returns, as well as tackling inefficiencies. We need to find a way to get the Bill agreed. Industry wants to get on with implementing the reforms and our pensioners want to start benefiting. The other place has expressed its view clearly, repeatedly and by substantial margins. I hope that noble Lords will reflect on whether it is right to ask the elected House to vote for a fourth time on a question to which it has given the same answer on every occasion. I ask noble Lords not to insist on their amendments and to agree the amendments proposed in lieu in the other place.
Baroness Bowles of Berkhamsted (LD)
My Lords, the arguments have been well rehearsed. I am not convinced that this coercion is as innocent as has been made out and I therefore wish to test the opinion of the House.