Pension Schemes Bill

Debate between Baroness Noakes and Viscount Thurso

Committee stage
Monday 19th January 2026 Grand Committee

[Viscount Thurso (LD)]

My Lords, I rise principally to speak to my Amendment 38 in this group and to support my noble friend’s Amendment 44, to which I added my name. I am in broad sympathy with the mover of Amendment 26.

I think we can all agree that we would like to deal, if possible, with inflation eroding the purchasing power of a pensioner. As was said on the last group, there is basically a contract between the employer and the employee in a DB scheme, where the employee expects to receive a certain pension. The case I raise in my amendment stems from the many pension schemes that do not offer an absolute inflationary rise as part of their terms and conditions. Quite a number do, but some say in their terms that there would “normally” be an increase of an inflationary amount, but it is not guaranteed. There are a number of schemes where the literature at the time the person went into the scheme—in the 1980s, 1990s or whenever—indicated that they may reasonably expect to get inflationary increases, but they did not.

In this instance, I am grateful to the BP Pensioner Group, which brought its case to my attention and helped with the drafting of this amendment and my others. Broadly behind its request is the fact that the BP scheme, which is now closed, is an extremely good scheme with quite a large surplus in it. It is very well funded and therefore, as per the last group, may well be something that could go back to the company in part. But it has chosen for a number of years to refuse the request of the trustees to make discretionary increases.

It is worth noting just how pernicious the effect of inflation is on these incomes. I used the Bank of England inflation calculator to see what had happened. Bearing in mind that the statutory amount is 2.5%, if you go back with the inflation calculator to 2005, it is 2.8%—you might say that is not too bad—but inflation from 2015 to 2025 was 3.11% and, from 2020 to 2025, it was 4.35%. In every year there has been a modest but rising and quite large difference between what the statutory cap would allow and what the actual inflation was.

Of course, that compounds every year. So, every year, the loss is compounding up. Today, a pensioner may well be significantly worse off than if they had been getting something. By definition, surpluses comprise funds in excess of those required to meet the totality of members’ entitlements in full; they are, therefore, the resource out of which discretionary payments can be made. As such, any payment of surplus to the employer could prejudice the possibility of a discretionary payment to members. What I am seeking, and what my amendment seeks, is to make sure that that is in balance.

As I mentioned, since 2021, inflation as measured by CPI has been well over 4%, much ahead of the cap of 2.5%. The Pensions and Lifetime Savings Association’s survey indicated that, during the recent period of exceptional inflation, only 12% of UK pension funds made permanent discretionary increases to protect the purchasing power of members. In looking at surplus being distributed in part to employers and in part to members, the economic good if the part of the surplus that goes to the employer is used in investment is obvious, but let us not forget the economic good in increasing the purchasing power of the pensioners. There is an equal economic good on both sides of this argument.

The noble Baroness, Lady Noakes, made the valid point that a great many companies supported their pension schemes during the difficult times of the late 1990s and early 2000s, but I would argue that that was in their contracts because they had contracted to make the payment at the end. We are now in a situation where, through the far better quality of trustees, the training offered by the Pensions Regulator—I have taken it and can attest that it is well worth doing—and the governance rules that have been brought in, we have the ability to make those surpluses available.

What this amendment would do is add to Clause 10 that the regulations to be made by the Secretary of State would include the words on the Marshalled List, which would mean simply that the Secretary of State could regulate to ensure that trustees took inflationary pressures into account. That is pretty modest, on the scale of the amendments that are being put forward, to deal with the surplus. Although the amendment is probing at this stage, if it is not met with some sympathy now, it may become a bit more than probing as we go on.

My noble friend Lord Palmer’s Amendment 44 is along the same lines, although it addresses pre 1997, which my amendment does not specifically do; I will leave my noble friend to argue the case for that. In passing this legislation, we owe it to those pensioners who have been left behind to do something to help them catch up.

[Baroness Noakes (Con)]

My Lords, I understand the motivation behind the amendments in this group, which call, in one way or another, for inflation protection, in particular for pre-1997 pensions that do not benefit from indexation to have a first call on pension scheme surpluses. I do not, however, support these amendments.

When compulsory indexation was first introduced by statute, it was applied only to pension rights which accrued after April 1997. That was a deliberate policy choice by government at the time. Although the cap and the index have been tinkered with over time, the basic policy choice has remained intact. The 1997 change was itself quite costly for those employers that had not previously included indexation or inflation protection in their pension offer to employees, which was quite common at the time. I am sure that the Government at the time were aware that imposing indexation on all accrued pension rights would have been very expensive for employers and would very likely have accelerated the closure of DB schemes.

The period after 1997 saw the evaporation of the kind of surpluses that used to exist, which, incidentally, vindicated the 1997 decision to exclude the pre-1997 accrued rights, because if they had been included, that would almost certainly have accelerated the emergence of deficits, which led in turn to employers considering how they could cap their liabilities by closing schemes entirely or future accrual. As we know, the period of deficits lasted until the past couple of years; they lasted a very long time.

Alongside this period of deficits emerging, there was a mutual interest among trustees and employers to de-risk pension schemes. That is why they shifted most of the assets into things such as gilts, which, in turn, increased the sensitivity of the defined benefit schemes to gilt yields, as we saw in the LDI crisis, and resulted, when interest rates started to rise again, in the surpluses starting to emerge. It was not the only cause but a very significant cause of the surpluses that we now see. We now have schemes in surplus: DWP figures suggest £160 billion—that figure will probably change daily as interest rates change—but that was only after significant employer support throughout the 1990s and the noughties was required, when significant deficit recovery plans had to be signed up to by employers to keep their defined benefit schemes afloat.

The amendments in this group seem to be predicated on the thought that these surpluses are now available for member benefits, as though employers had nothing whatever to do with funding their emergence. Because DB pension schemes are built on the foundation of the interests of members, it is obvious that the surplus will have to be shared between the two—that was partly covered in the previous debate—but the one thing we must always remember is that they have emerged largely from the huge amount of funding that has had to be put in since 1997 to keep the schemes afloat. That the surpluses have emerged does not mean that they are available for whatever good thing people want to spend them on. I certainly do not think it is right to use surpluses to rewrite history to create rights that deliberately were not created in 1997, for the very good reasons that existed at the time. For that reason, I do not support these amendments.