Pension Schemes Bill Debate
Full Debate: Read Full DebateDepartment: Department for Work and Pensions
Baroness Sherlock
Main Page: Baroness Sherlock (Labour - Life peer)Department Debates - View all Baroness Sherlock's debates with the Department for Work and Pensions
Thursday 5th February 2026
(1 day, 11 hours ago)
Grand CommitteeRead Full debate Pension Schemes Bill 2024-26 View all Pension Schemes Bill 2024-26 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 152-VII(a) Amendment for Grand Committee (Supplementary to the Seventh Marshalled List) - (4 Feb 2026)
Baroness Stedman-Scott (Con)
My Lords, it is a pleasure to close this debate and respond to the remarks of the noble Lord, Lord Palmer, on his Amendment 184. I am grateful to him for raising this issue, because it goes to the heart of how we ensure that pension reform delivers better outcomes for savers rather than simply neater market structures on paper. I think there is reasonably wide backing across the pensions industry for the Government’s broad objective of greater consolidation and efficiency within the defined contribution market. Many stakeholders accept, and indeed support, the proposition that increased scale, when combined with robust governance, strong investment capability and appropriate oversight, has the potential to deliver stronger long-term outcomes for members. Few would argue for fragmentation for its own sake.
However, support for consolidation is not the same as support for consolidation at any cost, or consolidation pursued without sufficient regard to its secondary effects. Well-founded concerns remain that the current design of the scale test risks it being too blunt an instrument. In particular, it does not distinguish adequately between schemes that are genuinely underperforming and those smaller or mid-sized providers that, despite operating below the proposed thresholds, none the less deliver consistently high-quality, well-governed and, in some cases, market-leading outcomes for savers. Indeed, the Government’s own analysis underlines this risk. The chart contained in paragraph 70 of the Government’s 2024 report shows no clear or consistent correlation between assets under management and gross five-year performance across large parts of the master trust and group personal pension market.
The principal scale-related concern identified appears to relate not to well-run schemes operating below the threshold but to the very smallest arrangements, in particular certain single-employer schemes where governance capacity and resilience can be more limited. That matters because consolidation in a pensions market is not a neutral process. This is not a typical consumer market. Savers are largely captive, choice is constrained, switching is rare and inertia is high. In such an environment, reductions in the number of providers can weaken competitive pressure long before anything resembling a monopoly appears. The risk is not always higher charges tomorrow but slower innovation, less responsiveness and poorer outcomes over time.
That is why this amendment is important. It would ensure that consolidation serves savers and that Parliament retains a clear grip on how the market is evolving. Small distortions in competition today—barely visible in the short term—can compound into materially worse outcomes over 30 or 40 years of saving. In a system built on long horizons, early and structured scrutiny is essential.
There is also the question of innovation. Smaller and newer providers have often been the source of advances in member engagement, digital capability, decumulation options and investment design. If consolidation raises barriers to entry through disproportionate compliance costs, restrictive exit charges or exclusivity arrangements, innovation risks being squeezed out, even where headline charges appear to fall. Efficiency gains that come at the expense of progress are a poor bargain for future retirees.
The report required by this amendment would not obstruct sensible consolidation; nor would it second-guess the direction of travel. Rather, it would provide Parliament with the evidence needed to ensure that consolidation is proportionate, targeted and genuinely in the interest of savers. It would help ensure that regulatory and competition safeguards remain fit for purpose as market structures change, and that opportunities for new high-quality entrants are not inadvertently closed off.
For these reasons, I believe that this amendment strikes the right balance. It is supportive of reform, alert to risk and grounded firmly in the long-term interests of those whose retirement security depends on the decisions we take today.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I thank the noble Lord, Lord Palmer, for introducing his amendment, which would require the Government to conduct a report on the impact of consolidation in the occupational pensions sector within 12 months of the Act being passed. I am grateful to the noble Baroness, Lady Stedman-Scott, for her remarks and her acknowledgement of the benefits of consolidation and the widespread support for it.
The fact is that consolidation is already happening across the pension landscape. The number of DC pension providers has reduced from roughly 3,700 in 2012 to about 950 schemes today. On the DB side, the number of schemes is similarly down from about 6,500 in 2012 to 4,800 in 2026, with a record number of transactions currently estimated in the buyout market. Our aim is to accelerate this trend of consolidation through the DC scale measures and DP superfunds. As I have said before, scale brings numerous benefits directed at improving member outcomes, including better governance, greater efficiency, in-house expertise and access to investment in productive markets.
I am not going to respond in detail to the comments from the noble Baroness, Lady Stedman-Scott, on innovation and other things, because we have given them a decent canter in previous meetings in Committee, but it is absolutely essential that pension schemes remain competitive post-scale. We expect that schemes with scale will innovate and drive competition, especially, for example, in consolidating single-employer trusts. The market will evolve, as will the needs of members, and we expect that the schemes and the industry will be able to align with this.
It is absolutely right that the Bill will lead to major change in the occupational pensions market. Although I do not agree with this particular proposal, I absolutely agree with the noble Lord, Lord Palmer, that we must understand and monitor the impact of these reforms, because the impacts of consolidation really matter. That is why a comprehensive impact assessment was produced, analysing the potential impacts of the Bill, with plans to evaluate the impact in further detail. An updated version of the impact assessment was published as the Bill entered this House; crucially, it included further details of our ongoing monitoring and evaluation plans, including critical success factors and collaboration across departments and regulators.
We have provided the market with clarity on our approach so that changes can be put into effect, but we need to allow time to assess and evaluate the impacts following full implementation. We will assess the overall impacts over an appropriate timeframe, given that the full effects of consolidation will be after the Bill has been implemented.
As I have mentioned before, we published a pensions road map, which clearly sets out when we aim for each measure to come into force. The fact is that many of the regulations to be made under the Bill will not have been made or brought into force within a year of the Bill becoming an Act. Any review at that point could be only very partial. However, the Government are committed to strong monitoring and evaluation of this policy, especially of its impact on members. The noble Lord, Lord Palmer, is absolutely right to point to the crucial role of the Pensions Regulator and the CMA. They are best placed, in the first instance, to monitor the impacts of consolidation as part of their respective statutory functions, including an analysis of emerging trends. The Pensions Regulator, for example, will play a key role in monitoring the impact of consolidation on the trust-based DC pensions market via its value-for-money framework.
I can therefore assure the Committee that we will keep this area under review, consistent with our stated policy aims for the sector and for good member outcomes. We will also continue to monitor our working arrangements with the regulators; this includes their ongoing monitoring of the pensions industry. We will submit a memorandum to the Work and Pensions Select Committee with a preliminary analysis of how the Act has worked three to five years following Royal Assent. The committee may then decide to conduct a fuller inquiry into the Act, consistent with standard practice, as set out in the Cabinet Office’s Guide to Making Legislation.
Given the above, a separate government report risks duplicating work while putting an undue burden on all those involved. If issues are identified by regulators before the Government submit a post-legislative memorandum, and there is a need for government action, then an evidence-based response can be taken. I completely agree with the noble Lord about the importance of this and I thank him for raising this debate. However, I hope that he feels reassured and able to withdraw his amendment.
Lord Palmer of Childs Hill (LD)
My Lords, I thank the Minister for that; it gives me some reassurance, and I am always happy to say when that happens. The aim of the amendment is to improve the Bill, not to undermine it. Some of the things that the Minister has suggested may happen are already happening. When figures are quoted quickly—such as 950 schemes of one sort and 4,826 of the other—the numbers do not seem so large, but they are pretty substantial in terms of those impacted.
We are worried about the impact of consolidation. I rather get the impression that the Minister is aware that there could be problems that need to be reviewed as we go along, and we will need time to assess what is happening. I take cognisance of the Minister’s reassurances: they take us along the same path as I am suggesting. We will have time, obviously, to review what is happening as time progresses. In the light of that, I beg to withdraw my amendment.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the compensation is payable.”Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 28 of Schedule 7 to the Pensions Act 2004 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the pension compensation is payable.
Baroness Sherlock (Lab)
My Lords, the Government recognise that the pension compensation system and the safety net it offers need to work harder for members. Payments from the Pension Protection Fund, the PPF, and the Financial Assistance Scheme, FAS, based on pensions built up before 1997, do not get uprated with inflation—pre-1997 indexation. Over time, they have lost a significant amount of their value in real terms. I am therefore particularly pleased to introduce Clauses 108 to 110, which together provide for pre-1997 indexation in the PPF and FAS, and extend this provision to members covered by the Northern Ireland legislation.
Clause 108 amends the relevant provisions in the Pensions Act 2004 and the Pensions Act 2008. It introduces increases on compensation payments from the PPF that relate to pensions built up before 6 April 1997. These will be CPI-linked and capped at 2.5%, and will apply prospectively to payments for members whose former schemes provided for these increases. Clause 109 makes equivalent amendments to the relevant Northern Ireland provisions, in the same way that Clause 108 does to GB legislation. This will ensure that PPF members covered by Northern Ireland legislation are treated in the same way as their counterparts in Great Britain. Clause 110 amends the relevant FAS regulations to introduce increases on compensation payments from the FAS that relate to pensions built up before 6 April 1997. As with the other clauses, these increases will be CPI-linked, capped at 2.5% and applied prospectively for members whose former schemes provided for these increases. We expect that first payments will be made to members whose former scheme provided for increases from January 2027.
Some affected members only had annual pre-1997 increases within their scheme due to the guaranteed minimum pension, or GMP, part of their pension. There is a statutory requirement for pension schemes annually to uplift any GMPs earned between April 1988 and April 1997. As such, PPF and FAS members who had only a post-1998 GMP will also receive increases on a proportion of their pre-1997 compensation payment. That is because the PPF is not legally required to separately identify GMPs when a scheme transfers to the PPF or qualifies for FAS.
We will therefore calculate a standardised percentage amount for PPF members to ensure that those who had this legal requirement for increases do not miss out. That will be done via regulations, and careful consideration will be given to this standardised approach. The Secretary of State will make the equivalent determination for FAS. Clauses 108 and 109 also give the PPF board the same discretion to adjust the percentage rate of pre-1997 indexation as it currently has for post-1997 increases.
These reforms bring a step change that will make a meaningful difference to affected PPF and FAS members. Incomes will be boosted by an average of around £400 for PPF members and around £300 for FAS members per year after the first five years. The pension compensation system will now offer a stronger safety net for members who, up until now, had lost out on pre-1997 inflation protection following their employer’s insolvency or scheme failure.
We have tabled eight minor and technical government amendments that amend the relevant provisions in the PPF legislation, including the Northern Ireland legislation and the relevant FAS regulations. These are to ensure that the pre-1997 increases in the PPF and FAS are implemented as intended and that affected members are able to receive the appropriate increases.
These amendments apply where an eligible scheme operated with more than one benefit structure. For example, a scheme may have paid increases on pensions built up before 6 April 1997 for one group of members but for another group the scheme may have paid increases only on GMPs built up on or after 6 April 1988. As the provisions were originally drafted, the latter group would not have had an entitlement to pre-1997 increases from the PPF or FAS. We want that group of members to receive indexation on a proportion of their pre-1997 compensation, and these amendments remedy the position.
I will comment on the other amendments in the group when I respond at the end of the debate. I beg to move.
Lord Davies of Brixton (Lab)
I will speak to my Amendment 203ZB. I thank my noble friend for the decision in the Budget to grant future increases. That is very much to be welcomed. As for the technical difficulties, I would love an opportunity to start discussing GMPs and even better if we got on to the anti-franking rules, but that is not the issue that I wish to raise today. As I have not moved the lead amendment, I have only 10 minutes.
In working out what I had to say, I realised that there are three groups dealing with pre-1997 increases: this group, group 2, the next group, group 3, where the noble Baroness, Lady Altmann, will move her amendment, and group 5, where at last I get 15 minutes as the mover of the amendment. There are issues that run through all three groups. That is not to downplay the importance of group 4 and the AWE proposals. There are intertwined issues here. There is the reduction in real terms of members’ benefits since they came into payment and the introduction of future increases. There is also the issue that is the subject of my amendment in group 2 and of the amendments in group 3, which is the losses that have been incurred by pre-1997 pensioners.
I am glad that the Minister said that those pensioners have lost out. I am glad that we have that common ground: they have lost out. Then there is the issue of pre-1997 benefits for schemes that are still active. Whether or not they are open to new members, they have pensioners and their legal entitlements to pre-1997 benefits differ from those post-1997. There are common themes there and I suspect that my remarks on all three groups could be put together and make a more coherent whole. In particular, there is a big issue about inflation protection for pre-1997. It is all about pre-1997. What was the feeling about inflation protection back in those days when it was under discussion? Even though it applies to this group, I am going to save that for group 3, when I shall move my Amendment 203.
I am not going to address in this group, although this is probably the most important point of all, the impact that this has had on the individuals concerned. I have had a substantial postbag, most of it by email, pointing out the problems that they have faced. I am not going to focus on that now because I have a limited amount of time, but to me it is the crucial point.
I shall start with the PPF and then come to the FAS in a moment. The principle has been established that PPF pensioners deserve increases in their pensions in respect of pre-1997 service. The Government agree with that principle but they are only going to implement it for the future. The same principle should apply to the past as to the future. Why should they be entitled to increases in the future if they are not entitled to exactly similar increases for the past? I am not talking about retrospection. This amendment has nothing to do with retrospection; it just says that these pensioners deserve pensions now in real terms that are the same in monetary value as they were when they came into payment.
The only reason why one would make a distinction between the increases in the future and making good the increases that have been lost in the past is the cost. I cannot think of any other plausible reason. There is no difference between them in terms of justice; it is simply about the cost. However, we know, because the PPF has given us the figures, that that does not apply here. The money is in the PPF that can afford these increases. It has a significant and growing excess of assets over liabilities and, because of that, the levy is being suspended. The employer providing these schemes is gaining the benefit—in effect, a sort of refund of the surplus that has been built up. Well, fair enough, they have paid for it, but so have the members and they are entitled to the increase. Whatever they had when their pensions came into payment should be increased from January 2027 to allow for what they would have got in respect of post-1997 benefits. That is clear and I hope that the Government will accept the point.
Then we come on to the FAS. The big difference between the PPF and the FAS is that the FAS is funded out of general taxation. However, let us be clear why the FAS is there: it is because Governments of both parties failed to provide the protection that they were required to give under European law, in the face of the fantastic campaign that was run on behalf of the pensioners of schemes that became insolvent—and employers that became insolvent—prior to the implementation of the PPF. That is the only reason why they are in the FAS. It was the Government’s failure; it was not their failure. Why should they lose out? Governments failed to provide them with protection. They only introduced the PPF from 2005, but the people who lost their pensions prior to that date are just as entitled. The Government gave in because of the fantastic campaign, as I say, but also because of the threat of further legal action at the European court that they knew they would lose. To make a distinction between FAS members and PPF is totally unfair and unreasonable.
There will be a cost and, because it is the FAS, it will fall on the taxpayers, but one principle is clear: where the Government have a debt to make good something that they have got wrong, they cannot excuse themselves from that debt by saying, “Sorry, we don’t quite have the money”. They should pay up. It is quite clear that the same treatment should be afforded to the FAS members as to the PPF members.
Baroness Sherlock (Lab)
My Lords, I am grateful to my noble friend for introducing his amendment and I look forward to the subsequent instalments of his reflections on these important areas. The Government’s reforms are a significant step forward in making the compensation system and its safety net better for members, but I recognise that it does not go as far as some affected members, or indeed some noble Lords, would want.
We recognise the impact that the issue of pre-1997 indexation has had on affected PPF and FAS members. My colleague, the Pensions Minister, has met with many representatives and has heard at first hand the impact on them. I have also had representations coming into my inbox and I understand the position of those who have contacted me. I recognise the intention behind Amendment 203ZB from my noble friend Lord Davies.
This amendment would increase the pension on which indexation is calculated in respect of PPF and FAS members’ compensation. The PPF has fully assessed the impact of retrospection and arrears. I say in response to the noble Baroness, Lady Altmann, that the cost of providing prospective and fully retrospective indexation and arrears—in line with CPI capped at 2.5% for members whose original schemes provided for these increases—is significant, totalling around £5.6 billion: £3.9 billion for the PPF and between £1 billion and £1.7 billion for FAS. If I have understood my noble friend’s amendment correctly, it would have the effect of increasing the baseline compensation paid to all PPF and FAS members, irrespective of whether their original scheme provided for 1997 increases. This would further increase the costs to the PPF and FAS.
The reforms put forward by the Government offer targeted support and introduce changes to indexation to compensation payments prospectively. The Government’s proposal to introduce pre-1997 indexation in the PPF will reduce the PPF reserve by £1.2 billion and cost around £0.3 billion to £0.6 billion for FAS, totalling £1.8 billion over the lifetime of both schemes. This is a significant shift, reflecting the value of the increases to members’ compensation payments.
The PPF reserve protects current and future members, as well as underwriting future claims across the almost £1 trillion DB system. Prudent management of the reserve is needed to ensure that the security it provides for its members, and the DB pension universe, is not compromised. In introducing this change, the Government had to strike a balance of interests for all parties—including eligible members, levy payers, taxpayers and the PPF’s ability to manage future risk—against the backdrop of a tight fiscal envelope. We believe that our reform achieves the right balance. Any further reduction of the reserve increases the risk to members and the PPF’s ability to manage future risk.
While the PPF has confirmed that the Government’s proposal does not affect its plan to switch off the levy, going beyond our proposal increases the possibility of the PPF needing to return to levy payers in the future. As it stands, this is a win for members and for those businesses. Any changes to compensation levels in the PPF and the taxpayer-funded FAS have significant implications for the public finances. Increases to PPF liabilities affect the Chancellor’s fiscal rules, because the present value of these liabilities change annually, which is counted as a cost in the public finances. Any increases to payments from FAS come at a direct cost to the taxpayer. This is why we are concerned about the risks of going further, as well as the risks to the PPF that I have described.
The bottom line is that the PPF and FAS are compensation schemes: they were never designed to fully replace members’ pensions. Members are in a better financial situation than they would have been before these compensation schemes were established. Our changes to the pension compensation system will offer a stronger safety net for members who, until now, had lost out on pre-1997 compensation increases following their employer’s insolvency or scheme failure.
The noble Viscount, Lord Younger, asked me about the solidity of the amendments and whether they would be enough to avoid legal challenge. If a legal challenge were to be brought forward, the Government consider they can successfully defend any such challenge. I hope that reassures him.
We understand that members will want to have a conversation quickly, and the PPF has rightly said that it would like to do it as soon as is practicable, but we have concluded that the earliest opportunity to provide pre-1997 increases to PPF and FAS members is January 2027, because implementation will require the PPF to identify eligible members in order to implement the changes. That is the first possible opportunity to uplift members’ payments pending the appropriate parliamentary processes. We will do it when and as soon as it can be done, but we have to be sensible about that.
I was asked how many members would benefit. I said that more than 250,000 PPF and FAS members are set to benefit from this change. Up to 90,000 may not benefit, although we know that includes a number of people who will benefit where they had post-1988 GMPs, and we are working with the PPF to identify the number of members who had post-1988 GMPs. Some 85,000 PPF and FAS members do not have any pre-1997 service, so they do not fall within the scope of this change.
I think the noble Lord, Lord Wigley, is going to ask about Allied Steel and Wire. The Minister for Pensions has met Financial Assistance Scheme members, including former Allied Steel and Wire workers whose scheme qualified for FAS, and he has heard first hand of the experience of those members. I am happy to confirm that former members of Allied Steel and Wire will benefit from the Government’s proposals of prospective legislation. If that is the question the noble Lord was going to ask, I hope that is enough to satisfy him.
Lord Wigley (PC)
I am very grateful and I hope that the benefit will be substantial.
Baroness Sherlock (Lab)
Just for clarity, the benefit will be exactly as I described in the Government’s amendments—which obviously is incredibly generous but, just to be clear, that is the benefit under question. In the light of this, I am grateful to my noble friend and all noble Lords, and I hope the noble Lord will not press his amendment.
Viscount Younger of Leckie (Con)
As ever, that is a very helpful clarification, but I will leave it up to the Minister to answer that. I stick with my view that we are not persuaded by these amendments. Perhaps there is more debate to be had. I have said all that I need to say; I am afraid that I am unable to support these amendments.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Baroness for introducing her amendment and all noble Lords who have spoken. I am afraid the noble Viscount has given a spoiler regarding my response, because I articulated many of the arguments on this in the previous group in response to my noble friend Lord Davies.
The Government recognise that pre-1997 indexation is an important issue for affected PPF and FAS members. That is why we listened and took the action that we did. The changes proposed by Amendments 186A, 187A, 188A and 189A would, essentially, award payments of arrears for PPF and FAS members who have missed out on pre-1997 increases up to now. As the noble Baroness described, that would mean a one-off lump-sum payment to be made from the PPF reserve. Amendment 203ZA would require the Secretary of State to determine how those additional payments would be funded in FAS.
I acknowledge the impact on members. This has been a long-running issue and, for reasons that noble Lords have clearly articulated, members will want to see their increases quickly now that we have made a decision to act. As I said, we expect that the first payments will be made to eligible PPF and FAS members in January 2027, which is the earliest possible opportunity to do so, and we are working closely with the PPF on implementing that. I recognise that prospective increases do not restore the erosion of the real-terms value of members’ retirement incomes. However, the Government’s reforms will make a meaningful difference to affected members while balancing the impact on levy payers who support the PPF, taxpayers who pay for FAS and affordability for the Government.
In response to the question from the noble Baroness, Lady Altmann, any payment that comes out of the PPF reserve will reduce the size of that reserve and therefore, in our judgment, must make it more likely that there may be a need for a levy to be reintroduced at some point. I shall come back to the arguments in a moment, as I said to my noble friend, but I have noted the importance of responsible management of the PPF reserve following the introduction of our reforms. The noble Baroness’s proposal—creative though it is, and I acknowledge that—would clearly also reduce the reserve. Although the reserve is forecast to grow, without a really substantive PPF levy the PPF will depend on its reserves and its investment returns to manage the risks from existing liabilities and future claims across the £1 trillion DB system.
Historically, the PPF has supported nearly £10 billion in claims, funded in part by the amount collected through levies. Without future levies, the reserve has to cover upcoming claims. The reserve offers protection against future risks, such as new claims and longevity risks, and, as I have said, avoids the need for a significant levy reintroduction. I also noted the significant public finance implications of changes in my earlier remarks.
The Government have not made an assessment of the noble Baroness’s proposal because we considered carefully what we thought it was appropriate to do. We worked with the PPF and fully considered the broader context of introducing pre-1997 indexation in both the PPF and FAS. In the end, it is the responsibility of the Government to strike an affordable balance of interest between all parties. We believe our reform achieves that. This measure is a fundamental shift in the level of protection afforded by the PPF and FAS to their members, but we think that is right and the appropriate balance. In the light of that, I hope the noble Baroness will feel able to withdraw her amendment.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the transferor’s PPF compensation is payable.” Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 17 of Schedule 5 to the Pensions Act 2008 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the pension compensation is payable.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the compensation is payable.”Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 28 of Schedule 6 to the Pensions (Northern Ireland) Order 2005 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the pension compensation is payable.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the transferor’s PPF compensation is payable.”Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 17 of Schedule 4 to the Pensions (No.2) Act (Northern Ireland) 2008 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the pension compensation is payable.
Baroness Sherlock
“, or
(iii) included such a requirement but that requirement did not apply in relation to pre-1997 service in respect of which the annual payment is payable.” Member’s explanatory statement
This amendment makes clear that sub-paragraph (2B) of paragraph 9 of Schedule 2 to the Financial Assistance Scheme Regulations 2005 (inserted by this clause) applies also to a case where a pension scheme required pre-1997 indexation but that requirement did not apply in relation to pre-1997 service in respect of which the financial assistance is payable.
Baroness Sherlock
“Chapter 2AAWE Pension SchemeNew public pension schemes
Establishment of new public schemes and transfer of rights(1) The Secretary of State may by regulations establish one or more schemes (“new public schemes”) which provide for pensions or other benefits to be payable to or in respect of persons who are or have been members of the AWE Pension Scheme (“qualifying persons”).(2) The Secretary of State may by regulations make provision for the transfer of qualifying accrued rights to a new public scheme (without the need for any approval or consent of the trustee company or AWE PLC, or any other person, to the transfer). (3) Regulations under subsection (2) may include provision for the discharge of liabilities in respect of qualifying accrued rights that are transferred.(4) In this Chapter—“qualifying accrued rights ” means—(a) any right to future benefits under the AWE Pension Scheme which, at the qualifying time, has accrued to or in respect of a qualifying person,(b) any entitlement under the AWE Pension Scheme to the present payment of a pension or other benefit which a qualifying person has at the qualifying time, or(c) any entitlement to benefits, or right to future benefits, under the AWE Pension Scheme which a survivor of a qualifying person has at the qualifying time in respect of the qualifying person;“the qualifying time ” means the time immediately before the date specified or described in regulations.(5) For the purposes of the definition of “qualifying accrued rights”—(a) references to pensions or other benefits (including future benefits) includes money purchase benefits, and(b) references to a right include a pension credit right.(6) Regulations under subsection (4) specifying or describing a date for the purposes of the definition of “the qualifying time” may make provision for the purposes of transfers of qualifying accrued rights generally, transfers of a particular description or a particular transfer.”Member’s explanatory statement
This new clause provides for the pension scheme of AWE PLC (a wholly owned government company) to be transferred to a new public sector pension scheme, while preserving existing rights of scheme members. It will be the first clause of a new Chapter in Part 4 of the Bill.
Baroness Sherlock (Lab)
My Lords, in moving government Amendment 194, I shall speak also to government Amendments 195 to 202; I would welcome the Committee’s support for them.
The AWE pension scheme is a trust-based defined benefit pension scheme for current and former employees of AWE plc, the Atomic Weapons Establishment. Since 2021, AWE plc has been wholly owned by the Ministry of Defence, and this pension scheme is backed by a Crown guarantee. These proposed new clauses will allow the Government to defund the existing scheme, establishing a new central government pension scheme for its members. The assets held by the scheme will be sold, with the proceeds transferred to the Treasury. The Chancellor announced this measure in her 2025 Budget, but the principle was announced in a Commons Written Ministerial Statement on 6 July 2022.
The new scheme will be an unfunded public pension scheme. This is in accordance with wider government policy that when a financial risk sits wholly with the Government, as it does here because of the Crown guarantee, it should not hold assets to cover that liability. The taxpayer is already exposed to the risks and the liability can be managed more efficiently in the round, along with other unfunded liabilities met out of general taxation. This measure will help to ensure that liabilities are funded in the most efficient way while ensuring the long-term security of members’ benefits. I assure the Committee that these clauses protect the rights that members of the AWE pension scheme have accrued under the current scheme. Neither the terms nor the benefits will be affected. The new public scheme must make provision that is, in all material respects, at least as good as that under the AWE pension scheme.
The new clauses in Amendments 194 and 195 provide that the new scheme should be established by regulations and set out the kind of provision that may be made by these regulations and any amending regulations. Although these are fairly standard for public schemes, I assure the Committee that the Government have considered carefully how these may be relevant to this scheme. The new clause in Amendment 197 ensures that the scheme rules cannot be amended unless prescribed procedures have been followed. In most cases, the requirement is to consult. However, if the proposed amendment might adversely affect members’ rights, the regulations must prescribe additional procedures to protect the interests of members, including obtaining the consent of interested persons or their representatives.
The new clause in Amendment 198 will enable the Government to direct the disposal of the assets currently held by the pension scheme for the benefit of the Exchequer. As we expect that the bulk of the assets will be sold before the new scheme is established, regulations under this clause will ensure that the trustees’ liabilities will be met by public funds, thus ensuring that pensions in payment will not be affected. Regulations under this clause will also be able to exempt the trustee or AWE plc from any liability that might otherwise arise because they have complied with the Government’s direction. This will include the power to disapply or modify specified statutory provisions. These powers can be used only in relation to regulations made under this clause and are intended to protect the trustee. For example, we expect that we will need to disapply the scheme funding regime in relation to the scheme once the sale of the assets begins.
The new clause in Amendment 199 ensures that the transfer of the AWE pension scheme to a new public scheme will be tax neutral, meaning that no additional or unexpected tax liabilities will arise for those affected by the changes. The new clause in Amendment 200 will give the Government the power to make regulations requiring individuals or organisations to provide the information needed to establish the new public scheme, administer the scheme and transfer accrued rights. It should be noted that the Government do not expect to use these powers, as we are working with the AWE pension trustees and others to ensure a smooth transition for the benefit of all members. This provision will be required only in case of non-compliance.
New Clause 201 ensures proper consultation and parliamentary scrutiny for regulations made under this part of the Bill, particularly those affecting the establishment and operation of the new public pension scheme and the transfer of assets. The Government are required to consult the trustee of the AWE pension scheme before making regulations to establish the new public scheme, transfer accrued rights or transfer assets and liabilities. This ensures that the interests of scheme members will be fully considered. Regulations that could adversely affect existing rights, have retrospective effect or set financial penalties are subject to the affirmative procedure. This ensures that significant changes are subject to parliamentary approval and scrutiny. All other regulations under this part of the Bill are subject to the negative procedure, which provides flexibility while maintaining accountability. I hope that this explains the plans for the AWE pension scheme. I commend these amendments to the Committee and I beg to move.
Baroness Neville-Rolfe (Con)
My Lords, I shall speak to government Amendments 194 to 202. The Government’s letter states that the liabilities of the AWE pension scheme will no longer be pre-funded, that the assets of the scheme will be sold and that scheme members will be protected in line with the approach taken to other pensions guaranteed by the Government. The proposed amendments to the Bill are said to provide the legislative framework to achieve this outcome. They would enable the creation of a new public pension scheme into which the accrued rights of AWE scheme members would be transferred. For the avoidance of doubt, Amendment 198 does not establish a conventional funded public sector pension scheme. Instead, it appears to create a hybrid transition mechanism which ultimately results in an unfunded public liability.
In a genuinely funded scheme, assets and liabilities move together into a continuing pension fund. The provisions break the link between members’ accrued rights and any dedicated asset backing. By contrast, a private sector defined benefit pension scheme is funded and backed by invested assets. It is governed by a statement of investment principles, which sets risk tolerance, balances growth and security, aligns investments with member liabilities and is overseen by trustees acting under a fiduciary duty to scheme members. Once members’ rights are transferred into the new public scheme, there is no guaranteed asset pool, there is no meaningful statement of investment principles and benefits are met from future public expenditure rather than from scheme assets, as the Minister explained.
The effect of this is a material change in the nature of members’ interests. Rights that were previously supported by a funded scheme, overseen by fiduciary trustees and governed by a statement of investment principles would instead rest on a statutory public sector framework. In that framework, the investment strategy and long-term funding are determined through central government processes and are therefore exposed to future fiscal and policy decisions. Although the Government’s interest in AWE plc is public in ownership terms, these provisions do not operate at a general or class level. They apply to a single named employer and to a closed and identifiable group of scheme members for whom a bespoke statutory framework is being created. This is the problem.
It is for these reasons that there remains a credible argument that the amendments are prima facie hybridising. I know about this because on Thursday 8 January I tabled my public sector amendment to the Bill, which is now Amendment 217. I was required to amend it before tabling because it named more than one specific pension scheme, as Amendments 194, 195, 196, 198, 199, 200 and 202 do. Interestingly and I think unusually, Amendment 199 also deals with taxation, which is something I confess I have not seen before, but there may be a precedent. My amendment did not move members’ interests at all. It simply required a review of the affordability, sustainability and accounting treatment of public sector schemes. That stands in contrast to the far more substantive and immediate changes affected by Amendments 198 to 202. My original amendment was rejected on grounds of hybridity and I had to take out the specific scheme references. Somehow—and it feels rather suspicious—the Government’s hybrid amendment was accepted by the Public Bill Office.
I urge the Committee to reflect carefully on the nature and consequences of what is proposed and the precedent that it may set for hybridity. I invite the Minister to consider this and to consider perhaps introducing amendments to Amendments 195 to 202 or withdrawing the amendments until the implications are considered by an appropriate constitutional expert. Obviously, I look forward to hearing the Minister’s explanation of why we are facing this situation at this point in time. My issue is with the hybridity rather than with the details of the AWE pension scheme, which is not a matter on which I am in any way expert.
Baroness Sherlock (Lab)
My Lords, I will start by discussing Amendment 203ZC and then come to the other amendments.
Amendment 203ZC would add new provisions to the Pensions Act, which would mean that, if an alternative sponsor provided a sufficient premium, a cash payment or alternative arrangement could be provided for members of that scheme that secured better benefits than the PPF level of compensation. The amendment seeks in particular to help members of the AEA Technology pension scheme. As we have heard, AEAT was formed in 1989 as the commercial arm of the UK Atomic Energy Authority—UKAEA—and was subsequently privatised in 1996. Employees who were transferred to AEAT joined the company’s new pension scheme, and most of them opted to transfer their accrued UKAEA pension into a closed section of the AEAT pension scheme. In 2012, 16 years later, AEAT went into administration, and the AEAT pension scheme subsequently entered the PPF.
I express my sympathy for all AEAT pension scheme members; I recognise their position. I am pleased to say that on pre-1997 indexation in PPF, which is an issue for AEAT members, we have listened and acted. Those with pre-1997 accruals and whose schemes provided for pre-1997 increases, which includes AEAT members, will benefit from this change.
However, the Government do not support this amendment. The noble Baroness outlined some of the issues around AEAT, but this case has been fully considered. We set this out in our response to the Work and Pensions Select Committee inquiry on DB pensions. These investigations included, but are not limited to, reviews by three relevant ombudsmen, debates in the Commons in 2015 and 2016 and a report by the NAO in 2023. This matter has also been considered by previous Governments in the period since AEAT went into the PPF, all of whom reached the same conclusion.
AEAT members have asserted that upon privatisation, insufficient funds were transferred into the scheme. As I understand it from historic responses, this amount was based on the financial assumptions at the time, and the trustees of the scheme agreed the transfer value. Members have also outlined that, given the amount transferred to the PPF, with investment, they could now be paid their full pension. However, the PPF does not work that way; let me explain why.
When schemes enter PPF assessment, evaluation is generally undertaken to determine whether there are enough assets to secure at least PPF-level benefits. Sufficiently well-funded schemes can come out of the assessment supported by PPF-appointed trustees to secure greater benefits than PPF compensation. Schemes that are funded below this level are transferred into the PPF. The PPF does not permit transfers out because it does not work as a segregated fund where individual scheme contributions are ring-fenced and can later be transferred out. That is due to PPF investment policies because the only grounds on which that might happen would be, for example, if PPF investment policies were such that they then became better funded.
The reason that does not work is that the PPF is a compensation scheme operating in the interests of all its members. It is not a collection of individual pension schemes. Funds transferred in from underfunded schemes and insolvency recoveries, alongside the levy and investment returns, are all brought together. Allowing members of schemes that have entered the PPF to transfer back out would undermine its ability to provide compensation for all its members and for future schemes in the case of employer insolvency.
This amendment changes the purpose of the PPF as a compensation fund and that safety net in case of employer insolvency. Schemes go into the PPF either because an alternative sponsor cannot be found to take on the scheme’s liabilities or because the scheme is unable to secure benefits that correspond to at least PPF compensation levels. We do not expect alternative sponsors will be found to pay a premium for schemes that have transferred into the PPF. Additionally, it would place a different role on the board of the PPF to undertake a member-by-member assessment of whether members would get better benefits through a transfer. We do not underestimate the difficulty of this, given the decades since many schemes, such as the AEAT, entered the PPF. Changing the PPF’s role and how it operates as set out would need to be much more broadly considered, alongside impacts on the PPF and potentially unintended consequences.
Baroness Altmann (Non-Afl)
Section 169(2)(d) in the Pensions Act 2004 seems to make provision for this to happen. Therefore, what is the purpose of that clause? I am trying to build on that to specify circumstances in which it could happen. Of course, when a scheme is in the assessment period, it can be extracted. I am trying to say that if it has gone in and can improve the funding of the PPF by paying a premium and give members more than they would have in the PPF, why would there be an objection?
Baroness Sherlock (Lab)
The challenge of this is that of course schemes can come out in the assessment period. That is the point of the assessment period: to work out whether there is a sponsor or enough funds, which could, with appropriate support, be able to deliver greater-than-PPF benefits, in which case the scheme may go out again. It goes into the PPF only if that cannot be the case. Once it has gone in, the scheme does not exist anymore. There are no scheme assets because, at that point, the members are not scheme members but members of a compensation scheme. It cannot be the case that, years later, someone should come along and say, “We now want to try to move a group of former members of a particular scheme back out of the PPF”. That simply does not work.
The noble Baroness asked something else. I apologise for being slightly confused earlier on: I thought this was going to be part of the previous group, so I am slightly scrabbling around trying to put my speaking notes in the right place. The noble Baroness is trying to draw a comparison between AWE and this. Although they were both DB pension schemes in the nuclear industry, the two situations are entirely different. AEAT was created in 1989 as the commercial arm of the UKAEA. It became a private company, with no further government involvement in ownership or management.
By contrast, AWE, which is responsible for manufacturing, maintaining and developing the UK’s nuclear warheads, has since the 1950s either been government owned or the Government have held a special share in the company. It became fully owned by HMG again in 2021, when it became an NDPB. As the Government own and fund AWE, they are also responsible for funding its pension scheme responsibilities. That is why the AWE has a Crown guarantee, granted in 2022, shortly after it became a public body of the MoD, having previously been government owned. I hope that explains why the two are differently treated.
Baroness Altmann (Non-Afl)
I respectfully ask the Minister to consider the possibility, which is arising, of someone who can come along after the assessment period and pay more than the PPF can provide. As I say, that could help the PPF’s funding. It should not in any way impact on the levy, and it is an option to permit that to happen. So my amendment, building on what is already in the Pensions Act 2004 but which has not yet been used, given that schemes are in surplus, would allow them to do that.
The other thing I will say is that everyone in the closed section of the AEAT with accruals before 1997 was in the public sector. They were members of a public sector scheme, and they were advised by the Government Actuary’s Department that if they transferred they would not need to worry about the security of their pension, but that turned out not to be the case. I therefore hope the Minister can see the parallels. I know she is in a difficult position on this, but I thank her for her consideration.
Baroness Sherlock (Lab)
I am not in a difficult position. The Government’s position is clear: these are not comparable schemes. One has a Crown guarantee, for the reasons that I have explained, while the other does not because, for a significant portion of its history, it was a private company. It was privatised, and it subsequently went into administration. Those are not comparable situations. While I have sympathy for the position of individual scheme members, that does not make the two comparable or the Government’s responsibility comparable. I am certainly not aware that someone is out there waiting to sponsor this, although the noble Baroness may be. She is nodding to me, and if she wants to share with the Committee that she has a sponsor ready to do that, I would be glad to hear it, but the idea that this would routinely be a pattern where, for lots of long-dead pension schemes, sponsors are waiting to draw them out just would not be practical for the PPF.
I am also advised that the subsection 2(d) that the noble Baroness mentioned is not in force. That does not make a difference to her argument, but it may make a difference to the nature of this.
I shall try to return now to the issue that we were talking about earlier on, the AWE scheme. On hybridity, I say to the noble Baroness, Lady Neville-Rolfe, that my understanding is that hybrid bills affect the general public but also have a significant impact on the private interests of specified groups. In this case, there is no impact on the general public, only on AWE members. That follows the precedent in Royal Mail and Bradford and Bingley/Northern Rock legislation. This also refers to schemes that were or are to be defunded and replaced with public schemes. I hope that explains why this is not hybrid. I cannot comment on why the clerks did not accept her amendment because I did not quite catch what it was that she was comparing it with.
Baroness Neville-Rolfe (Con)
My Lords, it may be that those are precedents that have been passed in legislation, but I am not clear that they have been put into this sort of Bill. The problem with the amendments is that they are a mixture of the general and the individual. That is what creates hybridity, which is why I ran into trouble with the Table Office when I tried to table my amendment. However, the Minister’s amendment seems not to have run into that issue, so that is something that we need to consider. Perhaps the Minister could have a look at it and bring the amendments back on Report, assuming that she is right and there is not a hybridity issue. I am very concerned about a constitutional innovation without expert guidance. She wrote a letter; I did not get it, but obviously I have been taking advice on this. It is slightly outside the remit of what we are able to agree on.
Baroness Sherlock (Lab)
The noble Baroness makes a very fair point. In the light of her comments, I do not know enough about what she tried to do and why it did not work. I would like to be able to compare them. Given that she makes a perfectly sensible suggestion, I happy to withdraw the amendment and make sure that I can answer her question before we come back on Report, if that is okay with noble Lords. For now, I beg leave to withdraw my amendment.
Baroness Altmann (Non-Afl)
May I just correct the record? I believe that the Goode committee may indeed have recommended limited price inflation up to 5%, and I apologise to the Committee.
Baroness Sherlock (Lab)
I thank my noble friend Lord Davies for introducing his amendment and for the history lesson. It is living history, but he always has the edge on me because he goes back to 1975, and at that point I was more interested in boys and make-up, so I simply cannot compete, I confess, on that front.
The reality is that this Government have to start in 2026 and where we are now, so we have to address what the right thing to do now is for the DB pension universe and for the schemes in general. I can totally understand why my noble friend has introduced this amendment. Members of some schemes are concerned about the impact of inflation on their retirement incomes, and I am sympathetic. We have been around this in previous groups. This amendment would remove references to 6 April 1997 as the start date for the legal requirement on schemes to pay annual increases on pensions in payment. Obviously, as my noble friend indicated, legislation requires increases on DB pensions in payment to be done only from 6 April 1997. That has been a pretty long-standing framework which reflects the balance that Parliament judged appropriate at the time between member protection and affordability for schemes and employers. These changes are normally not backdated; they are normally brought in prospectively.
Most schemes already provide indexation on pre-1997 pensions, either because it is required under the scheme rules or because they choose to award discretionary increases. The Pensions Regulator has done some analysis and is doing more work on this. The latest analysis indicates that practices differ, but many schemes have a track record of awarding such increases. However, imposing a legal requirement on schemes now to pay indexation on pre-1997 benefits would create costs that schemes and employers may simply not have planned for. These costs may well not have been factored into the original funding assumptions or contribution rates. For some schemes and employers, these additional unplanned costs could be unaffordable and could put the scheme’s long-term security at risk.
Many employers are working towards buyout to secure members’ benefits permanently. Decisions on discretionary increases must be considered carefully between trustees and employers against their endgame objective. The reality is that the rules for DB pension schemes inevitably involve striking a balance between the level and security of members’ benefits and affordability for employers. But minimum requirements have to be appropriate for all DB schemes and their sponsoring employers. A strong, solvent employer is essential for a scheme’s long-term financial stability, and that gives members the best protection that they will receive their promised benefits for life, as the employer is ultimately responsible for funding the scheme. Any change to that statutory minimum indexation has to work across the full range of DB schemes. This amendment would increase liabilities for all schemes, regardless of their funding position or governance arrangements. While some schemes and employers may be able to afford increasing benefits in this way, others will not.
The way DB schemes are managed and funded since the 1995 Act was introduced has changed, but the basic principle remains that we cannot increase scheme costs on previously accrued rights beyond what some schemes might be able to bear or that many employers will be willing to fund, and that remains as true now as it was then. Our view is that schemes’ trustees and the sponsoring employer have a far better understanding than the Government of their scheme’s financial position, their funding requirements, their long-term plans and therefore what they can and cannot afford. They are also best placed to consider the effect of inflation on their members benefits when making decisions about indexation. The regulator has already been clear that trustees should consider the scheme’s history of awarding discretionary increases when making decisions about indexation payments.
We discussed earlier in Committee the Government’s reforms on surplus extraction. They will allow more trustees of well-funded DB schemes to share surplus with employers to deliver better outcomes for members. As part of any agreement to release surplus funds to the employer, trustees will be better placed to negotiate additional benefits for members, which could include discretionary indexation. Although I understand the case my noble friend is making—I regret that I cannot make him and the noble Baroness, Lady Altmann, as happy as they wish—I hope that, for all the reasons I have outlined, he feels able to withdraw his amendment.
Lord Davies of Brixton (Lab)
I thank those who have taken part in this debate on an important issue. Many people out there—I have had messages from people who are watching this debate—hope for better news. I am sorry that at this stage the Government are maintaining the line.
On the question of history, I could go back to the 1960s and Richard Crossman’s national superannuation if people would like—I am even slightly tempted to start. But the bit of history I remember is in the 1980s, when many schemes had surpluses and the Government introduced, through the Inland Revenue, limits on surpluses, compelling schemes to deal with them. At that time, employers said to us—I was involved in many negotiations—“Okay, it’s fine, we’ll take the surpluses now, but depend on us. When things get tough, we’ll come up with the additional money required”. What happened is they gave up and walked away. That is why the Labour Government in the early part of this century introduced funding requirements, the Pension Protection Fund and so on because, ultimately, when employers and trustees were put to the test, all too often they failed to deliver the promises that they made when surpluses were available.
The noble Viscount, Lord Younger, rightly tied this to the issue of surpluses and certainly there will be an opportunity on Report to discuss the linkage between employers getting refunds from their schemes and providing better increases for members. That is such an obvious linkage. I would want to go beyond that, but the issue will continue. For the moment, I beg leave to withdraw my amendment.
Baroness Stedman-Scott (Con)
My Lords, the amendments in this group in the name of the noble Baroness, Lady Bowles, are thoughtful and proportionate. They raise genuinely important questions about how we can future-proof the operation of the Pension Protection Fund.
Clause 113 amends the provisions requiring the PPF board to collect a levy that enables the board to decide whether a levy should be collected at all. It removes the restriction that prevents the board reducing the levy to zero or a low amount and then raising it again within a reasonable timeframe. We welcome this change. It was discussed when the statutory instrument passed through the House, at which point we asked a number of questions and engaged constructively with the Government.
The amendments tabled by the noble Baroness would go further; once again, the arguments she advances are compelling. Amendment 203A in particular seems to offer a sensible way to shape behaviour without micromanaging it—a lesson on which the Government may wish to reflect more broadly, especially in relation to the mandation policy. If schemes know that the levy will always be raised in one rigid way, behaviour adapts, and not always in a good way. In contrast, with greater flexibility, employers retain incentives to keep schemes well funded, trustees are rewarded for reducing risk and the levy system does not quietly encourage reckless behaviour on the assumption that everyone pays anyway.
This amendment matters because it would ensure that, if the PPF needed to raise additional funds, it could do so in the least damaging and fairest way possible at the relevant time. I fully appreciate that the PPF is a complex area but, as the market has changed and is changing, and as the pensions landscape continues to evolve, the PPF must be involved in that journey. These are precisely the kinds of questions that should be examined now, not after rigidity has caused unintended harm.
I turn briefly to Amendment 203C. We are open to finding ways to prevent the levy framework becoming overly rigid, which is precisely why we supported the statutory instrument when it came before the House. Instead of hardwiring an 80% risk-based levy requirement into law, this amendment would place trust in the Pension Protection Fund to raise money in the fairest and least destabilising way, given the conditions of the year. Flexibility may well be the way forward. I have a simple question for the Minister: have the Government considered these proposals? If the answer is yes, why have they chosen not to proceed? If it is no, will they commit to considering these proposals between now and Report? I believe that that would be a constructive and proportionate next step.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Baroness, Lady Bowles, for introducing her amendments and explaining why she wants to advance them. As she said, taken together, they would give the PPF much more flexibility—full flexibility, in fact—in deciding how to set the levy by removing the requirement for at least 80% of the PPF levy to be risk-based. Obviously, in the current legislation, 80% of the levy has to be based on the risk that schemes pose to the PPF; this supports the underlying principle that the schemes that pose the greatest risk should pay the highest levy.
Although the PPF is responsible for setting the pension protection levy, restrictions in the Pensions Act 2004 prevent it significantly reducing the levy or choosing not to collect a levy when it is not needed. As has been noted, the PPF is in a stronger financial position and is less reliant on the levy to maintain its financial sustainability. That is why, through the Bill, we are giving it greater flexibility to adjust the annual pension protection levy by removing the current legislative restrictions.
Clause 113 will enable the PPF to reduce the levy significantly, even to zero, and raise it again within a reasonable timescale if it becomes necessary. To reassure levy payers, Clause 113 provides a safeguard that prevents the board charging a levy that is more than the sum of the previous year’s levy and 25% of the previous year’s levy ceiling. The legislative framework will also enable the PPF to continue to charge a levy to schemes it considers pose a specific risk. In support of this change, the PPF announced a zero levy for 2025-26 for conventional DB schemes and is consulting on setting a zero levy for these schemes in the next financial year. That would unlock millions of pounds in savings for schemes and boost investment potential, and it has been widely welcomed by stakeholders.
On the way forward, as the PPF is not currently collecting any levies from conventional schemes, whether risk based or scheme based, the make-up of the split is less consequential for schemes: a different percentage of a zero charge is still zero. But, while the PPF is strongly funded, it underwrites the whole £1 trillion DB universe, as I said. There is inevitably huge uncertainty about the scenarios that could lead to the possibility of the PPF needing to charge a levy again in the future, but it cannot be entirely discounted. We recognise the concern that, if that were to happen, the proposed legislation does not go far enough to allow the PPF to calculate the appropriate split between risk-based and scheme-based levies, particularly as the number of risk-based levy payers is expected to diminish over time.
Obviously, the amendments tabled here would give the PPF full discretion on how the split of the levy is calculated and set. While that may be welcomed by some, our view is that we need to consider any changes carefully to ensure that any legislation is balanced, is proportionate and gives the right flexibility while maintaining appropriate safeguards. That will take time. We will continue to consider whether further structural change to the PPF levies may be required in the future and, where it is, whether it works for the broad spectrum of eligible DB schemes, the PPF and levy payers.
In response to the noble Baroness, Lady Stedman-Scott, the Government’s view is that there is a reason the framework is set in legislation: to give levy payers confidence on future calls. But, as I said, we will consider the way forward. I cannot say to the noble Baroness that we will do that between now and Report—it will take time to reflect on future changes and, if there are to be any, to make sure that they happen—but I am grateful to her for raising the matter and for the debate that it has produced. I hope she will feel able to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD)
I thank noble Lords who spoke. I freely admit that they know more than I do about these aspects, so I am glad that the conversation has started. I understand that this might bring something a little less wide in due course. It is a conversation that, having started, I hope will be continued. I will think about whether I can invent something that is a little less adventurous for Report, but in the meanwhile, I beg leave to withdraw my amendment.
Baroness Janke (LD)
I belatedly state my interest: I am a member of the LGPS. I apologise; I should have said that at the beginning of my speech, so I just put it on the record.
Baroness Sherlock (Lab)
My Lords, I thank all noble Lords for introducing their amendments. On top of the usual suspects, it is nice to welcome my noble friend Lord Hendy and particularly my noble friend Lord Pitt-Watson, who was brave enough to come to Committee and speak on these kinds of topics when he has only just made his maiden. We should all be delighted to have him here, and I especially thank him for his kind words about the Committee. It is a joy, and I look forward to having him here for many more pension debates.
Amendment 204 from the noble Baroness, Lady Stedman-Scott, gives me an opportunity briefly to update the Committee on how the Government are unlocking pension fund investment in projects with social and environmental benefits. We have talked quite a bit about the Mansion House Accord in recent Committees—for newcomers, this is the commitment by 17 major workplace pension providers to invest at least 10% of their default DC funds in private markets by 2030, with a minimum of 5% ring-fenced for UK-based assets.
The Government welcome this initiative because it is going to see funds flow into major infrastructure projects and clean-energy developments. The Sterling 20, set up in October 2025, is a new investor-led partnership between 20 of the UK’s largest pension providers and insurers and will be channelling billions into affordable housing, regional infrastructure and broadband. Initiatives such as the £27.8 billion National Wealth Fund will help increase the UK pipeline of investable opportunities. It is a UK government-created public finance institution designed to crowd in private capital, including pension investment, towards clean energy, low-carbon infrastructure and social housing projects.
This is already happening. Pension schemes have the flexibility to invest in bonds, social housing and green technology where such investments are in members’ best financial interests. Industry is clearly acting. Legal & General has pledged $2 billion by 2030 to deliver 10,000 affordable homes and create thousands of jobs. Nest has committed £500 million to Schroders Capital, including £100 million for UK investments and £40 million for rural broadband. The measures in the Bill, especially those relating to scale and governance for occupational and local government pension schemes, are intended to ensure that pension schemes reach the levels of scale and expertise to be able to invest more in a broader range of assets, including social infrastructure. The Government will be able to monitor those commitments.
It is always a delight to hear the noble Baroness, Lady Stedman-Scott, being passionate about the issues in which she has such experience. I understand the intentions behind the amendment, but the Government are worried that the proposed statutory review-and-fix framework could make the system more complex and costly to operate without a clear enough indication it would deliver better results for savers. However, I am with my noble friend Lord Pitt-Watson that we should all keep talking about these issues. It is one of the debates in which we share so many objectives. We are just talking about the best way in which to do this.
I turn to Amendment 218C from my noble friend Lord Hendy. Again, I fully recognise the intentions behind it and the concerns about human rights issues and investment decisions. UK pension schemes are, in general, not just passive holders of capital but long-term responsible investors required by the regulatory framework to assess environmental, social and governance—ESG— factors across policy setting, integration, stewardship and reporting, all grounded in their statutory duty to consider financially material risks. In many schemes, responsible investment policies set clear expectations on human rights standards. For example, the People’s Partnership policy explicitly sets out how it identifies, manages and mitigates these risks.
UK pension funds invest globally, as my noble friend Lord Pitt-Watson said, but within strict fiduciary duties, requiring them to prioritise members’ long-term interests, rather than simply chasing the highest return. Ethical considerations, including human rights, therefore increasingly shape capital allocation decisions as trustees weigh financial returns alongside reputational, social and sustainability risks. That role carries a significant responsibility for thorough due diligence across the portfolio. Fund managers will typically undertake screening to ensure companies meet minimum ESG standards, including sectors such as weapons, tobacco or fossil fuels and identifying weak labour rights or sustainability practices. Such screening helps manage long-term financial and reputational risks.
A core part of this is human rights due diligence assessing company policies, supply chain practices, labour standards and processes for addressing risks such as modern slavery. Managers also consider controversy histories, sanctions lists and engagement records to identify systemic concerns that may warrant action or divestment. Governance factors, board effectiveness, anti-corruption controls, executive incentives and transparency are also examined, as weak governance signals elevated long-term risk. Investors increasingly expect companies to provide meaningful ESG and human rights data consistent with UN recommendations placing risks to people and planet at the centre of decision-making.
We have seen internationally, most notably in the Netherlands, that funds will divest from companies linked to UN-identified human rights violations. UK schemes, too, are acting. We heard mention of LGPS funds. Southwark has divested itself from companies linked to conflict and genocide. In the private sector, People’s Pension withdrew £28 billion from State Street over reduced ESG and human rights engagement, reallocating the assets to managers with stronger stewardship commitments. These actions demonstrate a clear readiness to adjust strategies where human rights issues affect long-term value or reputational risk. To support such decisions, UK investors draw on respected international frameworks, including the UN guiding principles on business and human rights and the OECD guidelines. Evidence from the 2024 DWP call for evidence shows that trustees actively using these standards and the UN Global Compact to guide their management of social risks.
The DWP and the Pensions Regulator also provide guidance on social factors. The 2024 Taskforce on Social Factors offers practical support on risks such as modern slavery and child labour. As part of our forthcoming statutory guidance on trustee investment duties, we will consider how to embed further practical examples of good practice, from schemes such as Nest, Brunel and People’s Partnership, ensuring that trustees of schemes of all sizes can draw on proportionate, real-world illustrations of effective human rights risk management.
Baroness Altmann (Non-Afl)
My Lords, I add my words of support to the concept being promoted by my noble friend Lord Younger. I hope the Government will look into this, as it might well be a good topic to task regulators with in making sure that either they or pension schemes themselves are helping people to understand pension schemes better, how they work and the free money that goes along with a pension contribution in terms of your own money. There is, as I say, extra free money added by, usually, your employer and other taxpayers. I do not think young people always understand just how beneficial saving in a pension can be relative to, let us say, saving in a bank account or an ISA, or indeed the value of investing. It would be in the interests of the regulators and, indeed, the providers to help people to understand that. The Government’s role in guiding that and setting up this kind of review could be very valuable.
Baroness Sherlock (Lab)
My Lords, I thank the noble Viscount, Lord Younger, for introducing his amendment and all noble Lords who have spoken.
As we have heard, the amendment would introduce a statutory requirement for the Secretary of State to conduct a review of pension awareness and saving among young people. I agree with the Committee about the incredible importance of this issue, and I understand why the noble Viscount has tabled the amendment, but I hope to persuade him that there is another way forward.
The starting point, inevitably, is that last year the Government revived the Pensions Commission. The original commission did an astonishing job; its legacy under the previous Labour Government in effect lead to the creation of workplace pension saving via automatic enrolment. Since then, with support from both parties, automatic enrolment has transformed participation in workplace pension saving. It has been a particular success for younger people. Our participation for eligible employees aged 22 to 25 has gone up from 28% in 2012 to 85% in 2024.
Viscount Younger of Leckie (Con)
My Lords, I will make just a few rounding-up comments. I am very pleased to have the support for my amendment from the noble Lord, Lord Sharkey, from my noble friend Lady Neville-Rolfe in particular, and from the noble Baroness, Lady Altmann. It was very helpful to hear from my noble friend Lady Neville-Rolfe the information she received directly from the review that she undertook into retirement age.
The Minister referred to the importance of education; I took note of her very helpful answers on what is happening at the sharp end of schools. I also took note of the comments from the noble Baroness, Lady Altmann, and the helpful suggestions that the regulators could perhaps play a more proactive role in this area.
I believe that Amendment 205 is modest but necessary. If we are serious about improving retirement outcomes, we must start by understanding why so many young people are disengaged and by shaping policy that meets them where they are, rather than where we wish they were.
I am delighted to see that the noble Baroness, Lady Drake, is in her place. We are all very keen to know what will come out from the Pensions Commission.
One question I put to the Minister now is about the timings. My understanding is that stage one will report in early 2027—one year’s time—but stage two, which is on this subject of pensions adequacy, will be at a later stage. Can the Minister clarify those timings, as they are still a bit unclear? I understand that she is undertaking a huge amount of very important work, but that would be very helpful.
Baroness Sherlock (Lab)
I will simply say that there will be a report early next year. I am very happy to write to the noble Lord to confirm any future timings.