Pension Schemes Bill

Debate between Lord Palmer of Childs Hill and Baroness Penn

Committee stage
Monday 26th January 2026 Grand Committee

[Baroness Penn (Con)]

My Lords, I will speak briefly in support of Amendments 112, 114 and 117 in the names of my noble friends Lady Coffey and Lady McIntosh of Pickering, which aim to set a cap on asset allocation.

In response to our debate on the previous group, the Minister consistently described the mandation power as seeking to achieve a “modest but meaningful” investment in private assets; and said, importantly, that it was designed as a “narrow backstop” to delivering the Mansion House Accord. If that is the case, why is the proportion of assets that can be mandated under this power not capped in line with that accord? Indeed, as I read it, it could be up to 100% of assets. Why is that? The Minister may point to consultation and other measures that will constrain the use of the power but, for something so controversial and which the Government say they do not want to use, I cannot understand why they are not constraining it in primary legislation.

I will touch on timescales in our debate on the next group, but the Minister says that this Government do not want to use this power. However, as things currently stand, it would be open to the next Government to use the power, and the one after that—as well as a couple of Governments in between if we do not go to full Parliaments, as we have not always done in recent years. In those circumstances, it would also be sensible to limit the power to delivering what the Government say they want it to do.

Why do the Government not want a maximum limit in primary legislation? What is their objection to it? The cynic in me wonders whether the power is so widely drawn that, when we remove mandation on Report—I might be getting ahead of myself but that is on the cards—the Government could bring forward a series of concessions at ping-pong to limit the use of the power to what they say they want it to do. I am sure that that is not the case, but it might be better than the position in which the Government think that this power, as it appears in the legislation, has been drawn appropriately. I am really interested in the Minister’s response on this.

[Lord Palmer of Childs Hill (LD)]

My Lords, I will come in at this moment because I wish to speak in favour of the amendment from the noble Lord, Lord Vaux, which I have co-signed, because he is unable to be with us today. These words are both mine and the noble Lord’s, more or less.

I am not in favour of the asset allocation mandation clauses generally. Amendment 119, however, seeks to probe the reasons why the Government have chosen a particular asset class for mandation: private equity. I have no problem with pension schemes choosing to invest in private equity; historically, it has generated good returns, in large part because of the use of debt to leverage those returns. Private equity may be a good investment for pensions schemes, and this amendment would not prevent that.

However, my understanding is that the principal motive of the Government for mandating asset allocation is to drive greater economic growth. I agree that venture capital and private debt—two other asset types listed in the Bill—may indeed create growth, but I do not understand why the Government believe that private equity is a growth driver. I have to assume that this is because the Government have fallen for the story that the private equity industry often tells about how much investment it makes, how many people it employs, what great returns it generates, and so on. What private equity actually does is buy existing companies or assets, allowing the previous owners to cash out.

Very rarely, I believe, does a private equity company provide new equity into a company. Rather, it typically does the opposite: it funds the acquisition with a very high proportion of debt. The leveraged buy-out is the basic model of most private equity activity. That debt is not borrowed by the private equity itself; rather, it is pushed down into the underlying company, and the interest and any debt repayments are made from that company’s profits.

One effect of this is to reduce the taxable profits—in other words, the debt interest is tax deductible—and therefore the tax is payable by the company. The debt itself is often located in offshore low-tax locations, so tax is not paid on the interest by the private equity or the lender, which may well be related. This is a direct loss to the Exchequer. I hope the Minister can reply to that.

The high leverage also has the effect of reducing investment by the company in its products or services. Instead of investing in its future growth, the company now has to use much of its cash flow to pay the interest. What often happens is that the private equity undertakes a cost-rationalising exercise so that the profits are improved in the short term with a view to selling the business again as soon as possible. The leveraged effect of the debt means that private equity can make a substantial gain even if the underlying business grows only in line with inflation.

The cost rationalisation often invokes workforce reductions. Studies indicate that private equity-owned companies typically have lower levels of employment even five years after the original buy-out. This certainly tallies with my experience, although I have not had the benefit of the experience of the noble Lord, Lord Vaux, who worked for private equity-owned companies during his career.

In the meantime, if there are any profits left, rather than being invested in growth they are usually paid out as dividends. In fact, it is not uncommon, if a company has managed to reduce its debt ratio, for a PE to recapitalise the company to put in more debt in order to allow the payment of a dividend. Of course there are exceptions, but, as many examples show, such as Thames Water—indeed, much of the water industry—Debenhams, Southern Cross and Silentnight, private equity cannot legitimately claim to be a force for growth. Are there good returns for its investors, and particularly its partners? Yes—but is it a force for growth? It is not really. It is said that £29.4 billion was invested in UK firms by private equity in 2024. Yes, but that investment was almost entirely in buying out existing businesses, which is very different from providing capital for growth.

So the noble Lord, Lord Vaux, and I are baffled as to why the Government think that mandating pension funds to invest in private equity will be good for the country. It may be good for someone but not necessarily for the country. I repeat that I have no problem with a pension fund investing in private equity if the trustees believe it is right for the fund and its members, but I see no benefit, and probably a downside, for the country as a whole. If we must mandate allocation, let us at least target it to asset types that generate growth, such as venture capital or infrastructure. If the Government’s primary motive for mandation is to drive UK growth, we should exclude private equity from the list. I hope the Minister and her colleagues will give thought to this, because we are on the same wavelength and we want the same answer, but not in the way that the Bill proposes at the moment.