Pension Schemes Bill

Lord Sikka Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

Moved by

[Lord Sikka]

45A: After Clause 10, insert the following new Clause—
“Insolvency within 10 years of payment of surplus: prioritisation of pension scheme above other creditors (1) Where—(a) an employer has received payment of surplus under section 36B of the Pensions Act 1995 (inserted by section 9 of this Act) and goes into insolvency within 10 years of receiving such payment, and(b) at the point of insolvency, the employer’s pension scheme has a deficit,the Secretary of State must, by regulations, make provision to ensure that when the employer sells assets to repay creditors, the pension scheme from which the surplus was initially distributed is paid before any other creditor.(2) In order to fulfil their duty under subsection (1), the Secretary of State may amend the Insolvency Act 1986 and the Enterprise Act 2002 to alter the hierarchy of creditors in the circumstances described in subsection (1)(a) and (b).(3) Regulations under this section are subject to the affirmative procedure.”Member’s explanatory statement
This amendment seeks to ensure that, if a company goes into insolvency within 10 years of receiving a payment of surplus from the pension scheme and the pension scheme has a deficit at that point, then the pension scheme must be prioritised as a creditor.

[Lord Sikka (Lab)]

My Lords, this amendment deals with a gap in the Bill. The transfer of surplus to employers could leave employees in jeopardy, especially when an employer enters bankruptcy. I will lay out a scenario. Suppose a pension scheme surplus is distributed to an employer but, soon afterwards, the pension scheme is in deficit and the employer enters bankruptcy. Under the pecking order at insolvency, as specified in the Insolvency Act 1986 and the Enterprise Act 2002, pension schemes rank as unsecured creditors, which is near the bottom. This usually means that they will receive little or nothing from the sale of assets of the bankrupt entity, and employees could lose some of their pension rights. A pension scheme with a deficit can be bailed out by the Pension Protection Fund, but the bailout is restricted to a maximum of 90%. This means that future retirees will lose some of their pension rights. Those already retired may lose some value compared with their original scheme, as the PPF annual increase could be lower than the rate of RPI or CPI.

There is nothing in the Bill that enables a pension scheme to claw back surpluses taken by employers during the last few years—the amendment mentions 10 years, but I am happy to change it to five if that persuades some noble Lords to support it. In any case, if the employer is insolvent, there is no chance of recovering the deficit from the employer anyway, so the only possibility is to prioritise payment to the pension scheme from the sale of the assets of the bankrupt entity. In other words, the pension scheme must be paid before any other creditor.

--- Later in debate ---

[Lord Sikka (Lab)]

Just to recap quickly, I was looking at a scenario where an employer had received a surplus from a pension scheme but soon afterwards became bankrupt. Normally, the PPF will rescue, but that is limited to 90%, which means that employees will face a haircut in their pension rights. So the only possibility to help to protect employee pension rights is to prioritise payment to the pension scheme from the sale of the assets of the bankrupt entity. In other words, pension schemes must be paid before any other creditor.

Deficits on pension schemes of bankrupt companies are not uncommon. I was adviser to the Work and Pensions Committee on the collapse of BHS and Carillion, and we looked at that closely. I also wrote a report on the collapse of Bernard Matthews for the same committee. Basically, they showed all kinds of strategies used by companies to deprive workers of their hard-earned pension rights.

This probing amendment seeks to protect employees by ensuring that pension scheme deficits not met by the PPF are made good by being first in line to receive a distribution from the sale of the assets of the bankrupt company. This applies only where the employer has taken a surplus in the last 10 years. As I indicated earlier, there is nothing sacrosanct about 10 years; if noble Lords wish to support this, it could be changed.

From a risk management perspective, it makes sense to put pension scheme creditors above other creditors. Unlike banks and financial institutions, employees cannot manage their risks through diversification. Their human capital can be invested only in one place. Employer bankruptcy is a tragedy because employees lose jobs and pension rights. For those of your Lordships who are not familiar with portfolio theory, the basic message is that there is a correlation coefficient of plus one, and it multiplies their risks. As human labour cannot be stored, employees will have no time to replenish their pension pots, and as we all get older, our capacity to work is also eroded. So, despite making the required contractual payments, employees will face poverty and insecurity in old age.

I urge the Government to protect workers’ pension rights. They should not be left in a worse position after the extraction of surpluses by employers. I beg to move.

[Baroness Noakes (Con)]

My Lords, I do not support Amendment 45A, tabled by the noble Lord, Lord Sikka. I am not sure that the kind of regulations envisaged in this amendment could actually create a creditor which has a priority in insolvency where a creditor does not exist at present. At present, a deficit in a pension scheme is generally not as a matter of law a creditor if the sponsoring employer goes bust.

--- Later in debate ---

[Baroness Sherlock (Lab)]

My Lords, I thank my noble friend Lord Sikka for introducing Amendment 45A. For clarity, I will speak to the amendment as if intended to address the power to pay surplus under Section 37, as Section 36B contains the modification power.

I fully recognise the concern that members’ benefits must remain protected when surplus is paid and that trustees take a long-term view of scheme funding and employer covenant. This is why there are strong safeguards, which I have described, as set out in Clause 10. Before the release of any surplus, trustees will need to make sure that the scheme is prudently funded and seek advice and sign-off from the scheme actuary, and other advisors, about the viability of any release and the impact that may have on the long-term health of the scheme.

While trustees perform an essential role in safeguarding members’ benefits, prioritising them above all other creditors in these circumstances risks distorting the already established insolvency regime. It creates uncertainty for businesses, ultimately harming the very members we all seek to protect.

On the points made by the noble Baroness, Lady Noakes, it is our concern that placing trustees ahead of other unsecured creditors could create significant uncertainty, increased borrowing costs and restricted access in future to finance, especially for smaller businesses. In the long term, this could potentially weaken employer support for pension schemes and threaten their sustainability, rather than strengthen it.

It is important to recognise that the current system already provides significant security for pension scheme members. Pension funds in UK occupational schemes are held in trust and are legally ring-fenced from the employer, so they cannot be accessed by creditors in an insolvency. The PPF exists precisely to offer a safety net to members who would otherwise risk losing their pensions when their employer fails.

Following the Chancellor’s announcement at the Budget, this Bill will also introduce annual increases on compensation payments from the PPF and FAS on pensions built up before 6 April 1997.

The insolvency regime is designed to operate alongside the compensation system. The structure of the pension protection levy already reflects the risk of employer failure and spreads that risk fairly across eligible schemes. The PPF assumes the creditor rights of the pension scheme trustees in the event of insolvency of the sponsoring employer and seeks to maximise recoveries from the insolvent employer’s estate.

Pension schemes, backed by a strengthened PPF, are already in a stronger position than many unsecured creditors. Giving trustees priority would leave small suppliers, contractors and even some employees with significantly reduced recoveries, despite having far fewer protections. We should not create a system where small businesses and individual workers bear disproportionate losses because a pension scheme deficit overrides all other obligations. There is also the risk of moral hazard, where trustees could be less prudent when deciding to release surplus, knowing that, under employer insolvency, they would have guaranteed priority above other priorities.

The amendment could affect the employer’s business plans as creditors may be less likely to lend money to the employer. Equally, banks may place conditions on borrowing to prevent surplus release if trustees were given priority. That dynamic could push companies towards insolvency earlier, not later, having a knock-on effect on members.

The only other thing I will add is that there are other tools open to trustees that are concerned about the strength of the employer covenant and the security of benefits. It is open to trustees during funding discussions or other negotiations to seek a fixed or floating charge over the employer’s assets, which would, in effect, elevate the scheme’s position in the insolvency priority order, providing additional protection should the employer become insolvent.

I want to be clear that trustees will have the final decision on whether to release the surplus. Before they can do so, the Bill stipulates statutory safeguards before a surplus can be released. I thank the noble Lord for his concern but for the reasons I have outlined, I ask that he withdraw his amendment.

[Lord Sikka (Lab)]

I thank all noble Lords for their observations, comments, suggestions and many questions. I will briefly address some. Does this risk distorting insolvency law? It is already distorted. Pension scheme members are unsecured creditors. People who cannot hold a diversified portfolio lose their job, lose some of their pension rights and have no opportunity to rebuild their pension part. It is already distorted and already against them. I am trying to offer something right to, generally, the weakest of the creditors. Sure, banks that are secured creditors may get a little less if you pay pension scheme creditors first, but banks hold diversified portfolios. They are in a better position to manage the risks compared to employees. Creditors are less likely to lend money to companies.

Do we have any evidence to show that, if you change the order and empower some creditors, somebody takes secure charge number one, somebody takes number two and somebody takes number three—the whole hierarchy? That does not seem to persuade creditors to lend less just because there is a new hierarchy; it does not seem to support that. Changing it to five years is a possibility. A pension scheme creditor comes into existence as and when an employer goes into bankruptcy. Therefore, the pension scheme is basically a creditor.