Pension Schemes Bill

Baroness Sherlock Excerpts

Committee stage
Thursday 22nd January 2026 Grand Committee

[Baroness Warwick of Undercliffe (Lab)]

My Lords, I am sympathetic to the probing amendments in the names of the noble Baroness, Lady Altmann, and the noble Viscount, Lord Younger—Amendments 47 and 51 respectively—on value for money, which I alluded to at Second Reading. With any Bill or set of regulations, it is important to have clarity on the intentions and in minimising any unintended risk. That is particularly so when looking at the protection of citizens’ lifetime pension savings.

The FCA, the DWP and TPR have just published their consultation on their detailed proposals for the new value-for-money framework for DC schemes. These proposals come with real bite. When introduced, all relevant DC schemes will have to report on the value that they provide to members across a range of metrics. That assessment report will provide the basis for comparing the value that the scheme provides against other schemes. If a given scheme offers poor value, the firms and trustees must deliver improvements or otherwise transfer their members to a scheme that does provide good value. The framework requires an online central database to capture the disclosure of value-for-money data.

The Bill mandates the framework for contract-based schemes regulated by the FCA. The DWP and TPR will consult on draft regulations for the trust-based schemes. The first value-for-money assessments are expected in 2028. The framework provides for consistent measurement and disclosure on investment performance, costs and service quality; objective and consistent comparison against the market; transparency and disclosure; and action to be taken where a scheme is not delivering value. However, there are clearly concerns—we see them expressed in the briefings that noble Lords have received—that the framework could give rise to problems, which I, too, would like to probe.

The VFM framework provides for forward-looking metrics to be considered alongside backward-looking metrics, with the stated aim of allowing for

“a holistic approach to investment to deliver the best possible long-term outcomes”.

There is a risk that the value-for-money framework could result in herding, as others have alluded to, as schemes seek to avoid poor value assessments. There is also a risk of forward-looking metrics being used to game a scheme’s assessment. I ask the Minister: what guardrails are explicitly allowed for in this Bill to control these risks?

On quality of service, the recently published VFM framework takes a more limited approach to quality service and administration metrics. Furthermore, metrics on how members engage with their pensions have not been included in the framework, but they will be important in informing schemes’ responses to changes, such as guided retirement and the targeted support regime.

Looking ahead, how will these concerns be addressed? Poor-performing schemes that are rated “red”—meaning that they cannot be improved—must transfer out members where it is in their best interests. This is stronger than the originally proposed wording to consider a transfer. It is made possible by the Bill’s provision for a contractual override to allow transfers for contract-based arrangements without members’ consent. However, it is worth noting that some members will have safeguarded benefits. My final question to the Minister is: what will happen to those benefits? It is not clear what mitigations this Bill provides to protect members.

[The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)]

My Lords, I am grateful to all noble Lords for introducing their amendments and for the debate that followed. The amendments rightly seek an assurance that the VFM framework is strong and effective and they try to clarify how it will take account of a range of important factors that can affect the value that a scheme provides. I regret that I cannot accept them, but I am going to go through the reasons why, as some interesting issues are being raised. Obviously, if I told the Committee that I was going to accept them, noble Lords would all fall over in shock, but this is a good opportunity to get these issues out there.

Let me say at the outset that the aim of the VFM framework is simple: we want to ensure that all savers are in schemes that deliver the best possible long-term outcomes for their retirement. The framework seeks to raise standards across the DC market by driving transparency, comparability and competition on genuine value rather than just on cost—a point made by the noble Baroness, Lady Stedman-Scott.

Clause 11 is deliberately drafted to provide enabling powers that allow the regulations establishing the VFM framework to be developed in consultation with industry and to be adapted as markets evolve. However, the VFM framework must be able to adapt to future financial market developments and to align with the FCA requirements for contract-based schemes. The risk is that hard-wiring any detailed technical criteria or rigid deadlines into primary legislation takes away the flexibility that is genuinely needed. It could get in the way of effective regulation and risks locking in concepts that could become outdated. However, I accept that there is a question around how Parliament gets to scrutinise the detail.

Clauses 11 and 14 set out key features of the VFM regime and provide enabling powers for the Secretary of State to make regulations on how VFM assessments will operate, including the metrics, the benchmarks and the processes that they will have to follow. The regulations will be subject to formal consultation with industry and regulators before being laid in draft for parliamentary approval under the affirmative procedure. In our view, this strikes the right approach: the Bill has the overarching framework in primary legislation while the technical detail is developed transparently through secondary legislation.

However, the noble Baroness, Lady Coffey, made an important point: Parliament needs to be able to understand what the assessment process will look like. A joint consultation was launched in early January by the FCA and the Pensions Regulator; it will run until 8 March. This consultation is the next step in the process of consultation on the technical-level detail of the framework, which will help to inform development and consultation on draft regulations and draft FCA rules—those are, of course, legal instruments.

I am conscious that some of the amendments were tabled before that consultation was launched. Those noble Lords who are up to their ears in the pensions world will no doubt have read the consultation in detail, but I will make sure that we send any noble Lord who has not done so a summary of, as well as a link to, it. I would be happy to answer any questions, if that would be helpful, but I will unpack the basics of this now.

The consultation sets out updated proposals and detailed draft FCA rules for implementing the VFM framework in the workplace DC pensions market and it reflects stakeholder feedback from the previous FCA consultation. FCA rules will apply to contract-based schemes, whereas regulations made under the powers in the Bill will apply to trust-based schemes. By bringing them together, responses to the consultation will help to inform both the draft DWP regulations and the FCA rules, with the obvious aim of ensuring consistency across trust-based and contract-based schemes. We do not want to end up with any kind of regulatory arbitrage in this or any other area. It is important that we do not pre-empt the outcomes of that process to make sure that we get the details right. Draft regulations will be consulted on.

--- Later in debate ---

Clause 18 confers a broad range of powers on the Pensions Regulator from compliance notices through to penalties, directions on value-for-money ratings and ultimately powers that may lead to scheme wind-up. Against that backdrop, it would be helpful for the Committee to understand whether these penalty levels are intended to act as a meaningful deterrent, a proportionate backstop or something else entirely. In particular, I would welcome some clarity from the Minister on how these figures have been benchmarked against existing regulatory regimes, whether they are expected to operate consistently across schemes of very different sizes and complexity, and why the Government have chosen to fix these amounts in the Bill. I emphasise that this amendment does not seek to weaken enforcement, but simply to probe whether the penalty framework as drafted is proportionate, coherent and justified. I look forward to the Minister’s explanation.

[Baroness Sherlock (Lab)]

My Lords, I again thank the noble Baronesses, Lady Altmann and Lady Stedman-Scott, and all noble Lords who have spoken. Let me start with the amendments from the noble Baroness, Lady Altmann. I completely appreciate her desire to make the VFM framework easier for everybody to understand. I recognise there is a need for clarity here and a role for regulators to support member engagement with something as complex as this, but our concern with her proposals is that they would reduce precision and could unintentionally weaken regulatory accountability and undermine comparability across schemes, and those are three pillars on which the VFM framework depends. There is a genuine challenge here, which is to balance technical accuracy with clarity for members. Obviously, the latter will help to overcome the kind of behavioural inertia that we all see and so will ensure that VFM assessments result in meaningful action, not just awareness.

That is distinct from the regulatory precision required for the VFM system, which is why these terms are in the Bill. That current wording of “fully delivering” and “not delivering” is not accidental: it is designed to reflect objective compliance with all the mandated metrics: costs and charges, investment performance, governance and member outcomes. The terms provide clarity for trustees and regulators about whether a scheme meets the required standards. Replacing them with “good value” and “poor value”, even if it sounds attractive on the surface, would introduce subjectivity. Good value is not a regulatory test. It risks creating ambiguity about what triggers action when a scheme falls short.

Members deserve clarity and I absolutely agree that language should be understandable. However, the right place for explaining concepts to members is in disclosures and guidance, not primary legislation. We intend to work with the Pensions Regulator, the FCA and industry to ensure that member-facing communications such as rating notifications to employers and the regulator-supporting guidance, which will be aligned with the implementation of VFM, explain these outcomes in plain English that is suitable for its intended audience. I take the challenge from the noble Baronesses, Lady Altmann and Lady Bowles, about how to make sure that happens. That is something I am really happy to reflect on quite carefully. However, changing the statutory terms dilutes precision, creates inconsistency and risks uncertainty. Our approach preserves enforceable standards while committing to clear, accessible explanations for members.

Amendments 64 and 65 from the noble Baroness, Lady Altmann, would limit the powers the Government have to specify the consequences for pension schemes that have had an intermediate VFM rating for fewer than five years in a row. Let me pause before I answer that to come back to the noble Baroness, Lady Coffey, who always asks clear questions. One of her questions was “How is this going to work, anyway?” Let me give a very quick rundown, subject to time. The consultation sets out updated proposals—they were updated in response to the previous consultation—and draft FCA rules, showing how the VFM framework will work. The paper sets out the proposed metrics for performance, costs, charges and service quality. It outlines how the assessment process will work. It gives more details around the ratings structure and the consequences associated with each rating. Basically, trustees of in-scope DC workplace pension schemes and arrangements will have to publish standardised performance metrics and follow a consistent and comparative assessment of value to assign an overall VFM rating. The regulator will ensure compliance with those obligations and will have the ability to enforce transfer of savers—I will come back to that in a moment—from consistently poorly performing arrangements.

I said that the consultation had changed. There were five key changes from the previous consultation. The most relevant one here proposes, in response to feedback, the adoption of a four-point rating system: red, amber, light green and dark green. There was strong pressure to have more granularity, so that it was not quite as stark. I make it clear that it is only amber that could lead to possible enforced transfer. I hope that is helpful.

A good question is “How will members know what ‘fully delivering’ means?” Obviously, we are not proposing to use the Bill’s terminology when communicating ratings to members. Instead, the schemes will use the four-point RAGG rating. Red corresponds to not delivering, amber and light green to intermediate performance and dark green to fully delivering. It is proposed that this more accessible and granular terminology will be used in the assessment reports published by all schemes at the end of 2028, and the reports will be made publicly available. Guidance will also include plain English explanations and a summary of metrics so that members understand what the outcome means for them.

[Baroness Altmann (Non-Afl)]

In what the Minister has just described, I do not quite understand how dark green and light green fit with “fully delivering”. Only dark green would be fully delivering, so why is light green not in the intermediate category? To me, this is quite confusing. I understand what the Minister is saying, but I urge her to work with whoever is devising this to iron out this kind of confusion at this stage, rather than running with it, as seems to be the intention here.

[Baroness Sherlock (Lab)]

We are still consulting on this. We consulted on the initial proposal and the response came back that more granularity was needed. We have to accept that clarity pulls in one direction and precision and granularity pull in the other, so the job of the Government is to support the regulator in making sure that we end up with a framework that does its primary job, which is not just to work out where a scheme is now but what the right consequences are for that scheme and then to make sure that is communicated to those who need to know in ways that are appropriate. On the one hand, the noble Baroness wants clear, strict categories, and on the other she wants to have different consequences for schemes depending on their circumstances. We think it is important to be able to judge appropriately and come up with a scheme. I would be happy to write to point out all the areas and explain more about how this works, but the point is that this needs to be understood by those who will do the assessments and the communication of the results of that has to be in the right language for those who need to understand them. As the noble Baroness knows as well as I do, it is the nature of pensions that the challenge is that marketing simple language does not map neatly onto precise legal language. I hope that at least explains what we are trying to do on that.

[Baroness Altmann (Non-Afl)]

My worry is we have a term “fully delivering” in this legislation. It does not seem to me that very many schemes are likely to be fully delivering, even in a light green capacity. Therefore, I think we are already sowing the seeds of confusion if we go along this route. That is all.

[Baroness Sherlock (Lab)]

I am going to explain a little bit about the consequences because the thing that matters most is the consequences. Amber schemes may be required to close to new employers. Red schemes must close to new employers. I am just getting that down for the record, which suggests that I probably did not say that a moment ago. Just to be really clear, amber schemes may close to new employers; red schemes must close to new employers. Much nodding, I hope, from behind me. Great sighs of relief all round. Excellent.

Let me come on to the consequences of this. On Amendments 64 and 65 from the noble Baroness, Lady Altmann, we think that making reporting less comprehensive, even for schemes with intermediate ratings, could reduce the early warning signals on which regulators will rely to protect savers. I fully understand her desire to make this reporting proportionate. The current framework is designed to strike a balance. Powers are designed to enable the Government to ensure that trustees keep sponsor employers informed and that any issues are addressed promptly via the improvement plan without putting unnecessary burden on schemes. The noble Baroness may want to note this bit. The Secretary of State has discretion under Clause 16 on the consequences of an intermediate rating and could require different consequences to flow from different levels of intermediate rating. It is not the intention that a requirement to close the scheme to new employers would necessarily flow from all intermediate ratings. I think that is what she is shooting at, so I hope that helps to reassure her. That enables some flexibility around the consequences for pension schemes that have, for example, received an intermediate rating for fewer than five years, which is the space that she was shooting into just now.

Changing the powers as suggested risks missing the signs that a scheme may be heading into trouble. Early sight of any negative impact on a scheme’s performance and value really matters. I am sure that the Committee agrees that it is better to catch problems sooner rather than later and to put in a plan to remedy things, ensuring that schemes provide value and avoiding harm to members and greater costs in the long run.

The amendment suggests that schemes should face full reporting only if performance issues continue for five years or more, but five years is a long time for problems to go unchecked. I think members deserve better protection than that. We certainly would not want to see situations where savers are left in a poorly rated scheme for many years. That is why we propose to give schemes in the intermediate rating a period of up to two VFM assessment cycles to make the improvements needed to provide value to their savers.

I know that Amendments 60, 61 and 69 from the noble Baroness, Lady Stedman-Scott, are probing amendments that want to challenge and clarify the terms “reasonable period” and “relevant period”. The relevant period is the VFM period, or rather the annual reporting timescale for data collection assessment against VFM metrics, which we expect to run from January to December of the preceding calendar year. We expect to set that out in regulations following consultation. The reasonable period is a period during which the regulator would normally expect the scheme to deliver value for money. Due to the level of detail this will involve, this will all be outlined in regulations. We will, of course, formally consult on draft regulations, and I am more than happy to make sure that we engage with interested noble Lords during the consultation to provide an opportunity to feed thoughts into that. The finer proposals behind the VFM ratings, such as the conditions under which each rating will apply and when they should be used, are outlined in the joint consultation which is currently open and will be provided in full in regulations.

Turning to Clause 18, Amendment 69 seeks to understand the rationale for the maximum penalty levels for non-compliance set out in subsection (5). As pension schemes grow in size, it is vital that the fines we impose on schemes carry real financial weight. This ensures that compliance and enforcement remain effective, safeguard members’ interests and, of course, maintain confidence in the system. These figures represent a significant deterrent against non-compliance while not being overly excessive in the current market landscape. We have worked closely with regulatory bodies and taken care to ensure the penalties align with other powers taken in Part 2 of this Bill. We believe the figures are proportionate to both the current and future scale of schemes.

--- Later in debate ---

[Baroness Coffey (Con)]

I am keen to get a sense of what the Government think the current spread is between the different ratings. For example, what proportion might be red? Is there any sense of this at all?

[Baroness Sherlock (Lab)]

I am absolutely not going to answer that. If there is answer which is known to me, then I will be happy to share it with her, but it certainly not known to me.

[Baroness Altmann (Non-Afl)]

My Lords, I thank all noble Lords who have spoken and the Minister for her responses and patience with the comments made, especially by me. I have ongoing reservations but will obviously look carefully at the consultation. I would be grateful if we might have a further discussion before Report, because this is a crucial area, for employers and members. Perhaps we can bring this back in some form to iron out this huge intermediate range that could have a wide variety of implications that might be quite costly—I know how much these reports cost when you try and commission them—to schemes that may be having a bad performance patch for a year or two, but for understandable reasons. I thank the Minister and I beg leave to withdraw the amendment.

--- Later in debate ---

[Baroness Altmann (Non-Afl)]

No. I was just saying, if you transfer assets in, that 2% charge does not apply and will not apply. Otherwise, obviously, it would be uneconomic. But I understand that the idea of NEST is that the transfer in of a pension from another provider does not incur the upfront charge of, I think, 1.8%. So that would not be an issue. It is just a 0.3% flat fee. I hope the Minister will be able to respond on that element. There is a residual risk to government in moving somebody’s long-term assets from one provider to another if the other provider eventually proves not to deliver good value.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords who have spoken on this. I will start by addressing the proposed amendments to Clause 22. I will say at the start that we regard this clause as being a vital measure to tackle the structural inefficiency caused by the ever-greater proliferation of small, dormant pension pots in the auto-enrolment market. It empowers the Secretary of State to make regulations to consolidate these pots into authorised consolidator schemes, improving outcomes for pension savers and reducing unnecessary costs to providers.

Amendments 79 and 80, from the noble Viscount, Lord Younger, seek to extend the dormancy period for a pot to be considered eligible for automatic consolidation from 12 months to 18 months. We concluded that the 12-month period strikes the right balance between legislative clarity and administrative practicality. The timeframe was consulted on extensively with industry in 2023, under the previous Government. I suspect the noble Viscount was the Minister, so he may recall this well. Twelve months represents a supported middle ground: long enough to ensure that pots are genuinely dormant but not so long as to delay consolidation unnecessarily. Extending the period to 18 months would create inefficiencies and higher costs for both savers and providers, and slow progress towards consolidation.

Amendment 80 proposes removing subsection (3)(b) from Clause 22 as a means of probing the circumstances in which a pot should not be treated as dormant. This was picked up, slightly glancingly, by the noble Baroness, Lady Coffey, as well. I make it clear that the scope of the policy is deliberately aimed at unengaged savers in default funds, where fragmentation poses the greatest risk to value for money and retirement outcomes. It is not designed to consolidate pots from those who are engaged and have made active decisions about their pension.

The exceptions provision is designed for cases where investment choices have been made that are driven by factors other than active financial management, such as religious belief. For example, following the consultation in 2023, sharia-compliant funds emerged as a suitable case for this. The aim was to ensure that savers in those funds remain eligible for consolidation and the benefits it brings, because, even though they have made a choice to be in a sharia-compliant fund, Clause 22 would allow schemes to differentiate that choice from other forms of pension engagement which might indicate that the member would not want their pot to be moved. I make it clear that anyone brought into scope under these exceptions will retain the option to opt out, so member autonomy is preserved, and consolidated schemes would need to offer a sharia-compliant option for consolidation to ensure that members’ wishes continued to be recognised and respected.

Although the power allows for wider exceptions in future, proportionality is key. For example, it would not be appropriate to consolidate members in ethical funds into a default fund; nor is it feasible for consolidators to cater to every ethical fund in the market. However, this flexibility would ensure that the framework could evolve if another religious or other fund reached sufficient scale. It balances the inclusion of disengaged savers with the need to limit complexity, cost and operational burden for authorised consolidator schemes; that is crucial to ensure that the automatic consolidation model remains viable.

Again, to be clear, this is not about bringing into scope people who do not want to be consolidated; it is about ensuring that those who are likely disengaged on pension saving are not automatically excluded from consolidation and its benefits simply because of their religious beliefs. For clarity, I note that, similarly, this clause does not allow or compel a pension scheme to move someone who has not selected a sharia-compliant fund into a sharia-compliant fund.

--- Later in debate ---

[Baroness Sherlock (Lab)]

My Lords, I thank the noble Viscount, Lord Younger of Leckie, for introducing his amendments. I should have said at the beginning of the previous group that I thank him for his support for this policy. I recognise that he has tabled his amendments in the spirit of exploring how best to make this work.

Let me start with the proposed amendments to Clause 24, which is a key part of the framework to enable the consolidation of small dormant pension pots. It sets out requirements for transfer notices: communications that inform members when their pot is due to be moved into an authorised consolidator scheme. These notices are an important safeguard, ensuring transparency and giving members the opportunity to opt out if they wish to. Amendment 84 proposes that the transfer notices must be clear, concise, accessible and so on and must be provided in prescribed alternative formats for digitally excluded or visually impaired members.

I fully support this principle, but we think the amendment is not needed because the objectives are already embedded in the Government’s approach. The Bill provides powers to set detailed requirements for transfer notices in secondary legislation, and we have committed to consult to ensure that notices are simple, jargon-free and easy to understand. Moreover, existing regulatory standards and guidance already require schemes to provide communications in accessible formats for vulnerable members, including those who are digitally excluded or visually impaired. We do not think that overlaying additional prescriptive requirements in primary legislation is helpful, but the underlying point is very strong. We need a framework that can evolve as technology and members’ needs change. Locking rigid requirements into the Bill could hinder that process, so we think the right place for these detailed standards is in guidance and regulation, where they can be updated as best practice develops.

Amendment 85 would require the Secretary of State to record and report annually on the number of transfer notices issued and the outcomes arising from them. Again, although I understand the intent, we do not think this amendment is proportionate, given the administrative burden that it would impose. The DWP already has robust mechanisms for monitoring the implementation and effectiveness of pensions policy, including through regular engagement with the Pensions Regulator and industry reporting. We will continue to publish updates on the progress of small pots consolidation as part of our wider reporting on pensions reform. The focus should remain on ensuring that the policy delivers better outcomes for members, reducing fragmentation, improving value for money and supporting a market of fewer, larger schemes. We believe that this can be achieved through existing oversight arrangements and targeted evaluation, rather than setting rigid reporting requirements in primary legislation.

I recognise that the Clause 31 stand part notice has been tabled to probe the extent and scope of the small pots regulations enabled by this clause, with particular focus on the powers conferred on the Pensions Regulator to levy fees. For clarity, Clause 31 does not create new powers beyond those already set out within the small pots measure. Its purpose is to provide clarity and detail on how those powers can be exercised to deliver the small pots consolidation framework effectively. This mirrors the approach taken with the authorisation of master trusts, for example, under the Pension Schemes Act 2017, where fees were introduced to ensure that the costs of regulatory oversight are borne by those seeking authorisation, not by the taxpayer. This is a well-established and proportionate mechanism that supports robust regulation while maintaining fairness.

As already discussed elsewhere, we believe that the clauses within this chapter strike a careful balance. They ensure that key regulations get full parliamentary scrutiny through the affirmative procedure, while allowing the Government to act quickly on minor or technical changes via the negative procedure when necessary.

Clause 31 sets out the circumstances where the use of a Henry VIII power may be required. To be clear, this is about ensuring that the legislation delivers a workable and proportionate framework. The Henry VIII power provides necessary flexibility to apply existing technical and procedural legislation to small pots regulation in order to ensure the effective implementation of the small pots regime. I shall give an example. It may be necessary to make consequential amendments to the Pensions Act 2004 so that the Pensions Regulator’s existing administrative powers can extend appropriately to the small pots framework. An example in the Bill is the amendment to Section 146 of the Pension Schemes Act 1993 to ensure that the remit of the Pensions Ombudsman is broad enough to investigate complaints or disputes in relation to the destination proposer, but this cannot be legislated for before final decisions around the delivery model are made. That is a good example of why this would work. Of course, any regulations made under this power will be subject to the affirmative procedure.

We think that that flexibility is essential for the effective implementation of the small pots regulations. Any regulations made under this power will be affirmative, but it is also worth noting that, given what I have said, removing Clause 31 would reduce the clarity for members and pension schemes on how the power to make small pots regulations may be used.

Finally, I will address the proposed amendments to Clause 32. Clause 32 is essential to maintaining trust and integrity in the small pots consolidation framework. It ensures that the Pensions Regulator can take direct action to uphold compliance with the regulations, protecting members and supporting the volume of transfers required accurately. Amendment 86 seeks to remove subsection (2) as a means of probing the expansion of regulatory powers conferred on the Pensions Regulator. Subsection (2) provides transparency for stakeholders by setting out the types of enforcement tools that may be included in regulations, such as compliance notices, third-party compliance notices and penalty notices. These are not new concepts; they align with the Pensions Regulator’s existing practices and procedures in other areas of pensions regulation. Removing this provision would not prevent enforcement powers being introduced in regulations, but it would remove clarity for schemes and members. Without it, we risk creating ambiguity and undermining confidence in the framework. This clause is not about overreach, but about ensuring that the regulator can act proportionately and effectively where schemes fail to meet their legal duties.

Finally, Amendment 87 seeks to remove Clause 32(4) to probe the rationale behind the maximum penalty limits. Subsection (4) provides clear, proportionate caps on financial penalties: £10,000 for individuals and £100,000 in any other case. These limits have been increased compared to existing frameworks to reflect the importance of compliance in this area. As pension schemes grow in size, it is vital that the fines we impose on schemes carry real financial weight. This ensures that compliance and enforcement remain effective, safeguard members’ interests and maintain confidence in the system. These amounts align with the wider compliance regime across the Bill. Without this subsection, regulations could still introduce penalties, but without any statutory cap. That would create uncertainty for schemes and could lead to disproportionate outcomes. By contrast, the current approach provides transparency and safeguards, ensuring penalties are significant enough to deter non-compliance but not excessive. It also enables appeals to the First-tier or Upper Tribunal, guaranteeing procedural fairness and accountability.

In conclusion, Clause 32 is not about granting unchecked powers; it is about providing clarity, proportionality and effective enforcement to protect members and deliver the outcomes this policy is designed to achieve. Removing this provision would create uncertainty and risk undermining confidence in the system.

The noble Baroness, Lady Altmann, asked me a question that I think related more to the previous group, but let me see what I can do. Why do we need small pot consolidation if we have the pensions dashboard? I think her question was slightly underpinned by the question, why do we need this at all, why can we not just use dashboards? We think they serve different but complementary roles in strengthening the system.

--- Later in debate ---

[Noble Lords]

The noble Baroness should speak now.

[Baroness Sherlock (Lab)]

The noble Baroness may do whichever she prefers.

[Baroness Altmann (Non-Afl)]

Okay. I have not fully prepared for it, but I am happy to do that; it will save us time later on.

The concerns expressed in Amendment 136 and the amendments that the noble Viscount, Lord Younger, mentioned—some of which I added my name to—revolve around schemes that are already established. There is uncertainty about whether the schemes that are currently below the level will be permitted as new entrants or be able to access new business.

I am already being told that advisers are opting to advise employers only to join schemes that are already almost at or above the current £25 billion default fund threshold, which is creating market disruption and preventing schemes currently below the scale threshold from growing, as they cannot access the amount of new business they would otherwise have anticipated. Therefore, the risk is that these schemes will close prematurely but could offer good value to members who would otherwise be able to benefit from a scheme that is potentially on track to enter the transition pathway but will not quite be there.

I will offer the Committee an example. One of the recent new entrants, Penfold, which was established in 2022, will not have the time that other new entrants, established a few years before it, will have—such as Smart Pension, which may well be on track to reach the goal by 2030. Penfold faces a cliff edge because it launched only in 2022, has already surpassed the £1 billion asset-under-management mark and could well quadruple business over the coming few years, which would be an extremely positive achievement, but it will not qualify it not to have to close.

There are other new potential entrants that were planning to enter the market in the next three or four years, but they cannot now do so unless they are able to enter the pathway. That is why Amendment 136 suggests that schemes that have been established for, let us say, less than 10 years—again, that is a probing figure—would be able to enter either the transition or new entrant pathway if there is a demonstrable case that they will be able to grow. However, I am completely aligned with the noble Baroness, Lady Noakes, that big is not necessarily best and that there are risks of an oligopoly developing in this connection, which I hope the Government would not have intended. I am convinced that that would not necessarily be in the interests of the market, innovation or pension savers more generally.

[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords for introducing their amendments. As this is the first time we are going to debate scale, let me first set out why we think scale matters. I hope to persuade the noble Baroness, Lady Noakes, with my arguments, but she is shaking her head at me already, so my optimism levels are quite low given that I am on sentence two—I do not think I am in with much of a chance.

Scale is central to the Bill. It adds momentum to existing consolidation activity in the workplace pensions sector and will enable better outcomes for members, as well as supporting delivery of other Bill measures. These scale measures will help to deliver lower investment fees, increased returns and access to diversified investments, as well as better governance and expertise in running schemes. All these things will help to deliver better outcomes for the millions of members who are saving into master trusts and group personal pension plans.

[Baroness Noakes (Con)]

Will the Minister say what the evidence base is for the assertions she just made?

[Baroness Sherlock (Lab)]

I was going to come on to that, but I am happy to do so now. Our evidence shows that across a range of domestic and international studies, a greater number of benefits can arise from scale of around £25 billion to £50 billion of assets under management, including investment expertise, improved governance and access to a wider range of assets. This is supported by industry analysis, with schemes of this size finding it easier to invest in productive finance. International evidence shows funds in the region of £25 billion invested nearly double the level of private market investment compared to a £1 billion fund. Obviously, we consulted on these matters and we selected the lower band, but there is further evidence that demonstrates the greater the scale, the greater the benefits to members. We did go for the lower end of that.

I turn to the amendments to Clause 40 from the noble Viscount, Lord Younger. This probing of how exemptions might operate, especially in relation to CDC schemes, is helpful. Our intent is clear: to consolidate multi employer workplace provision into fewer, larger, better run schemes. To support this, exemptions will be very limited and grounded in enduring design characteristics; for example, schemes serving protected characteristic groups or certain hybrid schemes that serve a connected employer group. I can confirm that CDC schemes are outside the scope of the scale measures. Parliament has invested considerable effort to establish this innovative market, and we will support its confident development while keeping requirements under review.

I turn to the broader point about why the exemptions are intended for use for schemes for specific characteristics; for example, those that solely serve a protected characteristic or those that serve a closed group of employers and has a DB section—hybrid schemes. I agree with the noble Lord that, if we were to have too many exemptions, it would simply mean the policy had less impact, but we need to have some flexibility and consultation.

Amendment 92 from the noble Baroness, Lady Bowles, proposes that master trusts delivering “exceptional” value under the VFM framework could be exempted from scale and asset allocation requirements. Exemptions listed in new Section 20(1B) relate to scheme design and are intended to be permanent. Introducing a performance based exemption tied to ratings would be inherently unstable for members and would risk blurring two parallel policies. Scale and VFM complement each other, and both support good member outcomes. However, we do not agree that VFM ratings should be used to disapply structural expectations on scale, and we do not wish to dilute either measure.

--- Later in debate ---

[Baroness Noakes (Con)]

I am struggling to understand why the Government are setting their face against good performance. They seem to be obsessively pursuing scale and consolidation of the industry, unable to see that, for pensioners and savers, equally good or better returns can be achieved from sub-scale operators. That is a question of fact. The evidence that the Minister gave earlier merely points to there being a correlation between size and returns; it is not an absolute demonstration that, below a certain scale, you do not achieve good returns for savers. I hope that the Minister can explain why the Government are so obsessed with scale rather than performance for savers.

[Baroness Sherlock (Lab)]

I feel that we will have to agree to disagree on this point. The Government are not obsessed with scale; the Government believe that the evidence points to scale producing benefits for savers. We find the evidence on that compelling. I understand the noble Baroness’s argument, but the benefits of scale are clear. They will enable access to investment capability and produce the opportunity to improve overall saver outcomes for the longer term.

I cannot remember whether it was this amendment or another one that suggested that a scheme that did well on value for money should be able to avoid the scale requirements; the noble Baroness, Lady Altmann, is nodding to me that it was her amendment. The obvious problem with that is that schemes’ VFM ratings are subject to annual assessment and, therefore, to change. It is therefore not practical to exempt schemes from scale on the benefit of that rating alone.

We are absolutely committed to the belief that scale matters. It is not just that we think big is beautiful—“big is beautiful” has always been a phrase for which I have affection—but I accept that it is not just about scale. It is not so for us, either. We need the other parts of the Bill and the Government’s project as well. We need value for money; we need to make sure that schemes have good investment capability and good governance; and we need to make sure that all parts of the Bill work together. This vision has been set out; it emerged after the pension investment review. The Government have set it out very clearly, and we believe that it is good.

[Baroness Altmann (Non-Afl)]

The remarks that the Minister is making are of concern to me—and, I think, to other Members of the Committee—because they are just what the big providers would say. They have the power. I have seen this in the pensions landscape for years: the big players have this incredible advantage and lobbying power and the power to get their way on legislation somehow. That is not always bad for members; I am not saying there is something terribly wrong with the big providers. What I am saying, though—this is an important point—is that there is a real need for innovation, new thinking and new ideas in this space. Huge sums of money are under discussion here. If we are bowing to the existing incumbents and not making provision even for those small businesses that are currently established but will not necessarily reach that scale in time, I am not convinced that we are improving the market overall. I would be grateful for a thought on that, or for the Minister writing to me.

[Baroness Sherlock (Lab)]

I am going to push back on the premise of the noble Baroness’s comments. I understand that she feels very strongly about this, but the Government are not doing this to benefit large pension schemes. The Government are doing this to benefit savers. The Government established an independent pension investment review, looked carefully at the evidence and reached the view that the best thing for savers is, via these measures, to encourage and increase the consolidation that is already happening in the marketplace. It is our view that that, combined with the other measures in the Bill, will drive a better market for savers and better returns for savers in the long term. That is why we are doing it—not because we want to support any particular players in the market; that is not what we are about.

The noble Baroness mentioned her Amendment 136; I want to respond to that as well as to the noble Baroness, Lady Noakes. There is an issue around whether schemes already in the market have enough time to make scale. From when the Bill was introduced in 2025, schemes have up to 10 years, if we include the transition pathway, to reach scale. We project that schemes with less than £10 billion in assets under management today could still reach the threshold based simply on historical growth rates. For example, a £5 billion fund today, growing at 20% a year, broadly in line with recent growth in the DC market, could reach £25 billion within 10 years—and that does not take account of the impact of consolidation activity, which we expect to see within the single employer market as a result of reforms brought forward in the Bill, such as VFM, which we expect to lead to poorly performing schemes exiting the market.

[Baroness Altmann (Non-Afl)]

Is there a reason why the Government will not even consider allowing some transitional entry for schemes that are already established, such as the one I mentioned, which may or may not reach that number? This is not a magic number—£10 billion or £25 billion are not magic numbers—but these are businesses that are already established. It will put people off entering the market if suddenly, with no warning, a company that started in 2022 is under pressure. Let us say that there are bad markets or that it takes longer; as I was saying, at the moment, employers are not going to give these companies new business. If the Government could look at some minimum period of establishment that could get new entrants into the 2010 transition, that would be good.

[Baroness Sherlock (Lab)]

The important thing here is clarity. The noble Baroness mentioned a single scheme. I am not going to comment on individual schemes, for reasons she will appreciate—she would not expect me to do so, I know—but we have to set some clear boundaries. The boundary has to be somewhere. As I said, we have actually gone for the bottom end of what was consulted on. We have created a transition pathway precisely to give schemes the opportunity to grow; they need to be able to persuade us that they have a credible path to do that.

In the case that the noble Baroness mentioned, if there were some particular market conditions that caused problems across a sector, she will be aware that in the Bill there is something called a protected period. There are powers in Sections 20 and 26 of the Pensions Act 2008 that give regulators the ability to delay temporarily the impact of the scale measures. That is to ensure that the consequence of a scheme failing to meet the scale requirement—having to cease accepting any further contributions—is planned and managed. There is a range of reasons why that might happen. It might be about an individual scheme that has been approved as having scale but has failed to meet the threshold or it might be a market crash that affects all schemes. There is flexibility there for the Government.

However, the principle is that we have to set some boundaries around that. The Government have reviewed the evidence carefully, and we have concluded that the point that we have chosen is appropriate. We have created a transition pathway in order to do that, and we have created new entrant pathways in order to accommodate those situations. We believe that that will protect members’ interests.

[Baroness Bowles of Berkhamsted (LD)]

The Minister has not yet mentioned whether there is any kind of indemnity or legal consequence. What the legislation does is not neutral in the sense that it provides cut offs and reasons not to invest. Is a company doing something wrong by continuing when it should say that it will not be able to make £25 million and it should roll up now? These are issues about which questions have come to me. It has not been looked at in the research. Could the Minister write to me to say whether there are any legal dangers for either side and whether there would be any compensation if the value of the pension becomes less than expected?

--- Later in debate ---

[Baroness Sherlock (Lab)]

We expect schemes with scale in a future landscape to deliver better outcomes for members. Consolidation is not created by the scale measures. It is already happening in the market, but we expect it to accelerate. Those running schemes are expected to carry out due diligence and act in the interests of their members in any consolidation activity. If there is anything else I can say on that, I will write to the noble Baroness. I am happy to look at it. The core question is whether it is a matter for those running schemes to make those judgments.

[Baroness Noakes (Con)]

Does the Minister understand that if you are currently a small scheme, unless you have certainty about being able to qualify to go into transitional relief, you will not be able to raise any money to facilitate your growth? It becomes a Catch-22. The Bill is creating uncertainty, which is destroying the businesses of those who might well be able to come through, but will not be able to convince equity or debt providers that they will be a viable business at the end because of the hurdles that the Government are creating in this Bill.

[Baroness Sherlock (Lab)]

I understand the noble Baroness’s concerns, but I contend that we are doing the opposite. We are creating certainty by being clear about what the intention is, what the opportunities are and where we expect schemes to be able to get to and in creating transition pathways but making it clear that people will have to be able to have a credible plan to do that. We are making that clear now. I have given the reasons why I anticipate that there is a pathway to scale for schemes that are around at the moment, but that is a judgment that schemes will have to make. If they do not believe that they can make scale, they will need to look at alternative futures in a way that is happening in the market already through consolidation. I accept that it may accelerate it, but it is not creating it.

Amendment 134 seeks to remove the no-members requirement entirely, accepting that it would potentially allow any existing DC workplace scheme to claim new entrant status, circumventing the scale policy, which, while contested, is the point of our proposal. Our inclusion of the no-members provisions in Committee in the Commons clarified the original intent and prevented a loophole.

Amendment 137 would mean that existing schemes would be able to access the new entrant pathway if they had stronger investment performance than can be achieved by schemes with scale, which we have touched on. While I understand the intention to reward and maintain strong investment performance, the focus there would be on short-term rather than long-term outcomes. There are various practical problems with doing that in any case, but I am also conscious that there will be occasions where a scheme that depends on its investment performance does not deliver and no longer qualifies on the pathway. That is then not a stable position for employers that use the scheme or its members. At the heart of the requirement is the need to create buying power for schemes to drive lower fees and increase returns. A small scheme simply cannot generate the same buying power, and schemes with scale are expected to deliver better outcomes over the long term.

Amendment 138 would strip the power to define “strong potential to grow” and “innovative product design” in regulations. The Government believe that these are key attributes of a successful new entrant in the market. Like other noble Lords, I know about the importance of ensuring that the measures we implement will be clearly understood and workable in the complex pensions landscape. The form that innovation will take is, by definition, difficult to predict; we would not seek either to define its meaning without input from experts and industry or to fix that meaning in law without retaining some flexibility. Consultation with industry will be important in ensuring that schemes can demonstrate these attributes; to be clear, we will consult on this and other aspects of the new entrant pathway relief first, before regulations determine the meaning of these terms.

--- Later in debate ---

Finally, as noble Lords have said, and I will say it, too, I suspect that when the Minister responds, she will say, as she did at Second Reading, that the Government do not anticipate using the reserve power—I think I have quoted her correctly there—but what if they do, or a future, different Government utilise the power that would be ready to be rolled out if it were put in primary legislation?

[Baroness Sherlock (Lab)]

My Lords, the broad, combined effect of these amendments would be to remove from the Bill the ability of the Government to require certain pension schemes to hold a prescribed percentage of their assets in qualifying assets. I confess that, after Second Reading, the reaction of some noble Lords has not been entirely a surprise to me. However, I have to say at the start that, although the provisions divide opinion, they deliver an important element of the pensions investment review that the Government concluded last year.

I will make two headline points. First, as I have said, we do not presently expect to have to use the powers, as we are confident that the industry will deliver voluntarily on its commitments made under the Mansion House Accord. Secondly, the Government would not be proposing these powers if there were not strong evidence that savers’ interests lie in greater investment diversification than we see today in the market. DC pension providers recognise that a small allocation to private markets can improve risk-adjusted returns as part of a diversified portfolio. Despite this, in many cases providers are holding back, not because it is necessarily in savers’ best interests but, among other reasons, because of a lack of scale or because of competitive pressure to keep fees low. That problem, alongside the potential economic benefits of this sort of investment, is why we have made investment diversification such a big focus of these reforms and why we have welcomed the Mansion House Accord. It is also why it is so important that the industry is pulling in the same direction and why it is necessary that the Government have taken reserve asset allocation powers as a backstop to be used only if necessary.

Noble Lords have raised various concerns about the powers, which we will no doubt explore in much more detail on Monday—I look forward to that. However, as an opening point, I emphasise that the Government have taken care to build in appropriate guardrails. First, the power is time limited. It will expire in 2035 if it has not been used, and any percentage headline asset allocation requirements that are in force beyond that date will be capped at their current levels.

Secondly, the Government are required to establish a savers’ interests test, in which pension providers will be granted an exemption from the targets, where they can show that meeting them would cause material financial detriment to savers. The Government will need to consult and publish a report on the impacts of any new requirements on savers and economic growth, both before exercising the power for the first time and within the five years following the power being exercised. The regulations implementing this framework will be subject to parliamentary scrutiny.

A number of points have been raised. I will keep my response fairly high level; I know that some of those points will come up again next week, so I will return to them then, given that we have limited time before the Grand Committee must end. I start with the question of whether this is necessary. The Government are strongly encouraged by the Mansion House Accord, which is an industry-led, voluntary commitment by 17 of the UK’s largest pension providers to invest 10% of their default funds in private markets, with at least half of that in the UK, by 2030. It means that savers will benefit from greater diversification and the potential for better long-term returns. In view of this progress, the Government do not currently expect to need to use these powers.

In response to the noble Viscount, Lord Younger, and the noble Lord, Lord Vaux, I note that there is a continued risk of a failure of collective action here. Individual providers are under competitive pressure to keep costs as low as possible, which can discourage them from investing in the full range of asset classes, even where it may be in savers’ interests to do so. The reserve powers signify to the industry that change is happening across the market, and in that way—together with our other reforms—they support the transition to which the industry has itself committed. That is the top line as to why we are taking the power and the circumstances in which we think we would use it. I will come back to the issue of private markets when we have a debate on private markets next week.

We will have a longer debate on trustees and fiduciary duty, particularly the issues around regulations, when we come back next week, if that is okay with the noble Lord, Lord Sharkey. However, the Government do not accept that this proposal cuts across fiduciary duty. There is widespread recognition of the benefits that a diverse investment portfolio can bring for savers. Indeed, that is exactly why the signatories to the Mansion House Accord are committing to investing in private markets. However, if the reserve powers did come to be used, the Bill provides for a savers’ interest test to ensure that schemes can deviate from any asset allocation requirements where they can demonstrate that savers would suffer material financial detriment. The Minister for Pensions has committed to working with the sector to ensure that guidance gives trustees the confidence they need to invest in the best interests of savers and the UK economy. A stakeholder-wide round table will begin this work early next month, and I will keep noble Lords informed on that.

The noble Lord, Lord Vaux, asked what happens if a scheme makes losses. Trustees continue to be responsible for investing in their savers’ interests. We will come back to this in more detail, but the headline is that this means savers would continue in all circumstances to be protected by the core fiduciary duties of trustees. Trustees would also continue to be subject to a duty to invest in savers’ best interests in line with the law. We would expect that duty certainly to apply to the selection of individual investments in a portfolio, the balance of different asset classes in a portfolio and to any decision to apply for an exemption under the savers’ interest test.

The noble Lord, Lord Vaux, asked about sorting out other barriers first. Last year, we completed a comprehensive review of pensions investment, which identified that greater scale, as well as a greater focus on value rather than cost, has the potential to unlock significant additional investment that benefits both savers and the economy. The measures in the Bill tackle that. However, that does not mean that the work stops on barriers and investment opportunities. For example, the FCA announced last month that it will consult on rolling out to the pension funds it regulates a target exemption from the 0.75% charge cap, to accommodate the sorts of performance-based fee structures often used in private market investment. The signatories to the accord have explicitly called for that.

The noble Lord, Lord Sharkey, asked about enablers and whether there are enough investment opportunities. The answer is yes. We will continue to engage closely with the industry on the steps it is taking and any obstacles it is encountering. At this point, we are encouraged by early signs of progress and are confident that the momentum will continue. On future investment opportunities, I draw the noble Lord’s attention to one example of the role that the Government are playing: the Sterling 20 Group of leading pension providers launched by the Chancellor at the October regional investment summit. That group, convened by the Office for Investment, includes all the Mansion House Accord signatories and has already met twice to discuss specific investment opportunities in venture capital and energy generation.

The noble Lord, Lord Sharkey, asked about the consumer duty. The FCA’s consumer protection objective will continue to apply to FCA-regulated schemes. The FCA will apply it in parallel to any asset allocation requirements: in other words, where it does not believe there is a conflict. Or at least, where we do not believe there is a conflict. Or someone does not believe there is a conflict. Savers’ interests tests will be available for FCA-regulated firms, just as for TPR firms.

--- Later in debate ---

[Lord Sharkey (LD)]

Can the Minister respond to the point I made about statutory guidance?

[Baroness Sherlock (Lab)]

I will answer that next week, if that is okay, when we discuss the issues of fiduciary duty.

[Viscount Younger of Leckie (Con)]

I have a couple of points to raise. The Minister mentioned that the reserved power was designed to be a signal, and I would argue that it is a pretty strong signal to put in the Bill. Will she strongly consider whether there are other ways to encourage investments in the UK other than using this, and what might they be? This is one of the things that we will want to press.

Secondly, she did not answer my question about the dangers of a future Government taking up these powers, even though she mentioned the sunset clause of 2035, which is, frankly, some time off.

[Baroness Sherlock (Lab)]

I am sorry I did not namecheck the noble Viscount in responding to the second point. I intended to respond by pointing to the safeguards and the guardrails that have been built in. That was the nature of the response to that.

In response to the first question, I thought I said that the Government accept that this is not the only issue and that we are addressing the other ways. We have been looking at the other barriers and investment opportunities. We also mentioned that the FCA has looked at examples. It is not the only thing; we are looking at the other things as well. We think there is already significant progress, but we think this reserve power is a way of ensuring that progress goes forward and not backwards on this issue.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will be brief. There is a lot that could be said, but we will have other opportunities later on in this Bill.

This should have been a happy Bill, doing good for ordinary workers and building the economy, looking after the future in two interconnected ways. For the main part, we had cross-party policy consensus and continuity. We had public and industry support, which is just what you need for issues such as pensions and long-term investment, aided by significant and consensual regulatory changes—culminating this week—that should enhance diversity, choice and transparency in investment decisions.

However, at the heart, we got this devil’s clause. The Government have not given development a chance and such a reserve power is a massive intervention. It is a clause that, where there was unity, brings division; where there was trust, brings doubt; where there was confidence, brings concern; and where there was hope, brings despair. No wonder noble Lords oppose it. It ticks every bad box. I urge the Government to think again. They have not given policy and process any due regard and therefore I am sure that many of us will return to this on Report. But, for now, I will withdraw my amendment.