Pension Schemes Bill Debate
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Baroness Sherlock
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Pension Schemes Bill
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Baroness Sherlock
Member's explanatory statement
This amendment corrects a consistency mistake.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I thank noble Lords—at least, most noble Lords—for their contributions to that little debate. It is probably worth saying at the outset what this is about. Anyone who listened to the noble Lord, Lord Fuller, would assume, first, that theft was involved; secondly, that pots were being taken away from people; and, thirdly, that they were being taken away from hard-working, self-employed businesspeople. None of those things is true. These are pots where people have had a series of jobs, they have moved on and they have left small-value pots scattered around in different places, on which they are paying often quite significant charges, and the value of those pots is diminishing.
The policy was consulted on not by civil servants sitting in Horse Guards Parade but by the previous Government in 2023. This is the proposal that was consulted on by the previous Government and I happen to think that they got this right. So too did the range of opinion that was consulted, and I will say more about that in a moment.
The intention behind the policy is to capture the rights-dormant small pots and have them transferred to a consolidator, which will be clearly classified by the regulator as being one that has been classed as having value for money, and only to such a pot. The intention is to capture the right small pots that are genuinely dormant while avoiding transferring pots belonging to members who remain actively involved with their pension saving. Of course, no eligibility test will operate perfectly in every circumstance, but we believe the current 12-month period provides the right balance between effective consolidation and member protection. I shall explain why in a moment.
The noble Baroness, Lady Altmann, wants to extend the period to 24 or 36 months. That would significantly extend the period during which a pot remains dormant. This is not about industry; it is about risking detriment, both to individual members, who would continue to face charges for longer, and to the wider scheme membership, who, in practice, subsidise these small deferred pots. Either of those extensions would delay the consolidation of genuinely dormant small pots, leaving inefficiencies in the system for longer, resulting in—
Baroness Altmann (Non-Afl)
If a pot has been forgotten about for many years, this problem will not exist even with my amendment because it will have been dormant for over three years, if it was left behind from a long time ago. I am concerned about the people who are working at the moment who may take some time off, and to give them a better chance.
Baroness Sherlock (Lab)
If the noble Baroness could have just a bit of patience, I am just coming to that. I ask her to bear with me for a moment.
Either of the noble Baroness’s proposals to extend the period of dormancy would delay the consolidation of genuinely dormant small pots, leaving inefficiencies in the system for longer, resulting in higher costs for schemes and for members through higher charges.
Where someone holds several small pension pots across multiple schemes, they will find themselves subject to multiple sets of charges over a number of years. The longer the dormancy period, the longer that members will face those charges. It is well recognised that many schemes apply a flat-fee charge structure, particularly those most affected by the proliferation of small pots, and that can compound the issue. For example, a saver with three separate small pots held across three schemes, each applying its own annual flat-fee charge, could see those charges accumulate over an extended dormancy period. If the period were lengthened to 36 months, they could face four more annual charges. Given the relatively low value of many small pots, such cumulative charges represent a significant risk of detriment to the member.
On the point about people taking a career break with the intention of returning to work, in the majority of cases such members will be adequately protected by the 12-month dormancy window. The noble Baroness, Lady Stedman-Scott, mentioned maternity leave. This was looked at carefully during the consultation. Where someone is on paid maternity leave, employers should carry on paying pension contributions. Where contributions are being made, the pots are not dormant, so any period of dormancy would not start until no contributions were paid, and those pots would not be subject to dormancy criteria and would not be consolidated.
Anyone taking an unpaid break that lasts longer than 12 months would find that the system included various safeguards. First, every member will get a transfer notice before consolidation takes place, giving them a clear opportunity to opt out if they judge that consolidation is not in their best interests. As we develop the delivery design, we will look to explore different forms of communication to understand how they can best support members’ engagement with the process.
Secondly, under Clause 115, the Government are taking a power to require employers to provide updated information to schemes periodically. We will consult on how that should operate, but if subsequent evidence shows that career breaks present a genuine issue, we could simply require employers to notify schemes where a break was planned or under way. Where appropriate, that would allow such pots to be made exempt from consolidation under regulations made under Clause 25.
However, the current evidence does not indicate that this is expected to be a widespread problem. As I said earlier, the 12-month timeframe formed part of the proposal consulted on with stakeholders across the pensions industry and consumer representative bodies in 2023 and represents a supported middle ground—long enough to ensure that pots are genuinely dormant, but not so long as to delay consolidation unnecessarily. It is essential that the policy maintains the right balance between operational efficiency and member protection. Just to be clear, the Bill currently requires the regulations to set a minimum of 12 months for a pot to be classified as dormant. That means that if evidence suggests that extending the period is necessary, that period could be set at a higher level or it could be extended subsequently through secondary legislation.
We all want to avoid negatively impacting individuals who take periods of unpaid leave, but if we think about it, applying a blanket extension to the dormancy criteria cannot be the right way to provide that protection. A more appropriate approach is to design the policy framework with the necessary safeguards built in from the outset, and that is what we have done. Introducing a universal increase to the dormancy period would exacerbate the risk of detriment for everybody involved.
Finally, government Amendment 51 is a minor and technical change. It replaces “specified” with “prescribed” in Clause 23 to ensure consistent terminology throughout the Bill. The amendment improves clarity and brings the clause into alignment with the drafting used elsewhere in the measure. In the light of what I have said, I hope that the noble Baroness will withdraw her amendment and that the House will support government Amendment 51.
Baroness Altmann (Non-Afl)
My Lords, I thank the Minister for her reply. What she describes sounds very good in theory. My amendment is designed to address the issue that that theory does not work in practice in the kind of pensions world that we have right now. There will be improvements, but they are not in place yet. There is no compensation for a member whose pot is moved away to a worse scheme. They may have higher fees or they may have lower fees. They may get better performance, they may get worse performance. It should be incumbent upon all of us to make sure that there is as much protection as possible. If somebody has not paid in for years, the three-year limit will be fine because they will have exceeded it. Therefore, I wish to test the opinion of the House on Amendment 49.
Baroness Sherlock
Member’s explanatory statement
This amendment corrects a mistake.
Baroness Stedman-Scott (Con)
My Lords, of all the amendments we have tabled and discussed on this Bill, for me, this group is the most important. Mandation is, rightly and understandably, the most contentious part of the Bill. I am grateful to all noble Lords who have helped raise awareness of this issue, which, as I am sure the Minister is aware, has garnered a lot of attention—and criticism—outside of this place.
The ABI has written to the Minister in the other place, Torsten Bell, to warn him of its “serious concerns” about the mandation power, saying that it is “not necessary” for the Government to mandate investment. It has asked the Government to withdraw this part of the Bill. Pensions UK has been unambiguous on this point. It too has called on the Government to remove this power from the Bill, warning that it would harm
“free and open market competition aimed at driving better saver outcomes”.
It has said that mandation would
“put those outcomes at risk”.
More recently, Paul Johnson, formerly of the IFS, wrote strongly against mandation in an article in the Times. Just the headline and strapline will give the Minister all the information she needs:
“Telling pension funds where to invest will not end well. The government’s desire to boost UK assets is understandable, but overriding the fiduciary duty of trustees crosses a line”.
The industry is clear, the experts are clear and much of this House is clear that the Government should not be directing private sector investment. It is obvious that this power overrides the fiduciary duty of trustees. This is a radical step, and it establishes the principle that it is appropriate and desirable for Governments to tell schemes how to invest to meet their own political objectives. The Government are right to want investment in UK assets—indeed, I am sure that no one in this Chamber would not welcome more money in UK assets. However, if the picture is not where we want it to be, the question for the Government is: why? Why is the UK not attracting that capital? What barriers exist? What reforms are needed?
Instead of doing that work, the Government have reached for a shortcut, a reserve power that is really a threat to compel investment. This is reckless. It sets a dangerous precedent, and the Government’s central defence—that they do not intend to use the power—raises two unavoidable questions. First, if they never intend to use the power, why are they legislating for it? Secondly, how can the Minister assure us that the power will not be used when they will not be in office for ever? This power is going into law, and I am afraid it will outlast the Minister and indeed all of us. The noble Baroness cannot speak for future Administrations, or indeed political parties such as Reform, God help us, which has signalled a great willingness to direct investment. The Government are handing this power not merely to their own Ministers but to future Ministers.
I will not detain the House any further than to say that this power must be removed. It is a massive overstep from the Government and, despite all the assurances of the Minister, no one is yet convinced that this can remain. Industry rejects it, experts have expressed serious concerns about it, and the Minister must remove it. I am sure she has listened to all noble Lords’ contributions. As my noble friend Lord Wolfson said, we must remove this Robert Maxwell power. We on these Benches, and I am sure others, will support the noble Baroness wholeheartedly if she seeks to divide the House on this matter.
Baroness Sherlock (Lab)
My Lords, as we have heard, the combined effect of these amendments would be to remove from the Bill the Government’s reserve power to require certain pension schemes to hold a prescribed percentage of their assets in qualifying assets. As the noble Baroness, Lady Bowles, indicated, we explored this territory in some depth in Committee, and noble Lords made a number of detailed and considered arguments. It has been good to have an opportunity to talk to a number of colleagues since then and to discuss their concerns. The Government have reflected but continue to regard the asset allocation reserve power as a necessary part of the reform package that this Bill introduces, and I will set out why.
The headline case is that there is strong evidence that savers’ interests lie in greater investment diversification than we see today in the DC market, and there is probably broad agreement on that. DC pension providers themselves have recognised this. A small allocation to private markets, as part of a diversified portfolio, offers the potential for better risk-adjusted returns over the long term. But despite that recognition, many providers are not yet acting on it. That is not because diversification is against savers’ interests. It is in significant part because of competitive dynamics, the pressure to keep headline costs as low as possible in order to win and keep new business from employers, and the difficulty of any single provider moving ahead of the market. This is not just the Government’s view. It is what the industry has said repeatedly.
Lord Wolfson of Aspley Guise (Con)
My Lords, does the Minister not recognise that in most industries, moving ahead of your competitors is an advantage, not a disadvantage? It is certainly not a reason not to move in the right direction.
Baroness Sherlock (Lab)
It depends on how the market is structured. The decision-makers here are employers. Let us look at what happened under the Mansion House Compact, the predecessor of the accord, brokered under the previous Government. The words were that
“‘too much focus on cost’ remains the key barrier”.
In other words, we have a market in the employment sector where the focus has been for too long on cost, not value. The noble Lord shakes his head, but we have heard this from around the House. Indeed, in Committee many people who do not agree with this power accepted the underlying diagnosis, and that is the basis on which the Government are proceeding.
The Government want the industry to invest in the full range of assets. One of the reasons, I suspect, that the Mansion House Accord is moving together is to make sure that it is clear that the market is going in that direction. That is the problem, we think: there is a risk of a failure of collective action. The accord is a commitment. The power gives providers assurance that the whole market will move so that they will not then be in a position where somebody faces a competitive advantage by reverting back to focusing on cost and not on value.
Lord Vaux of Harrowden (CB)
As I understand the noble Baroness’s argument, the focus on cost is the problem. This Bill solves that with the value-for-money framework, so why do we also need the mandation power?
Baroness Sherlock (Lab)
This all comes as a package. A lot of attention is focused on this particular reserve power, but in fact it is the combination of all the elements of the Bill that we discussed in some detail in Committee over recent weeks: the question of the investment in scale, the need for the value-for-money framework, the need for the option to consolidate small pots. All these things come together to create the conditions in which this will work. This reserve power is to address a particular question, the risk of collective failure. I fully accept that the noble Lord does not agree with it, but I want at least to have the opportunity to make the argument as to why the Government are proposing to do it in this way.
The Mansion House Accord represents a voluntary commitment by 17 of the UK’s largest DC pension providers to invest 10% of their default funds in private markets, at least half of that in the UK, by 2030. We continue to be encouraged by progress, but the risk of a collective action failure in this market has long been recognised. As I said, individual providers face strong commercial incentives to keep costs low and to defer action until others move first. The reserve power exists as a backstop to ensure that if voluntary progress stalls, the Government have the means to act. Its presence in the Bill sends a clear signal that the commitment to change is underpinned by more than good intentions, and it helps to give each provider confidence that the rest of the market will move too.
At earlier stages we discussed a range of issues around safeguards and other things, which I thought would come up in later groups but that will obviously depend on what happens next. First, the power is time limited. The noble Baroness, Lady Stedman-Scott, thinks this power will outlive us all. I hope it does not, because if it has not been used by the end of 2035 it falls away, so I very much hope that it will not outlive the noble Baroness and me, although obviously we are in the Lord’s hands: should we be called home, what can we do? If it has not been used by 2035, it falls away. If it has been used, any percentage requirements in place cannot be increased beyond that date.
Secondly, the Bill establishes a savers’ interest test. Pension providers will be able to apply for an exemption from the targets where they can show that meeting them would cause material financial detriment to their members. Thirdly, the Government must consult and publish a report on the expected impacts, both on savers and on growth, before exercising the power for the first time, and a post-implementation review must follow within five years. Finally, the regulations implementing any requirements will be subject to the affirmative procedure, so Parliament would have its say.
I will respond to some specific questions. There was a question about how to define UK assets. This would be done in regulations were the power ever to be used. Consideration would have to be given to the characteristics of different asset classes. The Mansion House Accord is accompanied by some high-level guidance on how a UK investment should be identified within each of the different asset classes. That asset class by asset class approach to establishing the location is also the one that the FCA has taken as it consults on the upcoming value-for-money disclosure requirements, which will require firms to provide UK overseas asset allocation split. If the Government ever came to exercise these powers, we would expect similarly to take an asset class by asset class approach.
Questions were raised about a future Government and how this might be used. The noble Baroness, Lady Coffey, prayed in aid the European Convention on Human Rights, and I commend her on that. First, on the question on property rights, this applies to default schemes and people can choose to opt out, but she raises a relevant point. Obviously I hope there will never be one, but if there ever were a Government of a different persuasion, were they to seek to use it in a way beyond what is here, I think they would run into problems. This Government have made it quite clear, in Committee in this House and in the other House, that the purpose of the power is to assure good outcomes for savers and the economy, recognising diversification benefits and the potential for higher returns. It is not an instrument for channelling investment into pet projects or specific companies.
The noble Lord, Lord Vaux, quoted me on this point. It was marvellous—“What he said” is what I would say. That is the Government’s view, and I have spoken about the various safeguards, but even if a future Government wanted to use these powers to do something either much broader or much more specific, of course they would have to abide by established principles of public law, including the requirement for Ministers to act rationally, ensuring procedural fairness and compatibility with ECHR rights when making secondary legislation.
The Government are under no illusions about the significance of this power. It is a substantial intervention and, if we ever found the need to use it, we would have to proceed with great care. I understand the strength of feeling on this. These powers, alongside the scale provisions, the value-for-money framework and the consolidation measures, are a package. Together, they are designed to deliver a step change in outcomes for millions of pension savers. If we remove the reserve power, we remove the mechanism that gives the rest of this framework its teeth when it comes to investment diversification.
For a long time, successive Governments have recognised the need to channel pension capital into productive assets. Auto-enrolment has brought millions more people into saving. We now have a responsibility to ensure that those savings are put to work properly to deliver better long-term returns. But the question before us is whether the Bill should contain the backstop at all. In the Government’s view, the answer is yes. Without it, the voluntary commitments made by the industry would rest on good faith alone. The experience of previous attempts to shift investment patterns in this market suggest that that, on its own, may not be enough. For those reasons, I respectfully ask the noble Baroness not to press her amendment.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank all those who have spoken. The overwhelming view is still that this power goes too far. Many of the issues on which the Minister comments are around cost but, as I said, the whole focus on cost has been brought about by regulation. Changing to value for money will, I hope, adjust that, although I have concerns that it will still be too bound up. But the more I listen to the Minister, the more I hear that there is a deliberate intent for market manipulation and control. That really worries me, because it does not seem to be at all market sensitive or prepared to use what is supposed to be one of the strengths of this country—its asset management.
I think this is dangerous and market distorting, even without any legal effect. As has been eloquently said, it is the wrong direction of travel—I thank the noble Lord, Lord Wolfson, for that reminder. I wish to test the opinion of the House.
Viscount Younger of Leckie (Con)
My Lords, I thank all noble Lords who have amendments in this group, which broadly seeks to refine the Government’s scale requirement as set out in the Bill to reflect the fundamental principle that size is not everything. We have heard a lot about that in this short debate. For the sake of brevity, I shall limit my remarks to my Amendment 77. The scale requirement as currently framed is too blunt an instrument. It risks prioritising size over quality, process over performance and structure over outcomes—in other words, it risks innovative and high performing funds merely because they are small. These remarks have been echoed by the noble Baroness, Lady Altmann.
The central question we must always ask in pensions policy is: does this improve outcomes for savers? This was the essence of my noble friend Lord Fuller’s remarks. If the answer is no, then we should think very carefully before proceeding. When this power comes into force, it will bring into scope schemes that are already delivering strong outcomes—schemes that are well run, well governed and performing effectively for their members. In such cases, forced consolidation is not just unnecessary but may be actively harmful. It risks disrupting successful investment strategies, increasing costs and ultimately undermining the very outcomes that we are seeking to improve.
This amendment would introduce a vital safeguard. It would give the regulator the discretion to recognise where consolidation would not benefit members and to treat such schemes as meeting the scale requirement. It would ensure that the policy is applied intelligently and does not run roughshod over schemes that are already doing what the Government want. Crucially, it would also reinforce fiduciary duty: trustees and managers must act in the best interests of their members, not in pursuit of arbitrary thresholds set by the Government. This amendment would ensure that they are not compelled to take actions that run counter to that duty.
Scale should be a means to an end, not an end in itself. Where scale improves outcomes, it should be encouraged, but where it does not, where schemes are already delivering for their members, we should not force change for its own sake. This amendment would simply ensure that savers remain at the centre of the policy, and therefore when this amendment is called I will seek to test the opinion of the House.
Baroness Sherlock (Lab)
My Lords, Clause 40 delivers the Government’s commitment to ensure that DC workplace pension savers benefit from the advantages that flow from scale and consolidation. The framework that the Bill establishes for scale is integral to securing better member outcomes, improved access to productive investment and stronger in-house capability. Evidence shows that scale can bring the ability to invest in diversified assets as well as lower member fees and investment costs. There is also evidence that scale can enable greater investment and governance capability in running a scheme. As DC schemes become more complex, these things will drive improved member outcomes and support the delivery of an income in retirement.
We had a debate on various issues in Committee, and one of the questions was about scale and competition in the marketplace. I reassure the House that the Government have considered this. Our analysis suggests that, once the scale measures have taken effect, there will be 15 to 20 master trusts and GPP megafunds operating.
There are a number of amendments in this group, and I will try to say something briefly about each. First, on the amendments that seek to add further exemptions to scale, the Government’s policy in this area is to allow day one exemptions that are based on a scheme’s permanent design characteristics. In other words, it should be as clear as soon as the regulations are in place whether a scheme meets an exemption, rather than it being subject to regular assessment. That is important because it is about providing certainty and stability for members and employers.
Amendments 55 and 60, from the noble Baroness, Lady Noakes, would create an exemption to allow master trusts and GPPs to be excluded from the scale requirements where they deliver investment performance that exceeds the average achieved by all master trusts or GPPs that meet the scale conditions. While I hear the noble Baroness’s arguments, I am concerned that this would undermine the Government’s objective: a market of fewer, larger and better-run schemes where economies of scale deliver sustained benefits for members.
Baroness Sherlock
“(7) Regulations may make provision of a kind mentioned in section 28A(10) or (11); and for this purpose a reference in those provisions—(a) to an approval under section 28A is to be read as a reference to an approval under this section; (b) to a relevant Master Trust is to be read as a reference to a relevant Master Trust or a group personal pension scheme;(c) to the trustees or managers of a relevant Master Trust is to be read as a reference to the trustees or managers of a relevant Master Trust or the provider of a group personal pension scheme.”Member’s explanatory statement
This amendment correct a consistency mistake and provides for regulations about approvals under inserted section 28E of the Pensions Act 2008 to make equivalent provision to regulations about approvals under inserted section 28A of that Act.
Baroness Sherlock
“(3) Regulations may make provision of a kind mentioned in section 28A(10) or (11); and for this purpose a reference in those provisions—(a) to an approval under section 28A is to be read as a reference to an approval under this section;(b) to a relevant Master Trust is to be read as a reference to a relevant Master Trust or a group personal pension scheme;(c) to the trustees or managers of a relevant Master Trust is to be read as a reference to the trustees or managers of a relevant Master Trust or the provider of a group personal pension scheme.”Member’s explanatory statement
This amendment correct a consistency mistake and provides for regulations about approvals under inserted section 28F of the Pensions Act 2008 to make equivalent provision to regulations about approvals under inserted section 28A of that Act.
Viscount Younger of Leckie (Con)
My Lords, I thank my noble friend Lady Noakes for her amendments in this group and I am grateful for the helpful remarks made by my noble friend Lady Neville-Rolfe and the noble Lord, Lord Palmer.
These amendments recognise an important point: a rigid, one-size-fits-all approach risks crowding out innovation, flexibility and ultimately better outcomes for savers. Schemes are not identical, nor are their members, and it is entirely right that providers should be able to design different default arrangements to meet different needs.
Amendment 105A is especially important in this regard. It would require regulations concerning the operation of the scale provisions in Clause 40 to have regard to innovation and competition. The Government have said time and again that they are pursuing a growth mission and that growth will underpin their ability to fund day-to-day spending. Yet what we have seen instead is very different: an ever-greater reliance on taxation to plug the gap, something that is not only economically damaging but ultimately unsustainable for the country.
The noble Lord, Lord Palmer, put it well. If the Government are serious about growth, then they must be serious about fostering innovation and competition in sectors such as pensions. Recognising and ensuring that innovation is not stifled is a practical and constructive way to support that mission.
This amendment does exactly that. It ensures that, in shaping the regulatory framework, the Government actively consider the importance of a competitive and innovative market—one that delivers for savers and contributes to wider economic growth. For those reasons, the Government should accept this amendment. Should my noble friend Lady Noakes wish to test the opinion of the House, we would be glad to support her.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Baroness, Lady Noakes, for introducing her amendments. The Government think it essential that pension schemes remain competitive post scale and we expect that schemes with scale, as well as market disruptors, will continue to innovate and drive competition. We actively encourage competition through the provision of the new entrant pathway to allow new innovative schemes to enter the market.
The scale measures place a requirement for a main scale default arrangement at the centre of the scheme, to deliver scale and the benefits that that can bring. Amendments 114 and 115 relate to measures on consolidation and addressing fragmentation within schemes that are in the market. There is currently significant fragmentation within the market, with high numbers of default arrangements that do not ultimately serve member outcomes.
While I recognise that much of the fragmentation is a product of history in contract-based schemes, we have seen that the number of default arrangements is increasing across the market and in a number of master trusts. We do not want to see the same issues arising over time as exist in GPPs, where members are in too many default arrangements that do not offer value.
Let me be clear: the measures in Chapter 4 do not cap or limit the number of default arrangements, nor do they impact on the ability of a new entrant to enter the market. What we want to see is default arrangements being created where this meets and continues to meet genuine member or employer need in tandem with the scale measures. That is why we are introducing measures to prevent new default arrangements from being operated without regulatory approval and carrying out a review into current arrangements to establish where they should be consolidated or the reasons for them to continue.
Amendment 114 seeks to require the review of default arrangements to consider the extent to which arrangements contribute to innovation and competition. I agree with the spirit of this amendment, but I do not think that it is necessary. The review must already consider the circumstances where it is appropriate for non-scale default arrangements to continue operating and it is right that competition and innovation will be part of that work. The review will consider how competition and innovation have driven the operation of non-scale default arrangements and what they are expected to deliver for members.
Amendment 115 seeks to require that regulations under Clauses 42 and 44 will have regard to competition and innovation. Again, I agree with the intention behind the amendment, but it is unnecessary. I shall explain why. It is reasonable to expect that the regulations that set out the criteria in which regulators can approve new default arrangements will include innovation and competition. Indeed, we expect these arrangements to meet a specific need or offer something different to the market. It is also reasonable that these will be considerations in setting out where non-scale default arrangements will have to be consolidated. However, as the Bill sets out, those regulations already have to take into account the conclusions of the review, and that will consider competition and innovation.
Amendment 105A seeks to require regulations across the scale measures to have regard to innovation and competition. I reiterate the Government’s support for an innovative market, and we expect providers to continue to innovate. The amendment is not needed to achieve that but, although well-intentioned, the duty that the amendment would introduce ignores the policy objectives of the scale measures and the benefits they are expected to bring. To be clear, the benefits of scale include lower charges, diversified investments and improved governance. We are already creating space in the market for innovation through the new entrant pathway and, as previously outlined, we still expect the market to be competitive.
More than that, though, we need to remember something crucial about the nature of the DC market. A competitive market is vital but we also have to recognise that the ultimate beneficiaries—the members—do not select their scheme. That is done by the employer. Employers are the decision-makers on pension provision. They are the buyers in this market and they will try to do the best for their workforce, but ultimately, of course, their focus will be on current rather than past employees. We therefore need to drive schemes to deliver for all members, not just those who are actively contributing, and too narrow a focus on competition and innovation will not do that. The needs of members should be paramount.
Baroness Neville-Rolfe (Con)
Before the Minister proceeds, could she tell us whether competition and innovation feature at all in the Bill?
Baroness Sherlock (Lab)
My Lords, there is, of course, an innovation pathway; innovation therefore clearly has to be in that. The innovation pathway is the innovation pathway, so it clearly is in that. I have set out on the record my expectation of what will be considered in the review and the fact that the regulations will have to take account of what the review says. I hope that satisfies the noble Baroness.
The needs of members should be paramount. It is right that the Government are acting to protect them and to drive schemes to have the capability and capacity to deliver better outcomes. I hope that the noble Baroness, Lady Noakes, can see that we share the same overall objectives and that the Bill as drafted accommodates the intent of her amendments. I hope she feels able to withdraw the amendment.
Baroness Noakes (Con)
My Lords, the Minister, as usual, talks a good story on competition and innovation. Our concern is that the Bill as drafted makes it difficult to see that the virtues of innovation and competition are in fact reflected throughout it. In particular, there is no mention of innovation or competition in the regulations restricting the creation of new non-scale default arrangements in Clause 42. That would be addressed by my Amendment 115.
Those who are exercising the extensive powers in the Bill to circumscribe the way in which the markets are allowed to develop need to have competition and innovation absolutely in their focus, but the Bill does not achieve that. The Minister could cite only the innovation pathway, but the Bill is much more than that. That is why I believe we need to make changes to the Bill. As I mentioned, I will seek to press both my amendments, but I will start by begging to move Amendment 105A.
Viscount Younger of Leckie (Con)
My Lords, this amendment speak to a principle that we on these Benches have returned to throughout our consideration of the Bill: the framework we are putting in place must reflect the reality of outcomes, not simply a rigid set of predetermined requirements. This amendment recognises that many schemes quite properly design different default arrangements for different cohorts of members. That is not a weakness; it is a strength. It reflects an understanding that savers are not all the same, and that good outcomes often require a degree of tailoring.
Where such schemes are performing well and delivering strong outcomes for their members, they should not be penalised simply because they do not conform to a single uniform model. In that sense, this amendment is important. It does not undermine the objective of improving scale where that is beneficial, but it ensures that we do not lose sight of the ultimate goal, which is—returning the same theme—better outcomes for savers.
Baroness Sherlock (Lab)
My Lords, I thank the noble Baroness, Lady Altmann, for introducing her amendments. I covered quite a bit of this ground in my response to the previous group, which was quite long, so I will not repeat that—I hope that the noble Baroness will not mind.
As I set out in the previous group, Chapter 4 of the Bill relates to default arrangements and the fragmentation in schemes that are in the market. To reiterate, the measures in this chapter do not cap or limit the number of default arrangements, nor do they impact on the ability of a new entrant to enter the market. I previously mentioned innovation, which features in the new entrant pathway, but what we want to see is default arrangements being created to meet member needs. That is why we are introducing a range of measures for them to need regulatory approval before they begin to operate.
On Amendment 112, I understand that the intent is to allow a scheme to have
“several non-scale regular arrangements”.
However, it is not clear what is meant by a “regular” arrangement in the description, as it is not defined.
Baroness Altmann (Non-Afl)
I did not go into detail for reasons of time. However, my intention with the word “regular” was to get away from the standard industry jargon of “default fund”, which has quite negative connotations for an ordinary member. Therefore, having the word “regular”—or “standard”, or whatever we want to call it—would be much better for the pensions industry than the negative term “default”. Most people would ask, “Why would I want to default on my money? I want to do something good with it”.
Baroness Sherlock (Lab)
The noble Baroness should not worry about time—it is only 3.45 pm. We have all the time in the world, so I am very happy to carry on debating this.
Baroness Sherlock (Lab)
Tell me about it. To pick up on the point the noble Baroness made, we have had the discussion about language before, and I am completely with her on how we describe things when we are facing customers and individual savers. However, language that goes into Bills has to be precise because it gets litigated, and therefore things have to be capable of being defined. That is why definitions matter. It is not about a desire to obscure or put things in language that is not easily understood. The key is to be precise in legislation, and in member-facing communications to be as clear as is necessary.
Baroness Sherlock
Member's explanatory statement
This amendment ensures that default pension benefit solutions must be designed and made available to deferred members (as well as active and pensioner members).
Baroness Sherlock (Lab)
My Lords, in moving Amendment 116 I will speak also to government Amendments 117, 118 and 119. These are all minor and technical amendments.
Amendment 116 to Clause 49, concerning guided retirement, makes a technical change needed to ensure that the legislation functions as intended. The amendment provides greater clarity that deferred members—those no longer actively contributing to the scheme but who are not yet drawing their pension benefits—are considered eligible members. This ensures that the framework covers the broad range of individuals for whom it was designed and reduces the risk of misinterpretation. The amendment does not change the policy; it simply provides the clarity needed for effective implementation, consistent with the policy intent.
Government Amendments 117, 118 and 119 will help to ensure that well-funded superfunds will not be forced to wind up when they still provide a high level of security to their members. Under the superfund supervisory framework that will be established through the Bill, a breach of the technical provisions threshold may result in the capital buffer being released to the scheme’s trustees, whereas a breach of the protected liabilities threshold may result in the superfund winding up.
In drafting this policy, we anticipated the upside-down situation which can arise within a superfund in certain circumstances when the protected liabilities threshold is breached before the technical provisions threshold. We have therefore taken powers in Clause 85(4) to determine that a breach of a threshold may not take place in specified circumstances. However, further engagement with industry and changing market conditions have indicated that the previously little-known occurrence in which these thresholds swap could be more common in future. Therefore, we need to build more flexibility into the forthcoming regulatory framework. As I said in Committee, it is important that we recognise that higher benefit levels in the PPF are good news for members of all schemes supported by the PPF.
The protected threshold has an important purpose: to ensure that members are protected in the rare instances where superfunds are deemed to be failing. Retaining the threshold will help the Pensions Regulator monitor the risk of a superfund failure. However, we recognise that forcing a superfund to wind up in instances where its technical provisions are lower than its protected liabilities would not be in members’ best interests if the scheme were otherwise able to meet its liabilities.
These amendments therefore seek to create further flexibility to ensure that superfunds are both secure for members and commercially viable. Other approaches may risk tying superfunds to absolute requirements before experience, insight and evidence can clarify the appropriate approach to take. We need to consult fully on superfunds’ funding thresholds, which will be set out in regulations, with a particular focus on this very issue. I hope the House can accept these amendments. I beg to move.
Viscount Younger of Leckie (Con)
My Lords, I shall speak briefly to this group of amendments. At the outset, I recognise that a number of these amendments are either technical or consequential. It is entirely right that the Bill should be internally consistent and operable in practice.
However, Amendment 117 raises a more substantive issue on which I would be grateful for some clarification from the Minister. This amendment alters the way in which the protected liabilities threshold for superfunds is determined, moving to a model in which the threshold is defined as a percentage set out in regulations. I know that we are on the cusp of closing proceedings on the Bill today, but I am afraid that I have a number of questions on this.
First, will the Minister set out clearly what problem this amendment seeks to address? What deficiency has been identified in the current approach? Secondly, what assurance can the Minister give that this change will not weaken the level of protection afforded to members? Is there any scenario in which this more flexible, percentage-based approach could permit lower funding levels than would otherwise have been required? Thirdly, how does the Secretary of State intend to determine the appropriate percentage? Will there be a minimum floor or is this entirely to be left to future regulations? Finally, given the importance of this safeguard, can the Minister explain why it is not being set out in the Bill and what level of parliamentary scrutiny will apply to the regulations that determine it?
Flexibility can be valuable, but when it comes to member protection it must be accompanied by clarity and by robust safeguards. I look forward to the Minister’s response.
Baroness Sherlock (Lab)
I am grateful to the noble Baroness, Lady Altmann, for her support. I know that she recognises the problem that this is designed to solve and why the Government have done this.
In response to the noble Viscount, Lord Younger, obviously I completely failed, but I thought that my speech explained the problem that this was designed to solve. Let me try again. If I say it again slowly, that might help—that is a comment on my speed, not on his comprehension, if I may say so.
The Bill is establishing a permanent supervisory framework for superfunds—there is only an interim arrangement at the moment. There are two different issues. A breach of the technical provisions threshold can result in the scheme’s buffer being released to the trustees, whereas on the other hand, if you breach the protected liabilities threshold then that can result in the superfund being wound up. If those end up being breached in not the traditional order, the superfund could end up being obliged to wind up, when in fact it could meet its liabilities other than because of this issue. That is the problem. I have tried to explain it more simply, and I apologise that I did not do so more clearly at the start. We discussed the problem in Committee, when the noble Baroness, Lady Bowles, tabled an amendment and we had a conversation about it. That is the problem we are trying to solve.
I said at the time that it cannot necessarily be in members’ interests to force a superfund to wind up when its technical provisions are lower than its protected liabilities, if it could otherwise meet its liabilities. I said that there was an option to use a clause in the Bill to deem that a threshold had not been breached, but if it is potentially going to be a more common problem, it makes more sense to deal with that in the way we have. The way we have set the threshold is about providing flexibility to make sure that schemes are not wound up unnecessarily.
We currently do not expect to set the threshold below PPF levels of benefits—I suspect that that is what the noble Viscount was aiming at. That is not what we intend. The focus is on ensuring the best possible member outcomes and protecting the PPF. Until the evidence gathering is complete, it would not be appropriate for me to speculate on precisely where that will be set, but I can say to him that that is the case.
On how it will be provided, there will be regulations. The superfund regulations will therefore be subject to the affirmative procedure. When those come back here, there will be every opportunity for the House to discuss them. I hope that answers the noble Viscount’s questions. If there is nothing else, I beg to move.
Baroness Sherlock
Member’s explanatory statement
This amendment would provide for the protected liabilities threshold in Part 3 (superfunds) to be met if the total value of the assets of the relevant scheme and the capital buffer exceeds a percentage of the scheme’s protected liabilities specified in regulations made by the Secretary of State.