Pension Schemes Bill

Lincoln Jopp Excerpts

2nd reading
Monday 7th July 2025 Commons Chamber

[Torsten Bell]

In any circumstances, the trustees would need to agree to a surplus release, so they are welcome to say to their employer: we are only going to agree to it on the basis of a change to something that the employer holds the cards over. I am happy to discuss that with the right hon. Member further, and there may be other schemes that are in a similar situation.

[Lincoln Jopp (Spelthorne) (Con)]

The way in which the Minister is talking about insurance buy-out suggests that, in the Government’s mind, insurance buy-out is still in some way a gold standard. Can he reassure the House that he is seeking to flatten the playing field, such that the increased choice available to defined-benefit pension schemes will mean that for perpetuals who run on—such as OMERS, which started off as the Ontario municipal employees retirement system and is now worth 140 billion Canadian dollars—there is as much safety in superfunds as there is in insurance buy-out?

[Torsten Bell]

I shall come on directly to the question of superfunds, which I know the hon. Member has a long-standing interest in. There is obviously a distinction between closed and open defined-benefit schemes, which I think is relevant to the point he is raising. It is also important for trustees to have a range of options.

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[Kit Malthouse (North West Hampshire) (Con)]

I congratulate the hon. Member for Tamworth (Sarah Edwards) on her speech. I am afraid, however, that you, Madam Deputy Speaker, will have to forgive me for puncturing the air of bonhomie and positivity about the Bill, because I am really not content with it.

Frankly, I feel it is my duty as an Opposition Back Bencher to be suspicious of consensus, particularly when the City of London is conspiring with a Labour Government to muck about with our pensions. We have seen that before. I am old enough to remember Gordon Brown’s so-called reforms in 1997, which struck a hammer blow to the British people’s pension funds. You will remember, Madam Deputy Speaker, that the late, great Frank Field—who was then the Pensions Minister—later called those changes a spectacular mistake that struck a hammer blow to the solvency of British pension funds and drove a dagger deep into the heart of the defined-benefit landscape, resulting in its extinction.

As such, I am afraid that must rise to raise some very significant reservations about this bit of legislation—and not just its technical execution, but the political instinct that it betrays. While the Bill is wrapped in the warm words of reform and modernisation, what it actually does is centralise control, unsettle previously settled rights, and risk disenfranchising precisely those people whom it purports to help.

To begin with the Bill’s technical aspects, I reiterate my point of order. I am a member of the local government pension scheme through my membership of the London Pension Funds Authority, and I am uniquely affected by this legislation, as are 6.5 million other former and current public sector workers. My view is that, under this Bill, those people’s rights are being denied, and that through the hybrid legislation process, they or their representatives should have the right to petition the Bill Committee and explain why they feel they are affected by investment pooling, the changes to fiduciary delegation and the asset consolidation. They are uniquely affected by this Bill, which strikes profoundly at the governance of the pension funds they have paid into in a way that it does not for other pension funds in this country. That is the definition of hybridity—if that is a word—so if we are going to stick to the rules in this House, we really should stick to them. I look forward to getting the letter that you promised me, Madam Deputy Speaker, and I know that you have asked me not to refer to procedure in the other place, but this is not the only Chamber that will be looking at this legislation.

The hon. Member for Oldham East and Saddleworth (Debbie Abrahams), who is just about to leave—I am sorry to detain her but will be brief—asked the Minister what the problem is. I repeat her question, but in relation to the local government pension scheme, I also ask what it has to do with him. It is my money, not his, and it is for scheme members to make decisions about how they wish their money to be used. It is not taxpayers’ money; it is my money. It is a defined-contribution and benefit scheme, and we have all paid into it. He is the second Minister in the space of 18 months to try to interfere with the local government pension scheme, and I stood in this Chamber and opposed Michael Gove, now Lord Gove in the other place, when he attempted to manipulate the local government pension scheme for political reasons. I urge the Minister to think twice before he does so.

Secondly, I believe that this Bill is conceptually flawed. If we are being generous—[Interruption.] By all means, the hon. Member for Oldham East and Saddleworth is free to go—I will not be mentioning her again. She was hesitantly rising to leave. If I am being generous, the ambition behind this Bill is to unlock capital that can be invested for the purposes of growth, but the methods it proposes are chillingly dirigiste and make the dangerous assumption that Whitehall knows best and that central direction by the Government can outperform the dispersed judgment of hundreds of experienced trustees managing diverse funds in varied contexts. Essentially, with this Bill the Minister is turning the pension fund industry into an element of Government procurement by the back door.

There are three further points that I want to put on the radar on Second Reading. I understand that the Bill will go through, but I hope the Minister will take them into account. First, it is simply not true that megafunds perform better. There is plenty of academic and empirical evidence that the picture is much more mixed. Often, smaller funds with better governance and a more focused investment strategy can perform better. These supertanker monopoly funds lose agility, lack accountability and become distant from pensioners and members of the fund. Their investment discretion and their ability to move quickly on investment decisions becomes sclerotic and bureaucratic. In particular, it is true that these megafunds specifically underperform when they invest in exactly the kind of illiquid assets that the Government are hoping to push them into: infrastructure and private equity. I urge the Government and the Minister please to examine carefully the evidence from the United States and elsewhere that shows that these very large funds do not necessarily produce better returns for investors. They may well be able to reduce costs because of scale, but I am afraid that the evidence is just not there on fundamental investment returns.

My second point is on the danger of politicisation. We have seen elsewhere in the world where pension funds have been pushed into the Government’s priorities to their own detriment. In Canada, large pension funds have come under significant Government pressure to invest in state infrastructure. In France, pension fund surpluses have been directed into Government bond-buying programmes effectively against their will. Once those assets become controlled and directed into state-favoured investment vehicles, which is what the Government are proposing through this Bill, the temptation for Ministers—not necessarily this Minister, but future Ministers—is to go further and push funds into politically convenient infrastructure projects that may prove to be financially disastrous. If that power had been available to the political team that decided to instigate the frankly financially disastrous HS2, and my pension fund had been put in it, where would I be now? I urge the Minister to think carefully about the responsibility for my retirement and my future. By me, I am referring to myself as a member of the local government pension fund. I am everyman for these purposes.

I am afraid that essentially what has happened in France and in Canada, and what may happen under this legislation in the UK, is that the pension fund system effectively becomes a tool of Government fiscal policy. Effectively, absent capital spending available directly from the taxpayer, the Government direct capital spending from pension funds—from private money—and plug holes that they create by writing cheques that they cannot fulfil. I would be interested in the Minister’s response to that.

[Lincoln Jopp]

I was just googling “dirigiste” and my right hon. Friend’s everyman quote. Will he comment on the fact that OMERS, which he would probably agree is one of these megafunds that he thinks are slow and unwieldy and invest in infrastructure and illiquids, returned a 7.1% net return over the last 10 years and the London Pensions Fund Authority returned a 7% return over the last 10 years?

[Kit Malthouse]

As I said, the evidence about performance across the population of funds is mixed. Some smaller funds do extremely well, because they have strong governance and a focused and nimble investment strategy. Some megafunds do reasonably well, because they can spread their risk across a variety of asset classes, but it is not a given that a big fund will perform better than a smaller fund. In fact, in certain circumstances smaller funds, because they have better accountability and can have a more focused investment strategy, may well perform better.

Frankly, and this speaks to my hon. Friend’s point, it is for me as a member of the pension fund to decide what I want to do, performance or otherwise, because it is my money. Given that I have contracted with this pension fund under circumstances made clear to me when I contracted with it as part of my employment or otherwise, it is not necessarily for the Government to steam in and tell me what I should or should not do with my own money. That means I carry a certain element of risk—absolutely—but unless we are going full-throated for the total financial infantilisation of the British people, I cannot see that we have any other way to preserve our financial freedom and autonomy.

--- Later in debate ---

[Lincoln Jopp (Spelthorne) (Con)]

I regret that the Pensions Minister, the hon. Member for Swansea West (Torsten Bell), is no longer in his place; I wanted to pay him something of a compliment for getting the Bill here today with typical ambition and enthusiasm. I should, however, remind him of my grandmother’s favourite saying: an ounce of experience is worth a ton of enthusiasm.

I stand here to talk about part 3 of the Bill on the basis of about four years’ experience as a director of the first pensions superfund, having attempted to get it through the Pensions Regulator and the interim regime put up under the last Government. That was ultimately unsuccessful; part of the reason why we are going to need the Pensions Minister’s enthusiasm and ambition is that he will come up against a series of vested interests. When we attempted—[Interruption.] I welcome the Pensions Minister back to his place and am grateful that he is here to listen to this.

When we attempted to launch the pensions superfund, we were bombarded by people who wanted to strangle the superfund industry at birth: the Association of British Insurers; an extraordinary intervention by the Governor of the Bank of England—I am not sure whether the Minister has had a chance to reprogramme the Governor of the Bank of England recently, but I hope he is more enthusiastic about the Minister’s proposal than he was about the last Government’s—and lastly, the Pensions Regulator itself.

I think the Minister wants to create a thriving market in superfunds. However, under the current interim guidance, capital requirements for superfunds are about twice those for insurers providing buy-outs, so it is hardly surprising that we have seen a number of recent new entrants to the insurance market but no new superfunds. The Solvency II regime—apologies for the slightly technical language, but the Minister will appreciate it—that applies to insurers works off a one-year 99.5% confidence level, but over time the industry has been allowed to apply a number of important adjustments, including diversification, matching adjustments and deferred tax credits. All have had the effect of effectively reducing the capital requirement for insurers. In combination, that means that the capital buffer for a buy-out provider is approximately half that of a superfund under the current interim regime, even taking into account the fact that superfunds are proposed to have a one-year 99% confidence level.

The Bill must address that inherent unfairness if, as the Minister wants, the superfund market is to grow. At the moment, it is the proverbial baby who refuses to put on weight. Can the Minister assure me that the Bill will address the problem and create a more level playing field that will allow superfunds to offer the 10% to 15% pricing discount to insurers that his Department has said it is seeking? As the Minister knows, there are a number of techniques for achieving that. He might consider: specifying that superfunds should apply a 98% one-year confidence threshold; the creation of a rule similar to the matching adjustment that applies to insurers; extending a VAT exemption to superfunds for essential pension services, such as admin, actuarial and investment, including scheme origination and transfers of the scheme to superfunds; or—I suppose this is an “and/or”—allowing superfunds to use structured capital instruments such as subordinated debt and preferred shares to lower the cost of capital and enhance investment flexibility, without compromising quality.

Lastly, I turn to the Pensions Regulator’s process of assessing superfunds and giving them a licence to operate—this is the bit where I have the scars on my back. Will the Minister take a close personal interest in this and change the way that the Pensions Regulator works, so that there are stricter and shorter time limits for assessing suitability—shorter than the limits currently in the Bill, which are six months as a default and nine months as a stretch? In the case of the pensions superfund, we had three applications and a similar timescale was used. One can just imagine why the investors’ patience finally ran out and the whole thing was wound up.

I do not want the Minister to be in the position of his predecessor, Guy Opperman, who stood in this place and said that greenlighting superfunds was his greatest achievement during lockdown, yet as a result of a combination of the regulatory environment that was put in place and the vested interests of those who argued against the birth of superfunds, the whole concept was strangled at birth. I want the Minister to avoid that, so I encourage him to look back at the first efforts to produce superfunds and tell the Pensions Regulator a great deal more about how it should do its business.

The reason why the Pensions Regulator became risk averse was because the last Government refused to cover superfunds in their Pension Schemes Bill, now the Pension Schemes Act 2021. The Pensions Regulator did not see why it should take any additional risk if politicians were not going to. I encourage the Minister to have the strength of his convictions to use primarily legislation to tell the Pensions Regulator the market that he wants it to regulate. Then he will give pension superfunds a fighting chance of coming into existence and consolidating. Notwithstanding some of the concerns that others have had, 5,100 of anything is not a working marketplace; it is ripe for consolidation—it was then and it is now.