Pension Schemes Bill

Lord Davies of Brixton Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

[Lord Davies of Brixton (Lab)]

It is always a pleasure to follow the noble Baroness, Lady Noakes; I still worry on those occasions when I find myself agreeing with what she says. No doubt we will have interesting debates in Committee.

It is a real pleasure to take part in this debate, which is a perfect start to the festive season. I declare my interest as recorded in the register as a fellow of the Institute and Faculty of Actuaries, and I look forward to the maiden speech of the noble Baroness, Lady White of Tufnell Park.

I thank all the individuals and organisations that have written to me about the Bill. They have raised too many issues to deal with them all today, but I and others will seek to raise them in Committee.

I welcome this Bill. It is the first leg of the route to better pensions that was set out in the Government’s pensions road map. It seeks to make existing provision work more effectively and to ensure that people derive the maximum benefit from their pension savings. These objectives are to be welcomed. The second leg of this journey will be the outcome of the Pensions Commission. Part 2 will address the adequacy of retirement incomes and the fairness of a system that currently contains persistent inequalities. I welcome my noble friend the Minister repeating that it will look at state as well as private pensions.

It is worth pointing out, particularly given the welcome presence of the noble Lord, Lord Willetts—though he is not in his place—that this Bill marks the effective end of personal pensions and sets out how we can move to a better system of collective provision, leading to improved, fairer and appropriate outcomes for members.

Taking the various proposals in turn, the Bill takes important steps to remove inefficiencies in the current system. They include the consolidation of small dormant pension pots, contractual overrides for FCA-regulated schemes and the resolution of the issues that have arisen from the Virgin Media judgment through the validation of certain amendments. Each of these changes affects individual member’s rights without their active involvement and therefore must be handled with care, supported by appropriate regulation and professional oversight. These measures will require careful scrutiny in Committee.

Next, the Bill requires defined contribution schemes to offer default retirement arrangements for members. I welcome this initiative and consider it to be the most significant part of the Bill—potentially, as it is still unclear how these arrangements will operate in practice. The Bill provides broad regulation-making powers. We have now had the helpful report from the Delegated Powers and Regulatory Reform Committee, but the details, as the committee emphasises, will depend on what is in the regulations. I therefore hope that we will be able to explore these issues in Committee and identify the main parameters that will apply to these default arrangements.

Turning to the value-for-money proposals, I have some reservations about what they can achieve. Greater and clearer disclosure based on defined parameters is undoubtedly desirable. However, value for money is not a simple or uniform concept. It varies significantly from individual to individual, reflecting different circumstances, attitudes to risk and personal needs. The problem is that there is no simple metric that can adequately capture this diversity. While charges are relatively straightforward to identify and compare, investment returns are inherently uncertain and can be assessed only by reference to the past. Beyond these factors, value for money is also shaped by the quality of the scheme administration, the level of service provided to members and the effectiveness of communication and support. Crucially, it also depends on how benefits are adopted and delivered and whether they meet differing members’ needs. Bringing these factors together, deciding how to weight them and reaching meaningful conclusions of value to members is highly complex. Therefore, while everyone is in favour of the concept of value for money—no one favours its opposite—its practical delivery is far more challenging than the Bill appears to acknowledge. The fear is that the process will simply end as a justification for making higher charges and hence lower benefits.

As a number of previous speakers have explained, the Bill contains provisions relating to pension scheme investments, which the Government consider a central element of the Bill. Other noble Lords have addressed, and will address, this in some detail, but I will make a couple of points.

I have no objection in principle to mandation, unlike other speakers. However, it is very important that the Government understand the implications of directing how members’ money is invested. Doing so carries responsibilities; this is where I found myself agreeing with the noble Baroness, Lady Noakes. I do not think that that aspect has been sufficiently recognised by the Government. I am also concerned, as other Members have mentioned, about the provisions that would be inserted into the Pensions Act 2008 by Clause 40 that refer to specific classes of investment that will be the subject of mandation. I do not believe that this belongs in the Bill.

I have a general concern about the Government in effect providing investment guidance—so much can go wrong—but my particular concern is the appearance of private equity in that clause. Private equity has a mixed performance record and presents significant liquidity and transparency challenges for pension provision. Where members have pension rights, illiquidity raises a question about who ultimately carries the risk that is inevitably involved: is it the member, the scheme or other members? I think the point was made by the noble Lord, Lord Vaux of Harrowden.

There are, of course, other issues that require careful consideration, alongside broader concerns, such as climate and systemic risk. I am sure these will be touched on by other Members.

I turn to my two principal concerns about the provisions in the Bill: first, the provisions relating to the release of surplus, and secondly, the provision for pension increases where no statutory guarantee currently exists. On the release of surplus, ministerial Statements have suggested clearly that members are intended to share where surplus is released—I have a series of quotes, but I am running out of time. If that is the case then this objective should be set out clearly in the Bill. This is particularly important as there is a requirement under the existing legislation that the release of surplus should be for members’ benefits, and that is being removed. The Government justify this on the grounds that trustees’ responsibility to members is sufficient. I am afraid my experience in the industry tells me that that is not correct. It needs to be in the Bill if that is the Government’s intention.

Also, where employers are involved in the process of releasing surplus, it is absolutely right that it should involve the independent recognised trade unions that represent the affected employees. This is established practice elsewhere in pensions legislation, where unions must be notified and, in some cases, consulted before decisions are taken. This should clearly apply. If it applies to benefit and changes, it should apply in the case of surplus release.

I turn to my other area of concern: pension increases. It is important to understand the context. Prior to 1997, there was no general statutory requirement for increases in payment, other than those associated with contracting out. However, by the mid-1990s, particularly after the Scott and the Goode reports, it had become standard practice for pensions in payment to be increased annually by at least a minimum amount. In some schemes, this was set out in the rules; in others, it depended on trustee discretion. Which approach was adopted was largely a matter of chance. Either way these increases were funded, members paid for them during their working lifetime as part of their pension contributions, and they had a reasonable expectation that they would receive increases when they retired.

Although scheme finances have fluctuated since then, in general schemes now have sufficient resources to pay increases. It is therefore reasonable to expect them to provide those increases, whether guaranteed or discretionary. This reflects the reasonable expectation members acquired when they accrued benefits in the 1980s and 1990s. This applies in two overlapping contexts. The first is to benefits provided by the Pension Protection Fund and the Financial Assistance Scheme, where the original legislation in both cases excluded any allowance for pre-1997 increases, regardless of rules or practice. The second aspect is members of active schemes: the scheme is continuing, but they no longer receive the discretionary benefits to which they have a reasonable expectation given their service in the 1980s and 1990s.

I welcome the provisions in the Bill relating to the PPF/FAS. They are clearly a response to the current financial state of the PPF. Without the surpluses in the PPF, I doubt that these measures would have come forward, so they are welcome. However, as I have explained, making a distinction between those for whom the rules say they are going to get increases and those for whom the practice was making discretionary increases is invidious. All affected members should receive the same increases. The benefits from these schemes have never been or been intended to be an exact copy of the benefits that were provided by the schemes that were lost. They were always a broad-brush approach to what is fair to provide.

Given the current financial circumstances, it is absolutely fair that all members should benefit from those surpluses. The Bill provides for employers to share in those surpluses by the suspension of the PPF levy. Employers are sharing in the surplus; members should also, whatever the precise details of their entitlement to past increases. Crucially, none of these members is getting any younger and many, sadly but inevitably, will benefit from the Government’s proposals for only a limited period. For 28 years they have suffered a loss and they are now going to benefit from the change in policy but, for many of them, it will be for far too short a period.

Finally, I turn to the circumstances of defined benefit schemes that are continuing to run. Many are in a healthy financial state but are failing to provide discretionary increases for members’ benefits that were accrued before the statutory requirement was introduced in 1997. I believe that it is now reasonable to expect schemes in general to provide these members with discretionary increases, and we need to investigate ways in which we can make sure that that will happen in Committee. I look forward to hearing my noble friend’s response to these and other points that have been made in the debate.

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Monday 12th January 2026 Grand Committee

[Viscount Younger of Leckie (Con)]

My Lords, it is a privilege to open today’s debate and to begin what I am sure will be five engaging and constructive days of scrutiny on this Bill in Committee. The proposed new purpose clause, in my name and those of my noble friend Lady Stedman-Scott and the noble Baroness, Lady Bowles, is not an attempt to rehearse the arguments advanced at Second Reading. Rather, it is intended to address a specific issue arising from the way in which the Bill has been framed and from the legislative approach that the Government have chosen to adopt.

The debate I seek to initiate is a principled one about legislative clarity and certainty, particularly in the context of what is, by any reasonable definition, a framework Bill. We believe that the Bill, as currently drafted, is light on detail and relies heavily on delegated powers. This has inevitably left your Lordships debating intentions, aspirations and hypothetical outcomes, rather than the Government’s settled policy. In those circumstances, is it not all the more important that Parliament is clear on the face of the legislation about what it actually intends to achieve?

The purpose clause amendment therefore intends to establish an overarching statement of intent, setting out the objectives against which the Bill and the regulations made under it should be understood and scrutinised. Where detailed provision is deferred to secondary legislation, such a statement provides Parliament, regulators and stakeholders with a clear point of reference. Without it, how are we to assess whether the powers being taken are exercised consistently with the will of Parliament, rather than merely within the scope of ministerial discretion?

More broadly, the amendment invites the House to reflect on whether Parliament is being asked to confer wide-ranging powers without sufficient clarity as to how they are intended to be used. At what point does flexibility begin to shade into uncertainty? How can proper legislative certainty be maintained when substantive policy choices are deferred, potentially amended repeatedly and then removed from direct parliamentary scrutiny? If there were an alternative procedural route that allowed the House to engage meaningfully with these questions, we would of course be willing to consider it. However, in the absence of such a mechanism, is it not reasonable to seek to debate these matters through a proposed new purpose clause, which would allow the House to test the Government’s intent within the normal amending stages of the Bill?

This concern is particularly acute in relation to value for money. Much of what this legislation seeks to achieve will ultimately stand or fall on the effectiveness of the value-for-money framework. Yet the provisions before us are thin and largely skeletal, despite the central role that the framework is expected to play. How can Parliament properly assess the merits of this approach when so much turns on detail that has yet to be set out?

I say at the outset that we are supportive of the value-for-money framework in principle, but its success will depend almost entirely on the detail of its design, the consistency of its application across schemes and the robustness of its enforcement. Without greater clarity on these points, how are trustees, regulators and members to understand the standards against which they will be judged?

That leads me to a wider question about the long-term purpose of the Bill. How do the Government envisage the pensions landscape to look like in 10, 15 or even 20 years’ time? Is the objective consolidation, greater scale, improved outcomes for savers or some combination of all three? How will we know whether this legislation has succeeded in delivering that vision?

We wish to engage not only with the immediate legislative mechanisms but with the broader strategic direction that underpins them. We fully accept that legislation must allow Ministers a degree of flexibility to respond to changing circumstances, but flexibility without a clear, articulated destination risks leaving Parliament and the industry uncertain about the direction of travel. Is it unreasonable to ask for the House to be told not only what powers are being taken but to what end they are intended to be used? It is in that spirit that this purpose clause has been tabled and I very much look forward to the debate that I hope it will provoke.

I wish to return briefly to the question of mandation, which, although I have not directly mentioned it, is an underlying issue in the Bill. It illustrates precisely why questions of purpose, process and limitation matter so greatly in the context of a framework Bill of this kind. We will of course turn to this in greater detail later in Committee but, as we are discussing the purpose of the Bill in this clause, it would be remiss of me not to mention it here at the outset as one of the most contentious provisions in the Bill—as we heard, broadly around the House, at Second Reading.

As drafted, the Bill establishes a broad enabling framework but leaves a great deal of substantive policy to be determined later through regulation. That approach inevitably creates uncertainty. It also places a heightened responsibility on Parliament to ensure that any powers taken are clearly bounded, carefully justified and firmly anchored to a stated purpose. In that context, we do not consider there to be a compelling case that asset allocation mandates are necessary to increase productive investment in the United Kingdom. Indeed, mandation risks cutting across the fundamental principle that investment decisions should be taken in the best interests of savers by trustees and providers who are properly accountable for the outcomes. I am sure that we will hear more about these arguments in Committee.

When the Bill itself provides only a skeletal framework, the absence of clarity around how such powers might be used becomes all the more concerning. If any future Government were ever minded to pursue mandation, it is essential that any such power be tightly limited, that savers’ outcomes are clearly protected and that asset allocation decisions are insulated as far as possible from political cycles and short-term pressures. Investment decisions should remain with those charged with fiduciary responsibility and not be directed by Ministers, however well intentioned. Those safeguards cannot simply be assumed; in a framework Bill, they must be explicit.

Moreover, the case for mandation is further weakened by the existence of credible and constructive alternative routes to unlocking greater levels of UK investment. Industry participants, including Phoenix Group, have identified a number of areas where policy reform could make a meaningful difference without recourse to compulsion. Government institutions such as the National Wealth Fund and Great British Energy could play a significant role by aligning guarantee products with insurers’ matching adjustment requirements, by engaging institutional investors earlier so that projects are structured to meet long-term investment needs and by continuing collaboration with the ABI Investment Delivery Forum to deliver investable infrastructure pipelines.

Similarly, the Mansion House Accord, building on the 2023 compact, has already driven tangible industry action. In our view, the priority now should be delivery, rather than the creation of new and potentially far-reaching powers. That includes implementing a robust value-for-money framework with standardised metrics; introducing minimum default fund size requirements, whether £25 billion or £10 billion, with a credible growth plan; and aligning the defined contribution charge cap with the Pensions Regulator’s approach by excluding performance fees where appropriate.

More broadly still, stronger capital markets are essential if the United Kingdom is to attract both domestic and international investment. This includes supporting the work of the Capital Markets Industry Taskforce, exploring measures to foster a stronger home bias in UK equities, considering whether stamp duty on share transactions is acting as a drag on competitiveness, and examining targeted tax incentives for pension fund investment in UK infrastructure. Ultimately, rather than mandating investment, policy should focus on understanding why UK investment has lagged. That requires serious engagement with questions of market structure, regulatory design, the quality of investment pipelines and the underlying risk-return characteristics of UK assets. Mandation risks treating the symptoms rather than addressing the causes.

I look forward to the Minister’s response. I make no apology for laying out certain aspects that I believe fit with the purpose of the Bill. However, as I said at the outset, I hope that we have a productive and interesting Committee. I beg to move.

[Lord Davies of Brixton (Lab)]

It is a pleasure to be here. Although for a while I was feeling a bit lonely, I very much welcome my noble friends; what we do not make up in numbers, I am sure my friends will more than make up for in the quality of their contributions. I declare an interest as a fellow of the Institute and Faculty of Actuaries.

It is worth at this stage spelling out that I have spent a lifetime advising people about pensions. I was the TUC’s pensions officer for a number of years. I was also a partner in a leading firm of consulting actuaries, and I worked for a number of years with a scheme actuaries certificate undertaking scheme valuations. In terms of sheer experience, I can fairly say that this is unique to noble Members of this House. I will not go on at length on future occasions, except when it is directly relevant.

The noble Viscount, Lord Younger of Leckie, declared his intention to avoid repeating a Second Reading speech—it is arguable as to whether he achieved that intention—but, in a sense, I welcome the opportunity to look at the Bill as a whole. While I support the Bill and I support my noble friends—there are some really good measures in here—the text underlying the opposition amendment suggests that we have a pensions system in chronically bad condition.

It suggests that returns are inadequate, that the system is fragmented and that it lacks transparency, with people unable to assess what they are getting. It provides inadequate communications. It is inconsistent across the different forms of provision. It prevents, or makes hard, innovative and flexible solutions to the problems that are faced. It needs to provide greater clarity for employers. It currently does not achieve responsible and innovative use of pension surpluses. To me, this suggests a system at risk of chronic failure.

To be honest, I accept those criticisms because underlying this system is the personal pension revolution introduced by the Conservative Government 40 years ago, which has proved to be unfit for purpose. We are having to make all these changes because of the failure of the system that the Conservative Government introduced. We need these changes because personal pensions did not work out. Collective provision is the answer to decent pension provision, and the Bill supports and develops collective provision and moves across this idea that everyone can have their own pot which they look after for themselves. I oppose the amendment and look forward to further discussions on the individual issues as they arise.

[Lord Fuller (Con)]

My Lords, it is always a pleasure to follow the noble Lord, Lord Davies of Brixton. He reminds me of that old joke about the dinner of actuaries where they are all complaining that everyone is living longer and it is getting worse.

I agree with this purpose clause, although I am surprised that it does not establish the balance between risk and reward, where pensions help people build secure futures by taking appropriate qualified risks. The pensions industry seems obsessed with risk minimisation, but without any form of risk there can be no reward; even cash is at risk from inflation.

The success of this Bill and why we need a purpose clause is to be grounded in how it makes it easier for people to take personal responsibility, to save for their futures, themselves and their families and to make their savings secure while permitting appropriate and manageable returns and providing risk capital to grow the economy. Inspiring people to save for their future is important, and pensions are long-term savings plans. Long-term returns dynamised through dividends, and boosted by employer contributions in many cases, are the best way to set yourselves up for later life.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, I share some of the concerns that have been expressed. I added my name to Amendment 6, and I could have added it to Amendment 5 as well. Before I go further, as it is an early part of discussing this Bill, I should say that I am a great supporter of the notion that there should be investment in productive assets that support the UK economy. Although I am not that heavy on mandation, if anything I lean in that direction quite a lot. It is obviously done through advisers, and maybe that is one reason for being concerned about advisers—perhaps they have pushed it too much the other way in times past. Noble Lords can take it as background that I am very supportive.

I am concerned about too much forcing of particular kinds of investment, and restricting the routes to those investments or the resistance of the opportunity if the trustees think that it is not the right thing to do. That is why I have some support for Amendments 5 and 6, because I think they may go too far. One of the good things about Clause 2(3) and (4) is that they are optional. However, it still hints at a lot of things that could be done.

I am concerned about any kind of dictation on which advisers can be used, because they have been very powerful. If there is any control over which advisers are used, that is another way of controlling the fund. Given the obligations of trustees to consult advisers, and the liabilities attached to that, they have to remain independent. That is the direction that I am coming from; therefore, I do not want the Bill to give powers that could go too far. That is why I added my name to Amendment 6, and why I have some sort of regard for the content of Amendment 5 around the investment opportunities.

[Lord Davies of Brixton (Lab)]

This group is about asset pools in the Local Government Pension Scheme. I had not intended to intervene on this group, but I want to comment on the remarks made by the noble Viscount, Lord Younger, in introducing this group of amendments on the Local Government Pension Scheme. I am relatively agnostic about asset pools. I am not sure that I am totally convinced by the Government’s line that big is necessarily beautiful, but I am open to that debate.

In introducing this group, the noble Viscount set it in the context of a large group of amendments introduced on much wider issues around the Local Government Pension Scheme than were originally expected—it was really just about investment in the Local Government Pension Scheme—and at a very late stage. It makes no difference to me personally, but fundamental questioning of the structure, running and management of the Local Government Pension Scheme was introduced at such short notice; we found about it only on Thursday or Friday. I can live with that, but I think that it was a little unfair to the people working in and running the scheme suddenly to produce this level of uncertainty. That was unwise. When you want to discuss these things, you start talking to the people involved first, but it is my understanding that it came out of the blue and everyone was totally surprised. Obviously, the issue was always there for discussion, so the fact that it has come up is not a surprise, but doing things at this moment and in this way was unfortunate and is causing problems for those trying to provide the pensions.

I believe that the fundamental premise introduced by the noble Viscount is wrong. The Local Government Pension Scheme is a notable success. Rather than setting up inquiries to discover what went wrong, we should be inquiring about what it got right, because it provides good pensions for a large number of people providing essential services. The average pension in the Local Government Pension Scheme is £5,000; that is because the scheme provides pensions mainly for people on low pay. It provides good pensions for people—often, for women with part-time jobs. It does so in a way whereby, in the forthcoming valuations—as I will expand on and discuss at greater length when we get on to the eighth group of amendments, because that is where the substantive discussion will take place—it faces a better record than private sector occupational pension schemes. We should be looking at its success and not, as the noble Viscount argued, the difficulties and failures.

[Lord Fuller (Con)]

My Lords, once again, I follow the noble Lord, Lord Davies of Brixton. I wish, perhaps uncharacteristically, to associate myself with many of his comments. I support the thrust of Amendment 2, and offer wider support for the other amendments in this group.

My qualifications to speak on this Bill as far as the LGPS elements are concerned is that I led a local authority for 20 years and have been a member of the Norfolk Pension Fund’s Pensions Committee since 2007. I have also been a member of the Local Government Pension Scheme’s advisory board since its inception in 2014. I am a past member of the fire service scheme’s advisory board, as well as a trustee of a number of private schemes. I also benefit from my own SSIP.

Today is about the LGPS. It is different, because not many of the public sector schemes have money put aside for their members’ retirements—although I accept that the scheme for MPs is one of them. In aggregate, the LGPS comprises 89 separate schemes cast throughout the entirety of the four home nations. Collectively, the 2024 scheme census reports a total of 6.7 million members, a third of whom are, directionally speaking, active; a third of whom are deferred; and a third of whom are actually in payment. In 2024, its total assets under management were worth £390 billion; it is much more than that now. These things change but, by whatever measure, the LGPS is the world’s fourth-largest or fifth-largest pension scheme.

When I came on to the Norfolk board in 2007, assets under management were £1.8 billion. They are now more than £6 billion. I echo the comment of the noble Lord, Lord Davies, that if only the UK economy had risen in that proportion. The LGPS delivers significant value. The typical member is a 47 year-old woman earning about £18,000 a year, for whom the pension is, as the noble Lord, Lord Davies, said, about £5,000. It is incredibly efficient. Operational costs are about half those of typical unfunded schemes. In the Norfolk scheme, of which I am a member, the cost per member is less than £20 per head. I accept that other schemes have costs higher than that, but it is an enviable record. We have saved for our future, but you would not know any of this from the thrust of the Bill and its overbearing tinkering.

What is the problem to be solved here? After some difficult times when interest rates were low, most schemes are now fully funded. It is a British success story that will be undermined by fettering the independence of schemes to make the best long-term investment decisions for their members and local taxpayers, muddling accountabilities by divorcing assets from liabilities and introducing new conflicts of interest. That cannot be right. The success has been delivered despite being buffeted by complications such as McCloud, the pre-2015 and post-2015 schemes, GMP, the rule of 75, dashboards, changing rules on inheritance and divorce and all the other things that happen when you have the best interests of 6.7 million workers in mind. The truth is that the LGPS is a million miles away from the fat cattery that the popular newspapers would have you believe.

That brings me on to the substance of Amendment 2. I have the greatest concerns that the fiduciary duty contemplated to members in this Bill, fairness to the taxpayer and ham-fisted interference from a merry-go-round of Local Government Finance Ministers will weaken this jewel in our economic crown. Taken together, subsections (2) to (8) promote the notion that the government nanny knows best, with broad powers down to the level of detail to determine the fine structure of the pooled schemes. This approach has already damaged the scheme for no good reason. The exemplar ACCESS band has been told to disband. It was doing a good job. With nearly £40 billion-worth of assets under management, it rented the best globally viewed FCA-qualified professionals in the City of London, one of the world’s top three financial centres. Now it is being forced to join a pool of other authorities headquartered miles away in the provinces, miles away from the cut and thrust and that leading intellectual property. There is a provision in subsection (7) that these pools should take steps to get FCA accreditation—I suppose we should be grateful for that—but these pools have no business even being on the battlefield until they are FCA qualified. Thus is the muddle of this Bill. In essence, this enforced uniformity means that star strikers have been replaced by subs from the reserve team. A global success story has been weakened with the risk of lower returns for members.

Moving on, this Bill talks about local government members, but the scheme is not about just councils. In the Norfolk scheme, which I know best, there are eight principal councils, but we now have more than 500 sponsoring employers—parish councils, care homes, catering companies, youth and social workers, classroom assistants and charities. Each has different scale, covenant strength and longevity. It is complex. Yet ministerial interference wants to shove them all into a one-size scheme that cannot fit all. In subsection (5) we see touching faith in the judgment of the experts and regulators who forced private schemes into LDIs and ruined them. I do not know why the Pensions Regulator and GAD are not on the Government’s list. I suppose we should be grateful that they are not. This whole Bill promulgates pensions groupthink on the altar of reduced risk and lower returns.

I will deal with Amendment 5 later because it talks about investment and there is a later group for that. I have heard the Minister say that bigger is better. Here again, I align myself with the noble Lord, Lord Davies. It is the thrust and the theme of this Bill more widely. Indeed, I heard the noble Baroness at the Dispatch Box lionise the Ontario teachers’ scheme in the week that it was rinsed for £1 billion in the collapse of Thames Water.

We see in Clause 2 that there will be directions as to what things can be invested in. When they tried that in Sweden, the public schemes lost another £1 billion in the Northvolt disaster, where virtue-signalling political investment directions made the members and taxpayers poorer. The harsh lesson is that the schemes become the plaything of meddlesome Ministers to require or prohibit, or to opine on lofty ideas, but without the responsibility or accountability of paying out. It is wrong.

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The Minister was perfectly correct to say that we will return to this issue on Report. In the meantime, I beg leave to withdraw.

[Lord Davies of Brixton (Lab)]

I am still mystified as to why Amendment 220 is not included in this group. It is left bereft, right at the end of the Marshalled List. Is there a reason?

[Lord Sharkey (LD)]

If the noble Lord is asking why it is there, I am afraid I will have to plead the Public Bill Office.

--- Later in debate ---

Moved by

[Lord Davies of Brixton]

7: Clause 2, page 4, line 23, after “investments” insert “including social housing”
Member’s explanatory statement
This is a probing amendment that seeks to explore how and to what extent LGPS assets might be used to provide social housing as an investment.

[Lord Davies of Brixton (Lab)]

I emphasise that this is not about mandation. Mandation is a big issue, but this is not about that; it is about the possible ways in which Local Government Pension Scheme assets could be invested. It is a probing amendment and I am sure that it is not word perfect in achieving its objective.

It arises under subsection (4) of this clause. It mentions various issues with how the strategy that is set out should be implemented. It is a probing amendment that seeks to explore how, and to what extent, Local Government Pension Scheme assets might be used to provide social housing as an investment. The oddity about this debate is that I am sure we all share the belief—tell me if I am wrong—that housing is an ideal investment for a pension fund. What I want to know from the Government is the extent to which that will be possible within the structure being established by this Bill.

I start with the fund, which is a long-term defined benefit pension scheme with inflation-linked liabilities. Social housing assets provide long-dated stable income streams that closely match this profile, so the sheer logic of these funds investing in local housing is clear. This issue has been debated extensively, within the relevant field, among the think tanks and so on that support local authorities and are interested in the investments of the Local Government Pension Scheme. For example, a think tank called Localis produced a report recommending that council pension assets should be a funding solution to the UK’s affordable housing crisis; that issue is widely discussed and widely supported.

Of course, that has already happened and is already happening. The London CIV has a substantial investment on behalf of the London pool of investments in social housing. I refer to social housing; personally, I have a preference for council housing, but the issue is broader and includes all forms of social housing. For example, the head of real estate at the London CIV says:

“Our UK Housing Fund is designed to help increase the supply of good quality affordable housing while delivering income-driven returns to our Partner Funds”.


Again, in the heart of the industry and the sector, the value of this approach is strongly supported.

More specifically, are funds investing in local housing? They might be investing in housing, but it could be anywhere. However, the synergy with a local fund investing in local housing has a massive attraction in terms of both the councils involved and the members of a scheme seeing how their funds are being invested in the local community. That is a very attractive perspective on how the funds should be decided.

At the same time—this point does not need spelling out—we face a severe housing crisis. There is a need for extensive housebuilding. We have the resources and the need, so why do we not just get on and do it? Council pension funds are, by their nature, patient, long-term investments; that is such a good match for housing delivery. Of course, it is accepted, from the number of funds that have already gone this way, that the fiduciary responsibility is suitable. The committees managing these funds see that investing in housing matches their fiduciary responsibility.

Everyone agrees that there is a great deal of synergy here. Local pension schemes investing in social housing is financially prudent and low-risk, provides a long-term strategy and delivers clear public value. What is there not to like? Can my noble friend the Minister assure the Committee that this synergy will be recognised in the forthcoming regulations and the accompanying statutory guidance?

We are debating this matter in terms of the Bill here, but, as the previous debate made clear, it is the regulations that count. The regulations that will govern how these pools can invest are currently being discussed—an extensive consultation is taking place—but, alongside that, is a closed consultation on the statutory guidance that will accompany the regulations. There may be a debate as to why it is not a public consultation on the statutory guidance, because the two things—the regulations and the guidance—mash together closely.

The problem is that the draft statutory guidance limits the extent to which local funds can set requirements on the actual decisions that will be taken by the pools. I am getting into the detailed structure of how the administering authorities and the investment pools will work together. The point relates generally to all forms of local investment but it is particularly acute in this area, where we are talking about building houses for local people. More specifically, does the proposed pooling framework act as a potential barrier to Local Government Pension Scheme investment in social housing?

There is a broader, more general issue here; I am gear-shifting. The specific issue is whether the pooling arrangements interfere with local investments, particularly in housing, but there is the general issue of whether administering authorities—local councils, in effect, for these purposes—can pass their ESG considerations, for example, on to the pooling arrangements. We need to be clear at this stage. I have raised this issue specifically in relation to housing—it would be good to get a clear answer on that—but there is a wider point around the other ways in which these funds should be investing in the local community. Are the new structures going to stop that happening in practice?

On the other amendments in this group, I think that I agree with Amendment 9, but I will listen to my noble friend the Minister’s response on it. I look forward to hearing the reasons for Amendment 10; I do not understand it, but I shall listen carefully. I do not really understand Amendment 11 either, so, again, I look forward to the explanation from the noble Viscount. In the meantime, I beg to move the amendment standing in my name.

[Baroness Warwick of Undercliffe (Lab)]

My Lords, I have no extant interests to declare—my interest in pension schemes is in the past—but I have considerable sympathy with my noble friend Lord Davies’s Amendment 7.

We suffer from chronic underinvestment in genuinely affordable and social housing, which is undermining the social fabric of this country and limiting the opportunity for the growth that we so badly need. The Government have vowed to build 1.5 million homes by the end of this Parliament, with a longer-term aim of resolving the housing crisis; other Governments have attempted to do the same. The Government have already committed substantial sums towards that aim, but demands on public funding are increasing and more resources will clearly be needed to deliver it.

I had a particular interest in housing associations in the past. These raise private debt to put alongside public grant to fund social housebuilding, and currently have more than £130 billion of debt facilities in place. The social housing sector is a great example of harnessing public and private investment to drive economic growth and build the homes that we need. Net additional dwelling figures for the 2024-25 financial year showed that 208,600 homes were added to England’s stock—well short of the 300,000 homes a year needed to meet the Government’s target of 1.5 million homes by the end of this Parliament. With the right funding, investment and financial capacity in place, social and affordable housing can play a key role in boosting supply and meeting that ambitious homes target.

There is a general recognition of the need to increase institutional investment in the UK and that pension schemes, with their long-term characteristics, could and should be part of that solution. This part of the Bill refers specifically to the LGPS. The Chancellor has already cited the LGPS as a means of achieving that necessary level of investment. In fact, several LGPS funds already have a strong track record of co-investment in affordable housing, and that potential needs to be maximised. I hope that the Government will ensure that all large pension schemes have the right incentives and strategic tools, coupled with an effective regulatory regime, to provide returns to the scheme while protecting scheme members’ interests and ensuring enduring social impact.

--- Later in debate ---

[Lord Katz (Lab)]

I could not have put it better myself. We have to be careful in regarding ESG as fashionable politics, inserting itself into a fashionable investment space. We have to be careful not to throw the baby out with the bathwater and to really appreciate that there are good reasons why certain investments are more popular and investments in other areas are being shunned. There are trends in industry and society as to what products and classes of investment are popular. Sometimes, we can overthink these things.

I am pleased that the noble Viscount, Lord Thurso, popped up because I was just about to address his question about the Bill preventing funds setting targets on local investment, on this theme. I hope this answers his question: they must set a target, but it can be any value that the fund considers appropriate. They retain that element of flexibility, which I hope is helpful.

Regarding Amendment 9, the Government will require some administering authorities to report on their local investments, including the total investment, and on the impact of investments, in their annual reports through guidance. We consider that Amendment 9 would be an unnecessary duplication of a requirement that was already set out in guidance and in regulations. We think that it would not add anything to the Bill, as that regulation is already good practice—it is already there.

Amendment 12, spoken to by noble Baronesses, Lady Bowles and Lady Altmann, seeks to expand the definition of local investments beyond stretching point: it could mean investments for the benefit of persons living or working in any of the administering authorities’ local areas. Our fear here is that the amendment would, in effect, break the definition of local investment, as it could mean any investment in England and Wales. We contend that local investment, as it stands, has a broad definition, as it can refer to investments that have measurable beneficial impact for people living or working in areas local to, or in the region of, the administering authority, or of its pool partner administering authorities. As a consequence, this is broad enough to capture an appropriately wide geographic range while ensuring that there are still benefits for the local area.

To ensure a clear and firm trajectory to consolidation and benefits at scale for the scheme as a whole, along with the assurance I hope I have provided to the noble Lords in discussing these amendments, I respectfully ask my noble friend Lord Davies to withdraw his amendment.

[Lord Davies of Brixton (Lab)]

I thank my noble friend the Minister for his reply. As I made clear, my amendment was not about mandation or compulsion but the ability for local authority funds to invest in ways which are seen as socially beneficial. There was general agreement about the synergy, as I put it, between investing in social housing and the investment needs of local authority funds. The Minister was clear that it should not be a barrier, but, as the regulations are still being discussed, and as the statutory guidance has not been agreed yet, this is a moving feast. I hope that, at some stage, we will be able to get a specific statement on the ability of funds to invest in housing, and in the other ways which have been suggested. I beg leave to withdraw the amendment.

Amendment 7 withdrawn.

--- Later in debate ---

Following on from what the noble Baroness, Lady Bowles, said, before we come to new Section 28C and the specific part of this Bill that deals with it—as well as my own amendments seeking specifically to include it, if that is where we end up—I would be grateful if we recognised that there is a problem here. Perhaps there is a misunderstanding on the part of the Government about how the real estate investment trust industry has reinvented itself in order to offer long-term investors, such as pension funds, diversified access to expertly managed infrastructure investments, alternative energy, real estate and so on—as well as private equity—in a closed-end structure. The industry has done that to give pension funds the option of investing in either type of asset so that the market will not continue to be skewed away from one of Britain’s investment success stories, which we are so proud of and which has served investors extremely well over many years.

[Lord Davies of Brixton (Lab)]

This is really a debate by proxy on Section 40 and new Section 28C; I am sure that we can all look forward to a repeat of this discussion.

I am not against mandation in principle; it is entirely reasonable for a Government to adopt that approach. What worries me here is that, for some reason, they are putting investment classes into statute. That is just wrong. The point here is broader than the one just made by the noble Baronesses. To pick out sectors of investment, the Government are giving their imprimatur to these particular classes of investment; however, they will go wrong at some stage, and the Government will be on the hook for having advocated for them. I am against having any of these references in the Bill. I do not want to see anything added; I want them to be taken out.

[Lord Fuller (Con)]

My Lords, now I am really worried—every time I have followed the noble Lord, Lord Davies of Brixton, I have tried to amplify the points he has made.

I congratulate the noble Baroness, Lady Bowles, on her masterful exposition of a technical piece of detail; she brought it down to the ground and made it alive. She put her finger on it when many of us have not been able to put our finger on what makes us so uncomfortable about the Bill. We know that it is not right. When you get meddlesome Ministers fiddling around in stuff where they do not really know what they are doing, there is not just co-operation but—as the noble Baroness exposed—a connivance and a cartel. She explained how those two things have led to conflicts of interest; there will be a lot of Cs in the words I am about to use. It is anti-competitive, and it has restricted choice.

The noble Baroness has wedged open the door because, later on in the Bill, there are provisions—I will not defer to them too much now—for the existing operators to lock out new entrants. I was instinctively uncomfortable with that but, now, I am worried because there seems to be a guiding hand here to reduce choice, stifle innovation and damage the reputation of the City. I do not think that that was purposeful, but this is what happens when you get a Bill that is so overly complicated and takes people away from saving for their long-term retirement.

I nearly feel sorry for the noble Lord, Lord Katz, because I have never seen such an evisceration. I am sure he is going to defend it and do the best he can. But what the noble Baroness, Lady Bowles, has shown is that it is rather like the Chancellor, who now says she had no idea what was really happening when she put the rates on the pubs. It was a mistake, and she did not have all the information to hand. While I accept that the noble Lord, Lord Davies, has said we will come back to this on another day, I thank the noble Baroness, Lady Bowles, because she has given an opportunity—a breathing space or an air gap—for the Government to now go back to look at this in more detail.

The noble Baroness, Lady Altmann, also laid out the import of this amendment when she said that one-third of all the FTSE 350 is engaged in this. I expect the Minister in winding to say, for a third time, that growth is the number one priority of this Government. Let us hope he does say that because, if he does, he will either accept this amendment here and now, or give an undertaking that, at some stage before we get to this in the main part of the debate, it will be accepted and we can move on.

It is not just casting a shadow over the LGPS and the parts of Yorkshire which are disinvesting; it is accidentally casting a shadow over the City of London, which is the world’s second or third largest financial centre. It must be stopped. I think the noble Baroness, Lady Bowles, has done the Committee and our nation a great service in the last half an hour, and she is to be congratulated for it.

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Wednesday 14th January 2026 Grand Committee

This cannot be viewed in isolation from the Government’s wider approach to local government reform. Rising pension costs, constrained local finances and an already uncertain and poorly executed programme of local government reorganisation only compound the risk. That is why these amendments matter. They do not seek to undermine local government pension schemes or dictate outcomes. They seek clarity of purpose, consistency of interpretation and accountability for decisions that carry significant financial consequences. If we are serious about long-term affordability and giving local government the stability it needs to plan and invest, we must begin by ensuring that the regulatory framework governing contributions is clear, proportionate and aligned with its founding intent. I look forward to the Minister’s response.

[Lord Davies of Brixton (Lab)]

The noble Baroness cited a particular case and gave considerable detail about the circumstances. Is there any reason why the Committee cannot be told which authority it concerns? As things stand, there is no way that I or any other Member of the Committee could comment on that case. If the noble Baroness can tell us which authority it is, in the interest of transparency, I urge her to do so.

[Baroness Stedman-Scott (Con)]

I have always been a supporter of transparency. I do not know the answer to the noble Lord’s question, but I will find out and let him know either the name of the council or the reason why I cannot give it to him. We have other examples that we are happy to share. I hope that answers the noble Lord’s question. I beg to move.

[Lord Davies of Brixton (Lab)]

It is a pleasure to take part in this debate. It is an important issue and public money should always be open to scrutiny and deep thought about how we approach these issues. The noble Baroness, in introducing the amendments, quoted the significant switch round in the financial state of the Local Government Pension Scheme. She will be able to have an interesting discussion with her former colleagues, Liz Truss and Kwasi Kwarteng, as to why exactly that has happened. They have had more influence on it probably than the actuarial profession.

My message essentially is, “If it ain’t broke, don’t fix it”. What we have here is the Official Opposition attempting to make a crisis out of a significant success. The Local Government Pension Scheme has been successful, as attested to by the noble Lord, Lord Fuller, yet here we are being presented with it as if there is some crisis to address. We should recognise that, in actuarial terms, the financial management of the scheme has been a significant success. It is up to those suggesting reviews—two in this group of amendments and two more in the following group, which should more accurately be here—to explain, rather than providing anonymous details, what the problem is.

The context is that, compared to private sector funded schemes, where contributions have been increasing, what we are going to see in the coming year is the opportunity of significant cost reductions. This is for two reasons. First, it is because of the successes of Local Government Pension Scheme investments, with returns of around 9% per annum since the last valuations. As a result, that has generated significant surpluses—significant excess of assets over liabilities. I shall come back to that in a later group. Following the latest set of triennial valuations, substantial reductions will be available. It is up to individual authorities to make their decisions, but the opportunity will be there, certainly for most funds.

As far as actuaries who support and work within the local government sector are concerned, as I explained on Monday, this discussion comes as a bolt from the blue. What we really need in this area is stability. It would be far better to promote discussion first within the sector, with those who know what they are talking about, before producing these proposals, which inevitably lead to uncertainty.

It is not a surprise, given the environment we are in, that there has been no consultation on this, unlike the investment changes, because it is part of a programme that we see with amendments submitted later in this Bill. There are some people who just do not like successful collective pension provision. There is an agenda at work here. As I say, I do not oppose consideration of the issues, but we should understand where it is coming from.

It is important to understand that the last valuations were in 2022. The current valuations, as at 31 March last year, are under way and we do not yet have the full results. Early results have been provided and we know the direction of travel, but we do not know the final results, which is why I question the figures being quoted. We do not yet know the results over the sector as a whole of the current series of valuations. Any speculation about that outcome misses the point.

The second point I want to make is that there is no one-size-fits-all solution to the funding of local government pension schemes. They vary widely in their size. The staff membership has to be taken into account, and that varies, and you also have to understand that some of these funds have significant numbers of non-local government members through the admitted body process and each of those has to be assessed in a proper way. There is no way you can have a one-size-fits-all approach to the actuarial management of these funds. You need the professional knowledge and judgment of actuaries—you may think I am promoting my own profession—to decide what is the best approach.

Clearly, that judgment should be open to review and, of course, it has been reviewed. That is what is so nonsensical about these proposals. Under Section 13 of the Public Service Pensions Act 2013, the Government can ask for reviews of the funded public service schemes, which effectively means local government schemes. Indeed, such a review has been carried out and a full detailed report produced by the Government Actuary, setting out the approach that has been adopted, comparing the different approaches—there are four firms of actuaries, which all have slightly different approaches—reconciling them and judging the assumptions that have been made.

Broadly speaking, the Government Actuary has given these valuations a clean bill of health. Therefore, any suggestion that there is anything wrong about the actuarial approach that is being taken is denied by the Government’s own actuarial adviser. Funds need to take account of local needs and public interest has a role in deciding how services can be employed in these funds. There is no question of refund in these funds, but the way in which it affects contributions is crucial.

Another point, which I think the noble Baroness ignored, is that these funds are all subject to the cost- capping arrangements set out in the coalition Government’s review of public service pensions of 14 or 15 years ago. There is a cost cap. I made a note of what the noble Baroness said: that the full cost of the contributions “bears on the employers”. That is just wrong. It bears on the employers and the members together. It is the employers’ costs that are capped under legislation and it is the members who bear the risk of increasing costs and stand to enjoy the benefit of reducing costs. The cost cap is crucial in these schemes and to ignore its important role fails to understand what we are doing. I am sorry—I could go on, but I think the situation is clear.

There was just one other point—I will go on. It arises under the next group and it is the idea of a statutory funding standard. Of course, we tried that with private sector pension schemes and it was a disaster. Everyone agreed it was a disaster and we had to have a new system—whether the new system was any better is a matter for debate. However, the idea of having a statutory funding standard just did not work.

To conclude—I hope it is a conclusion this time—there is no evidence that the existing system has failed. Indeed, we expect to see the benefits of the current approach when we decide what these funds should be in the light of the forthcoming valuation results.

--- Later in debate ---

[Lord Davies of Brixton (Lab)]

There is a phrase, “esprit d’escalier”—is that how you say it?—for when you are walking down the stairs and you suddenly think of the thing you wish you had said in a previous discussion. Well, this group of amendments provides an ideal opportunity to avoid that very problem.

I do not want to delay the Grand Committee unnecessarily but I feel forced to say something. In essence, these amendments are fundamentally misconceived. I do not object to these questions being asked, but have the two previous speakers ever looked at a Local Government Pension Scheme valuation report? All the information for which they are asking and more is set out in those reports, in accordance with the professional standard that all actuaries must meet.

It is worth saying that that professional standard is set not by actuaries but by the Financial Reporting Council, which sets technical standards for the actuarial profession. The profession looks after professional standards but technical standards, and specifically what should appear in a valuation report, are set by the Financial Reporting Council, which is not part of the actuarial profession. Obviously, there is big actuarial input, but the final decision is made by the council, and all the information called for by the noble Viscount and the noble Baroness is in those reports. Of course, there may be cases where it does not appear in those reports, in which case that is a case of technical malpractice and the Financial Reporting Council should be told.

[Baroness Altmann (Non-Afl)]

I apologise for intervening, but I feel that there is a bit of misdescription here. Yes, it is true that Regulation 64, for example, includes this information, but the FRC does not have the authority to insist on these issues being fed through. Indeed, there is non-statutory guidance that seems to override all this. For example, it says that you should not consider changes in contribution rates on the basis of liabilities that have changed due to market changes, so the interest rate environment, which has changed so fundamentally, is supposed not to feed through to the conclusions on contribution rates. That is part of this mindset which, I feel, it is so important for us to try to adjust as we go forward, given the fundamental changes that have happened.

[Lord Davies of Brixton (Lab)]

I apologise, but I do not understand what the noble Baroness is saying. Actuaries have to comply with these professional standards; any valuation report they produce has to meet them—that is not a question for debate. If a report does not meet those standards, it should be pursued on its merits. To claim that this information is not available is simply untrue: it is there in the valuation reports. I always have problems with the word “transparency”, because to me it looks like something you can see through and you cannot see it, but I take it to mean that a full explanation of the degree of prudence, a wide evaluation of the assumptions chosen, what effect different assumptions would have and the outcome in terms of the contribution rate all have to be set out. They are publicly available.

The second point is that actuaries do not decide on the valuation assumptions; the management committee decides, on actuarial advice, what the assumptions should be. The local, democratically elected representatives take the decisions, including about what the contribution rate should be. We are currently in an odd state where lots of information on the situation is becoming available, but that is because we are at the end of a three-year cycle of valuations. By the end of this year, all these issues will have been resolved. Not everyone will be pleased; it is entirely possible that some admitted bodies will find that their contributions go up. Perhaps they had significant changes in their workforce—who knows? But the mere fact that some contribution rates go up while the overall move is a reduction does not in itself mean that the system is broken.

I find it difficult to understand what exactly these amendments intend to achieve. The information is available, the decisions are made by the local government bodies involved, and they take the decisions based on their democratic responsibility. What more could we want?

[Baroness Altmann (Non-Afl)]

Perhaps I could assist the Committee. These amendments are asking for a publicly available report that clarifies and sets out all this information on a basis that council tax payers, for example, whose money is being used, can see with clarity: it is provided to them. With all due respect, they will not read the actuarial report, but having a properly set-out review that explains all this clearly, in language that people can understand, would have huge value.

--- Later in debate ---

[Baroness Noakes (Con)]

I shall just comment on Amendment 19. To summarise what the noble Lord, Lord Davies of Brixton, said, there are actuaries’ reports that have all this information, and actuaries understand those reports. Amendment 19 concentrates on publishing something in a form accessible to employers and the public, and I think that that is very important, because actuarial practice is quite difficult to understand sometimes. It cannot be assumed that a member of the public could understand actuarial language. We need to be able to communicate in a way that is accessible to the people who actually bear the costs of the local authority pension scheme—the council tax payers. I do not think that that is met by the actuaries’ reports, which doubtless comply with all kinds of standards issued by the FRC and long-standing actuarial practice but, in my limited experience of looking at these things, are pretty difficult to understand.

[Lord Davies of Brixton (Lab)]

I do not think that I said that it was okay if actuaries understood the report even if no one else did. I have in front of me the last valuation report from the pension panel of the London Pensions Fund Authority. I have been looking through it and I think that it is a wonderful example of presenting difficult actuarial information in a way that is understandable to any member of the fund who is prepared to put a modicum of effort into understanding it. The report starts with a very clear and concise executive summary, picking out the important points, then goes through all the issues that need to be explained, around levels of prudence and why particular assumptions have been made. It is all in there, with lots of appendices alongside if you want a deep dive into the detailed data.

I do not think I said that these reports were understandable only by actuaries; these are big commercial organisations which support their clients by providing information in an accessible manner. That is part of their job and it is what I always tried to do when I was a scheme actuary. The feedback that I received was that people were pleased to understand what was happening to their money.

[Lord Fuller (Con)]

In my scheme, and in the one that the noble Lord, Lord Davies of Brixton, talked about, we take pride in what we do—but if only all the schemes did that. The value of these amendments is in taking the best schemes, which set the bar, and making sure that other schemes meet that bar in terms of transparency. Just a few of them doing it is not good enough; we want all of them to be doing it.

--- Later in debate ---

[Lord Fuller (Con)]

I was coming to a conclusion anyway, so I will not detain your Lordships any further. I have made the points that I wanted to make.

[Lord Davies of Brixton (Lab)]

At the risk of receiving a glare from my Whip, I feel I have something to contribute to this group as well.

I will first make a general point. If noble Lords and noble Baronesses are going to quote specific examples, we need chapter and verse in order to understand what is happening. If we are just given figures, we are meant to absorb and draw some conclusion from them, which is not possible; we need to know chapter and verse of any examples that noble Lords quote so we can analyse and see what is really going on in that particular case. I have to say that my assumption is that, with all the examples we have been given, there is a readily available, understandable situation, and somewhere along the line there has been a failure of understanding.

On Amendment 20, my question for the noble Baroness, which she sort of answered, was: why is this amendment required? I think we were told that it is all too difficult, but of course it is not all too difficult. There is a big example: the London Borough of Kensington and Chelsea, which has a Conservative-controlled council, earlier this year made an interim change in its contribution rate to zero because its investment policy had been so successful. It is worth noting that it has a very successful investment policy and it is one of the smallest local government funds—something to bear in mind during the other debates on the Bill.

There is a question: how often should you undertake a valuation? There is a strong argument for three years because that provides some level of stability to the council’s finances. You have to remember that, over the last year or two years, a council may be paying too much or it may be paying too little, but that is not money down the drain; it either goes into the fund or does not, and it will be available or not available at the end of the three-year period. The money does not disappear if contributions are up, and it will be reflected in the future contributions that that council will pay.

I am also concerned that of course an employer will seek a review when it thinks its contribution is going to go down. I bet it will not seek a review if it thinks its contribution is going to go up, which provides exactly the sort of ratchet effect that the noble Baroness said she wanted to avoid. So it would be perfectly practical to do a valuation every year with the strength of the computers we have available now. It a long time since the day when I had to sit at a large square sheet of paper and do all the figures by hand: you just run the computer and there are the figures. I am sure the consulting firms will be happy to get all the additional fee income, but does it actually produce the advantages that we are told will be achieved through this amendment?

I note the points made by the noble Baroness, Lady Scott of Bybrook. I think it is a very valid point. It is a shame that whatever the local government department is called nowadays has not been involved with the Bill; it could have brought some perspective to where we are.

On Amendment 20A and benchmarks, I draw the attention of the noble Baroness, Lady Altmann, to a regular report from a group whose name I shall not get right—but there is a national group of local government pension schemes. Following each valuation, it produces a detailed report providing all the information she asks for. Again, the information is available. She is asking for this information, when it is already easily available online. On my iPad, I can look up all the information which it is being suggested is being hidden away. The importance of the Local Government Pension Scheme is obvious, and obviously there should be transparency, but the idea being promoted that we do not know what is going on in these funds is gravely unfair to the pension schemes concerned.

[Lord Katz (Lab)]

My Lords, I shall now respond to Amendments 20 and 20A. I am grateful to the noble Viscount, Lord Younger of Leckie, and the noble Baronesses, Lady Stedman-Scott and Lady Altmann, for tabling them. Amendment 20 seeks to revise the existing LGPS regulations to make it easier for employers in the scheme to request interim reviews of contribution rates. I welcome the intention to increase flexibility in how surpluses in the LGPS are treated, but it is crucial for any flexibility to be underpinned by robust safeguards to protect the long-term funding position of those funds. It is important, equally, to make the distinction between how surpluses are treated in the LGPS scheme and in other defined benefit schemes. At the risk of repeating my words on the previous group, within other defined benefit schemes, trustees can choose to release surplus where scheme rules allow. Clauses 9 and 10, which we cannot wait to get to, will increase that flexibility.

In the LGPS, the triennial valuation process already ensures that contribution rates are reviewed every three years and enables withdrawal of surplus through reduced contribution rates where it is prudent to do so. The interim review process is available as an additional mechanism to allow scheme employers, particularly those at risk of exiting the scheme, to seek lower contribution rates between valuations. Interim reviews may take place if it appears likely to the administering authority that the liabilities have changed significantly since the last valuation, if there has been significant change in the ability of employers to meet their obligations or if the employer has requested a review.

I welcome the call from noble Lords opposite to make interim reviews easier to understand and more transparent. I agree that regulations on interim reviews require revision, including on these points. Indeed, the department has already stated this in a letter to administering authorities—that was in March 2025. I understand the point that the noble Baroness, Lady Stedman-Scott, was making about the vicissitudes of the market and other changes that occur. Without wishing to be overly sarcastic, we could posit having reviews on an almost continual basis to try to anticipate market movements, changes in demographics or other external shocks. I am not for a minute suggesting that that was the intention behind the amendment, but it proves the point that, if we are going to break up the cycle of valuation, when and how we do it is a question for further debate. That possibly addresses some of the points that the noble Baroness, Lady Scott of Bybrook, was making as well. It is important that any changes to regulations are properly considered and avoid unforeseen consequences.

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Monday 19th January 2026 Grand Committee

Moved by

[Lord Davies of Brixton]

23: Clause 9, page 10, line 18, leave out “surplus” and insert “assets”

[Lord Davies of Brixton (Lab)]

This group raises important issues about the purpose of these proposed changes to the legislation on pension schemes. I am going to move my Amendment 23 and speak to my Amendments 25, 27, 28, 29 and 30—and I thank the Chairman for the correction. I look forward to the speech of the noble Viscount, Lord Younger, on his Amendment 26, which on the face of it asks a perfectly valid question.

The main amendment in this group, Amendment 25, seeks clarification from my noble friend the Minister about the purpose of Part 1, Chapter 2 of the Bill. This chapter is headed

“Powers to pay surplus to employer”.

Other than that, the Bill and the Explanatory Notes are silent on why the law is being changed. I will come back to that, but first I will address my Amendments 23, 27, 28, 29 and 30, which simply seek a change in the terminology used in the Bill, leaving out the word “surplus” and inserting the word “assets” instead.

I make no apologies for what may appear a pedantic point. Words are important. Later amendments from the noble Baroness, Lady Altmann, would also change the wording, so I think that there is an understanding that words are important, but what do I mean in this specific case? Let us consider the difference from the point of view of a scheme member between being told that their employer has taken some surplus from their pension fund and hearing the statement that their employer has taken some assets from their pension fund. I believe that the latter statement is a much better reflection of what is happening. “Surplus” suggests that the money is not needed, which is never true in a pension scheme; “assets” suggests something far more concrete.

It is worth emphasising that there is no certain meaning of what constitutes a surplus. It is not a technical term in actuarial speak; it was not a word that I ever used when devising pension schemes as a scheme actuary. It is widely used in general conversation—I sometimes use it myself—but it does not appear in the technical actuarial guidance, except as required by a cross-reference to legislation on surpluses. I suggest that using the word “assets” is a much clearer and more honest reflection of what is happening and I urge my noble friend the Minister to accept the change.

Amendment 24 was tabled to make it clear that the intended purpose of releasing assets is to be for the benefit of scheme members as much as for the benefit of scheme sponsors—if not more, in my view. As mentioned, there is no indication in legislation of why scheme assets might be released. What are the purposes for which surplus assets will be released? What is the purpose of the change in legislation and the facilitation of such release? It is left entirely in the hands of scheme trustees exercising their fiduciary duty. Government Ministers during the passage of the Bill have made reference to that on numerous occasions.

However, I believe that this is highly problematic. Experience tells us that we cannot rely on all trustees to interpret the appropriate purposes of the release of assets. It has to be in the Bill. The title of the chapter,

“Powers to pay surplus to employer”,

illustrates the problem. I have been advised by the clerks that it is not possible to amend those parts of the Bill, but it simply reflects the content of that particular chapter. As I said, this illustrates the problem. It only talks about the employer but says nothing about scheme members.

The absence of any reference to scheme members in the Bill contrasts with what Ministers have told us on numerous occasions. There has been a consistent message from Ministers throughout the passage of this Bill that the change will be of benefit to members. On the release of surplus, ministerial statements have suggested consistently that it is intended that members will share in the benefits of releasing assets. For example, my noble friend the Minister said at Second Reading,

“the Bill introduces powers to enable more trustees of well-funded defined benefit, or DB, schemes to share some of the £160 billion of surplus funds to benefit sponsoring employers and members”.

So it is not just about employers. In the Government’s own words, it is about members as well as employers. My noble friend went on to say:

“The measure will allow trustees, working with employers, to decide how surplus can benefit both members and employers, while maintaining security for future pensions ”.—[Official Report, 18/12/25; col. 875.]


Scheme members hearing this must assume that, if the employer benefits from a release of assets, they will as well. But there is nothing in the Bill that will make that happen. The Minister for Pensions made a similar statement many times. He has argued consistently, and rightly, that the release of assets—surpluses, if you will—is not just about employers but about delivering better benefits for scheme members.

Look, for example, at the Government’s road map for pensions. It states under the heading “Surplus flexibilities”:

“We will allow well-funded … pension schemes to safely release some of the £160 billion surplus funds to be reinvested across the UK economy and to improve outcomes for members”.


But there is nothing in the Bill that delivers on that promise. The DWP press statement about the Bill said:

“New freedoms to safely release surplus funding will unlock investments and benefit savers”.


Again, there is nothing in the Bill.

Then we find a statement by the Minister for Pensions on 4 September during Committee on the Bill in the Commons:

“It is crucial that the new surplus flexibilities work for both sponsoring employers and members”.—[Official Report, Commons, Pension Schemes Bill Committee, 4/9/25; col. 130.]


Yet again, there is nothing in the Bill. I could go on—there are plenty of examples—but I hope that I have made the point.

If that is the case and the intention is that members as well as scheme sponsors are expected to benefit when assets are released, this objective should be set out clearly in the Bill. This is particularly important because the Bill, as drafted, removes the existing requirement on trustees only to release surplus where this is in the interests of members. We will come to this again when we reach Amendment 37 in the name of the noble Viscount, Lord Thurso. I will support that amendment, but I think that it would be better to put the requirement for members to benefit as well as employers clearly and unambiguously in Clause 9. A defined benefit scheme is a joint endeavour, involving both employees and employer. They should be treated on an equal basis. I ask my noble friend the Minister to accept the point and bring forward a suitable amendment on Report. I beg to move.

[Lord Kirkhope of Harrogate (Con)]

My Lords, I will briefly intervene because the probing amendments here are important to how we look at the precise nature of surpluses. Clearly, the principle of making it easier to return a genuine pension scheme surplus to employers is worthy of support, particularly given how much has historically been paid by employers into DB schemes, often at the expense of capital investment. But safeguards are absolutely critical—this is the point I want to make about the relationship between employers and trustees in this area. It must be a trustee decision to distribute surplus, and trustees must be required to consider how the surplus has accumulated, as was touched on by the proposer. Was it due to employer contributions, member contributions or strong investment returns?

Under the proposed legislation, employers will no doubt apply immense pressure to steer the distribution towards them and not the members. In exercising their discretion, trustees must be unencumbered, properly advised and protected from the undue and inappropriate pressure that sponsoring employers will no doubt place on them. That is a real concern to me. We must be wary of employers exercising their powers to put in place weak trustees, who will not act in members’ best interests. We must also be wary of making it harder for trustees to distribute surplus to members in favour of employers.

Surplus distributed to members through increased benefits will directly improve the position of the real economy through increased domestic expenditure and of course increased tax receipts. If we are to restrict the use of surplus assets away from scheme memberships to employers, we must ensure that surplus distributed to them is used for reinvestment in the UK economy through capital expenditure. I would like to hear the Minister’s view on that.

On what a surplus is, the changes made by the Pensions Regulator to the DB funding code of practice in November 2024 have codified the requirement for pension scheme trustees to fund DB pension schemes very prudently—I think that those are the words that he used. Further, the investments that trustees are strongly encouraged to hold, through that code of practice, mean that the investment strategies are usually much lower risk than the insurance companies that many pension schemes are now being transferred to en masse under bulk annuity contracts.

In June 2025, the Pensions Regulator issued guidance that suggested that excessive prudence or hoarding of surplus could be considered poor governance by trustees. If we are to make it easier to distribute surplus from pension schemes, the bar for that should not be so low that the security of member benefits is weakened and it should not be so high that it requires schemes to be excessively funded. The current bar of buyout funding is, in my opinion, far too high.

Safeguards are important. It is absolutely critical that trustees are required to take appropriate advice and that actuarial advice is compliant at all times with the relevant technical actuarial standards. Trustees must be able to make informed, evidence-based decisions, unencumbered by the interests of the insurance industry and free from undue employer pressure. That particular relationship concerns me most in our probe into the functions of the surpluses. I hope that the Minister can give reassurances about the position of trustees—how they will be protected and by whom—in this particular contest or area of decision-making.

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[Baroness Sherlock (Lab)]

I am coming on to that, but I am grateful to the noble Lord for pressing me on it. All trustees are bound by duties which will continue to apply when making decisions on sharing surplus. They have to comply with the rules of the scheme and with legal requirements, including a duty to act in the interests of beneficiaries. If trustees breach those requirements, the Pensions Regulator has powers to target individuals who intentionally or knowingly mishandle pension schemes or put workers’ pensions at risk. As the noble Lord knows, that includes powers to issue civil penalties under Section 10 of the Pensions Act 1995 or in some circumstances to prohibit a person from being a trustee.

The key is that the Pensions Regulator will in addition issue guidance on surplus sharing, which will describe how trustees may approach surplus release, and that can be readily updated. That guidance will be developed in consultation with industry, but it will follow the publication of regulations on surplus release and set out matters for trustees to consider around surplus sharing, as well as ways in which members can benefit, including benefit enhancement. That guidance will also be helpful for employers to understand the matters trustees have to take into account in the regulator’s view. I hope that that helps to reassure the noble Lord.

We will come on to some of the detail in later groups around aspects of the way this regulation works, but I hope that, on the first group, that has reassured noble Lords and they feel able not to press their amendments.

[Lord Davies of Brixton (Lab)]

I thank my noble friend the Minister for her reply and other speakers who have contributed to this debate, which I think was worth having. I am pleased that I raised the issue on terminology. I recognise that it is a lost cause, but I have never been afraid, like St Jude, to support lost causes. It is an important point that we need to understand the vagueness of the concept of surpluses and that it is actual assets that disappear from the fund.

On the substantive point, I am afraid that I did not find my noble friend’s response satisfactory. As she said—I made a note of it—trustees remain the heart of decision-making. That exactly is the point. I am afraid that I do not share the Panglossian view of trustees. Many of them—large numbers of them—do a difficult job well, but it is not true of them all.

It is enough of a problem, as I can attest from my own experience of many years in the pensions industry, that we cannot rely on trustees to deliver in all cases. The balance of power between members and trustees is totally unequal. Members, effectively, are not in a position to question trustees’ discretion and responsibilities, and they cannot take it to the ombudsman, because it falls outside the remit.

When my noble friend says that the Government have been clear, that was exactly my point: they have not been sufficiently clear and have frequently given the members a reasonable expectation that they will share in the release of assets. With those words, I beg leave to withdraw my amendment.

Amendment 23 withdrawn.

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[Lord Fuller (Con)]

My Lords, I first became a pension fund trustee in 1997. The trustees at the time knew that there was a turning point, and it was probably just as well to get someone who might be alive 30 years later at least tutored in the principles of pensions at that moment—so it was clearly a moment in time. How right they were, because 30 years later, here I am.

I recall that it was a difficult moment for the scheme of which I was a member, and the private company for which I worked. Since the Barber reviews of 1991, with regard to the benefits payable in the final salary scheme, which was still open, it was the will of the directors that at all costs the final salary scheme should remain open and open to new accruals. Progressively, the benefits were diluted from RPI to RPI capped at 5% to RPI capped at 2.5%. Every step was taken and every sinew strained to keep that scheme open. But in 2003, the actuary reported that, on a scheme with assets of just £5 million, £4 million extra had to be tipped in; that was a sucker punch, and the scheme was inevitably at that stage closed to new members.

It turns out that the assumptions that were made, with the benefit of hindsight, were overly prudent. The deficit was exaggerated. But notwithstanding having put more than £4.41 million—that is the number that sits in my mind—into the scheme, three years later there was another £2.6 million to find as well. My goodness, the company could have made much better use of that capital to grow the business, rather than to fill a hole that history tells us was not there to the extent that it appeared.

We are in a situation where our scheme, which we kept open as long as we could, could not stand it any longer when we got to 2003. There was another turning point in 2006, in “A-day”, but I shall park that to one side. All that money was tipped in—and the suggestion that all the money that has gone into the scheme is some sort of pot to be shared now down the line, equally or in some proportion with the members as well as the company, is a false premise. Without the commitment of these private companies in those darkest days, the schemes would have closed much earlier and members would not have participated for those extra increments that they did.

I listened carefully to the noble Baroness, Lady Altmann, who asked what happens for all those people in the pre-1997 schemes. Well, here is the GMP rub. Astonishingly, I received a payment in the past six months, wholly unexpectedly, from my pre-1997 accrual, for the guaranteed minimum pension. So the suggestion that members are not sharing in any of the benefits of the pre-1997 scheme is a further false premise.

I am no longer a trustee of the scheme, but I know the trustees. The professional and actuarial costs associated with calculating these GMPs have been quite extraordinary. In fact, it would be much better for the trustees to have just made an offer, forget the GMP, and everybody would have been much better off.

The GMP issue illustrates the folly of going down the path that this amendment would lead us. All it is going to do is drive trustees into having more expensive calculations, actuarial adjustments, assessments and consultations, whereas, for the most part, the trustees are minded to make some sort of apportionment and that apportionment needs to be balanced, individual for the scheme in its own circumstances, based on how much excess money was tipped into the scheme for all those years in the post-1997 world. It is about having some sort of fair assessment, a fair apportionment. For the most part, the trustees of private schemes have the benefits and the interests of the members completely at heart and I do not see any circumstance when that does not happen.

This amendment is unnecessary for two reasons. On the one hand, trustees take these things into account. Secondly, that money is truthfully the employers’ money because they went above and beyond, listening in good faith to the professionals, the actuaries and everybody else who had put their oar in on the overly prudent basis, as it now turns out, to make good deficits that were not actually there. I say to noble Lords that for all the pounds that were put in post-1997, when other things happened in the macroeconomy and the Budget—which I will not detain noble Lords with—this country’s pension schemes could have been in a significantly stronger position than they are now had the trustees carried on as they were and not listened to some of the siren voices in government and the so-called professional advisers.

[Lord Davies of Brixton (Lab)]

I strongly support Amendments 26 and 39 from the noble Baroness, Lady Altmann. I have a question on Amendment 39, the proposal that trustees should be able to make one-off enhancements. I understand that there has been some recent change in the tax treatment of such payments, and I wonder if my noble friend could update the Committee on where we are with that.

The noble Lord, Lord Willetts, made the point that we are referring to an issue which will depend on the regulations—one of the problems we face is that this is a skeleton Bill. As I understand it, the question is, in essence: can the trustees use the surplus assets to pay the DC contributions of people who are not in the DB scheme? There is a particular quirk with that. Purely randomly, some schemes established the DC arrangement as part of the DB scheme, and other employers established the DC arrangement as a separate legal entity. It is pure chance which way they went; it depended on their advisers. I have questions about it in idea and principle, but if we are going to admit that, it would be wrong to distinguish between the chance of the particular administrative arrangements that were adapted. I wonder if my noble friend is in a position to comment on that point.

I have significant reservations about the amendment from the noble Lord, Lord Palmer of Childs Hill, for free advice being paid for by surplus. Most members of DB schemes do not need advice—which is the entire point of being in a DB scheme. You just get the benefit. That is what is so wonderful about them. Advice rather than guidance is extremely expensive. The idea that a free, open-ended offer of providing advice should be made needs to be looked at extremely carefully. We have the slight difficulty here in that I am replying to the proposals of the noble Lord, Lord Palmer of Childs Hill, before he has made them, but I have to get my questions in first, and maybe he will comment on that point.

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[Lord Palmer of Childs Hill (LD)]

This seems like a good moment to come in. I first ask the Minister: do the Government agree that a responsible use of surpluses should strengthen confidence in DB schemes and not leave members feeling that prudence has benefited everybody but them? In this, I disagree with the noble Lord, Lord Fuller, because people do feel aggrieved.

I have three amendments here. Amendment 32 is designed to ensure that regulations take account of the particular circumstances of occupational pension schemes established before the Pensions Act 1995. Members of pre-1997 schemes, so often referred to in this debate, are often in a different position to those in later schemes. These schemes were designed under a different legal and regulatory framework. Current legislation does not always reflect those historical realities, creating unintended iniquities.

Amendment 32 would require regulations under Clause 9 to explicitly consider—that is all—these older schemes. It would allow such schemes, with appropriate regulatory oversight, to offer discretionary indexation where funding allowed, so it would provide flexibility while ensuring that safeguards were in place. It would give trustees the ability to improve outcomes for members in a fair and responsible way, and it would help to address the long-standing issue of members missing out on indexation simply because of their scheme’s pre-1997 status. It would also ensure that members could share in scheme strength where resources permitted. Obviously, safeguards are needed, and Amendment 32 would make it clear that discretionary increases would be possible only where schemes were well funded. Oversight by regulators ensures that employer interests and member protections remain balanced.

My Amendment 41 is about advice. When you are as knowledgeable as the noble Lord, Lord Davies, you do not need the advice, but many pensioners are missing it. This amendment would allow a proportion of pension scheme surplus to be allocated towards funding free—

[Lord Davies of Brixton (Lab)]

The amendment talks about surpluses, so it is talking specifically about defined benefit schemes. It is not talking about DC schemes because such schemes do not have surpluses. I just want to be clear.

[Lord Palmer of Childs Hill (LD)]

I thank the noble Lord; it is just that impartial pension advice for members is not always available to everybody. Many savers struggle to navigate pension choices, whether around a consolidation investment strategy or retirement income. Without proper advice, members risk making poor financial decisions that could damage their long-term security. If you are in the business, you have to take the good with the bad, but we would like to give members a bit of advice if the money is available. Free impartial advice is essential to levelling the playing field.

Surpluses in pension schemes should not sit idle or be seen simply as windfall funds. Redirecting a small—I stress “small”—proportion to fund member advice would ensure that surpluses are used in a way that benefits members directly. Amendment 32 would not mandate a fixed share; it would simply give the Secretary of State powers to determine what proportion may be used. This would, I hope, create flexibility and safeguards so that the balance between scheme health and member benefit can be properly managed. Further advice from surpluses reduces the need for members to pay out of pocket and it builds trust that schemes are actively supporting member outcomes beyond the pension pot itself.

Amendment 44, to which my noble friend Lord Thurso referred, would insert a new clause requiring the Secretary of State to publish

“within 12 months … a report on whether the fiduciary duties of trustees of occupational pension schemes should be amended to permit discretionary indexation of pre-1997 accrued rights, where scheme funding allows”.

It aims to explore options for improving outcomes for members of older pension schemes. I maintain that this amendment is needed because many pre-1997 schemes were established before modern indexation rules. Trustees’ current fiduciary duties may limit their ability to avoid discretionary increases, which is what this amendment is about. Members of these schemes may be missing out on pension increases that could be sustainable and beneficial. I will not go on about what the report would do, but there would be many benefits to this new clause. It would provide an evidence-based assessment of whether discretionary indexation can be applied safely; support trustees in making informed decisions for pre-1997 scheme members; and balance members’ interests with financial prudence and regulatory safeguards.

The amendments in this group are clearly going to progress on to Report in some way. Sometime between now and then, we are going to have to try to amalgamate these schemes and take the best bits out of them in order to get, on Report, a final amendment that might have a chance of persuading the Government to take action on these points. Many of the amendments in this group—indeed, all of them—follow the same line, but there needs to be some discipline in trying to get the best out of them all into a final amendment on Report.

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[Baroness Sherlock (Lab)]

I will need to come back to the noble Viscount on that specific point. Obviously, at the moment, a minority of trustees have the power in the scheme rules to release surplus; our changes will broaden that out considerably. If there is a particular subcategory, I will need to come back to the noble Viscount on that. I apologise that I cannot do that now—unless inspiration should hit me in the next few minutes while I am speaking, in which case I will return to the subject when illumination has appeared from somewhere.

It is worth saying a word on trustees because we will keep coming back to this. It was a challenge in the previous group from my noble friend Lord Davies. The starting point is that most trustees are knowledgeable, well equipped and committed to their roles. But there is always room to better support trustees and their capability, especially in a landscape of fewer, larger consolidated pension funds. That is why the Government, on 15 December, issued a consultation on trustees and governance, which, specifically, is asking for feedback on a range of areas to build the evidence base. It wants to look at, for example, how we can get higher technical knowledge and understanding requirements for all trustees; the growth and the use of sole trustees; improving the diversity of trustee boards; how we get members’ voices heard in a world of fewer, bigger schemes; managing conflicts of—

[Lord Davies of Brixton (Lab)]

Sorry. Corporate trustees are a specific issue. Does the consultation include the particular responsibility of single corporate trustees?

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[Viscount Thurso (LD)]

My Lords, I will speak to my Amendments 34 and 37 and will briefly comment on the other amendments. Quickly, before I do that, I seek to assist the Minister with the question I asked her on the last group. I was written to by people who came together as a small group to protest against the failure of a trustee and an employer to award discretionary increases, contrary to their joint policy of matching inflation, originally published in 1989 and repeated in pensions guides and newsletters over the years. For the last four years, the employer has refused consent to modest discretionary increases recommended by the trustee and supported by the independent actuary. That is the situation I am looking at. I hope that is helpful.

I turn to the current group. Let me say, first, in response to the noble Viscount’s amendment and his Clause 10 stand part notice—as he said, both are probing amendments—broadly speaking, I concur with him. If we had had regulations, draft regulations or just something to look at, an awful lot of these questions would not have needed to be put at this stage. As a matter of principle, I am always in favour of the affirmative procedure, rather than the negative one; I shall leave that there.

I know that the noble Lord, Lord Davies, will speak eloquently to his own amendments in a moment, but they are a bit of a variation on the theme of the ones in my name. My Amendment 34 would, in Clause 10 and at line 23,

“after ‘notified’ insert ‘and consulted’”.

What that would do is to say that the trustees would have not only to notify the members but to consult them. My Amendment 37 is very much along the same lines. It would insert, at the end of proposed new subsection (2B), a new paragraph—paragraph (e)—

“requiring that the trustees are satisfied that it is in the interests of the members that the power to pay surplus is exercised in the manner proposed in relation to a payment before it is made”.

Both amendments seek to explore the relationship between the employer, the members and the trustees.

I have listened to the arguments where it has been put forward that the employer has underwritten the surpluses, almost, and is at the mercy of the trustees. The case that I have put forward shows that, actually, there is often a power imbalance between the members—they are probably at the bottom of the pile—the trustees and the employer. I completely concur that the idea of mandating a response is wrong, but it is open to have regulations that require the trustees both to have regard to and to look at that, so that we reach a situation where members’ interests have at least equal value, in the eyes of the trustees, as the requirements of the employer.

I feel that these amendments are very modest. Who knows what might happen later on, but this stage the amendments are designed to reinforce members’ ability to be consulted and know what is going on.

[Lord Davies of Brixton (Lab)]

My amendments address how members’ interests can best be represented whenever a release of assets is under consideration.

As the Bill stands, the first members will know about such proposals is when they are a done deal—that is, when the decision has been made by the trustees, having talked to the employer. That is what the Bill says, and that is clearly wrong. There is also nothing in the Bill about any involvement of members in the process, such as consultation. This is obviously unacceptable; they should be involved fully from the start. I support the amendments in this group in the name of the noble Viscount, Lord Thurso.

I would probably oppose Amendment 42 in the name of the noble Baroness, Lady Noakes, but, obviously, I shall wait to hear what she says before coming to a conclusion—although the noble Baroness’s remarks on the previous group gave me the gist of what is proposed. Finally, I shall await my noble friend the Minister’s response to the questions raised by the amendments in the name of the noble Viscount, Lord Younger of Leckie.

My Amendment 36 is relatively straightforward and, I hope, uncontentious. Members need to be told before, not after, a decision is made by the trustees and agreed by the employer. This is a point of principle. Scheme members are not passive recipients of their employers’ largesse; they should be equal partners in a shared endeavour, and they have the right to be involved.

My other two amendments would bring scheme members’ trade unions into the process. A question has been asked a number of times during the passage of the Bill in the Commons: who represents members when a release of assets is proposed? The answer, of course, is their trade unions. This is a matter of fact. Consultation is inherently collective and there is now extensive and detailed legislation on how members are to be represented collectively. This applies here, as it does to all other terms and conditions of employment. I should emphasise that this is a requirement to consult on the employer, not the trustees. It applies to trade unions recognised for any purpose under the standard provisions of employment law.

Amendment 36 is relatively straightforward. It would simply require the employer to inform recognised trade unions at the same time as scheme members of the proposals that it is considering in discussion with trustees to release scheme assets. Amendment 40 would go further; it would require an employer to consult with those recognised trade unions before reaching any agreement with the trustees. The requirement to consult with trade unions about changes in pension arrangements that they sponsor is not a new provision. I am not proposing anything radical or new. Pension law already requires consultation with trade unions in this particular form; it requires them to take place before major changes in employees’ collective arrangements. My case is simply that the decision to release assets is a major change and hence it should be brought within the consultation requirements that are already set out in legislation.

This is all in accordance with Section 259 of the Pensions Act 2004 and the regulations under the Act. These are the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006, that is SI 349 of 2006. These regulations require employers with at least 50 employees to consult with active and prospective scheme members before making major changes—known as listed changes in the legislation—to their pension arrangements.

The key requirements set out in the legislation includes a mandatory consultation period. First, employers must conduct a consultation lasting at least 60 days before a decision is made. Secondly, there must be a spirit of co-operation. Employers and consultees are under a duty to work in the spirit of co-operation and employers must take the views received into account. Thirdly, the affected parties consultation must include active members, those currently building benefits, and prospective members—eligible employees not yet in the scheme. Deferred and pensioner members are generally excluded, which I have always regarded as a shortcoming in the legislation.

The listed changes that currently trigger statutory consultation are: an increase in the normal pension age; closing the scheme to new members; stopping or reducing the future accrual of benefits; ending or reducing the employer’s liability to make contributions; introducing or increasing member contributions; changing final salary benefits to money purchase benefits; and reducing the rate of revaluation or indexation for benefits. It should be noted that this is not just about changes in benefits; it is about changing the financing of the scheme. A release of assets is a change in the financing of a scheme, and so it should be included in the list in these regulations. My amendment would simply direct that regulations should be laid that will add release of assets to the list of these listed changes.

There are consequences under the legislation for employers that fail to comply with it, but the spirit here is one of setting out a process of working together, in order, as far as possible, to reach changes to the scheme that are accepted to both sides of the employment relationship.

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[Baroness Sherlock (Lab)]

My Lords, I am grateful to all noble Lords who have spoken on these amendments to Clause 10. Having previously set out the Government’s policy intent and the context in which these reforms are being brought forward, I start with the clause stand part notice tabled by the noble Viscount, Lord Younger. As he has made clear, it seeks to remove Clause 10 from the Bill as a means of probing the rationale for setting out the conditions attached to surplus release in regulations rather than in the Bill. It is a helpful opportunity to explain the scope and conditions of the powers and why Clause 10 is structured as it is.

The powers in the Bill provide a framework that we think strikes the right balance between scrutiny and practicality, enabling Parliament to oversee policy development while allowing essential regulations to be made in a timely and appropriate way. It clearly sets out the policy decisions and parameters within which the delegated powers must operate. As the noble Viscount has acknowledged, pensions legislation is inherently technical, and much of the practical delivery sits outside government, with schemes, trustees, providers and regulators applying the rules in the real-world conditions. In pensions legislation, it has long been regarded as good lawmaking practice to set clear policy directions and statutory boundaries in primary legislation, while leaving detailed operational rules to regulations, particularly those that can be updated as markets and economic conditions change and scheme structures evolve, so that the system continues to work effectively over time.

In particular, Clause 10 broadly retains the approach taken by the Pensions Act 1995, which sets out overarching conditions for surplus payments in primary legislation while leaving detailed requirements to regulations. New subsection (2B) sets out the requirements that serve to protect members that must be set out in regulations before trustees can pay a surplus to the employer—namely, before a trustee can agree to release surplus, they will be required to receive actuarial certification that the scheme meets a prudent funding threshold, and members must be notified before surplus is released. The funding threshold will be set out in regulations, which we will consult on. We have set out our intention and we have said that we are minded that surplus release will be permitted only where a scheme is fully funded at low dependency. That is a robust and prudent threshold which aligns with the existing rules for scheme funding and aims to ensure that, by the time the scheme is in significant maturity, it is largely independent of the employer.

New subsection (2C) then provides the ability to introduce additional regulations aimed at further enhancing member protection when considered appropriate. Specifically, new subsection (2C)(a) allows flexibility for regulations to be made to introduce further conditions that must be met before making surplus payments. That is intended, for example, if new circumstances arise from unforeseen market conditions. Crucially, as I have said, the Bill ensures that member protection is at the heart of our reforms. Decisions to release surplus remain subject to trustee discretion, taking into account the specific circumstances of the scheme and its employer. Superfunds will be subject to their own regime for profit extraction.

Amendment 37, tabled by the noble Viscount, Lord Thurso, seeks to retain a statutory requirement that any surplus release be in the interests of members. I am glad to have the opportunity to explain our proposed change in this respect. We have heard from a cross-section of industry, including trustees and advisers, that the current legislation, at Section 37(3)(d) of the Pensions Act 1995, requiring that the release of surplus be in the interests of members, is perceived by trustees as a barrier because they are not certain how that test is reconciled with their existing fiduciary duties. We believe that retaining the status quo in the new environment could hamper trustee decision-making. By amending this section, we want to put it beyond doubt for trustees that they are not subject to any additional tests beyond their existing clear duties of acting in the interests of scheme beneficiaries.

I turn to Amendments 31 and 43, which seek to clarify why the power to make regulations governing the release of surplus is affirmative only on first use. As the Committee may know, currently, only the negative procedure applies to the making of surplus regulations. However, in this Bill, the power to make the initial surplus release regulations is affirmative, giving Parliament the opportunity to review and scrutinise the draft regulations before they are made. We believe that this strikes the appropriate balance. The new regime set out in Clause 10 contains new provisions for the core safeguards of the existing statutory regime; these are aligned with the existing legislation while providing greater flexibility to amend the regime in response to changing market, and other, conditions.

Amendments 35 and 36 seek both to prescribe the ways in which members are notified around surplus release and to require that trade unions representing members also be notified. I regret to say that I am about to disappoint my noble friend Lord Davies again, for which I apologise. The Government have been clear: we will maintain a requirement for trustees to notify members of surplus release as a condition of any payment to the employer. We are confident that the current requirement for three months’ notification to members of the intent to release surplus works well.

However, there are different ways in which surplus will be released to employers and members. Stakeholder feedback indicates that some sponsoring employers would be interested in receiving scheme surplus as a one-off lump sum, but others might be interested in receiving surplus in instalments—once a year for 10 years, say. We want to make sure that the requirements in legislation around the notification of members before surplus release work for all types of surplus release. We would want to consider the relative merits of trustees notifying their members of each payment from the scheme, for example, versus trustees notifying their members of a planned schedule of payments from the scheme over several years. Placing the conditions around notification in regulations will provide an opportunity for the Government to consult and take industry feedback into account, to ensure the right balance between protection for members and flexibility for employers.

I understand the reason behind my noble friend Lord Davies’s amendment, which would require representative trade unions to be notified. They can play an important role in helping members to understand pension changes. However, we are not persuaded of the benefit of an additional requirement on schemes. Members—and, indeed, employers—may well engage with trade unions in relation to surplus payments; we just do not feel that a legislative requirement to do so is warranted. The points about the role of trustees, in relation to acting in the interests of members in these decisions, were well made.

Amendment 34 would require member consultation before surplus is released. I understand the desire of the noble Viscount, Lord Thurso, to ensure that members are protected. The Government’s view is that members absolutely need to be notified in advance, but the key to member protection lies in the duty on scheme trustees to act in their interests. Since trustees must take those interests into account when considering surplus release, we do not think that a legislative requirement to consult is proportionate.

[Lord Davies of Brixton (Lab)]

Just to be absolutely clear, the three-month notification period relates to the notice of implementation; it is not three months’ notice of the decision being made.

[Baroness Sherlock (Lab)]

I believe so; if that is not correct, I shall write to my noble friend to correct it. Coming back to his point, the underlying fact is that we believe that the way to protect the interests of members is via the trustees and the statutory protections around trustee decision-making.

I apologise to the noble Viscount, Lord Thurso, as I misunderstood his question in our debate on the previous group. I am really grateful to him for clarifying it; clearly, he could tell that I had misunderstood it. At the moment, when a scheme provides discretionary benefits, the scheme rules will stipulate who makes those decisions. In many cases, that involves both the trustees and the sponsoring employer, as may be the case in what the noble Viscount described.

When considering those discretionary increases, trustees and sponsoring employers have to carefully assess the effect of inflation on members’ benefits. But, as the noble Viscount describes, if it is not agreed, the employer may effectively in some circumstances veto that. We think the big game-changer here is that these changes will give trustees an extra card, because they will then be in a position to be able to put on the table the possibility for surplus being released not to the member via a discretionary increase but to the employer. However, they are the ones who get to decide if that happens, and therefore they are in a position where they suddenly have a card to play. I cannot believe I am following the noble Viscount, Lord Thurso, in using the casino as a metaphor for pensions, which I was determined not to do; I am not sure that that takes us to a good place. But it gives them an extra tool in their toolbox to be able to negotiate with employers, because they are the ones who hold the veto on surplus release. If they do not agree to it, it ain’t going anywhere. So that is what helps in those circumstances.

--- Later in debate ---

Although this is a technical amendment, looking to bring together all these regulators in the national interest, I am told by the industry—I thank John Hamilton, who is the Stagecoach group pension fund chair of trustees; William McGrath, founder of the C-Suite Pension Strategies; and Henry Tapper, chair of AgeWage, for bringing this to my attention—that, if we can get this working right and if this is inserted into the Bill, we will be able to change how trustees look at their responsibilities to members for the long run. We will be able to start to use these pension assets in a positive way to secure better benefits in future for their members and the nation than the current haphazard application of the standards and all the excellent hard work that the actuaries do, which is driving trustees away from one of the most productive futures for this national pool of wealth.

[Lord Davies of Brixton (Lab)]

I find myself in some difficulty in speaking to these amendments. First, although I declared my interests as a fellow of the Institute of Actuaries at the beginning of Committee, it is appropriate, in accordance with practice where there is a specific interest involved in the amendment, to declare it again. I am not a practising actuary at the moment, but I could be, and this would bear directly on my ability to earn money.

I support what I think is behind the proposals being made by the noble Baroness, Lady Altmann. We should consider ways of strengthening trustee consideration of the way forward, whatever it is. More specifically, an automatic response to go to annuitisation is clearly wrong. If trustees do not consider the other options, they are not acting properly and are not discharging their fiduciary responsibility. The suggestion is that this is happening too often at the moment.

Broadly speaking, I agree that there has been a rush to buy out, but that has happened for a wide variety of reasons, of which I would suggest that the presence or absence of particular actuarial advice is only a small part. To overemphasise this part without looking at what else is going on is a problem. Trustees should be supported to make better decisions, and part of that process is the actuarial report that they produce from their scheme actuary.

Just to provide a bit of background, we need to understand that actuarial regulation is just a little confusing. We have two regulators for actuaries. There is the institute itself, which is responsible for professional standards—“you should not bring shame on the profession and you should make sure that you know what you are talking about before you provide advice”. All that side of things is handled by the profession itself. Technical standards, such as what should be in a valuation report, are the responsibility of the Financial Reporting Council, a completely separate body that is not part of the actuarial profession. Although there are actuaries involved in the work of the FRC, it is not an actuarial body but an independent body. I will not go into the history, but, for whatever reason, it was decided to take that technical supervision away from the institute and place it with the Financial Reporting Council.

The particular standard referred to here is the technical actuarial standard, or TAS 300. That does not mean that there has been a previous 299; it starts at 300. There is a 100, and there are other numbered standards that come and go. This is the one that relates to advice to trustees, not just for valuation purposes but for calculating what basis the fund should use to calculate transfer values, commutation rates and so on. So there is this technical standard, set by an independent body.

I understand that that standard is controversial, and the noble Baroness, Lady Altmann, reflected some of that controversy in her speech. It would be fair to say that views differ. It is also important to understand that the current edition of TAS 300 was issued after extensive consultation last July and came into effect only on 1 November last year. It is always open to debate what the standard should say. My concern is that that standard is intended for actuaries, to tell them how they should provide actuarial advice to trustees. Its role is not to tell trustees how to behave. The problem, which I recognise, and which has been suggested as a reason for these amendments, is that trustees are not behaving properly—or it could be that they are being ill-advised by actuaries. That is not something that I am going to endorse but, if that is true, there is a disciplinary process under the Financial Reporting Council. Again, that is not part of the actuarial profession; it is a separate disciplinary process for anyone identified as not complying with the TAS. The issue can be raised with the FRC, and it may well be that it should have been raised more often, because that is really the first port of call if you think that the advice is wrong. It is not to put it into a piece of legislation.

I am very sorry to find myself in contention with the noble Baroness but, if trustees need to be regulated, it is not the job of the Financial Reporting Council to do it. It is not its job to tell trustees how to do their job. That is an issue that I am sure that we could debate extensively. I recognise the problem, but I am not convinced that we have been presented with the correct answer.

[Lord Fuller (Con)]

My Lords, I know that this is a technical amendment, and in the last group I disagreed with the noble Baroness, Lady Altmann, but on this one I totally agree with her analysis, particularly her identification of the groupthink that trustees suffer, bamboozled and pressured by the FCA, TPR and actuaries, and sometimes investment managers, to be overly risk-averse in some of their investments. In particular, there is a drive—it is explained that it is prudential and that the regulations require it, which means that we need to look at the regulations—for pension funds to apply an increasing proportion of their assets to liability-driven investments.

If your scheme happens to be in deficit, these LDIs will anchor you in deficit for the rest of time, because that is how they work. That is wrong, because the trustees have no control over what the interest rate, discount rate or gilt rate might be. They can adjust—plus or minus, in the case of gilts—but, ultimately, liabilities are driven by the gilt rates. They have no control over that, but they do have control over how the assets in their scheme are invested for the greatest return.

However, that is not how their schemes are valued at the triennial, which is valued on the gilt rate. As the noble Baroness, Lady Altmann, said, the value of their assets is depressed by virtue of being in a scheme. As people buy out and are forced to buy out—Amendment 33A contemplates what happens when you approach a buyout—schemes are being mugged. Members are being short-changed by this artificial diminution in the value of the assets, which at the moment pass into the hands of an insurance company, as the noble Baroness, Lady Altmann, said. No longer impeded, weighed down or anchored from being in a scheme, they can be let rip. The uplift happens quickly, and there is an immediate profit to the insurance company.

It is perverse that the entire regulatory advisory industry is mandating schemes to go into overly prudent investment products, almost suckering them down so that they have to pay a premium to be bought out, and all the profits go somewhere else. That is not prudence; it is short-changing the members of the schemes and diverting huge amounts of productive capital for the engine of our economy and the private businesses that generate wealth and pay taxes.

Regarding Amendment 33A, it is really important that trustees have imagination and are encouraged to think as widely as they possibly can, asking, “What does this mean? Are we in the appropriate asset mix? Should we be rammed into LDIs because we are chasing a deficit, or should we be invested in growth to pay benefits for members?” That is the dilemma, and this amendment shines a light on it almost for the first time in the Bill. Trustees in as many schemes as I can think of are being misdirected, ostensibly to reduce risks. But they are not reducing risks; they are reducing the sustainability of their schemes and their ability to pay for today’s members, including, most importantly, the youngest members of their scheme, who have the longest to go to retirement. Following the dismal, dead hand of these regulators is prejudicing the ability of these schemes to pay out for their youngest members in 20, 30 or 40 years’ time.

I notice that the noble Lord, Lord Willetts, is not in his place, but he made this point in a previous group. This is the generational problem that we have, between the eldest and the youngest people in the scheme. We need to strengthen and empower our trustees to play their roles simply and straightforwardly and not as though they are not competent or do not feel confident to resist the so-called advice they are getting from regulators, which are acting in groupthink and not in the scheme’s best interest, or the interests of either members or companies.

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Monday 26th January 2026 Grand Committee

[Baroness Altmann (Non-Afl)]

My Lords, I support every word that the noble Baroness, Lady Bowles, has said. I hope the Minister understands that this series of amendments is designed, once again, to help the Government.

The policy of excluding the very asset classes that the Government want to promote and want pension funds to invest in, just because they are held in a particular form, seems irrational. The process used to introduce it, as the noble Baroness, Lady Bowles, outlined, was materially flawed. There was a lack of consultation and the policy is directly contrary to some previous ministerial Statements and to the stated policy intention. I cannot see how any reasonable person could argue that excluding these companies is a legitimate means of achieving the stated policy objective. The decision goes against common sense and defies economic logic. It opens pension scheme members up to less choice, higher long-term costs and, potentially, new risks such as gating or frozen investments.

Amendments 122 and 123 are designed specifically to ensure that, if a closed-ended investment company holds the assets in which the Government want pension funds to invest as a result of the Mansion House Accord, they can do so. Amendment 123 includes these as qualifying assets under the Bill and Amendment 122 talks about ensuring that, if securities are

“listed under Chapter 11 of the UK Listing Rules or the Specialist Fund Segment that provide exposure to the qualifying assets”,

they too can be included.

These amendments would not change the intentions of the Bill or the Government’s policy; they would reinforce them. If schemes cannot invest in listed securities, we will exclude the closed-ended funds that hold such assets, for no obvious reason other than, perhaps, the fact that the pension funds or asset managers that are launching the long-term asset funds will obviously prefer to have their own captive vehicle under their direct control, rather than those quoted freely on the market.

I would argue that, by excluding investment trusts and REITs as qualifying assets, we will fetter trustees’ discretion as to what assets they can invest in and how they can do so. I do not believe that the Government want to do this. I think this is an unintended consequence of wanting not to allow schemes just to say, “Well, I invest in Sainsbury’s and it has a lot of property in the UK, so that’s fine”. But this is a very different argument. I hope that the time spent by this Committee on these funds will prove worth while and that this dangerous, damaging exclusion can be removed from the Bill.

If the Government want—as they say they do—pension schemes to invest in UK property, the amendments on this topic would allow them to choose to hold shares in Tritax Big Box, for example, which is a listed closed-ended fund. It is a collective investment REIT, not a trading company, and UK regulators, the stock market and tax regulation recognise its functions as a fund. It is just like a long-term asset fund, but it is closed-ended instead of open-ended. Under the Bill, pension funds would not be able to invest in it, even though it holds precisely the type of private assets targeted by this section of the Bill.

The amendments would maximise schemes’ choice of investable assets within the target sectors. This would widen competition, which should bring downward pressure on asset management costs; it would reduce the risks of inflating asset prices, by channelling demand into fewer investment pathways; and it would enhance potential risk-adjusted returns. There is simply no reason why master trusts and other pension schemes should object to being given additional freedom to make investments to meet the requirements of these reserve powers. Why are we discriminating against a particularly successful British financial sector offering a proven route to holding the assets in which the Government want pension funds to invest? I have not seen any argument to say that, if we include these amendments, pension funds would have to invest in these companies, but they could use them if it suited their needs.

I look forward to the Minister’s answer. I know and accept that she is in a difficult position, but I have not heard a coherent answer as to why we are going down the route that we are. Tritax Big Box is just one example. It owns and develops assets worth £8 billion and controls the UK’s largest logistics-focused land platform, including data centres, which the Government designated as critical national infrastructure in 2024. Tritax Big Box announced that its data centre development strategy will be partnering with EDF Energy, which manages the UK’s nuclear power, to develop such infrastructure. It is remarkable that such a homegrown success story should be excluded from the opportunities available to pension schemes.

This sector has reinvented itself over the past few decades, from being a holder of diversified quoted equities to managing real illiquid assets. It is generally recognised that it is an ideal structure for holding illiquid assets—it has renewable assets, wind farms, solar farms and National Health Service GP surgeries. All these elements of the economy need significant investment and pension funds could be using their assets to support them. Surely that should be part of the Government’s intention for the Bill. I hope that this possible error in the Bill can be recognised and corrected so that we can move forward without further discussion on this topic.

[Lord Davies of Brixton (Lab)]

The noble Baroness, Lady Altmann, called on the support of reasonable people. I think of myself as a reasonable person, and I support her. I find the Government’s position on this totally inexplicable. I say in all honesty to my noble friend the Minister that the reasons given so far for these provisions do not in any way explain their position. It is inexplicable.

In my view, it is possible to make an argument that closed-end funds of this sort are more suitable than some other sorts of investments for pension investment because of the possibility of there being additional liquidity. That makes it even more inexplicable. A further problem is that pension funds could invest in an investment company that is not a closed-end fund but holds these investments. However, if it decided to float on the stock exchange, it could not do so because it would lose all the pension fund investments. So there is not logic at all to the Government’s position. There may be some logic, but we have yet to hear it.

[Lord Remnant (Con)]

My Lords, I very much support the amendments in this group, tabled variously in the names of the noble Baronesses, Lady Altmann and Lady Bowles of Berkhamsted. They all seek to ensure that closed-ended funds, in the form of UK-listed investment companies, are not disqualified from being eligible to invest in the private market assets targeted by the Bill, alongside open-ended funds. I say this not only as a private investor in both types of funds but as one who has sat on and chaired boards responsible for managing both types of investment.

They each have their relative advantages and disadvantages, which I will not enumerate here, but it is in fact investment companies that, over the long term, tend to have lower fees and better performance records, to the advantage of their investors. It seems perverse to exclude them from the Bill, seemingly solely on the grounds that they have listed status, when the nature of their underlying investments is identical to those held by open-ended vehicles. Indeed, investment trusts are particularly suited to the type of investments envisaged by this Bill and the Mansion House Accord—namely, assets that are essentially illiquid. Investment companies hold well over £100 billion-worth in private assets, and unlisted infrastructure and renewables have been among the fastest growing segments in recent years.

As the noble Lord, Lord Davies of Brixton, indicated, it is this ability more effectively to offer liquidity in illiquid assets that particularly distinguishes closed-ended vehicles from their open-ended cousins. It is in times of stress, whether within the investment vehicle itself or more broadly due to general economic or financial conditions, that some of the more unfortunate investment failings occur. They tend to relate to liquidity or lack thereof, they have happened in the recent past and they have occurred in open-ended structures.

Noble Lords will need little reminding of the demise of the Woodford Equity Income Fund. Suffice to say that, in two years, it lost two-thirds of its value; it became increasingly and disproportionately reliant on unlisted investments, which could not be sold to meet investor redemptions; and it was suspended in June 2019, leaving investors unable to access their money.

Noble Lords may be less familiar with the travails afflicting open-ended property funds. Property is an asset class specifically targeted by the Mansion House Accord. The writing was on the wall for them ever since they suspended in the depths of the Covid crisis. That triggered funds in the sector to begin to close down, given the evident problems with liquidity that resulted in a fundamental mismatch in the demands of investors against the liquidity of the underlying asset. These investors are mainly not faceless institutions but retail investors—the same individuals who save for their pensions. The only way in which the managers of the fund can mitigate these liquidity issues is by holding substantial cash holdings, which cuts across its investment objectives and dilutes returns. Once an announcement to close is announced, properties are likely to be sold at fire sale prices into difficult markets, and investors may have no access to their money for well over 12 months.

Institutions running open-ended funds attempted to address these liquidity problems by establishing the long-term asset funds referred to earlier, but their structure is still such that they cannot solve the problem but only rather crudely mitigate it through having more restricted dealing windows than the daily dealing offered by more traditional open-ended funds. They have been authorised by the FCA only since 2023 and are unproven. They are described by one prominent investment platform as high-risk investments recommended for experienced investors who have already accessed the more traditional investment options, yet they qualify under this Bill to the exclusion of investment companies which have proved their worth for over 150 years. I do not understand the rationale for this.

--- Later in debate ---

[Lord Davies of Brixton (Lab)]

I wanted to speak after the noble Lord, Lord Palmer of Childs Hill, because, while I agree with what he said, I slightly disagreed when he talked about the favourable returns achieved by private equity. There is a massive problem with survivorship bias in those figures because the ones you never hear of again do not enter the figures.

I have a question for my noble friend the Minister. It seems an odd bit of drafting to say: “may for example”. Is “for example” doing anything in that sentence? Clearly it is not intended to be all encompassing, so others must be possible; it suggests that the person doing the drafting was not really sure that they liked what they were doing. It is pussyfooting about a bit. Secondly, what do these terms actually mean? I have an idea about “private equity”, but what about “private debt”, “venture capital” and “interests in land”? Goodness knows what the last one means. Are these terms defined anywhere? Can we get a clear definition of these things before we confirm this part of the Bill?

--- Later in debate ---

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will speak to Amendments 146 to 150. This group of amendments is all about trustees. Although I submit that nothing in this Bill should unsettle the basic foundation of our trustee law, there remains extensive debate in the courts and academic literature, and among trustees, on how far wider policy objectives and emerging risks can be taken into account. I am trying to address some of those.

Amendment 146 would simply reinforce the obvious: fiduciary duty remains the overriding principle of pension governance and trustees must act in the best financial interests of members. That is the cornerstone of trust law. The courts have been clear for decades that trustees must prioritise members’ financial interests above all else. Yet the combination of the Mansion House rhetoric, promotional language in the Bill and the possibility of future regulations has created real anxiety among trustees about whether they are expected to prioritise government preferences over member outcomes. This amendment aims to remove that ambiguity. It would restate the law, reassuring trustees that their primary duty has not changed.

Amendment 147 follows on from that in seeking to introduce a safe harbour. Trustees are increasingly worried about being second-guessed, not for misconduct but for failing to meet expectations that are not clearly defined. Many are lay trustees. They act in good faith, take professional advice and follow their fiduciary duties. They should not face penalties or adverse consequences because they did not meet a quota or chose a different route to the same underlying assets. A safe harbour is a standard legal mechanism used in other regulatory regimes. It protects trustees who do the right thing, prevents retrospective reinterpretation of policy signals and ensures that trustees can make decisions based on evidence, not fear.

Amendment 148, also tabled by the noble Baroness, Lady Altmann, addresses systemic risk. Trustees already consider systemic risks: climate change, economic resilience, supply chain fragility and other long-term factors that materially affect pension outcomes. The Pensions Regulator already expects trustees to consider these issues, but the statutory framework is uneven and expectations are not always clear, so this amendment would codify best practice. It would ensure that trustees consider systemic risks as part of their fiduciary duties, while making it explicit that this does not mandate investment in any particular vehicle. It is about risk management, not direction of capital. Trustees are careful and sensible people and will observe the policy direction, including on private assets. As I said last week, before we had the devil’s clause, there was broad agreement that it would be far better to trust the trustees.

Amendment 149, again from the noble Baroness, Lady Altmann, addresses structural discrimination. I have already dealt extensively with how the Bill risks creating unequal treatment between different collective investment structures. Trustees should be free to choose the most appropriate structure for their scheme, whether listed or unlisted, based on liquidity, valuation, discipline, governance or member outcomes. The amendment would simply ensure a level playing field. It would prevent distortions, protect competition and ensure that trustees are not nudged away from structures that have served savers well for over a century.

Finally, Amendment 150 deals with herding risk. Regulatory herding is a known danger, which we have seen most recently and dramatically with LDI, where regulation, guidance or professional advice pushes everyone in the same direction at the same time and systemic risk increases, not decreases. The Mansion House agenda, if interpreted too narrowly, risks creating precisely that kind of clustering. This amendment would require the Secretary of State to avoid mandating or promoting investment in a way that induces herding and ensure that any guidance emphasises diversification and risk management. It is a simple “Do no harm” provision which learns from recent history. It is also embedded in the terms of the Mansion House Accord, as spoken to last Thursday by my noble friend Lord Sharkey. Trustees must not be forced to purchase assets that do not exist, do not exist safely or do not exist at a fair price.

None of these amendments would obstruct the Government’s objective. None would prevent investment in productive finance. None would limit trustee discretion. What they would do is ensure that trustees remain protected, that their duties remain clear and that the Bill does not inadvertently distort markets, undermine competition or create new systemic risks. These amendments are modest, sensible and protective. They would strengthen the Bill, support trustees and safeguard the long-term interests of pension savers. It is what we should all be thinking about.

[Lord Davies of Brixton (Lab)]

I support mandation. I am in favour of the Government introducing the measures in this Bill, in principle. All Governments have a duty, not just a right, to deal with market failure. If the current investment advice and structures that we have are failing to deliver investments in the growth that we need in our economy, then the Government have a duty to act. I am not yet convinced that they have all the mechanics of mandation right, but that is the process we are going through at the moment in investigating how it will be achieved.

I am not so sure—I ask my noble friend the Minister to guide the Committee on this—about a question raised at Second Reading to which there was no answer, which applies to this part of Bill. Do the Government understand that the inevitable corollary of mandation is responsibility for the outcome? Outcomes may be better. We are told at length that this will improve things; the aim is to grow the economy to achieve good investments.

The Government may not have a legal responsibility to make sure that happens, but they certainly have a moral responsibility when they are saying how members’ money should be invested and they also, inevitably, have a political responsibility to ensure that they produce a system that enjoys broad public trust. A failure to achieve the Government’s objective will break that trust. Do the Government appreciate and understand the implications of what they are doing?

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Tuesday 3rd February 2026 Grand Committee

Amendment 142 in the previous group looked at protecting the trustees or managers in such a situation. Amendment 167 would provide a sensible mechanism for making the scheme members whole if they suffered losses as a result of the government mandation. If the Government are going to force trustees or managers to act in a way that they do not believe to be in the interest of scheme members—that is the implication of mandation—it must be appropriate that the Government bear the risk of any underperformance. Neither members nor trustees should be made worse off as a result of government intervention.

[Lord Davies of Brixton (Lab)]

I possibly touched on this issue in the wrong group, but as the noble Baroness, Lady Kramer, has indicated, I raised, in essence, the same points in the previous debate.

I am in favour of mandation, but what worries me is that the Government do not seem to understand—and have never acknowledged—the consequences, which have been set out so clearly by the noble Baroness, Lady Kramer, and the noble Lord, Lord Vaux. There are consequences if the Government tell people how to organise their retirement income and if, having told them how to proceed to achieve a good income, it subsequently turns out that the Government are wrong. As I said last week, they will not necessarily be legal consequences, but political consequences and moral consequences.

I draw attention to the Financial Assistance Scheme, which we are going to be debating later this week. It was established because the Government had to acknowledge their failure to introduce the appropriate law and protect people, and they lost income. That is an exact precedent for where we are now. That Government had a responsibility to protect those people and failed to do so. After a vigorous campaign by those who had been affected, and the threat of losing a case at the European court, which was possibly more influential on the Government, they had to act. It is not wild speculation that the Government will end up having to meet these moral and political consequences; it has already happened. The Government have to face up to what they are proposing here.

[Baroness Altmann (Non-Afl)]

My Lords, I support this amendment in principle. I share the concerns just expressed by the noble Lord, Lord Davies, about the risk of mandating a substantial proportion of any pension fund to be invested in what is, in effect, the highest-risk end of the equity spectrum, which is meant in other circumstances—if you ask the Pensions Regulator and so on—to be the risky bit of investment.

The Government may need to think again about the consequences of potentially being so narrow—of course, in the Bill, we do not even have the exact definition of what the assets are going to be in terms of these unlisted opportunities—because the opportunity set for risky investments that can actually benefit the economy is a lot wider than seems to be indicated in the Bill. Surely the more diversified the portfolios, the better risk-adjusted returns members can expect. I hope that the Government will give the Committee a more precise understanding of their expectations for the types of assets and for the consequences of being automatically enrolled in a scheme that invests in private equity assets or other unlisted assets that end up failing completely—as has happened so frequently with that type of investment in the past.

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[Lord Fuller (Con)]

My Lords, there are three clauses here and one would have to be pretty churlish to want to reject and disagree with the thrust of what they are trying to achieve. But I am concerned, as is my noble friend Lord Younger, about how we might put in these contractual arrangements. I am concerned that we are going to sleepwalk into a situation where there is unrealistic customisation and we are going to set unrealistic expectations about the ability of schemes—particularly the larger schemes, because we know schemes are going to be much bigger than today—to give personalisation.

We are going to see, if I read these regulations correctly, a huge number of bespoke arrangements. There is going to need to be candour, not just from the schemes themselves but from the members when they are asking questions. What is the duty upon the person to take advice? Normally, at the moment, if you want to change your pension arrangements, you need to take advice and pay for it. Who will pay the fees? Is it the member or the scheme itself?

When I think about candour, it leads me down the path of thinking about what happens to people who are in impaired life situations. Perhaps they have cancer or another terminal disease. I am not going to trespass on the arguments that are made every Friday in your Lordships’ House, but as we have learned from those debates, there is a lack of certainty about people who are in those impaired situations.

That leads on to my noble friend’s point about capacity and capability of trustees to make these judgments—that is difficult. So I am entirely in agreement with the idea that people should be able to have control and a bespoke arrangement just for them, but I am concerned about the practicality of delivering what can be subjective judgments of the trustees. In these large schemes you may have to deal with hundreds or thousands of these applications.

In local government—a parallel world— the EHCP system mandates a personalised regime for children’s special educational needs. I suppose my concern is that it has led to a huge bureaucracy—a cottage industry of a huge amount of appeals, process and, of course, delay. When you have pensions, you cannot have a delay because people are at the end of their lives—are they going to make it?

I want to agree with the thrust of this, and these are probing amendments, but I am interested in the Minister laying out in some detail how these bespoke arrangements might be calculated and defended by trustees with lots of other things to do. I am also very much drawn to the amendments from the noble Baroness, Lady Noakes, about being realistic about the current ways of work, in which people have blended retirements, and about the requirement to have indexation and all those sorts of things. It does seem complicated, and I am interested to hear what the Minister might say about it.

[Lord Davies of Brixton (Lab)]

This part of the Bill is particularly important and the part to which I gave the strongest welcome. There is, inevitably, a caveat: we do not know much of the detail because it depends so much on what the regulations say and require. But this is the necessary and right framework to provide pathways for people to get the sort of benefits in retirement that best suit them.

I have some concern that there has been discussion of having more than one default, which rather defeats the concept of a default. Either the member will have to choose the appropriate default or someone else will, which places a particular responsibility on whoever will take the decision. It is important.

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

My Lords, before I conclude on this group, I thank in particular my noble friend Lady Noakes for her probing amendments, which ask a number of important questions.

I will make a few points and rounding-up comments but, before I do, I want to pick up on my noble friend Lord Trenchard’s remarks. I must admit that I was very surprised to hear the remarks made by the noble Lord, Lord Davies, on his view of the pensions landscape; they were fairly forceful. As he will expect, I entirely disagree with his comments. I just make the point that our party brought in improvements to auto-enrolment and introduced the dashboard system; I pay tribute to my noble friends Lady Coffey and Lady Stedman-Scott. I have more to say but I will give way.

[Lord Davies of Brixton (Lab)]

I just want to pick up the noble Viscount’s point about auto-enrolment. It was a Labour Government and a Labour Bill that introduced automatic enrolment. The only change that the coalition made was to delay it, thereby reducing people’s future pensions.

[Viscount Younger of Leckie (Con)]

We brought this into effect. Of course, that takes us back to the coalition in 2010-15, but so much has been done since then. I will not go on but, if the noble Lord feels so strongly about this, why does he not probe his own Government more on why there is nothing in the Bill about saving more for retirement? I have not even mentioned the points in the Budget on salary sacrifice. I just wanted to get that in, as the noble Lord has become quite political.

Moving on swiftly, Amendment 177 probes whether all default pension benefit solutions are required to provide a regular income and whether that income must necessarily be for life. Here, I pay some respect to the noble Lord, Lord Davies, because he rightly used the expression “pathways for people”, which are what this is all about. I am grateful to the Minister for providing some clarification on this point. She used a very good expression, “freedom to choose”, which is key in our discussion on this particular group.

However, given the significance of this issue for members’ retirement outcomes, it is vital that this clarity is communicated, not just within this Committee but clearly and consistently to those whom these reforms are intended to serve. My noble friend Lord Fuller spoke about the importance of personalisation, which I think is a very good expression.

Communication will be especially important in the context of guided retirement, where members may reasonably assume that a default implies a particular structure or guarantee unless told otherwise. The use of the word “default” is more than semantic, as I know the noble Baroness, Lady Altmann, has laid out in the past—I note she is not in her place. Ensuring that expectations are properly set will be central to building confidence and avoiding confusion at the point of retirement. Again, my noble friend Lord Fuller raised the importance of ensuring that certain cohorts must be particularly noticed and properly treated.

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Let us have a look, in the round, at all six of the regulatory actors in pensions and take that forward. There might be a seventh; I will stand corrected. Then we can go forward.

[Lord Davies of Brixton (Lab)]

Once again, I find myself in the position of being in broadly the same area as the noble Lord, Lord Fuller. I agree with much of what he said. We can always be in favour of reviews. The only substantial objection is that the Secretary of State—or more accurately, the hard-pressed officials—has better things to do, particularly with having to implement the Bill when it is an Act.

The Pensions Commission is also crucial. The noble Viscount, Lord Younger, for whom I have a lot of respect, challenged me on why I am not doing more on adequacy, in effect. Of course, the answer is that I fully support the Pensions Commission; that is where the focus should be on that area. I think my noble friend the Minister is aware of some of my views on the level of inadequacy in pension provision, but the commission is where it should be at.

Pensions are inherently political. I make no apology for making political points. I am against the idea of moving towards a joint regulator. There are two broad types of pension provision: individual contracts and employer-sponsored collective provision. I am very much in favour of the latter as opposed to the former. The former has, and always will have, severe problems, whereas collective provision is what has led the high standard of private provision across, broadly, half of the working population.

The problem with having a single regulator is essentially cultural. One or the other approach is bound to predominate in its thinking. It is impossible to ride two horses, unless you are in a circus, and that is not where we want to be. We need a regulator for collective employer-sponsored provision, and a regulator for market-based provision. That is what we have got so, in a sense, in my few remarks I have already carried out the review that has been called for and reached a satisfactory solution.

[Lord Palmer of Childs Hill (LD)]

My Lords, what worries me is that the noble Baroness, Lady Coffey, says we should grab the challenge. I am not sure that I am ready to grab the challenge and not convinced that we should abandon, in any way, the Financial Conduct Authority. I wonder what representations have been made by the FCA on this. I would like to hear how the FCA feels about the Pensions Regulator taking over and what has happened in the past.

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I have two questions for the Minister. First, how do the Government define significant scale for superfunds? What size of market do they envisage in five or ten years’ time? Secondly, if the Government are serious about achieving that scale, will they commit to reviewing and, where appropriate, reducing some of the barriers I have outlined so that superfunds are able to develop into a robust, competitive and member-focused part of our pension scheme? I look forward to the Minister’s response.

[Lord Davies of Brixton (Lab)]

Everyone agrees that they are a good idea, but in her reply, can my noble friend the Minister tell the Committee what serious contenders there are to take advantage of this quite complicated and lengthy piece of legislation? The practical experience so far is that a good idea has never quite cut it, and other options are now becoming available. Are people actually going to go down this road?

[Baroness Sherlock (Lab)]

My Lords, I am grateful to the noble Baronesses, Lady Noakes and Lady Bowles, for introducing their amendments. I will start with Amendment 181, which would broaden the range of schemes able to apply for a transfer into a superfund by effectively including active schemes.

On the points made by the noble Baroness, Lady Noakes, the responses to the DWP’s initial consultation on DB consolidation noted clear practical difficulties in assessing the future of a scheme. It is not clear how the regulator would conclude that the scheme will have no active members at an unspecified time of transfer. Furthermore, closing DB schemes can be a protracted exercise, where unforeseen complicated issues can arise. This Government, and previous Governments, have been consistent in saying that superfunds should be an option only for closed DB schemes. To avoid such complications for the scheme trustees and the regulator, Clause 65 sets out that closed schemes alone can transfer to a superfund and only where they are unable to secure member benefits with an insurer at the date of application.

Amendment 182 from the noble Baroness, Lady Bowles, would broaden the range of schemes able to apply for a transfer into a superfund by removing the restriction that schemes which can afford insurance buyout cannot transfer to a superfund. By removing this requirement from the Bill, superfunds could compete directly with insurers. That would risk superfunds offering endgame solutions in the same space as insurers, while being held to a lower standard in terms of member security.

The onboarding condition was introduced following industry response to the consultation on superfunds which first identified this risk. There was concern that employers may see superfunds as a way to relinquish their responsibilities at a lower cost than insurance buyout, and that trustees could be pressured to transfer into a superfund when a buyout solution is available. It is important for us to remember that insurers and superfunds operate under very different regimes. Insurers under Solvency UK requirements have stringent capital requirements and their members are fully protected by the FSCS.

Superfunds are built on existing pensions legislation and, as such, the PPF acts as a safety net providing compensation. The PPF provides a great deal of security, but not as much as the FSCS. Superfunds offer a great deal of security, but their capitalisation requirements are not as stringent as insurers as they are not designed to be as secure. That is because superfunds have been designed as a slightly less secure, more affordable endgame solution for schemes that are well funded but cannot afford buyout. They are not intended as a direct competitor for insurance buyout. The onboarding conditions address the risk of regulatory arbitrage, recognising those differences.

Clause 65 therefore provides clarity by ensuring that only appropriately funded schemes can transfer to superfunds. As introduced, it includes the power to substitute another condition if needed. We will consult with industry to assess what, if any, further refinements may be needed to protect scheme members.

Amendment 183 from the noble Baroness, Lady Bowles, would require superfunds to assess their protected liabilities threshold at the lower of a prudent calculation of a scheme’s technical provisions or based on a Section 179 calculation of the buyout price of PPF-level benefits. This amendment, and the noble Baroness, recognise the importance and impact on this threshold of the Chancellor’s Budget announcement that the PPF will provide prospective pre-1997 indexation for members whose schemes provided for this.

The purpose of the protected liabilities threshold is to ensure that in the rare circumstances where a superfund continues to underperform, the scheme is wound up and member benefits are secured at the highest possible level. The threshold is an important part of member protection and has been designed to prevent members’ benefits being reduced to PPF compensation levels should a superfund fail. The threshold also recognises the risk that scheme funding could continue to deteriorate in the time it takes to wind up.

Clause 71 therefore aligns the protected liabilities threshold with the calculation of those protected liabilities. It sets the threshold at a level above the Section 179 calculation, so that members in a failing superfund receive higher-than-PPF benefits. There is the added benefit that PPF-level compensation that is bought out with an insurer protects the PPF itself.

We recognise the impact that changes announced in the Budget have on the superfund protected liabilities threshold, and that it would not be good for members’ outcomes if a superfund is required to wind up prematurely when there is still a strong likelihood that benefits can be paid in full. Any changes to reduce the threshold, however, will require careful consideration and need to ensure that members and the PPF are protected. The level of the protected liabilities threshold will be subject to further consultation with industry as we continue to develop the secondary legislation.

The Committee will also note that for those instances in which technical provisions are lower than the Section 179 valuation of a scheme, Clause 85(4) allows the Secretary of State to provide by regulations that a breach of a threshold has not taken place. These calculations have the potential to converge, and sometimes swap, in very mature schemes and we acknowledge that that occurrence is more likely following the introduction of pre-1997 indexation for prospective PPF benefits.

The use of this power will aim to ensure there are no unintended consequences for well-funded superfunds in those circumstances. It is not our intention to place any additional pressures on superfunds. Providing pre-1997 indexation for PPF benefits is the right thing to do. All members in schemes supported by the PPF benefit from knowing they can count on higher levels of compensation should the worst happen—a fact that should be celebrated. We are committed to working with industry to create, as the noble Baroness, Lady Stedman-Scott, questioned, a viable and secure superfunds market and will consult on issues such as these following Royal Assent to ensure we appropriately balance the metrics of each threshold.

My noble friend Lord Davies asked me to look forward to see what demand there will be for this. That is quite hard to do, but we estimate that around—I am told—130 schemes with £17 billion in assets may take up the option of entering a superfund, but we recognise these figures are highly uncertain. It will depend on how the industry reacts, future economic conditions and competition. The numbers, of course, could be significantly greater if the market grows.

It has been an interesting discussion, but I hope in the light of my remarks, the noble Baronesses feel able not to press their amendments.

Pension Schemes Bill

Lord Davies of Brixton Excerpts

Committee stage
Thursday 5th February 2026 Grand Committee

[Baroness Sherlock (Lab)]

My Lords, the Government recognise that the pension compensation system and the safety net it offers need to work harder for members. Payments from the Pension Protection Fund, the PPF, and the Financial Assistance Scheme, FAS, based on pensions built up before 1997, do not get uprated with inflation—pre-1997 indexation. Over time, they have lost a significant amount of their value in real terms. I am therefore particularly pleased to introduce Clauses 108 to 110, which together provide for pre-1997 indexation in the PPF and FAS, and extend this provision to members covered by the Northern Ireland legislation.

Clause 108 amends the relevant provisions in the Pensions Act 2004 and the Pensions Act 2008. It introduces increases on compensation payments from the PPF that relate to pensions built up before 6 April 1997. These will be CPI-linked and capped at 2.5%, and will apply prospectively to payments for members whose former schemes provided for these increases. Clause 109 makes equivalent amendments to the relevant Northern Ireland provisions, in the same way that Clause 108 does to GB legislation. This will ensure that PPF members covered by Northern Ireland legislation are treated in the same way as their counterparts in Great Britain. Clause 110 amends the relevant FAS regulations to introduce increases on compensation payments from the FAS that relate to pensions built up before 6 April 1997. As with the other clauses, these increases will be CPI-linked, capped at 2.5% and applied prospectively for members whose former schemes provided for these increases. We expect that first payments will be made to members whose former scheme provided for increases from January 2027.

Some affected members only had annual pre-1997 increases within their scheme due to the guaranteed minimum pension, or GMP, part of their pension. There is a statutory requirement for pension schemes annually to uplift any GMPs earned between April 1988 and April 1997. As such, PPF and FAS members who had only a post-1998 GMP will also receive increases on a proportion of their pre-1997 compensation payment. That is because the PPF is not legally required to separately identify GMPs when a scheme transfers to the PPF or qualifies for FAS.

We will therefore calculate a standardised percentage amount for PPF members to ensure that those who had this legal requirement for increases do not miss out. That will be done via regulations, and careful consideration will be given to this standardised approach. The Secretary of State will make the equivalent determination for FAS. Clauses 108 and 109 also give the PPF board the same discretion to adjust the percentage rate of pre-1997 indexation as it currently has for post-1997 increases.

These reforms bring a step change that will make a meaningful difference to affected PPF and FAS members. Incomes will be boosted by an average of around £400 for PPF members and around £300 for FAS members per year after the first five years. The pension compensation system will now offer a stronger safety net for members who, up until now, had lost out on pre-1997 inflation protection following their employer’s insolvency or scheme failure.

We have tabled eight minor and technical government amendments that amend the relevant provisions in the PPF legislation, including the Northern Ireland legislation and the relevant FAS regulations. These are to ensure that the pre-1997 increases in the PPF and FAS are implemented as intended and that affected members are able to receive the appropriate increases.

These amendments apply where an eligible scheme operated with more than one benefit structure. For example, a scheme may have paid increases on pensions built up before 6 April 1997 for one group of members but for another group the scheme may have paid increases only on GMPs built up on or after 6 April 1988. As the provisions were originally drafted, the latter group would not have had an entitlement to pre-1997 increases from the PPF or FAS. We want that group of members to receive indexation on a proportion of their pre-1997 compensation, and these amendments remedy the position.

I will comment on the other amendments in the group when I respond at the end of the debate. I beg to move.

[Lord Davies of Brixton (Lab)]

I will speak to my Amendment 203ZB. I thank my noble friend for the decision in the Budget to grant future increases. That is very much to be welcomed. As for the technical difficulties, I would love an opportunity to start discussing GMPs and even better if we got on to the anti-franking rules, but that is not the issue that I wish to raise today. As I have not moved the lead amendment, I have only 10 minutes.

In working out what I had to say, I realised that there are three groups dealing with pre-1997 increases: this group, group 2, the next group, group 3, where the noble Baroness, Lady Altmann, will move her amendment, and group 5, where at last I get 15 minutes as the mover of the amendment. There are issues that run through all three groups. That is not to downplay the importance of group 4 and the AWE proposals. There are intertwined issues here. There is the reduction in real terms of members’ benefits since they came into payment and the introduction of future increases. There is also the issue that is the subject of my amendment in group 2 and of the amendments in group 3, which is the losses that have been incurred by pre-1997 pensioners.

I am glad that the Minister said that those pensioners have lost out. I am glad that we have that common ground: they have lost out. Then there is the issue of pre-1997 benefits for schemes that are still active. Whether or not they are open to new members, they have pensioners and their legal entitlements to pre-1997 benefits differ from those post-1997. There are common themes there and I suspect that my remarks on all three groups could be put together and make a more coherent whole. In particular, there is a big issue about inflation protection for pre-1997. It is all about pre-1997. What was the feeling about inflation protection back in those days when it was under discussion? Even though it applies to this group, I am going to save that for group 3, when I shall move my Amendment 203.

I am not going to address in this group, although this is probably the most important point of all, the impact that this has had on the individuals concerned. I have had a substantial postbag, most of it by email, pointing out the problems that they have faced. I am not going to focus on that now because I have a limited amount of time, but to me it is the crucial point.

I shall start with the PPF and then come to the FAS in a moment. The principle has been established that PPF pensioners deserve increases in their pensions in respect of pre-1997 service. The Government agree with that principle but they are only going to implement it for the future. The same principle should apply to the past as to the future. Why should they be entitled to increases in the future if they are not entitled to exactly similar increases for the past? I am not talking about retrospection. This amendment has nothing to do with retrospection; it just says that these pensioners deserve pensions now in real terms that are the same in monetary value as they were when they came into payment.

The only reason why one would make a distinction between the increases in the future and making good the increases that have been lost in the past is the cost. I cannot think of any other plausible reason. There is no difference between them in terms of justice; it is simply about the cost. However, we know, because the PPF has given us the figures, that that does not apply here. The money is in the PPF that can afford these increases. It has a significant and growing excess of assets over liabilities and, because of that, the levy is being suspended. The employer providing these schemes is gaining the benefit—in effect, a sort of refund of the surplus that has been built up. Well, fair enough, they have paid for it, but so have the members and they are entitled to the increase. Whatever they had when their pensions came into payment should be increased from January 2027 to allow for what they would have got in respect of post-1997 benefits. That is clear and I hope that the Government will accept the point.

Then we come on to the FAS. The big difference between the PPF and the FAS is that the FAS is funded out of general taxation. However, let us be clear why the FAS is there: it is because Governments of both parties failed to provide the protection that they were required to give under European law, in the face of the fantastic campaign that was run on behalf of the pensioners of schemes that became insolvent—and employers that became insolvent—prior to the implementation of the PPF. That is the only reason why they are in the FAS. It was the Government’s failure; it was not their failure. Why should they lose out? Governments failed to provide them with protection. They only introduced the PPF from 2005, but the people who lost their pensions prior to that date are just as entitled. The Government gave in because of the fantastic campaign, as I say, but also because of the threat of further legal action at the European court that they knew they would lose. To make a distinction between FAS members and PPF is totally unfair and unreasonable.

There will be a cost and, because it is the FAS, it will fall on the taxpayers, but one principle is clear: where the Government have a debt to make good something that they have got wrong, they cannot excuse themselves from that debt by saying, “Sorry, we don’t quite have the money”. They should pay up. It is quite clear that the same treatment should be afforded to the FAS members as to the PPF members.

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[Lord Davies of Brixton (Lab)]

I offer my support for the amendment moved and the other amendments proposed by the noble Baroness, Lady Altmann. She suggested that, in some ways, her amendments are more important than mine. I agree and I will come on to why that is so in a moment. I recognise the importance of the government amendments but, in the words of my noble friend the Minister, we have to recognise the impact of the lack of past increases on those affected.

Retrospection has been mentioned. It is a complete red herring. By its nature, any form of compensation will be retrospective. We are not going to compensate people for what happens in the future. The compensation being paid all too slowly to the Post Office managers is retrospective. The money being paid to the infected blood victims is retrospective, but we still have to pay. “Retrospection” is not a relevant word in this context. We are clear, and we all agree, that these people have lost out, to use the words of my noble friend the Minister, so retrospection is a red herring.

My noble friend the Minister also mentioned the significant impact on public finances. That is true because it has been defined in that way, but we are setting the rules. We are not being subjected to rules imposed by outside interests. If the Treasury does not have the wit or ingenuity to adjust the rules in a way that would allow for these payments from the PPF, which, in reality, would have no impact whatsoever on public expenditure, those who have been affected by the lack of increases will draw their own conclusions as to what the Government really want to do. My noble friend also said that this is a compensation scheme and that it was never designed to offer full redress. Well, that is what we are debating; it is exactly what we are saying is wrong and should be rectified.

The point that I wish to emphasise in this section is the need for urgency. That is why this amendment is the important one. To be brutal, we are dealing with a declining population. It has been estimated that more than 5,000 pensioners with pre-1997 rights are dying each year. We have to take action. Even my amendment, which I proposed to bring the pension up to its current real value, does not address the issue for these people because many of them will not be here. Compensation via lump-sum payments, along the lines suggested in these amendments, are, I believe, the way in which this problem should be addressed. I strongly support these amendments.

[Lord Palmer of Childs Hill (LD)]

My Lords, I will briefly speak in support of the amendments. I emphasise that they look at how to do this by lump-sum payments, rather than by increasing pensions. That is important. It is what we in my profession used to call “creative accountancy”. It seeks to achieve a result by lump sums, more or less off the Government’s balance sheet. There has been some blending of the funds in the past. It is a way of doing it in a creative accountancy way, largely getting rid of the problem by lump-sum payments. I hope that the Government will look at this in a creative way in order to provide some justice without incurring an ongoing debt.

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[Lord Davies of Brixton (Lab)]

Does the noble Baroness agree that her scheme would work the other way round, because older members will tend to have more pre-1997 service that younger members, whose pre-1997 service will be relatively limited? A scheme along the lines she proposes will have some element of generational fairness.

[Baroness Altmann (Non-Afl)]

I thank the noble Lord. I would certainly say that there is a significant and obvious element of fairness in this proposal for lump sums to be paid. I argue that it would level the playing field, because those who have lost the most at the moment will continue to lose the most, whereas if you recognise the past losses and the forward uplifts are still being paid then you equalise, to some degree, the fairness and the losses between people of different age groups.

I hope that we can come back to this matter on Report and that we might have a meeting to discuss the potential for something of this nature to be introduced in the Bill. In the meantime, I beg leave to withdraw my amendment.

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[Baroness Altmann (Non-Afl)]

My Lords, I have Amendment 203ZC in this group, but unfortunately the Committee has not received a copy of my amendment.

[Lord Davies of Brixton (Lab)]

It is on a separate sheet.

[Baroness Altmann (Non-Afl)]

Good. I now have it and I want to check that everyone else has it too. That is my first question dealt with.

In speaking to this amendment, the aim is to enable members of pension schemes that have gone into the PPF after their assessment period to be extracted, with regulations laid that will govern the terms on which they can be extracted. This is particularly relevant to the AEAT scheme: I know that we will come to this in later groups, with a requirement for a review of the situation. My amendment is trying to facilitate a practical resolution to the problems faced by the Atomic Energy Authority scheme. There are parallels with the Atomic Weapons Establishment or AWE scheme: employees originally had a scheme similar to and in fact derived from that of the UK AEA.

The AWE staff and their pensions were transferred to the private sector, and in 2022 the Government granted a Crown guarantee to the private company scheme. However, members of the AEA scheme were told that the scheme that they were encouraged to transfer to in 1996 would be as secure as that provided by the Atomic Energy Authority public sector scheme. This was not the case, though, because it was not offered a Treasury guarantee. It would appear that the Government Actuary’s Department failed to carry out a proper risk assessment of the various options offered to those members in 1996. Indeed, they were apparently specifically told not to worry about the security of the scheme to which they transferred all their accrued benefits. Of course, all these accrued benefits are pre-1997.

What happened after that is that they went into a private sector scheme. It was a closed section of that scheme, only for the members who transferred their public sector rights into it. The public sector rights had full inflation protection for pre-1997 and members paid an extra 30% or so contribution into that private sector scheme in order to conserve the inflation protection. However, as part of that, the pension they were saving for, the base pension, was lower than the one for those members in the open scheme who had joined not from the public sector. They were working on the principle that that their scheme was secure and that they would be getting the uplifts of inflation. When it failed—the private sector company went bust in 2012—and they went into the PPF in 2016, they suddenly discovered that they had paid 30% more for inflation protection, which was gone. And because they had paid 30% more for that protection and were accruing a lower pension, a 180th instead of a 160th scheme, their whole compensation was lower than that of everybody else who had not had any assurances from the Government that transferring their previous rights into a private sector scheme would generate these kinds of losses.

This is probably the worst example I have seen of government reassurance and failed recognition of the risks of transferring from a guaranteed public sector scheme into a private sector scheme. This amendment seeks to require the Government to lay regulations that would transfer members out of the PPF, those members of the closed scheme, if they wish to. I am not forcing anyone to do so within this amendment. You have to offer them the option of going or staying if they are satisfied with the PPF. Also, a sum of money may need to be paid to the PPF, which would take away the liability and thereby reduce PPF liabilities, but also sets up an alternative scheme that could be along the lines of the AWE arrangements, for example. That would potentially be another option. On privatisation, the Government received a substantial sum of money from the sale of that company, the private sector takeover of the commercial arm of the Atomic Energy Authority. That delivered less money than was paid to the private sector scheme to take over the liabilities. Therefore, the Government have money to pay with, which they have never really acknowledged.

I hope that this amendment is a potentially direct way to help the AEAT scheme, if the Government are minded to consider it. It builds on a provision that is already in the Pensions Act 2004, which talks about situations whereby there is a discharge of liabilities in respect of the compensation, which this amendment would be doing. It prescribes the way in which subsection (2)(d) of Section 169 of the Pensions Act 2004 could be used to help the AEAT scheme.

I have also been approached by a private sector employer whose scheme failed and went into the PPF. At the time, the employer did not have sufficient resources to buy out more than the Pension Protection Fund benefits for his staff. He now is in a position to do that and would like to do so but, at the moment, he cannot get his scheme extracted. He is willing to pay an extra premium to do that, in pursuance of a moral duty to try to give his past staff better-than-PPF benefits. That is what this amendment is designed to achieve. It is built on the connection between AEAT and AWE, but could also help other private sector schemes if the employer feels—it would normally involve smaller schemes—that there is a moral obligation that they can now meet, financially, to recompense members at a level better than the PPF, once the assessment period is over and the resources have gone in, and to take it back out again.

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Moved by

[Lord Davies of Brixton]

203: After Clause 110, insert the following new Clause—
“Indexation of pre-1997 pensions(1) The Pensions Act 1995 is amended as follows.(2) In Section 51 (annual increase in rate of pension)—(a) omit subsections (1)(b) and (1)(c)(ii);(b) in subsection (2)—(i) omit “on or after April 1997”;(ii) omit “to payments in respect of employment carried on or after April 1997”;(iii) omit “or, as the case may be, to payments in respect of employment carried on or after April 1997”;(c) in subsection (4ZE), omit “or, as the case may be, to payments in respect of employment carried on or after April 1997”;(d) in subsection (5)(a), omit “6 April 1997 or”;(e) in subsection (8)(a) and (b), omit “at any time on or after 6 April 1997”.” Member’s explanatory statement
This new clause would remove references to 6 April 1997 from section 51 of the Pensions Act 1995 in order to require that annual increases to pension payments in line with CPI and RPI apply to pensionable service both before and after 6 April 1997.

[Lord Davies of Brixton (Lab)]

My Lords, I am going to try to put this issue into context. This is the third leg of our discussion, which centres on what we do now in relation to benefits that accrued for pensionable service prior to 1997.

I am going to take the Committee into a little history. The 1997 date was set by the Pensions Act 1995. I was there; although I had long left the TUC, because the TUC’s normal pensions officer had taken leave of absence for a few months, I was, in effect, acting as the TUC’s pensions officer at the time. On the background, in terms of what people understood about pension increases at that time, I will go all the way back to 1971, when the Pensions (Increase) Act was passed. In 1971, it was obviously under a Conservative Government. They linked public service pensions to inflation—initially RPI then subsequently, from 2011, CPI. That was all well and good. It set the standard, quite properly, for the Government of good pension provision, including increases. I make no apology for that. I am sure that we will return to this issue when we have the debate at our next meeting on public service pensions. The Conservative Government set that standard.

Then, in 1981—again, under a Conservative Government —Margaret Thatcher, the Prime Minister, decided, egged on by Aims of Industry, that there should be a review of pensions and pension increases. She took a personal interest—it is all there in the Thatcher archives—and established the Scott inquiry. Chaired by Sir Bernard Scott, a prominent businessperson at the time, it was a five-person inquiry that undertook a detailed study of pension increases, starting with public service pensions. We do not hear much about this inquiry now—there is another more famous Scott inquiry—because it came up with the wrong answer. Despite the committee being hand-picked by the Prime Minister, it came up with the answer she did not want. It said that index-linking was justified—it is worth saying here that, when it says “index-linking”, it is talking about the limited price index, or LPI, so not full indexation in all circumstances but up to a limit—and that there was no case for its removal from public service schemes.

The committee decided that public service pensions were not overly generous overall. It pointed out that the main driver of costs for public service pensions was not index-linking but the final salary benefit structure. Again, as an aside, it is worth noting that, from 2011 onwards, public service schemes moved away from that; they are now all average salary schemes. The committee advocated for parity of pension increases with state pension increases. So this committee, which was set up to tell the world how bad index-linking was, said that everyone should have index-linking. That was in 1981.

There is another stage. Originally, when schemes contracted out, they promised to provide GMPs. Initially, the GMPs were not index-linked but had a flat rate, and the state scheme was left to provide the indexing on the fixed flat-rate private sector schemes. However, by 1986, it was decided that the private sector schemes could provide LPI, initially at 3%. The scheme had to provide GMP, but it provided inflation linking up to 3%, and inflation over that would still come from the state scheme. This is where the contracting out becomes incredibly complicated, of course. That change to the GMP was when a Conservative Government introduced an additional element of index-linking in occupational schemes.

Then we had the Maxwell scandal, the subsequent Goode report and the Pensions Act 1995. There is a theme here. It was a Conservative Government; William Hague was the Secretary of State. From 1997, they introduced LPI index-linking, initially up to 5% and subsequently reduced to 2.5% in 2005—unfortunately, that was a Labour Government, but there you go. So there is this whole consistent move towards limited price indexation in occupational schemes. It became the accepted approach to providing occupational schemes. A scheme that did not provide some element of indexation in retirement was seen as an inferior scheme.

I was there, as I say, so what was my experience? Many schemes, particularly larger schemes, had LPI in the rules pre 1997, following Scott in the early 1980s. Schemes have gradually introduced it more and more; of course, index-linked bonds were introduced specifically as a follow-on from the Scott report. So many schemes, particularly large schemes, had LPI in the rules.

Other schemes said, “We’re going to provide indexation but we’ll do it under discretionary powers”. However, they still expected to provide increases and funded for them. It is my view, having been there, that, pre 1997, the number of schemes making no allowances for LPI increases was vanishingly small. For some, it was in the rules; for others, it was in the funding basis. Practically every member had a reasonable expectation of LPI in retirement in respect of the benefits that they accrued pre 1997. The statutory requirement was introduced to cover all schemes, as recommended by the Goode report; that was absolutely right.

So the suggestion that people are unreasonable in expecting their pre-1997 benefits to be increased is entirely wrong. It was entirely reasonable for them, and that is what people believed at the time, although they may not have a legal entitlement. This does not affect just the PPF or the Financial Assistance Scheme, where we are told that, if the scheme did not have it in the rules, it will not get these increases. It particularly affects active pension schemes—not necessarily those with new entrants, but those with pensioners to whom the scheme is paying money.

Many of the members will have benefits accrued before 1997, and those members have a reasonable expectation of increases. That is why I move Amendment 203 as a basis for discussion at this stage. In the light of what we hear, I may come back to the issue on Report. The law can now move to requiring increases on pensions accrued pre-1997, whatever it said in the rules, because it is a question of not legal but political justification. Politically, people can reasonably expect the Government to provide them with justice, and there is a reasonable moral expectation that they should now get limited price indexation on their benefits accrued prior to 1997.

The issue here is the position in which so many members find themselves. Their trustees—who were perhaps more engaged, years ago, with the operation of the scheme in those days—gave them a reasonable expectation of the benefits. I wrote to many schemes around that time, asking them what their practice was, having got an increase in the rules. Many of them wrote back to me and said, “Yes, we expect to increase these pensions and we are funding the scheme on that basis”.

Trying now, 30 years later, to distinguish between schemes that provided for these increases in the rules and in the funding basis is politically and morally wrong. These people have a reasonable expectation, and we have this opportunity to see that they are treated correctly. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I have every sympathy with the noble Lord’s amendment, and I would love the Government to find themselves able to accept it. I would certainly agree on the moral case and on the historical justification for members having reasonable expectations that their pensions would not suddenly be whittled away to a fraction of what they would previously have had. The Goode report recommended unlimited inflation protection, but it was limited when it came in and it was only from 1997 onwards rather than retrospectively. There are echoes there of what we have just heard about the Pension Protection Fund.

I see that the noble Lord, Lord Brennan, is here; he was instrumental in campaigning for the Allied Steel and Wire members and worked so hard to help them, as the noble Lord, Lord Davies, also did. The noble Lord, Lord Wigley, is no longer here, but this would certainly apply to the Allied Steel and Wire members, and I urge the Government to look at the amendments. I fear that there may be little appetite, given that our previously much more modest suggestions were rejected and bearing in mind that not all schemes are in surplus—there may be an issue. But, if the Government were so minded, there is certainly a good case for considering the amendment that the noble Lord, Lord Davies, so ably moved.

--- Later in debate ---

[Baroness Sherlock (Lab)]

I thank my noble friend Lord Davies for introducing his amendment and for the history lesson. It is living history, but he always has the edge on me because he goes back to 1975, and at that point I was more interested in boys and make-up, so I simply cannot compete, I confess, on that front.

The reality is that this Government have to start in 2026 and where we are now, so we have to address what the right thing to do now is for the DB pension universe and for the schemes in general. I can totally understand why my noble friend has introduced this amendment. Members of some schemes are concerned about the impact of inflation on their retirement incomes, and I am sympathetic. We have been around this in previous groups. This amendment would remove references to 6 April 1997 as the start date for the legal requirement on schemes to pay annual increases on pensions in payment. Obviously, as my noble friend indicated, legislation requires increases on DB pensions in payment to be done only from 6 April 1997. That has been a pretty long-standing framework which reflects the balance that Parliament judged appropriate at the time between member protection and affordability for schemes and employers. These changes are normally not backdated; they are normally brought in prospectively.

Most schemes already provide indexation on pre-1997 pensions, either because it is required under the scheme rules or because they choose to award discretionary increases. The Pensions Regulator has done some analysis and is doing more work on this. The latest analysis indicates that practices differ, but many schemes have a track record of awarding such increases. However, imposing a legal requirement on schemes now to pay indexation on pre-1997 benefits would create costs that schemes and employers may simply not have planned for. These costs may well not have been factored into the original funding assumptions or contribution rates. For some schemes and employers, these additional unplanned costs could be unaffordable and could put the scheme’s long-term security at risk.

Many employers are working towards buyout to secure members’ benefits permanently. Decisions on discretionary increases must be considered carefully between trustees and employers against their endgame objective. The reality is that the rules for DB pension schemes inevitably involve striking a balance between the level and security of members’ benefits and affordability for employers. But minimum requirements have to be appropriate for all DB schemes and their sponsoring employers. A strong, solvent employer is essential for a scheme’s long-term financial stability, and that gives members the best protection that they will receive their promised benefits for life, as the employer is ultimately responsible for funding the scheme. Any change to that statutory minimum indexation has to work across the full range of DB schemes. This amendment would increase liabilities for all schemes, regardless of their funding position or governance arrangements. While some schemes and employers may be able to afford increasing benefits in this way, others will not.

The way DB schemes are managed and funded since the 1995 Act was introduced has changed, but the basic principle remains that we cannot increase scheme costs on previously accrued rights beyond what some schemes might be able to bear or that many employers will be willing to fund, and that remains as true now as it was then. Our view is that schemes’ trustees and the sponsoring employer have a far better understanding than the Government of their scheme’s financial position, their funding requirements, their long-term plans and therefore what they can and cannot afford. They are also best placed to consider the effect of inflation on their members benefits when making decisions about indexation. The regulator has already been clear that trustees should consider the scheme’s history of awarding discretionary increases when making decisions about indexation payments.

We discussed earlier in Committee the Government’s reforms on surplus extraction. They will allow more trustees of well-funded DB schemes to share surplus with employers to deliver better outcomes for members. As part of any agreement to release surplus funds to the employer, trustees will be better placed to negotiate additional benefits for members, which could include discretionary indexation. Although I understand the case my noble friend is making—I regret that I cannot make him and the noble Baroness, Lady Altmann, as happy as they wish—I hope that, for all the reasons I have outlined, he feels able to withdraw his amendment.

[Lord Davies of Brixton (Lab)]

I thank those who have taken part in this debate on an important issue. Many people out there—I have had messages from people who are watching this debate—hope for better news. I am sorry that at this stage the Government are maintaining the line.

On the question of history, I could go back to the 1960s and Richard Crossman’s national superannuation if people would like—I am even slightly tempted to start. But the bit of history I remember is in the 1980s, when many schemes had surpluses and the Government introduced, through the Inland Revenue, limits on surpluses, compelling schemes to deal with them. At that time, employers said to us—I was involved in many negotiations—“Okay, it’s fine, we’ll take the surpluses now, but depend on us. When things get tough, we’ll come up with the additional money required”. What happened is they gave up and walked away. That is why the Labour Government in the early part of this century introduced funding requirements, the Pension Protection Fund and so on because, ultimately, when employers and trustees were put to the test, all too often they failed to deliver the promises that they made when surpluses were available.

The noble Viscount, Lord Younger, rightly tied this to the issue of surpluses and certainly there will be an opportunity on Report to discuss the linkage between employers getting refunds from their schemes and providing better increases for members. That is such an obvious linkage. I would want to go beyond that, but the issue will continue. For the moment, I beg leave to withdraw my amendment.

Amendment 203 withdrawn.