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.