Pension Schemes Bill

Lord Vaux of Harrowden Excerpts

Committee stage
Tuesday 3rd February 2026 Grand Committee

[Baroness Kramer (LD)]

My Lords, my noble friend Lord Sharkey sends his apologies; he is at a funeral and will read Hansard with great attention. I thank the noble Lord, Lord Vaux, for supporting me on Amendment 167. I think it is the first time in 15 years that I have degrouped an amendment to stand by itself, but I can see no other way to ensure a clear answer from the Government: will they put their money where their mouth is?

The Committee has discussed qualified assets and, while I do not intend to repeat the discussion, I hope that everyone understands how high risk a portfolio of such assets is. The Financial Services Regulation Committee, in January, titled its look at the private equity markets as Private Markets: Unknown Unknowns. Some 75% of firms invested in by venture capital fail. Complex infrastructure is both high risk and illiquid; we can think HS2, the Elizabeth Line—four years delayed and £4 billion over budget—and Hinkley Point, which seems to run out of money time after time. If someone with a substantial pension wants to invest in such assets, that is fine with me, but the Mansion House Compact —or accord, I do not care which terminology is used—covers only auto-enrolment default fund pension schemes. These are vehicles for those with the narrowest shoulders, with low incomes, small pensions and little financial knowledge. The downside risk for them means poverty.

The Government have assured us, and those pension savers with the narrowest shoulders, that under the Mansion House Compact, and by putting 10% of their pensions into qualified assets, they will be winners—to quote the Minister on the first day in Committee:

“with an average earner potentially gaining up to £29,000 more by retirement”.—[Official Report, 12/1/26; col. GC 205.]

No warning of the downside was mentioned and clearly, to the Minister, the downside does not seriously exist. I challenge that. I am always very wary of promises of low-risk, high-return investments.

The Government have argued that the Mansion House Compact, combined with the provisions in this Bill, brings great benefits because risk can in effect be eliminated by the structures that have been introduced and the use of large providers. I want to challenge some of those shibboleths. Large providers have explained to me that they can enhance pensions and use qualified assets safely through lifestyle investing, where more is invested into high-risk assets early in the life of the pension, switching later to low-risk investments. If I lose £100 in the first year that I save in a pension, the loss is compounded through the life of the pension and I will have thousands less to get me through retirement. If I lose £100 the day before my pension matures, I lose £100. Early losses are never made up by later gains because they in no way enhance the performance of other assets in the portfolio. If you lose on A, there is no sudden guarantee that you will gain on B. Lifestyle investment is a marketing tool to sell schemes to the financially anxious.

The Government and the Minister argue that the risks in qualified assets can be mitigated away through diversification. For a fund fully invested in good-quality assets, such as the FTSE 100 or the S&P 500, I see the argument for diversification to manage risk, but diversification loses its effectiveness in high-risk portfolios, as everyone should have learned from the collateralised debt obligation scandal that triggered the financial crisis in 2008. Let me illustrate with an extreme example. I go to the casino, maybe several casinos. I play the slot machine, roulette and blackjack. I am beautifully diversified. But we all know that I will still lose my money.

The Government’s case that pensioners with the narrowest shoulders should be 10% invested in qualified assets really depends on assumptions that it makes about asset allocation. The argument is that the pension companies involved would employ the best experts to pick winners among those qualified assets. Some experts are better than others, though I note that they all will find statistics and present them to show that they have the Midas touch.

I note the analysis of the Government Actuary’s Department, which shows that over time and on average—that is a key word—virtually every model portfolio tested delivers similar results. But there is a catch, as the noble Lord, Lord Sharkey, pointed out last week—the GAD’s conclusion underscored its uncertainty. It said that

“there is considerable uncertainty, particularly with the assumptions for projected future investment returns”.

The noble Lord, Lord Sharkey, also quoted from the Institute and Faculty of Actuaries, which made the point even more forcefully. I could not work out what the mean looked like when I looked at that work done by the government department. Obviously, the mean really matters because an average can be made up of a few big winners and a lot of small losers. It is the losers in the high stakes game of qualified assets that worry me.

I am not attempting to stop the Mansion House Compact and the Government’s plan to put 10% of the assets of auto-enrolment default funds into qualified assets even though they are unlisted, opaque, high-risk and illiquid. My amendment would simply require the Government to provide a safety net for those who are in no position to live with the downside in these investments.

The noble Lord, Lord Davies of Brixton, last week said that

“the inevitable corollary of mandation”,

which is where he was focused,

“is responsibility for the outcome”.—[Official Report, 26/1/26; col. GC 284.]

But I regard the Mansion House Compact as very much a government-driven agreement designed by the industry to head off even more coercive action and so I think that the same principle applies: “responsibility for the outcome”.

My amendment is simple:

“Upon the individual becoming entitled to receive retirement benefits under the scheme, the trustees or managers must obtain an actuarial assessment of—


(a) the net investment return attributable to the qualifying assets held within the default arrangement over the period during which the individual’s rights were so invested, and


(b) the net investment return that would have been achieved over the same period had those assets instead been invested in a prescribed benchmark fund”.


In the amendment, benchmark fund

“means a diversified, low-cost equity index fund of a description specified in regulations”.

If the benchmark fund would have performed better, the Government make up the difference to the pensioner. The calculation, despite what the Minister said, is very simple, requires no new data and can be crafted straightforwardly. Pension schemes would just code it into their normal reporting.

If the Minister and the Government are right, and investment in qualified assets, as structured under the Mansion House Compact and in this Bill, benefits and does not harm pensioners in auto-enrolment default schemes—those people I described at the beginning with the narrowest shoulders and least able to take risk—it costs the Government absolutely nothing to sign up to this protection provision. If the Government believe their own words, accepting my amendment means taking no risk at all for the Government or taxpayer. My amendment only costs the Government money if they are wrong in the promises that they are making. The amendment would certainly give peace of mind to the poorest pensioners and strengthen their confidence to save and to invest.

We all want auto-enrolment to better serve low earners, but that requires shaping policy around the capacity of low earners to take risk. I ask the Government to put their money where their mouth is and provide the pension value protection described in my amendment. I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, I apologise for not being able to be here last week for Amendment 142. I am grateful that the Minister responded to it regardless of that. I have added my name to Amendment 167. I will try to be very brief because the noble Baroness, Lady Kramer, has explained it with her usual clarity, and the amendment covers some of the same ground that we debated in the last group—although it attacks the problem from the other direction.