Pension Schemes Bill

Mark Garnier Excerpts

2nd reading
Monday 7th July 2025 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

It is a great pleasure to be here with you, Madam Deputy Speaker, and I welcome the Minister to his place. He has been here a couple of days over a year and is already taking an important Bill through Parliament. It is good to see him, and I very much look forward to working constructively with him as the Bill progresses through the House.

While the Bill is not perfect, the Minister will be pleased to hear that there is cross-party consensus on many of the planned changes. That is because we all want our pension system to be working better. If we rewind back to 2010, we inherited from Labour—dare I say it—a private pension system that was not quite ideal. The move from a defined-benefit pension-dominated market to a defined-contribution system had left millions of people behind. Back in 2011, only 42% of people were saving for a workplace pension. The cornerstone of change was auto-enrolment, which has been an overwhelming success, as I am sure the Minister will agree. Now around 88% of eligible employees are saving into a pension, and the remaining 10% who opt out tend to do so because of sound investment advice.

The Conservatives are proud of our rock-solid support in government for our pensioners. The triple lock ensured that we lifted 200,000 pensioners out of absolute poverty over the course of the last Government. Workers deserve dignity in retirement, not just a safety net in old age. They deserve to look forward to their later years with hope, not anxiety, and with choice, not constraint. That is why before the last election, the previous Government had turned their attention to two central issues: first, getting the best value for money out of our pension schemes and, secondly, pensions adequacy. I will come to pensions adequacy later, but let me start by recognising some of the positive measures contained in the Bill to make our pension funds work better for savers.

When Labour gets pensions policy right, it is often by building on the Conservative legacy, recognising what works and seeking to extend it. That is why we broadly support the measures in the Bill that seek to consolidate and strengthen the gains of auto-enrolment. We also welcome the continued progress towards the pensions dashboard, which will revolutionise the way people access their pension information and plan for their financial future.

For too long, the complexity and fragmentation of pension pots has left savers confused and disengaged, as we have heard. If you are anything like me, Madam Deputy Speaker, and are thinking more actively, dare I say it, about your retirement income—actually not like me; you are a lot younger. [Interruption.] Mr Speaker is like me; he is thinking about his pension. He will have spent countless hours trying to track down old pensions. The dashboard, however, will put power back into the hands of savers, and we will support measures in the Bill to improve its implementation and delivery.

I want to highlight the creation of larger megafunds in both the public and private sectors, as well as the consolidation of the local government pension scheme, as sensible and pragmatic steps. The LGPS is one of the largest pension schemes in the UK, as we have heard. It has 6.7 million members with a capital of £391 billion, yet it is highly fragmented into 86 locally administering authorities. There is a great deal of divergence in the funding positions of those councils, even among geographic neighbours. They range from Kensington and Chelsea, which has a scheme funding level of 207%, to neighbouring local authorities like Waltham Forest, Brent, and Havering, which were underfunded in the 2022 triennial review. While we support the concept of these megafunds, there are legitimate questions that I hope the Minister will address in Committee. We do not want to see constituents from one council area unwittingly funding shortfalls from neighbouring areas.

Like many people in this House, I first cut my teeth in politics as a councillor. Soon after being elected, I was appointed chairman of the finance committee on Forest of Dean district council. One of our tasks was to oversee the performance of our local pension fund. Let me assure the House: the Forest of Dean is a truly wonderful place, but it is not the City of London. Our finance committee was made up of dedicated local councillors, but when it came to scrutinising the pension fund, we were—to put it kindly—out of our depth. Meanwhile, the pension fund managers, with their packed diaries and weary expressions, seemed to treat a trip to rural Gloucestershire as a rare expedition to the outer reaches of the Earth.

One thing struck me about small local government pension funds: they simply did not work. But it is not just in local government, small funds are—albeit with some notable exceptions for bespoke funds—not fit for purpose in a global investment environment, as we heard from the Minister. The creation of larger funds will enable greater scale, better investment efficiency and, ultimately, better value for money for members. It will allow our pension funds to compete on the world stage, to invest more in UK infrastructure and to deliver higher returns for British savers.

There are other areas of the Bill that we support and welcome. The consolidation of small, fragmented pension pots is a long-overdue reform. Bringing those together will reduce administrative costs and prevent the erosion of savings through unnecessary fees. The introduction of a value-for-money framework is essential to ensure that savers are getting the best possible deal, not just on charges, but on investment performance and retirement outcomes. We also welcome the development of guided retirement products. We cannot simply leave savers on their own to navigate complex choices at retirement. Changes to provide greater support for those facing terminal illness will provide comfort to those in extremely challenging circumstances. These are all positive steps, and we will work constructively with the Government to ensure they are delivered effectively.

While there is much to welcome, there are also significant areas where the Bill falls short and areas that require attention if we are to deliver a pensions system that is truly fit for the future. Most fundamentally, the Bill does not address pensions adequacy. The uncomfortable truth is that millions of people in this country are simply not saving enough for their retirement. The amounts people are saving, even with auto-enrolment, are too low to deliver a decent standard of living in old age. Research by Pensions UK shows that more than 50% of savers will fail to meet the retirement income targets set by the 2005 pensions commission. Closing the gap between what people are saving and what they will need must be the pressing concern of this Government. We urgently need the second part of the pensions review to be fast-tracked, with a laser-like focus on pensions adequacy. We need a bold, ambitious plan to ensure that every worker in this country can look forward to a retirement free from poverty and insecurity.

[Dame Meg Hillier]

The hon. Gentleman is not wrong on this point. In fact, the Public Accounts Committee looked a number of years ago at enrolment in pension schemes and found that a lot of young people were not enrolling because of the cost of living, which his Government have to take responsibility for. There is no easy answer to this, but I would be interested to know if the Conservative party now have policies to resolve this problem.

[Mark Garnier]

It is an important question, and one that I will come to in due course. Watch this space for a fascinating manifesto in the run-up to the next general election—I am sure everybody looks forward to it.

[John Glen]

Further to the point made by the hon. Member for Hackney South and Shoreditch (Dame Meg Hillier), in every election we all say that we cherish the triple lock, and we seek to gain electoral advantage from it, but do we not need to come to a settled collective view in society about the combination of the triple lock and the inadequacy of auto-enrolment? The 8% contribution is not enough, as the hon. Gentleman said; we need to get to Australian levels. One speaks to the other. Unless we can take a holistic view of those two elements and the third pillar, we are not being truly honest about some of the trade-offs, given that we are dealing with £70 billion of tax relief at the moment.

[Mark Garnier]

The former City Minister raises a good and important point. He tries to bring together a number of related but quite disparate issues that we need to think carefully about. I would not want to make Conservative party policy on the hoof at the Dispatch Box, though the Minister urges me to do so. These are important points, and I think my right hon. Friend would understand that I would not want to rush into anything without careful, considered thought. These are issues on which he and I—and the Minister, of course—might get together.

As I said, we need a bold, ambitious plan to ensure that every worker in this country can look forward to a retirement free from poverty and insecurity. That means looking again at contribution rates, the role of employers and how we support those who are excluded from the system.

Another omission in the Bill is the failure to extend the benefits of auto-enrolment to the self-employed. There are over 4 million self-employed people in the UK—people who are driving our economy, creating jobs and taking risks. Too many of them face the prospect of old age in poverty, with little or no private pension provision. Research by the Institute for Fiscal Studies found that only 20% of self-employed workers earning over £10,000 a year save into a private pension. With the self-employed sector continuing to grow, the Bill misses an opportunity to come up with innovative solutions for this underserved group in the workplace.

[Kirsty Blackman]

On auto-enrolment, the other missing group is those aged under 22. Auto-enrolment seemed to be set up with the view that people would go to university before entering the jobs market, but that is not the case for many people. It is possible that starting auto-enrolment earlier would mean much more adequate pension pots for people, because the earlier they save, the bigger their pot grows by the time they reach retirement.

[Mark Garnier]

The hon. Member makes an important point. The earlier people start putting money in, the better. As a result of compound interest, over many years they will end up with a bigger pension pot, even if at the beginning the contribution is quite small; the amount aggregates over a long period. We will discuss that in Committee.

We are concerned about the lack of detail in the Bill. Too much is left to the discretion of regulators and to secondary legislation. Parliament deserves to have proper oversight of these reforms. From my discussions with the industry, it seems there is tentative support for many of the reforms in the Bill. However, the message that keeps coming back is that the devil will be in the detail, so I hope that as this Bill makes progress through the House, the Minister will be able to fill in more of the blanks—and I am sure he will; he is a diligent individual.

I move on to the most important thing that this Bill hopes to achieve: growth. We want to support Labour Members on the growth agenda, but too often they go about it in slightly the wrong way. Surpluses in defined-benefit pension schemes are a great example. Interest rates have risen post-covid, and that has pushed many schemes into surplus. In principle, we support greater flexibility when it comes to the extraction of these surpluses, but there need to be robust safeguards; that is certainly the message coming back from the industry.

Under the legislation, there is nothing to stop these surpluses being used for share buy-backs or dividend payments from the host employer, for instance. Neither of these outcomes necessarily help the Government’s growth agenda. We would welcome a strengthening of the Bill to prevent trustees from facing undue pressure from host employers to release funds for non-growth purposes. In addition, to provide stability, the Government should carefully consider whether low dependency, rather than buy-out levels, will future-proof the funds, so that they do not fall back into deficit.

Although the Government are keen to extract surpluses from the private sector, there is not the same gusto shown in the Bill when it comes to local government pensions. The House has discussed in detail the Chancellor’s fiscal rules, not least earlier today. Under the revised rules introduced by the Chancellor, the measure of public debt has shifted from public sector net debt to public sector net financial liabilities. As a consequence, the local government pension scheme’s record £45 billion surplus is now counted as an asset that offsets Government debt. This gives the Chancellor greater headroom to meet her fiscal targets—headroom that, dare I say it, is shrinking week by week. I do not wish to sound cynical, but perhaps that is the reason why the Bill is largely silent on better using these surpluses. This may be a convenient accounting trick for the Chancellor, but the surpluses could have been used, for instance, to give councils pension scheme payment holidays. The Government could make it easier to follow the example set by Kensington and Chelsea, which has suspended employer pension contributions for a year to fund support to victims and survivors of the 2017 Grenfell Tower tragedy. These revenue windfalls could be redirected towards a range of initiatives, from local growth opportunities such as business incubators to improving our high streets. We could even leave more money in council tax payers’ pockets.

I turn to the part of the Bill on which we have our most fundamental disagreement: the provisions on mandation. The Bill reserves the power to mandate pension funds to invest in Government priorities. That not only goes against trustees’ fiduciary duties—although I appreciate and recognise the point the Minister made earlier—but means potentially worse outcomes for savers. Pensions are not just numbers on a spreadsheet; they represent a lifetime of work, sacrifice, and hope for a secure future. The people who manage these funds and their trustees are under a legal duty to prioritise the financial wellbeing of savers. Their job is not to obey political whims, but to invest prudently, grow pension pots and uphold the trust placed in them by millions of ordinary people.

That fiduciary duty is not a technicality; it is the bedrock of confidence that the entire pension system rests on. These pension fund managers find the safest and best investments for our pensions, no matter where in the world they might be. If things go wrong, we can hold them to account. But if this reserve power becomes law, we have to ask the question: if investments go wrong, who carries the can? Will it be the pension fund manager and the trustees, or the Government, who did the mandation?

Likewise, while the reserve power in the Bill focuses on the defined-contribution market, the shift in emphasis has potentially profound impacts across the sector. UK pension funds, along with insurance companies, hold approximately 30% of the UK Government’s debt or gilt market. If mature defined-benefit schemes move from the gilt market to equities, that potentially has a profound impact on the Government’s debt management, or ability to manage debt, and therefore interest rates and mortgage rates. For that reason, we would welcome the Minister confirming whether any concerns have been raised by the Debt Management Office, and possibly the Bank of England. There is widespread opposition from across the industry to this power—I am approaching the end of my speech, you will be pleased to hear, Madam Deputy Speaker. There are better ways for the Government to deliver growth, such as changing obsolete rules and removing restrictions.

In the annuity market, solvency rules prevent insurers from owning equity in productive UK assets. Wind farms, for example, deliver stable returns through contracts for difference and contribute to the Government’s green agenda. They could be an ideal match for long-term annuity investments, while also delivering clean energy. Releasing the limits on the ability of insurers to fully deploy annuity capital has the potential to unlock as much as £700 billion by 2035, according to research by Aviva. Rather than imposing top-down mandates, we want the Government to maximise growth opportunities from our pension industry by turning over every stone and seeking out the unintended consequences of old regulations, not imposing new ones.

I will conclude, Madam Deputy Speaker, as you will be delighted to hear. [Interruption.] Yes, I have taken a lot of interventions. We reaffirm our commitment to working constructively with the Government. Stability in the markets is of paramount importance, and we recognise the need for a collaborative approach as the Bill progresses through the House. We will bring forward amendments where we believe improvements can be made, and we will engage in good faith with Ministers and officials to get the detail right.

We want to go with, not against, the grain of what the Government are seeking to achieve through this Bill, and I look forward to working with the Minister in the weeks and months ahead.

[Madam Deputy Speaker (Ms Nusrat Ghani)]

I call Chair of the Select Committee, Debbie Abrahams, after whom I will call Steve Darling.

Pension Schemes Bill (First sitting)

Mark Garnier Excerpts

Committee stage
Tuesday 2nd September 2025 Public Bill Committees

[Gerald Jones (Merthyr Tydfil and Aberdare) (Lab)]

As do I.

[Mark Garnier (Wyre Forest) (Con)]

So do I.

[Sarah Edwards (Tamworth) (Lab)]

And I.

--- Later in debate ---

[The Chair]

I call Mark Garnier, the shadow Minister.

[Mark Garnier]

Q Thank you very much for coming to give evidence. It can be a little intimidating, even for us, to see so many Government Back Benchers sitting across the table.

I will start with the most controversial point: the mandation of local government pension schemes when it comes to amalgamation and being forced to go into assets. There are two parts to my question. First, is it fundamentally right to entrust trustees with looking after the interests of the members of pension schemes and then, separately, to tell them how they should be investing that money? Secondly, are there any guardrails to protect pension fund members from being forced to invest in unwise investments?

Zoe Alexander: We are concerned about the precedent set by the reserve power in the Bill. We realise that it might not be used, and we hope that that will be the case. We hope that the work the industry has done to create the Mansion House accord and get DC schemes on track to invest more in the UK will fulfil its promise. The presence of the power creates a series of risks, and certainly enacting it would create a series of risks for savers in terms of its impact on investments, on price and, ultimately, on the value that is accrued to savers in the market.

We are looking for more guardrails on the power. We would like it to be constrained to apply specifically to the commitments in the Mansion House accord, and no more than that. We think that is appropriate, because the market and the Government have together set out what “good” looks like. If we agree on that, let us put that in the Bill and make it clear that that is the extent of the power.

We would also like the sunset clause on the power to be brought forward from 2035 to 2032. That would give more than enough time for the industry to deliver on the commitments in the Mansion House accord, and for the Government to assess progress and whether the power is required. We feel that keeping it on the statute book until 2035 would introduce undue political risk.

[Mark Garnier]

Q To summarise, you are saying that the general direction of the policy, which is to get more investment into the UK and therefore more infrastructure, is not in itself a bad thing.

Zoe Alexander: We absolutely support the general direction of the policy. Our members are very committed to investing more in the UK and they are doing a huge amount of work on that. They have already invested heavily in the UK, with huge investments from schemes such as the local government pension scheme. On the DC side, schemes are maturing; they need time to get to the scale of investment of schemes such as the LGPS, but they are on the journey and they are committed to doing that. We do not take this position because we do not agree that schemes should be investing more in the UK; it is to do with trustee discretion to make the decisions about where to invest.

[Mark Garnier]

Q Ironically, I met some annuity providers who are enthusiastic to invest in equities, but they told me that they are being prevented from doing so. For example, an investment in the equity of a wind farm is a very good asset, because there are predictable returns from it, contracts for difference in the price, and all the rest of it, but they are not allowed to invest in that because they are not allowed to invest into equities. Do you think there are better ways the Government can achieve its aims—that mandation is a bad way of achieving it, but that there are other, better ways that are being missed out in the Bill?

Rob Yuille: Yes, there are better ways. The specific point that you mentioned about prudential regulation rules are not for this Bill, but other measures that could be taken, essentially to make the UK an attractive place to invest, are the kind of things that the Government are trying to do. Along with the Mansion House accord, which we were delighted to take forward with Pensions UK and the City of London Corporation, we agree with the Government’s assessment that use of the reserve power should not be necessary and will not be necessary.

Firms are already investing in the UK. The Pensions Policy Institute’s latest statistics show that 23% of DC assets are in the UK, and annuity providers say that it is around two thirds, so we are talking about hundreds of billions of pounds in the UK. There is the appetite to invest in the home market, because they know it best, in the kind of projects that the Government are trying to drive forward and provide policy certainty about. We share the concern about the precedent it sets and the potential impact on scheme members, and we would propose another guardrail.

There is already provision for a review, were this power to be used, of the impact on scheme members, which is right, and the impact on the economy, which is also fair enough, but they should also look at the impact on the pensions market and the market for the assets that would be mandated, because there is a risk that it would bid up prices in those assets, and that it would create a bubble in them. There are guardrails, but more important, there are other measures, including things that the Government are already doing, that make this power unnecessary.

[Mark Garnier]

Q I have one final question. The key point, from the point of view of your members and the local government pension scheme, is that the interest of the members should not be trumped by the interest of the wider economy—their interest comes first. Is that right?

Zoe Alexander: That is right, but often those things are consistent, and our members would agree with that. Those things are not inconsistent.

Rob Yuille: I agree.

[Sarah Edwards]

Q I am interested in hearing a little more about unlocking surplus and some of the challenges, particularly in the way that it is described or calculated, and what the thresholds might be. Obviously, there is an opportunity, but there is also a balance around conflicts arising when an employer might wish to access the surplus. Perhaps you could comment on your understanding and interpretation of how the Bill deals with that issue.

Rob Yuille: The challenge is aligning it with scheme members’ interests so that they are not put at risk. If a surplus turns to a deficit, which it can do because it is by no means guaranteed, and if an employer then fails, there is actual detriment to those scheme members. As we know, economic conditions can change. It is an opportunity for employers, though—that is the purpose of it—and schemes can and do extract surplus now, often when they enter a buy-out with an insurer.

It does need guardrails, and the Bill includes the provision that it has to be signed off by an actuary and it is the trustees’ decision. That is important, but there is a related challenge about the interaction of the surplus and superfunds. Each of those is okay: you can extract a surplus, for the reasons that we have discussed, and you can go into a superfund if you cannot afford a buy-out. The problem is, if a scheme could afford buy-out, extracts a surplus and then no longer can, and then it enters a superfund, the scheme members are in a weaker position than they would otherwise be. There are a couple of things that could be done about that: either leave the threshold for extracting surplus where it is—which is buy-out level, rather than low dependency—or change the Bill so that the combination of surplus and superfund cannot be gamed to get around that. In any case, as you say, it is important to monitor the market, and for the regulators to be alive to potential conflicts of interest.

Zoe Alexander: Pensions UK is content with the idea of using the low dependency threshold for surplus release. We think the protections are sufficient. Providing that the actuarial certification is in place, the sponsoring employer is in a strong financial position and a strong employer covenant is in place, we think there are real benefits to be had from surplus release. We highlight the fact that some employers and trustees will be looking to move benefits from DB to DC using surplus release, or even to a collective defined-contribution scheme. We are interested in the potential of that to bolster the benefits of those types of scheme, and we would like Government to look at the 25% tax penalty that applies when doing that, because if those funds are kept within the pensions system, that is to the benefit of savers, so perhaps that tax charge need not apply.

--- Later in debate ---

[The Chair]

Thank you. I call the shadow Minister.

[Mark Garnier]

Q Thank you very much for coming to give evidence. Can I get straight into a detailed question regarding the repayment of surpluses, starting with the local government pension scheme? I am advised that regulations 64 and 64A of the Local Government Pension Scheme Regulations 2013 currently allow for surpluses to be paid out of local government pension schemes, but the problem is that actuaries and trustees get nervous when a local government pension scheme is in surplus and are reluctant to allow the surplus to be paid. The provisions of the Bill therefore try to address something that has already been addressed, but they are not tackling the right problem.

Patrick Coyne: I think that question is more relevant to me. The reforms across the Bill could be good for savers, but they could also be good for the UK economy. What you are pointing to is a wider, systemic issue in the marketplace, where we have a patchwork quilt of regulation that has built up because the pension system is idiosyncratic, and in some cases 70 years old. The Bill is trying to give trustees the tools for the job. On surplus release, it is trying to give them a statutory override, to look across the piece and say, “When I am a well-run, well-funded pension scheme, is it right that I can extract surplus if it is safe to do so?” We think that is a really important principle.

[Mark Garnier]

Q I agree that is an important principle, but if you are a trustee, you are potentially personally liable for any deficits, and you could get yourself in trouble. I will come on to the defined benefit pension schemes in a minute, in relation to the same point. At the end of the day, if you have an actuary who is advising you, “It is fantastic that we are in surplus now, but markets change, we could have a stock market crash and we could be in deficit next week,” you may be more cautious than the Bill would perhaps like to encourage you to be. Do you think that is a fair criticism?

Patrick Coyne: Another important part of the Bill is making sure that we get implementation right. There will be a period now when we can consult, and all of us—Government, industry and the regulators—have a role to play to make sure that that happens. I would say that the Bill will actually prompt a discussion that might not have been had by many trustee boards over the last few years. If you look at the amount of surplus that has been released in recent years, it is in the tens of millions, not the billions. We now estimate that three quarters of schemes are in surplus on a low-dependency basis, which is an actuarial calculation of self-sufficiency. That means there could be up to £130 billion across the market. We think it is right that well-funded, well-governed schemes can consider releasing that surplus, if it is in the interest of members to do so.

[Mark Garnier]

Q Would you be happy if the full £130 billion was released, and therefore these pension funds were right down to the wire, even if they are still technically in surplus?

Patrick Coyne: I think it is highly unlikely that that scenario would happen. Our engagement with the marketplace tends to show that firms considering a different endgame option, which might include running on and releasing surplus, tend to be doing so on a basis where they have hedged their assets, so that they can manage economic volatility, and they are using growth assets above that limit to consider surplus release.

[Mark Garnier]

Q I will turn to DB pension schemes—where you have a sponsor company. For example, I have heard the British Telecom pension scheme described as a pension scheme with a telephone provider attached to it. One of the criticisms I have heard is that, because of the rules that were brought in as a result of Maxwell raiding the pension schemes many years ago, DB pension funds are reluctant to invest in equities, because they could end up going into deficit reasonably quickly. One of the intentions with the Bill is to get funds investing more in equities, but there are still elements left behind encouraging behaviour that does not follow the grain of the Bill. Those particular rules—I refer to them as the Maxwell rules—that defend against host employers raiding a pension scheme are having a wider detrimental effect, but that is not being addressed by the Bill.

Patrick Coyne: It is important that we have a regulatory framework that can cope with different economic conditions. Over a number of years, Parliament has introduced a number of pensions Acts to ensure that defined benefit schemes, which are mostly mature—mostly closed—are secure.

There is a real opportunity in the Bill to build on the fantastic success that we have had in creating a nation of savers—11 million more people putting something away for retirement—and turn that system into something that can provide an adequate income in older life. That means turning the focus of the DC system on to value for money. That is where I believe the real potential is.

[Mark Garnier]

Q You just triggered another question. Charlotte, can I quickly ask you about the retail distribution review? The retail distribution review came into effect on 1 January 2013. One of the criticisms at the time was that moving from a commission-based model, where IFAs were paid by commission, to being paid by cash, reduced the number of people seeking financial advice from something in the region of more than 50% to something in the region of 9%. RDR, although a very well-intentioned change brought by the FCA, has had the unintended consequence of making it more difficult for people who need that advice to get it from an IFA. Have you guys had a think about that within the FCA?

Charlotte Clark: It is not in this Bill, but there is a very large work programme going on at the moment around the advice guidance boundary review. As Patrick said, as pensions have changed—there have been big changes in the market over the last 10 years or so—more and more people have come to need support, particularly at the point of retirement, but also in thinking about how you build assets in pensions and more generally. All the targeted support work we are doing is about how you help people more to make these difficult decisions. This Bill is very much about, “How do you get the market right?” but at the same time, we want to make sure that savers have the right support to make the right decisions at the point of retirement or before.

[Mark Garnier]

Or, indeed, when they first start to work. As somebody once said, compound interest is the eighth wonder of the world.

[The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)]

Q I definitely agree about the eighth wonder of the world. Thank you for coming this morning. This is the Committee’s first sitting, and it is great to have both of you before us. One of the features on the DC side of our pension landscape is the two different regimes that we are operating. The Government’s policy intent is that, from the experience of the saver, they do not see a difference between the trust and the contract regime in so far as possible. That will certainly be true for their experience of the measures in the Bill on value for money and decumulation. Could you share a bit about how the FCA and the TPR are working together to make sure that is the case?

Patrick Coyne: Over a number of years, we have worked closely with the Financial Conduct Authority to ensure that when we deliver interventions within the pensions landscape, the outcomes are consistent. One way we have done that is through an update to a joint strategy. We also have almost daily calls with one another to ensure that when we consider interventions and how to enable the system to provide value for money and support people at retirement, we do so in a coherent and comprehensive way. We must really understand the different constituents of our marketplace, whether they be workplace versus non-workplace pensions, or, in the People’s Pension space, pensions analogous to the master trust offer.

Charlotte Clark: To add to Patrick’s point, we meet fairly regularly. There are various different forums and working groups. As you say, Minister, there is that sense that it does not matter where you save. Most people are probably saving in both the contract-based side and the master trust side, given that people have pots in lots of different places. It is important not that people understand where the regulation is, but that the regulation is consistent and there is no arbitrage between the two systems.

--- Later in debate ---

[The Chair]

We will now take oral evidence from Christopher Brooks, head of policy at Age UK, and Jack Jones, pensions officer at the TUC. Once again, we must stick rigidly to the timings in the programme motion, as the Committee has previously agreed. For this session, we have until 10.55 am. Could the witnesses please briefly introduce themselves for the record?

Christopher Brooks: I am Christopher Brooks, head of policy at Age UK. We are the national charity for older people.

Jack Jones: I am Jack Jones, pensions policy lead at the Trades Union Congress.

[Mark Garnier]

Q Thank you. I am particularly interested to hear from the two of you, because one of the interesting things about this Bill is that we have had a lot of lobbying from the profession but very little on behalf of the members of these pension funds, who are so important. Mr Jones, if I may start with you, Unison made the point that there is a clear lack of member voice in the Bill. Do you think that is a fair criticism?

Jack Jones: I believe that was aimed specifically at the LGPS requirements, but yes, I would certainly agree with that, and it probably extends to some other areas of the Bill as well. Unison is not alone; all the unions involved in the LGPS scheme would agree that the pooling structures mostly have a clear lack of member representation on their governance boards. There is a real mishmash of governance arrangements and of reporting and transparency arrangements across the different pools at the moment.

We have some examples of quite good practice—there are pools with a meaningful number of member representatives on them, but they are few and far between. Many have no representatives or only have observers that do not have any voting powers. Member representation has an important role in the LGPS, with a long history of ensuring that members’ interests are represented when investment decisions are made. Moving away from that has taken something away from the scheme.

It is particularly important when looking at measures that will make investment decisions more remote from members by pooling into larger geographical areas and larger funds, and by requiring—or expecting—them to invest in more complicated assets with higher up-front fees. That is the point at which it becomes even more important to have oversight, to give reassurance that members’ interests are at the heart of all those decisions.

[Mark Garnier]

Q Could you expand a little on the technicalities of how that would work? Obviously, the trustees are there to represent the members, but they are merely a small board of individuals. If you take something like the British Telecom pension scheme—I do not know how many people are in it, but it is perhaps tens of thousands—how would a group of trustees find out what members are thinking about what they would like? You could have representation, but would you have polls?

Jack Jones: That is a good question, and it is a wider issue. Member representatives are there to ensure that people with skin in the game are around the table when decisions are made. They are there to reassure members that people like them—those who will be relying on the scheme for their retirement income—are involved in those decisions. Yes, they cannot represent the full range of any large scheme’s membership. A lot of interesting work could be done around how you find out what members think about how their money should be invested and how we then take that into account in decision making.

That is one area where, at the moment, there is potentially a little bit of a gap. The trustees have clear guidance that they can take into account non-financially-material ESG factors, but we hear a lot from unions that there is a very high level of wariness from schemes about actually doing that. They quite often point to their fiduciary duty and say, “Actually, our primary responsibility is towards the financially material factors.” They quite often ignore the guidance that says they can take into account other factors where they know it is in their members’ interest. Work needs to be done on what the best mechanism is to find out what Members think, but there is also a job to make sure that trustees know that they can and potentially should act on that.

[Mark Garnier]

Q You raise a very interesting point. Members could come up with an idea. For example, you mentioned ESG, which is a fine thing—I would not disagree with that—but sometimes it could be right to invest in something that a lot of people feel uncomfortable about, such as the arms trade or weapons manufacturers. Very sadly, they are having a bonanza at the moment, because of all the problems that are going on in Ukraine and Gaza. As I say, it is for very tragic reasons. None the less the pension itself could do very well out of investing in that, yet the members may decide it is a bad idea on ethical grounds to invest in something like munitions manufacturing.

Jack Jones: Well, it is the members’ money that is being invested. You have to make a balancing decision, but where you have clear evidence that the majority of members have these ethical beliefs that they want to see reflected in how their money is invested, you need to take that into account.

[Mark Garnier]

Q My last question—Chris, leap in at any point if you feel you have an answer—is about paying out surpluses, either to local government or defined benefit pension schemes. Lots of people have argued why it is a good idea and good for the country, and all that kind of stuff, but are there any concerns in the TUC or Age UK that it could put some of these pension schemes—particularly the private ones, the defined-benefit ones—into risk unnecessarily and the wrong thing could happen, even though the intention was well meaning.

Jack Jones: Clearly that risk is there, and it would have to be managed very carefully.

[Mark Garnier]

Q Do you feel the Bill covers that management?

Jack Jones: I think it puts a lot of responsibility on trustees to make that assessment. I think it is fair enough to set out the criteria under which trustees might consider surplus release—that is where you have sustained and high surpluses on quite a prudent basis. Whether you actually make that decision to release that surplus and whether you think that is in the members’ best interests relies a lot on trustees making that decision.

One particular weakness at the moment is around potentially allowing sole trustees to make that decision. This is usually where you have a closed DB scheme that, instead of having a fully constituted board with member representation, will have a sole corporate trustee appointed by the sponsor. There, the conflicts seem too great to possibly manage for that corporate trustee to make a decision on behalf of the members and say, “Yes, we think it is appropriate for surplus to be released.”

It would also be really useful for guidance to lay out the ways in which any kind of surplus release must benefit members as well as the sponsor. There is obviously the argument that if the sponsor then goes and invests that money in, for example, either higher pay or better contributions for DC members or investing in the business, that is in the members’ wider interests, but we need to recognise that although employers suffered quite a lot because of the really high deficits that we saw over a sustained periods by having to put in those employer deficit coverage contributions, members also suffered.

You saw schemes being closed and benefits being cut in various ways. We had reductions to accrual, changes to indexation and that kind of thing. Guidance should probably recognise that and say to the trustees, “If you are going to consider releasing surplus, it needs to be done in ways that both benefit the member directly by improving their benefits in some way.” It is a complex question: what is the best way of doing that? I would not want to prescribe that too much. However, the principle that trustees have to consider is how that money is used to actually improve benefits, as well as potentially to—

[Mark Garnier]

Q Christopher, do you have any thoughts on that, quickly?

Christopher Brooks: We do not work on final salary pensions, so I do not take a view on it.

[Torsten Bell]

Q As we have just heard, there is some cross-party agreement that the main purpose of the changes is ensuring that we drive up the returns to members—particularly financial returns, but also more generally. What do you think will make the most difference, from the perspective of the returns, particularly to DC savers? Balance between VFM; scale metrics; decumulation changes; small pots—all of these are about driving up returns for members. What are you most excited about?

Christopher Brooks: I think they all work together, so I would say it is a combination of them, but scale seems to be one of the main drivers. I am thinking about NEST in particular, which has been leading the way in terms of investing in private assets. It is able to negotiate a good deal, because of its scale. If you can drive that with similar outcomes across the marketplace, it will be really beneficial to members.

--- Later in debate ---

[The Chair]

I call the shadow Minister.

[Mark Garnier]

Q Thank you very much for coming along to give evidence this morning. I want to start with a general question: what do you see as the risks associated with surplus extraction? As we know, a lot of the funds are now in surplus, but we only need interest rates to start crashing back again—it is probably unlikely—and they could go back into deficit. Do you think the safeguards for surplus extraction are sufficient?

Colin Clarke: It is a very good question. There are risks that an employer could extract surplus so that it puts the scheme in a position where something might happen in the future that caused them to be underfunded. It is quite key that, although the Bill has some very high-level rule-making powers at the moment, the guidance that comes out alongside that makes very clear the circumstances in which it would be appropriate for trustees to be able to do that.

Scheme rules aside, trustees today are able to extract surplus, and they have to follow fiduciary duty, follow a process and get advice from independent advisers to make sure that what they are doing will not jeopardise the security of members’ benefits. The Bill itself is mainly to override any sort of constraints that trustees have within their rules that might prevent them from doing that. However, trustees would still have to follow the same process they would follow today to make sure that they are in a good position from a funding perspective, that they do not take anything out too hastily and that they look a few years ahead. It is not just a case of being able to extract surplus from an affordability point of view today; they need to be looking ahead to the long-term funding position as well.

[Mark Garnier]

Q One thing we have not talked about is what the surplus extraction will be used for. If a host company starts taking advantage of this and they invest in building the business, most people would probably agree that that is rather a good thing. However, if they pay out dividends, is that a good thing? If they do share buy-backs, is that a good thing for the host company? How do you think trustees should examine what the purpose is of the fund extraction, and whether it is a good idea or a bad idea—or even an unethical idea?

Dale Critchley: It is a trustee decision to take. I do not necessarily think that the trustees need to take into account what the employer is using the surplus for. They are looking at whether it is appropriate to return the surplus to the employer.

If you look at a case from 2023 that went to the ombudsman, Aviva was involved in the buy-out for a company that subsequently returned £12 million of surplus to the employer. The trustees, the ombudsman found, had acted quite rightly by taking into account the fact that the company had made considerable contributions, including considerable deficit contributions, over the years, and that it was right, in the trustees’ opinion, that once all of the benefits promised to the members had been secured, the excess was delivered back to the employer. I am not sure that that company or those trustees took into account what that company was going to use the money for; they just looked at whether or not it was appropriate to return the surplus to the employer.

[Mark Garnier]

Q But is that right? Do you think that is a good use? Ultimately, as we have discussed, there is always the tricky question about how a fund could go back into deficit again. The flipside of that is that deficit then appears on the balance sheet of the host company, so there is an incentive not to raid it too much. A lot of private equity is very good, but there are certainly accusations that some people can invest into a company through private equity and be quite punchy in terms of revving up the balance sheet of a company, taking out dividends and borrowing lots of money to pay back to the shareholders. If you start opening up the possibility that a pension fund could raid—to use the word “raid” is provocative, but you see what I mean—then an unethical investor could do the wrong thing, even though it is legal.

Dale Critchley: I am not a defined benefit pension scheme trustee, but I would expect the trustees to look at the members first of all: are the benefits secured that were promised to the members? Is there room to reasonably augment those benefits? However, to say, “We will only give you this surplus back if you use it for x” is, I think, overstepping the duty of the trustees.

[Mark Garnier]

Q That is interesting; I will go and have a think about that one.

Both of you manage annuity funds. For the record, I have had a chance to meet representatives of your organisations and have had long discussions about this. One of the interesting points that has come out of conversations with many people and organisations in your position is that, while the thrust of the opportunity of this Bill is to bring together pensions and make them more efficient, and another is to be able to unlock opportunity to invest into the UK and into various opportunities, yet there are some rules that are not being addressed. As one of your colleagues mentioned to me, Dale, an annuity fund is not allowed to invest into equities, yet investing into something like a wind farm would be an ideal opportunity to get a predictable return. Do you think the Bill is missing out on some of these measures that could be updated?

Dale Critchley: I do not think it necessarily needs any change incorporating into the Bill. It is a matter for the Prudential Regulation Authority to allow us to make the investments that back our annuities. We would be quite happy to take that up afterwards, but I think that could be achieved through a change to PRA rules rather than incorporation into the Bill.

[Mark Garnier]

Q Also, similarly on the equity point: with defined benefit pension schemes, as I mentioned a bit earlier, if you have a deficit, that then appears on the balance sheet. The behavioural outcome of that is that if you are a trustee or from the host company, you would want to avoid the risk—rather like with the BT pension fund, which I think is £7 billion in deficit, and which now restricts the ability of BT to raise money. The behavioural outcome is that you do not invest into something that has high volatility but long term growth, i.e. the equity market. The 1987 stock market crash was hideous at the time—I am probably the only one present who remembers that—but the long-term growth over the equity market proved that was just a mere blip. However, at that time a company would have had a deficit on its balance sheet. Should we change those rules about the deficits on the balance sheet in order to allow pension funds to invest into equity, which is really what we want to get out of this?

[The Chair]

Can I ask for short answers now, please, because we need to move on to other Members.

Colin Clarke: It is an interesting question. It is not something I am a huge expert on, to be honest, and it needs careful thought, because there could potentially be some unforeseen consequences that I have not considered. If there were going to be any suggestions to change any rules in that regard, there would have to be evidence gathered to understand what the potential implications of that would be.

Pension Schemes Bill (Second sitting)

Mark Garnier Excerpts

Committee stage
Tuesday 2nd September 2025 Public Bill Committees

[The Chair]

I remind Members that questions are not limited to what is in the brief, but your questions must be within the scope of the Bill. In line with this morning’s session, for each panel of witnesses I propose to call the shadow Minister first, then the Minister and then the Liberal Democrat spokesperson. I will then go back and forth between the Government and Opposition Benches; anyone who wants to ask a question should catch my eye.

We must stick to the cut-off times specified in the programme motion, so I will have to interrupt questioners if necessary. I remind Members that they must declare any relevant interest both when speaking in Committee and when tabling amendments to the Bill. If there are no further questions, I will call the next set of witnesses.

We will now hear oral evidence from Councillor Roger Phillips, chair of the Local Government Pension Scheme Advisory Board, and Robert McInroy, head of LGPS client consulting at Hymans. We have until 2.30 pm for this panel. Will the witnesses please introduce themselves for the record?

Councillor Phillips: Good afternoon. I am Councillor Roger Phillips. I chair the Local Government Pension Scheme Advisory Board and have done so for the last 10 years. Prior to that, I was on the working party that reformed the pension scheme from final salary to career average.

Robert McInroy: Thanks for inviting me. My name is Robert McInroy and I am the head of LGPS consulting at Hymans Robertson. We provide actuarial, investment and governance services to around 75% of LGPS funds, and it is pleasing to say that we have had some of those partnerships for many decades. In fact, Hymans Robertson was created over 100 years ago to provide services to the LGPS and local government.

[Mark Garnier (Wyre Forest) (Con)]

Q64 Thank you for coming to this afternoon’s session. Councillor Phillips, I will start with you on the big argument about mandation. Obviously, these are reserved powers, which will not necessarily be used. Local government pension schemes will not be forced to go into things that they do not want to, but in the last two or three weeks the hon. Member for Clacton (Nigel Farage) has spoken about potentially using local government pension fund money to bail out 50% of Thames Water. That would be £9 billion or £9.5 billion going into something that is not a productive asset. Does that type of talk from senior politicians make you worry about the potential misuse of mandation?

Councillor Phillips: I think there is general concern within the sector when language like that is used, because we are talking about a considerable sum of money that belongs to 6.7 million pensioners. You therefore have to treat that with utter respect. You have a fiduciary duty to look after that money and ensure that the investment is wisely made. The fiduciary duty of the funds and pools is there—the funds own the pools—so there will be concern if somebody wants to politicise it. That is a very dangerous road to go down.

When it comes to UK investment, the LGPS is already investing in the UK in a very big way. This is not a case where you use a stick and say, “You’ve got to invest in the United Kingdom.” It is about identifying risk, return and sometimes conflicts of interest. Certainly we should be investing where it is sensible to do so for the benefit of our pensioners and for the least obligation to our employers as well. That should be clearly understood by everyone.

[Mark Garnier]

Q For trustees, the arrangement will be slightly different if it goes into a big pool, but to what extent do you think local authorities, if they are going to see mandation, would be keen to invest into their local areas, to support local investment?

Councillor Phillips: Local investment is difficult because, again, I go back to this business of it being our duty to invest wisely, prudently and sensibly. That is important. With local investment, first of all, it depends on your definition of “local”, particularly given the current pooling arrangements. You could have a strategic mayoral authority that has three different pools, because the pools come from all over the geography of England and Wales, so that is a difficulty.

Secondly, it is about return and making sure the pipeline of potential projects is there and that those projects are investable. If LGPS is going to invest in them, surely the rest of the investment industry will also want to invest in them, including the Canadian people.

The other thing I would say, which I surely do not have to tell you as Members of Parliament, is that some local matters are controversial. You may think that a particular local investment is what an area needs, but actually a large part of your people do not. You have to show a little bit of discretion. You may invest in offshore wind, which is very popular, but getting the link to the grid, going across open countryside with massive pylons, is not popular. The LGPS will have to bear that in mind, because sometimes the members, the constituent authorities and the council tax payers will not appreciate it.

[Mark Garnier]

Q It is difficult. You raised the point about geographical location and that a mayoral authority could have three different funds within it. More important, Cornwall county council, for example, may suddenly discover it is having to invest into Northumbria because that is where somebody decides it needs to invest, and may feel very embittered or cross about that.

Councillor Phillips: We go back to the importance of fiduciary duty. You are there to invest for the benefit of your pensioners and to make sure that you do that in a sensible and reliable way. As has been proved to date, the most popular element is probably affordable housing. Cornwall, which you mentioned, has invested very wisely in affordable housing. Together with its relationship with local government as the owners of much land, there is huge potential there, but it only comes right when the return is there. If the return is not there, you are not going to enter into it.

[Mark Garnier]

Q So the key point is that every single investment must be done on a benefit analysis rather than a social good analysis?

Councillor Phillips: If you do not do that, I do not know where you are going with your pension investment.

[Mark Garnier]

Q There is potential for surpluses to be paid back into the community. Is that not a good alternative for that type of more social investment as opposed to non-commercial investments?

Councillor Phillips: We anticipate that the latest round of valuations will show a very good surplus for all the pensions. That is credit to the investments that have been made to date. That does pose some issues as to what you do with those surpluses, but we live in a very volatile situation, and circumstances can change. You have to be careful, because if you reduce contribution rates considerably, that is a great benefit at this moment in time, but if you then turn around and start to increase them again, that can be very difficult for all employers to deal with, including local government.

[Mark Garnier]

Q That is very helpful. Robert, would you like to add anything?

Robert McInroy: Yes, on the last point about surpluses. I am a fund actuary. We are working through the 2025 valuations, and it is pleasing to see improvements in funding levels across the LGPS. We think that that, in turn, can mean lower contribution rates, particularly for councils—something in the region of 3% to 6% of pay, so that is positive. It is important to realise that the success of the current scheme has perhaps not been picked up in some of the language and assumptions built into the reforms that have been put forward.

[Mark Garnier]

Q Would you suggest a higher hurdle for valuations in terms of surplus distribution?

Robert McInroy: That has been discussed on a fund-by-fund basis—whether the funding target should be increased from something like 100% to 120%, for example. That has been actively discussed.

[Mark Garnier]

Q Would you support that?

Robert McInroy: I support looking at the range of options, which includes reducing employer contributions and flexing investment strategy, including for some of the areas that we have talked about and will be talking about, that could be available to the LGPS in terms of investments.

[Mark Garnier]

That is very helpful; thank you.

[Luke Murphy (Basingstoke) (Lab)]

Q I want to return to your comments, Councillor Phillips, to be sure that I caught your meaning. You mentioned the popularity or otherwise of network grid schemes running across the countryside. I was not quite sure whether you were saying that those were a relevant consideration for investment.

Councillor Phillips: Like the local government sector, the local government pension scheme operates in a goldfish bowl: constantly, on a weekly basis, an article is written about you or you receive a freedom of information request. So you are very conscious of the scrutiny, and that helps direct you to manage the investment risks as part of your fiduciary duties. What people do not realise is that there will be particular packages that Government and strategic mayors may think a fine investment that they should be in, but there might be some local problems. To go back to the previous question, it might be better for Northumberland to invest in it rather than Cornwall. That sensitivity has to be there.

--- Later in debate ---

[The Chair]

The Committee will now hear oral evidence from Helen Forrest Hall, chief strategy officer at the Pensions Management Institute, and Sophia Singleton, president of the Society of Pension Professionals. We have until 3 pm for this panel. Could the witnesses briefly introduce themselves?

Helen Forrest Hall: I am Helen Forrest Hall, chief strategy officer at the Pensions Management Institute. We are the leading professional body for those running pension schemes in the UK. We provide qualifications and training to the sector, as well as continued professional development, and have almost 8,000 individual members.

Sophia Singleton: I am Sophia Singleton, president of the Society of Pension Professionals, and in my day job I am a partner at XPS Group. The society represents providers of advice and services to pension schemes and employers. As such, we represent quite a broad range of the industry, from pensions lawyers and actuaries through to professional trustees, pension providers and administrators.

[Mark Garnier]

Q There has been a lot of talk about mandation, which you will be well aware of. Over the time that I have been researching it, over the last few months, we have had pretty much exclusively commentary that it is not a very good thing. Tell me that that is wrong. Why is it possibly a good thing?

Helen Forrest Hall: I would love to say that. I start by saying that the PMI supports the principle that larger pension funds are likely to lead to better outcomes for members. A great and growing weight of evidence, and obviously an awful lot of international experience, shows that they provide greater economies of scale and greater opportunities to invest in a broader range of assets. Unfortunately, we believe that the reserve power sets a dangerous precedent of political interference with a trustee’s fiduciary duty. The considerations of each individual pension scheme are a matter for the trustees, taking into account their members’ experience and what will drive the best outcomes for those members.

Obviously, significant progress has already been made in terms of pension schemes demonstrating their desire to meet the Government’s eagerness for them to invest in a broader range of assets, and the consolidation elements of the Bill should help with that. But I think that the reserve power provision runs a serious risk of cutting across that well-founded fiduciary duty, as well as creating all sorts of disruption to long-term investment planning—another thing that pension schemes are well set up to do—and creating market distortion.

Sophia Singleton: We are very much aligned with the Government’s objective around investing in these assets. We believe that they can deliver and, as Helen has said, the industry has already made quite a strong move towards investing in them. We are going to get there, and it is really about not forcing that to happen too quickly. Schemes need to deploy capital when the opportunities arise and when the right time is, otherwise we risk distorting the market. That is a real concern, because it could deliver poor outcomes for savers. I am sorry we cannot give you a different answer, but we have three concerns about the mandation. Who is legally accountable if there is underperformance? Underperformance is possible. Is it the Government? Is it trustees? How will it affect the markets? How will it affect public trust? At a time when people need to save more into their pensions, they will worry that their pension scheme is no longer investing for returns as a priority.

[Mark Garnier]

Q Helen, can I pick up on your comment that you have to make long-term decisions? These reserve powers have a sunset clause that will apply in 2035. Presumably, if you are making an investment decision, you have to take that into account. An investment decision could be expected to pay out in 2040, and in making that decision you would have to take into account the possibility, remote though it may be, that your investment objectives may be forced to change between now and 2035. How will that affect the performance of a fund, even if the power is never used?

Helen Forrest Hall: That is the problem with a reserve power. It does not have to be used to influence the decisions that trustees are making about their investment strategies, because they have to consider the instances—and there is not an awful lot of clarity in the Bill about what those instances would be—in which this power might be used. They might suddenly find their long-term, well-considered investment strategy outwith Government legislation. That is a dangerous place to be. Pension schemes, quite rightly, are doing their job when they are thinking about their members and their beneficiaries, and making long-term investment decisions. They have the capacity and the joy of being able to do so, but that means that they have to think about those kind of time horizons. That means that a reserve power with a sunset clause with that kind of short-term time horizon will start impacting decisions that people are making at the moment.

[Mark Garnier]

Q So if this clause is passed, we could potentially see a drop-off in the performance of pension funds?

Helen Forrest Hall: I am not sure that we would draw a direct correlation, but the point is that it will start to influence investment decisions. Those may be good decisions, or not, and they may be decisions that trustees would have made anyway; the challenge is that the reserve power exists, a good trustee and their legal advisers will be taking account of that at the moment.

Sophia Singleton: We believe that the threat—just the threat—of this power is the worst of all worlds, in a sense, because the lack of clarity about what trustees should do and take into account when investing for the long term makes it very difficult for them to carry out their fiduciary duties.

[Mark Garnier]

Q It has been suggested to me that the mere fact that this reserve power is in existence may subconsciously encourage funds to invest in the UK, and that therefore they can naturally find 5% investment into the UK and infrastructure, or maybe even more. Do you think that is a valid point?

Sophia Singleton: What I would say is that we are already moving in that direction. If you look back a few years ago, it was very difficult operationally for defined contribution schemes to invest in those types of assets. If you look at things now, both on the supply side and the demand side we see factors that are really supporting investment in those assets.

On the demand side, the new value for money framework really incentivised investment into private market assets because of the risk-adjusted metrics included within the framework, and the work that the industry and regulators have done to take away the operational barriers that existed. On the supply side, the Government have committed to help to create that pipeline of investments. Publishing the pipeline that is coming up is very helpful, because people can plan how to employ their capital, and having the British Growth Fund and so on to invest in alongside the private sector is also helpful.

We are already seeing it happen: we are seeing funds recruiting investment experts to help to manage those assets, so they are already gearing up and skilling up to do this, and we are seeing fund managers releasing private market funds suitable for DC schemes on a regular basis. We do due diligence on those funds, and there are more and more that we have to look at. So it is happening.

[Mark Garnier]

Q It is happening; that is very good, and it is good to hear that there is a pipeline being developed. It is certainly something that has been talked about for a number of years. When I was the investment Minister back in 2017-18, we were very keen to get foreign direct investment coming in to the UK, so there was the Office for Investment in No. 10 doing all that stuff.

That begs the question that, as the Government at any time is trying to attract foreign direct investment into the UK, not least to try to sort out the current account deficit, you as pension fund managers will find yourselves in competition with, hopefully, foreign investors coming into the UK. What is the hierarchy of offer? Do you think UK pension funds should be offered exciting investment opportunities before foreign direct investors?

Sophia Singleton: I do not think we should be interfering with the market; I think it needs to be a free market and, as trustees of pension schemes, we need to be exercising fiduciary duty to choose the right investments for our members and to give the returns.

[Mark Garnier]

But you would rather see the opportunities first?

Sophia Singleton: Absolutely—we would love to see the opportunities first.

Helen Forrest Hall: The other dynamic there is that international pension funds, for example, are often looking to invest in the UK for reasons different from the reasons UK pension funds might want to invest. For them, it is often a smaller part of their portfolio, and part of their own need to diversify where their assets are, in order to manage their own volatility risks. There has been a history of going after the same investments, and unfortunately that is the market and that is healthy competition. One of the challenges and one of the market distortions we see with things such as the reserve power is that you will have the same group of people fighting over what, for a short period of time, is inevitably going to be a short pipeline. That will have an impact on things such as the value for money that you are getting for those investments.

[Mark Garnier]

That is very helpful; thank you very much.

[Torsten Bell]

Q Thank you both for joining us today. I want to ask you to reflect on the internal consistency of some of what you have said. Implicit in what you are saying is that pension schemes should have been investing in a wider range of private assets over the course of the past 10 years, and that that is what they should want to be doing in future—so in some ways we have not been living up to our fiduciary duties in the past, and we are now making changes to do that.

Given that that is your logic, the question is why that has not happened. If you go and ask actual pension providers why that has not happened, they will tell you they have a collective action problem and an industry focused exclusively on cost and not on returns, and that they struggle to deliver against that. If you have a collective action problem, you need to ask how we resolve that.

You then get to the fact that the Mansion House accord is entirely industry led, with numbers set by them—it is not about distortion to the market; you might want to reflect on that, given the comments you have just made. You also spoke about a lack of clarity, but the Mansion House accord provides clarity about the objectives: everyone can see them and they are set by the industry. When it comes to savers’ interests, you know that the Bill includes a carve-out for trustees to say, “This isn’t in my members’ interests, so we won’t be doing it.” Reflect a bit on the consistency of the argument you have made about the real progress you want to see on investment in a wider range of assets—because it is in savers’ interests and should have happened in the past but did not—and the changes in the Bill. I would gently suggest you might want to think about the consistency of that.

Sophia Singleton: We are not a mature industry—the defined contribution industry—and in the past we have not invested in these assets because there have been operational barriers, including the focus on cost.

--- Later in debate ---

[The Chair]

We will now hear oral evidence from Patrick Heath-Lay, chief executive officer of People’s Partnership, and Ian Cornelius, CEO of NEST Corporation. We have until 3.30 pm for this panel. Will the witnesses please briefly introduce themselves for the record?

Patrick Heath-Lay: Good afternoon. My name is Patrick Heath-Lay. I am the CEO of People’s Partnership, a large DC master trust with £35 billion of assets under management and about 7 million members. Importantly, we are a not-for-profit organisation. Within that, we are an asset owner, not an investment manager, so our asset ownership activities are solely for the benefit of members and not commercially for ourselves.

Ian Cornelius: I am Ian Cornelius. I have been the CEO of NEST since May last year. I will say a few words about NEST. It was set up by the Government at the inception of auto-enrolment to make sure that every individual has access to a good-quality pension. It has been a great success story. It now looks after over 13 million members, which is a third of the working population, and manages over £53 billion of assets on their behalf. We receive about half a billion pounds of assets every month.

The focus of NEST has been, and will continue to be, on low to moderate earners, so the typical NEST member earns just under £25,000. In many ways, NEST is probably one of the best examples of the sort of megafund that the Bill is looking to create. It has been able to invest in private assets, invest in the UK and deliver good outcomes for members.

[Mark Garnier]

Q Ian, can I start with you? One of the problems with auto-enrolment is where individuals move from one job to the next, not with a small pot under £1,000 but with a slightly bigger pot that is none the less still administratively tricky. Do you think that the Bill sufficiently tackles that problem?

Ian Cornelius: I do not think that the Bill particularly focuses on that problem, but the question is whether it is a problem. The pensions dashboard will help to provide more visibility of where people’s money is and help them to manage that more effectively. I think it is right to focus on small pots, because they are inefficient. It is much harder for consumers to track lots of small pots, and it is driving costs in the industry, so I think that that is the right initial focus.

[Mark Garnier]

Q One of the original ideas of the last Government was to have a lifetime pot, whereby an employee would pay into a fund, but it was deemed by the industry to be quite difficult to administer, because as an employer you would have to be dipping bits into different pots. What was put up as an alternative was a magnetic pot, whereby an individual would be able to move their money from one pot to the other. Each time they changed jobs, that pot would be picked up from employer A and moved to employer B’s pot. Do you think that is a sensible alternative?

Ian Cornelius: Customers—members—can already do that if they choose to.

[Mark Garnier]

Q Do they know that they can do that? Somebody who is changing jobs quite a lot would not necessarily be the sort of person who is making strategic decisions about their retirement.

Ian Cornelius: I think that is right. It probably goes back to dashboards. They are key to helping to increase visibility. That will get people thinking about the choices they can make, how they want to manage their pension and how they can consolidate their pensions. That will drive that type of activity naturally. At NEST, we have always had one pot per member to make it as easy as possible for our members. Ultimately, it is about member choice.

[Mark Garnier]

Q Yes, that is kind of helpful.

Patrick, could I turn to you? We met and had a very interesting chat. One thing we discussed was the scale of the funds. There is a requirement in the Bill that funds such as yours will need to be valued at £25 billion by 2035. One thing we discussed at the time was whether that creates a barrier to entry for new asset managers, and a lack of competition among asset managers in order to provide the best value for those funds. Would you share some of your thoughts about the £25 billion minimum size?

Patrick Heath-Lay: Yes, of course. We have conducted research. Toby Nangle did some research for us in 2025, and WPI Economics has also looked at the issue of whether scale drives better economies. Generally, aside from all the international comparisons from Canada and Australia, it is proven that scale will drive better economies. You can leverage scale to drive a more efficient administration. If you are asset owners like these two organisations, we get to choose where we invest the money, which managers we use, who will come with the best solutions and who has the best routes and access to market to allow us to invest in a way that benefits and shares the benefit of that investment with the end saver, which for us as an organisation is the sole focus.

I believe that scale, utilised in the right way, does deliver those efficiencies, but this is where the package in the Bill, and particularly a key element like value for money, is critical to establishing that as this market evolves. You want to be reassured that the investment activity at that scale is delivering increasing value for members, which is really the sole purpose of driving that scale. From our own experience and the research that we have done, it is a proven model, but that scale needs to be harnessed in the right way.

[Mark Garnier]

Q I completely agree: I think it is absolutely right that the more money you have, the more negotiating power you have and the more you can diversify risk and all the rest of it. But part of what I am worried about is this: how is anybody going to prove to the regulator that they will have £25 billion of assets under management by 2035? Surely that is an incredibly difficult thing to prove.

Patrick Heath-Lay: I do not want to be flippant in my response, but our scale already means that we are over that limit, so I have not really put too much thought into how they will do it. I believe that there is enough, within the business plans of entities that might be affected, to be able to make some reasonable assumptions as to what ongoing contributions will be coming through the door and how they will respond to some of the opportunities that may arise in this market over the next few years, from organisations that are choosing to move because of the extent of change that is coming.

I emphasise that I still think that the package of measures and that scale test is the right thing to instil that movement, because I think savers will be better off, provided that it is harnessed in the right way. That is why I come back to this: value for money is the proof point, and we need to make sure that we centre on that as an industry. Being able to evaluate how these changes have created a more competitive market in key areas going forward is really quite important.

[Torsten Bell]

Q This morning we heard from Legal and General and from Aviva on how they are planning to operationalise the requirements in the Bill on default drawdown products. I thought it would be good to give you the opportunity to answer the same question: how are you thinking about that within your organisation?

Ian Cornelius: It is one of the elements of the Bill that we very much welcome. I think guided retirement solutions are overdue. Certainly, our members have been opted into a retirement savings scheme, and they end up with a pot of money rather than an income. I think their expectation is an income. In fact, in the research we have done with our members, they say that the most important things for them are to have a sustainable income, confidence that it will not run out and an element of flexibility, because their circumstances can change very quickly in retirement. I think the guided retirement solution moves us in that direction.

At NEST, we have been working on this for some time, as we recognise that it is a core issue for our members. We therefore want to introduce a guided retirement solution—it is very much a work in progress—that delivers that sustainable income, but also gives them a guarantee that it will not run out. That will be some sort of deferred annuity, purchased probably when they are 75, to kick in when they are 85. We are actively working on that and will be looking to introduce it in 2027, aligning with the expectation in the Bill.

Patrick Heath-Lay: It is very similar from our perspective. We should not underestimate how much onus the shift from final salary to DC has put on individual savers, in terms of the decision that they have to make, in a very complex world that they really do not understand. Even if you surface a lot of information, your constituents will still struggle to navigate those decision points. We also should not underestimate the onus they have taken on, in terms of the risk of their own fund, when you think about the productive finance agenda and other things here. I think it is absolutely the right move. It is a good development for us to bring about guided retirement journeys in a way that is either “Do it for me” or “Do it with me” for policyholders.

Similarly, we are thinking about drawdown and how we can facilitate or help people to understand the implications of the actions they may take with accessing their funds, and then, when they get to later life, some sort of deferred annuity as an approach. The really important aspect is the guidance and how we can help, but have certain obligations on ourselves, as providers, to make sure that we are accountable for the help that we are giving as we go through the process.

--- Later in debate ---

[The Chair]

I call the shadow Minister.

[Mark Garnier]

Q I want to ask about the value for money framework. There seem to be a lot of fans of the value for money framework. Are Phoenix as enthusiastic about it as everyone else seems to be, if that is not too loaded a question?

Tim Fassam: The short answer is yes, we are big fans of the value for money framework, but it is worth thinking about why that is. When we are looking at why we have not had the investment that we would necessarily expect, and that we see in other similar countries—so, exposure to private markets and exposure to productive assets—we think there are roughly three groups of reasons. Some are cultural and have been helped by things such as the accord and the compact. Some are regulatory, and that will be a major topic of conversation in this Committee. But some are market, and the market challenges are really around who is the buyer of automatic enrolment pensions. That is usually the employer.

Historically, we have seen most employers focus on the charge, and the charge alone. That means we are now seeing charges well below the price charge cap for automatic enrolment, which is a good thing for consumers, but it is at such a low level that it is very hard to offer more enhanced investment solutions, so that means they tend to be invested in more passive investments and trackers. The value for money framework is important because it should have an impact on those purchasers, making it easier for them to see a more holistic view of the value that they are getting from the pension that is being offered to them, in terms of investment, service and a wider range of metrics. We are not sure it is perfect, as currently developed, but it is certainly in the right direction.

[Mark Garnier]

Q There was an interesting intervention yesterday from the Reform party about local government pensions. I know that is not necessarily part of what we are talking about now, but they made the point that 50 basis points is way too much to charge for assets under management and that it should be 10 basis points instead. You raise exactly that point, which is that it is not about how much you are being charged, but about a combination of that and the performance and how much you are growing. I am 100% behind that particular point, because it makes a huge amount of sense, but one of the things that slightly bothers me is about the metric data. It looked at the quality of service provided to members, which is a nice thing to have—it is about whether you are looked after properly—but it is a marketing type of thing. Slightly more important are the investment performance and the cost, and also the asset classes that the scheme or arrangement invests in.

Where I begin to get slightly confused is that it then switches to member satisfaction surveys. I am curious as to what the member is. You raised the very good point that the customer is the business, but that is not the same as the member. Who is being asked whether they are investing in the right assets? That is quite a technical question by the time you start looking all of this. Can you see that there are anomalies and Gordian knots within this?

Tim Fassam: There is certainly a lot of detail to be worked through. That will include understanding the impact of all these factors. For example, investment return will be an incredibly important part of the value-for-money framework. It is very hard to do forward-looking investment return analysis, but if you do backward-looking, you cement the best of what we have today. The premise of the Bill is that we want to see a different investment pattern going forward. It will be very hard to, say, model a higher allocation to private markets in a forward-looking metric unless we have some creative thinking. Getting those investment metrics right is absolutely critical.

Service does matter to customers in terms of how easy it is to deal with and how much support they are getting to make good investment decisions. That will have a significant impact. When you combine it with things like the potential for targeted support, that could make a very significant difference in terms of the outcomes that the consumers get. We always think of the end customer being the individual. We have a close and important working relationship with the employer, and they are often working with employee benefit consultants to choose their scheme, but the most important stakeholder in all of this is the end user. We want them to get the best possible result to help them prepare for retirement.

[Mark Garnier]

Q I have one final question. Various clauses look at the asset manager and the trustees effectively marking their own homework on this. There are consequences of an intermediate rating, consequences of a “not delivering” rating and various other issues. Is that the best way of doing it? To a certain extent, the managers and the trustees have a vested interest in doing well.

Tim Fassam: We are certainly concerned about the intermediate rating and the risk that that could cause a cliff edge if it means that, to get an intermediate rating, you are effectively closed for new business and potentially existing new joiners for a new firm. We think an intermediate rating that aligns with delivering value, but with a warning light that gives the firm a couple of years to get back into high value for money, will stop the perverse consequences. What I mean by perverse consequences is that if the cost of underperformance is significantly higher than the benefit of outperformance, you will see everyone herding in the middle. That will mean that you may well get a better outcome than today, but you will not get the competitive pressure to be the best of the best, which I think will see the better outcome in the longer term.

[Mark Garnier]

Q Very quickly, if you get an intermediate rating, is it published?

Tim Fassam: Your value for money rating will be published.

[Mark Garnier]

Q So you could run into the same problems that we saw recently where the Financial Ombudsman Service was publishing who has been under investigation, which caused problems. That has now been changed, but we could be entering into that same problem.

Tim Fassam: If you see very strong market or regulatory consequences for hitting an intermediate rating, the focus will be on not being intermediate rather than on being the best that you can be. We would like to see a focus on delivering the best value for money that you can.

[Luke Murphy]

Q In your written evidence, the Phoenix Group encourages Parliament to reassess some of the timelines for the initiatives to ensure that there is sufficient time for market participants to respond in the interests of members and consumers. However, you also advocate for bringing forward the 2030 timeline for small pots and extending its scope to all pension schemes. How do you reconcile those two comments? Could you elaborate on why you think the deadline should be brought forward for small pots and extended? What are some of the barriers or challenges that might make the Government reluctant to take up your suggestion?

Tim Fassam: That is a very good question. One of the things that makes the Bill powerful but more complex is the number of elements that interact. Eventually, we hope, it makes the whole greater than the sum of its parts, but it does mean it is critical that you get the ordering right. For example, we need the value for money framework and transfer without consent as soon as possible, so that we are able to get in good shape for the 2030 scale test—so those deadlines brought forward. Small pots are part of that scale: we are seeing thousands of new small pots generated every year, so the quicker we can get on with managing small pots, the fewer of them there will be for us to manage going forward.

It is critical to think very carefully about the staging and phasing of the various elements of the Bill. That is the point we are trying to make. On the elements that help the market get to where we hope to get to by 2030, we need to get in as swiftly as possible, with enough time after the detail is in place for the industry to implement. I appreciate it looks like we are asking for things to be slowed down and sped up, but it is just making sure the ordering is correct and we have enough time to get into good shape for that 2030 deadline.

We think the scope should be extended partly because of how supportive we are of the measures. Being a historical consolidator of private pensions, we have millions of customers who are not workplace customers but who could benefit from being transferred into a more modern, larger scale scheme and from going into a consolidator of small pots, for example. We see that value in our own book. We look at the opportunity and think, “We wish we could do that for this group of customers. They would really benefit.”

The pensions market is quite complex, as others have pointed out. It is contract-based and trust-based. You also have workplace and private pensions. The more consistent we can be across all the different types of customer, who often do not think of themselves as being any different from each other, the more coherent a scheme we are likely to get at the end result.

--- Later in debate ---

[Mark Garnier]

Q The Bill provides for surplus extraction from funds. Do you see that as a good or a bad thing?

Morten Nilsson: I see it as a good thing. I think it will change the pension industry quite a bit as a positive innovation. Closed DB schemes, which we focus on, might be seen more as an asset for sponsors, rather than a liability that they would like to get rid of as quickly as possible. I think that it will create quite a lot of innovation, and a lot of good things will come out of that.

[Mark Garnier]

Q For defined-benefit pension funds?

Morten Nilsson: Yes.

[Mark Garnier]

Q One of the questions around that is what drives a removal. We heard from previous witnesses that if a host employer puts in more money than is necessary, it seems perfectly reasonable for them to get some of that back. In some cases, that money could be used for investment in plant and machinery to expand the employer, but at the other end of the scale it could be used for share buy-backs to enhance the share price of the employer. Do you think it matters what happens to the money that is being withdrawn from these pension schemes, or should that be up to the host company?

Morten Nilsson: I see it pretty much as you described. The main duty of the sponsors and the trustees is to ensure that there is enough money in the scheme to pay the benefits that were promised to members. If there are excess funds, it is reasonable that they can be invested back into the economy. In May, we surveyed 100 finance directors who are responsible for schemes with over £500 million of assets: 93% of them said that they would want to access the surplus, 49% said they would reinvest it in their local business, in the UK, to create jobs and do other good things, 44% said they would consider sharing it with members, 42% said they would invest it in their global operations, 40% said they would pay it back to shareholders, and 33% would invest it in DC. That is quite a wide range of uses. I think some of it will be paid back to shareholders, which may be local or abroad, but I expect a lot of it would be invested back into the UK economy in one way or another.

[Mark Garnier]

Q Michelle, you run the compensation scheme. Do you see any risk in surplus extraction? I know that by definition, it is surplus and therefore you should be able to take it out, but at the moment, a lot of funds are in surplus. We went through a period of low interest rates, where it was a bit tricky, but now interest rates have gone up, and suddenly those funds are in a lot of surplus. We are probably not going to see interest rates come down to super-low levels anytime soon—well, who knows? If the economy does particularly badly, they may well do. My first question is, do you see any increased risk as a result of this? You are presumably looking at the risk of having to pay out. Secondly, should the benchmark be slightly higher for surplus distribution?

Michelle Ostermann: Obviously, just as you describe, because we backstop the entire industry, what we are watching most closely is the fundedness of schemes, combined with the credit quality or the covenant, and the financial stability of the organisation itself. Those two combined are what help us to assess industry-wide risk and determine how much reserve we need to set aside for future claims on the PPF.

There is a spectrum of schemes out there, clearly—some that are very well funded, which you have been speaking of, and several that are not as well funded. On that spectrum, our focus is on the left side tail—the ones that are most underfunded, or nearing the potential to be underfunded. Given the measures that are being discussed for the release of surplus, we at the PPF feel comfortable with it not imposing a material amount of risk to us, as it is currently defined. It seems to find a nice prudent balance between allowing some flexibility for sponsors to use that money in hopefully a productive way, combined with the test to make sure they do not fall below a certain level, which would bring risk upon the industry and the PPF. We have been a constant participant in that conversation, and we would like to suggest that we will continue to play that role as a surveyor of the net residual impact to the industry.

[Mark Garnier]

Q Do you stress test the pensions industry in the same way as the Bank of England stress tests the banking system?

Michelle Ostermann: Yes—it is very similar.

[Mark Garnier]

And you war game it?

Michelle Ostermann: Yes. The biggest variable that we have a hard time predicting in those scenarios is the likelihood of this being used and the manner in which it is used, but we test deep into the tail. We try several scenarios that give us a high probability of it being abused or overused, and the opposite, and we have come out with pretty strong confidence. As it is defined today, we feel comfortable.

[Mark Garnier]

Q I must ask a question that is perhaps a self beat-up, if you like. There was a disastrous mini-Budget a few years ago under a different Prime Minister—of course, at the time, we got rid of our bad leaders. Did you stress test a scenario such as that?

Michelle Ostermann: Not here in the UK, but as you can tell by my accent, I am not a local. I worked in Canada for most of my career, at two of the largest Canadian “Maple Eight” pension plans, and those are things that we would assess quite regularly. In fact, the open DB schemes here in the UK function very similarly to those in Canada. I joined the PPF in large part because it is a mini-version of the Canadian model. It is exceptionally similar, to me. You will notice that during the liquidity crisis that occurred it was the liability-driven investment strategies, with the degree of leverage, that were most at risk, and it was interest rate-sensitive. Those open DB schemes that were using a more balanced degree of risk, including some equity risk, were unencumbered. It was Railpen, which I worked for when I was here previously. I was phoning back to my peers both there and at the universities superannuation scheme and PPF, and they all withstood that very well.

[Mark Garnier]

Q So while we were all running around like headless chickens trying to figure out what was going on, you were saying, “We told you so. We knew that was going to happen.”

Michelle Ostermann: It is definitely something that was on our radar. When we build the investment strategy for an open DB scheme, such as those I described, it is quite different and less susceptible to that type of risk.

[Steve Darling]

Q I seek some clarification from Michelle. At the moment, there is a fee extracted to support your organisation. What if that fee were ceased?

Michelle Ostermann: I assume you are speaking of our levy?

--- Later in debate ---

[The Chair]

I call the shadow Minister.

[Mark Garnier]

Q Obviously, the most controversial part of the Bill is mandation—or rather, reserved powers for mandation; I am corrected by the Minister, who is flashing me interesting looks. Why do you think it is that Canadian pension funds are investing more into UK assets than British pension funds are—without being mandated?

Chris Curry: We heard a little about that from the previous witness, who I think also has first-hand experience of the Canadian investment models, but there are a number of different reasons. First, there is the aggregation in the system that was talked about; the UK has a very fragmented pensions system. There are a number of different large sectors, but each large sector is not large internationally speaking. Scheme maturity, scheme size and scale generally are a factor. Very few individual schemes have the scale and the amount of assets to invest large-scale in some of the UK opportunities in the way that Canadian schemes have invested on a large scale—as has been said. Half a billion pounds to £1 billion in a single investment is very large by UK standards, compared with the size of schemes.

There is also, because of that lack of scale, a lack of development of the expertise required by some of those specialists—sophistication has also been mentioned—across some of the different individual schemes that we have in the UK. If you are larger, you can afford to have those specialist management teams or specialists on the board. It is not such a proportionate cost as it would be to a relatively small scheme.

Cost is another factor. As we heard from previous witnesses, in the UK a lot of focus on schemes has been on the cost of providing a scheme; in the workplace especially, by default a lot of competition is based on cost. With some of the opportunities we are talking about, especially in productive finance, in the UK space, investing in the UK would come at a high cost, so there is less scope for that cost to be absorbed in an overall larger fund. A lot of the things that the Bill is trying to address are probably some of the reasons why we have not seen that UK investment up until this point.

[Mark Garnier]

Q A previous witness, Michelle Ostermann, made two really interesting related points. One is that, having derisked the UK pensions industry, there is not the appetite to make some of these investments. The second is that other countries are much better at leveraging their pensions industries in order to promote economic growth. Is that something you have looked at, William?

William Wright: Certainly on the derisking side, while we are blessed to have the second or third largest pool of pensions assets in the world, the structure of our pensions system—the fact that so many DB schemes have closed or are running off—means that the overall risk appetite simply is not there. There is a danger in this debate of comparing the outcomes that we see in different types of pension fund systems around the world and thinking, “We like the look of that. Can we have a bit of that, please?” I am simplifying here, but we tend not to be too keen on looking at the inputs and the decisions, often taken 20, 30 or 40 years ago in different markets around the world, that have helped to lead to the development of those systems as they are today. The Canadian public sector defined-benefit model did not happen overnight. Michelle knows the history of it better than I do, but it goes well back into the 1980s. That is why so many of the aspects of the Bill should be welcomed. They look at the fundamental drivers of what will help to define pension fund outcomes for members and the structure of our system in 10, 20 or 30 years’ time.

On how other systems think about pension systems in relation to growth and economic wellbeing in their domestic markets, one of the things that we found particularly striking is that when you compare DC pensions in the UK with DC systems in other countries, or public sector DB in the UK with public sector DB in other countries, there tends to be, for DC pensions in other countries, a higher domestic bias. There tends to be more investment, whichever way you look at it, in their domestic equity market than we see from UK DC pensions in the UK equity market. You also see, almost universally, higher levels of investment in private markets. So much of that comes back to scale. Scale is a threshold—it is not enough on its own—and then there is the sophistication, governance and skillset that needs to be built over many years on top of that.

[Mark Garnier]

Q On this derisking thing, a number of investment managers over the years have pointed out to me that the rules were brought in as a result of Maxwell absconding and taking a lot of money out of his pension fund. Deficits are now placed on to the balance sheet of the host company, which means that the inclination of those companies is to prefer those pension funds to be invested in less volatile assets, not equity markets, where you can have a stock market crash one day as a minor correction in a long-term growth market. Do you think that is the kind of thing that Michelle was referring to in talking about derisking, where legislation that was well-intentioned at the time has had perverse outcomes?

William Wright: Yes. As a number of witnesses have mentioned today, because of the structure of the UK pension fund industry, there are many different perspectives, often not entirely aligned, shall we say, with each other. Every participant in the industry has responded perfectly rationally to the incentives in front of them and the regulation behind them in their investment behaviour and risk profile. International accounting standards, rather than just UK standards, have helped to drive that in the private sector. We have seen similar derisking in other corporate DB pension systems around the world. It has been an entirely rational response. It is really interesting to see which elements of which markets around the world seem to have found a more positive response. Canadian public sector DB, the closest comparison to LGPS in this country, is one example. Others are Australian DC or some of the Nordic models—the Swedish and Danish DC models.

[Mark Garnier]

Q Chris, following on from the points about derisking and all the rest of it, we heard from Phoenix a little earlier about the value for money framework. Everybody seems to agree that the framework is a good thing because it is going to drive better performance and all the rest of it, with one exception, expressed by Phoenix: the consequences of an intermediate rating. It is one of those difficult things where you seek mediocrity rather than going for good performance. Do you think that is a valid criticism of that particular part of an otherwise welcome part of the Bill?

Chris Curry: First, I agree that we have seen lots of positive response to the value for money framework. Looking across international examples—Australia, in particular—it seems as if it will be very welcome in trying to ensure that, as part of the consolidation and what is potentially coming with the next Pensions Commission, with more investment going into UK pensions, that investment is going into a place that is actually going to work on behalf of the members who are investing their money. That is really important in what we are doing. I would also echo some of the views we heard earlier that it is really important in moving away from just a cost-based analysis of pensions and into value, and in looking at the whole range of different factors that are going to determine whether you get a good outcome rather than just at how much the investment costs.

There are challenges. What we have seen in particular, which Tim mentioned earlier and echoes what we have seen in Australia, is that where you have a very hard measure over a relatively short period of time, that will affect investment behaviour. Because there is such a penalty for falling behind over a short space of time, you do everything you can to avoid falling behind, and there is fairly conclusive evidence that that has led to herding of investments in Australia. That is not to say that a framework, or even an intermediate marker, necessarily has to lead to that; I think that depends on the parameters you set and whether you are looking at the returns over one year, three years or five years, and how that works.

Ideally, recognising that pensions are a long-term investment, you would not want to be looking too much at what happens over a short period of time in investment markets; you would want to be looking over a much longer period and at how the underlying strategy is performing. That is always very difficult, and one of the challenges is trying to get the balance right between what you can measure objectively and what you can measure subjectively. Where you are looking at things like an intermediate report, you tend to be looking at something that is objective, and it is quite difficult to do that over a long period of time. There is always a balance to be struck as part of this, and it would be good to investigate that more as we get further through this process, to work out the best way of doing it in order to achieve the best outcome for members.

[Mark Garnier]

If I remember rightly, the Bill allows for the detail to come in afterwards, so we will have a bit of work to do when this is all over. Thank you very much.

[Torsten Bell]

Q We all have work to do; it is never all over. Chris, this question is mainly for you, as I am conscious that you have done lots of work over an extended period on the dashboard. Obviously, there are elements of the Bill that relate to that—mainly relating to the PPF—but not many. However, is there anything you want to tell the Committee about the lessons from it for when we come to the small pots work, which obviously is a central part of the Bill?

Chris Curry: I listened with interest to some of the earlier witnesses talk about dashboards, and there certainly are some lessons that we can learn from the pensions dashboards programme, as it has been evolving over the past few years, for small pots in particular.

There are two issues that I would pull out. The first is on the technology front. I think someone suggested that the next five years or so could be quite a tight timetable to build a technological solution and get it in place. You have to be very careful—you cannot underestimate just how much complexity there is and how long it takes to do these things—but I would say that the work that we have done on pensions dashboards is giving us a bit of a head start. That is not to say that we necessarily need to build on or use parts of the system that we have already built, but it has helped us understand a lot about, for example, how you can find pensions—the way you can use integrated service providers rather than having to go direct to all the schemes, and use a syndicated model to find where people might have their pensions.

It has helped the industry get a long way down the path to where it needs to be, as well. One of the big challenges for pensions dashboards is the quality of data. Enabling individuals to find their pensions means data quality: it needs not only to exist and be there; it needs to be accurate and it needs to be up to date. When you are thinking about an automatic consolidator or default consolidator for small pots, that is even more important. You are not just transferring information, but transferring money, so it is really important that the data is high quality. The work that is being done on pensions dashboards will get people in the industry a long way to having part of that in place as well.

There are definitely lessons that can be learned from how we progressed on the pensions dashboards programme. It has got us much closer to where we would be if we had had a completely blank page to start from, but there is still a reasonable amount of work to do, because it is working in a slightly different way.

--- Later in debate ---

[The Chair]

Thank you very much indeed. I will go immediately to the shadow Minister, Mark Garnier.

[Mark Garnier]

Q Thank you very much for the work you are doing on behalf of pensioners—it is important. Mr Sainsbury, the PPF has some £14 billion in reserves. Could you share with us the main arguments for and against using that to benefit PPF and FAS scheme members?

Roger Sainsbury: In the light of Terry’s extended life history, I will just add that I am a fellow of the Royal Academy of Engineering and a former president of the Institution of Civil Engineers.

Before I come to your important question, I would like to feel sure that everybody in this room really understands the huge seriousness of the issue we are considering. This business of removing indexation from people who had pensionable service prior to 1997 has been going on for 20 years. Many of the people involved have seen the value of their payments eroded by maybe even more than 50% in that time. It is really very serious.

The second thing I would like to mention is that the scale of the problem is actually greater than the Post Office managers scandal. Of course, I am not suggesting for a moment that any of our claimants is suffering in the appalling way the postmasters did, but the numbers of our people are so huge compared with the postmasters that the actual amount of money at stake is greater. We have 140,000 PPF members who are affected by this bizarre clause of limiting the indexation, 60,000 of whom are 80 and have zero indexation, so it is a truly serious thing.

I would also like to mention one other dimension, which is timing. In our written submission to the Committee, we did not even bother to press the basic argument for why indexation should be awarded; we just focused on timing, because time is absolutely not on our side at all. Our claimants are dying, on average, at the rate of 15 a week—it is probably three while we have been holding this meeting this afternoon—or 5,500 a year. We have been told by the Department that the necessary amendment to the Pensions Act 2004 cannot be made by statutory instrument. There would have to be a new Bill and a new Act, and goodness knows how many years that might take or how many more thousands of people would have died. That is why we are pressing to get an amendment to this Bill to give a more timely answer.

Now I come to your question: what are the main arguments for and against using the reserves to benefit the members? Well, the first argument is simple, but really rather powerful: it is the only purpose that, legally, the PPF is allowed to spend its money on. The Act is very clear: unless some legal judgment was made against them, which is not on the horizon at all at the moment, the only way they are allowed to spend money is either on their own overheads or on giving benefits to members, such as the indexation that we are now talking about.

That is reason No. 1; reason No. 2, in my mind, is that expectations have not been met and promises have not been fulfilled. I go back to the Secretary of State who introduced the Second Reading debate on the 2004 Bill. He pledged that pension promises made, by the original schemes that people were in, must be met—that is, met by the PPF, which is the reason why the PPF was to be, by that Act, created. Yet that has not happened because, somehow, into schedule 7 to the Act came these dreadful words that have had the effect of not permitting the PPF to pay any indexation at all to people for time worked prior to 1997.

The third reason—ultimately, this is the important reason—is that the 140,000 people need this money. They desperately do, some of them. I mean, obviously not everybody’s condition is the same, but a lot of people will be suffering real misery and hardship. They need this money. I ask myself: “Were this Government elected on promises of governing with humanity and compassion? Are this Government going to meet that need? Or are they going to walk by on the other side?” I do not myself believe that they are; I believe that they will come up to the mark and find a way through the perceived difficulties that they have.

I think those are probably sufficient reasons to be going on with; as to the reasons against granting this, frankly, I cannot see any.

[Mark Garnier]

Q Well, there is one, which I would like to test both your opinions on. The Government point out that the reserves are on the public sector balance sheet, and therefore are treated as an asset of the Government, which is obviously offset against Government debt. Do you think that is a justifiable reason not to—

Roger Sainsbury: Well, if—

Terry Monk: Can I have a go? Alan, who is sitting behind me, and all of us say that we did the right thing at the right time to secure our futures. There was no risk—we were guaranteed there was no risk. The minimum funding requirement was seriously flawed post-Maxwell. That changed it. We were told our pensions were safe. They were no longer safe—I found out to my cost, and many others did, that our pensions were not safe.

If I try to use the argument to our members that are still alive, “We can’t give you these increases because of the national accounts,” they will say, “Hang on, I did the right thing. I was told my pension was safe. I did the right thing all the way along in my life, and I saved for my future—for my comfortable retirement. I did not want to depend upon the state. I wanted to do it for myself. That is what I was proud to do.” To use the argument that the national accounts do not allow these people to get their benefits? I could not use that argument, whatever the reasons might be behind it.

Roger Sainsbury: May I try to answer your question more specifically? I think that indexation would have an impact upon Government finances. The impact would be that cash would flow into the Treasury, because if indexation is permitted and starts to be paid, there will be income tax paid on that money. The money will be going out from the private funds of the PPF, but the income tax and subsequently the VAT on expenditures will be coming into the Treasury coffers. I have yet to meet anybody, other than people in government, who can comprehend how it can be that when the PPF, from its private funds, meets an obligation, which has the incidental effect of bringing cash into the Government coffers, that can at the same time lead to a failure to meet the fiscal rules.

The fiscal rules, incidentally, are set up for a period of four years, when the unravelling of the indexation obligation will take many decades. We have been told in ministerial letters that it has been set up this way with a view to improving transparency. Well, I am sure you have all heard of the fog of war, but I think we are now up against the fog of transparency. I do not think it is real money that the Government are talking about. Even in their own letters, they say it is a statistical way of handling the figures.

The recent Government line on this is that it is the fault—I do not want to put blame on anybody—or the responsibility of the Office for National Statistics, because it was the Office for National Statistics that decreed that the assets and liabilities of the Pension Protection Fund should be counted as part of the public sector national financial liabilities, rather than as part of the public sector net debt, but that decision was made in 2019. We are therefore more inclined to hold responsible the present Chancellor, who, in her Budget of last October, made the decision that, for the Government financial rules, the metric should no longer be the public sector net debt, but the public sector net financial liabilities. It was that that brought the PPF, as it were, on to this part of the playing field.

[Mark Garnier]

That is very helpful, thank you. I am very conscious that other Members will almost certainly have questions, but I must say that I entirely agree with you that a sum of money set aside for compensation should not be brought into the Government’s balance sheet.

[Steve Darling]

Q Have you done any reviews of the impact of enhancing payments to those in receipt of the financial assistance scheme? You alluded to some suggestions around VAT payments and tax payments if payments were enhanced. Have you engaged with any studies on that, and what that input may be?

Terry Monk: We have looked at all sorts of scenarios. I do not know whether Michelle is still here, but the problem is that, although the PPF has done all sorts of “what if” calculations about all sorts of “what ifs”—we have had copies, and the Work and Pensions Committee has had copies—we do know what the “what if” is. We know what our members have lost, but we will not know, until such time as we hear from the Government, what they are proposing. We have offered time and again to meet not just the current Pensions Minister, but previous Pensions Ministers—I have to say that a few of them would not even meet us. This Minister has met us, and he knows the issues, but we do not know what is in the mind of the DWP or the Treasury in dealing with this issue. Once we know that, we will know whether we are fighting or we are working together, and what the answer will be. To answer your question, there is a net effect benefit of paying that amount, but we are in the dark—we do not know how long the bit of string is.

Roger Sainsbury: Incidentally, one of the benefits of the cash coming in, supposing we do get indexation, is that it would at least make a contribution if the Government had decided they were also going to pay money to the FAS members. It would be a contribution to help offset the Treasury payments that would have to be made for the FAS.

Terry has referred to the situation, but I think the key thing is that in 2023 the Select Committee asked the PPF to provide financial estimates for what it would cost to do indexation. The PPF then produced some really excellent tables that showed a number of different hypothetical systems for delivering indexation. It was a bit like a restaurant menu. There was a possibility to have a scheme that would not be hugely beneficial, but that would not cost all that much money to administer, right through the range to a Rolls-Royce scheme, which would obviously cost a lot more money.

We have been asking for RIPA. Just to be absolutely clear, we are not asking for the grim reaper; we have had enough of him already, with people dying. This the bountiful RIPA—retrospective indexation plus arrears. We are pressing for that, but we did not invent it. It was not invented by the DPA. It was part of the menu that the PPF produced, and we merely picked it from the menu. RIPA is reasonably high up the menu, but it is not at the very top. There are other things that we are not asking for that we might have asked for, so we are not being greedy.

With respect to Terry, we are not bothering too much about what is in the PPF’s mind or in the Government’s mind. We are much more concerned with what we are trying to put into their mind. When we decided to go for pushing for RIPA, it was because RIPA is the minimum scheme of indexation that would have the effect of doing away with what is presently a two-tier membership within the PPF. There are two classes of membership: those with indexation and those without. There is nothing in the Bill making any provision for that. It is grossly unfair and it needs to be done away with, and it just happens that the RIPA option is the minimum way of getting rid of that deplorable two-tier membership. I think that gives you perhaps a fuller answer about the situation.

Terry Monk: Are we virtually out of time?

--- Later in debate ---

[The Chair]

Thank you very much. I will hand over to the shadow Minister.

[Mark Garnier]

Q Thank you very much, and thank you for coming in this afternoon. I do not know how much of this you have listened to, but there are a lot of worries about mandation coming in on pension funds. Of course, this does not include the local government pension scheme, because this is about defined contribution pension funds. However, there are measures in the Bill that enable the Secretary of State to have the powers to issue directions and guidance to local government pension scheme pools. Do you worry that these could be mandation by another method?

Rachel Elwell: The LGPS is already investing significantly in the UK, as you have probably already heard. We invest more than 25% of the assets we look after on behalf of pension funds in the UK, and there is a very good reason for that, which I can explore a bit further if you would find it helpful.

To answer the specific question, I am not concerned that the power will instruct the LGPS to invest in specific things. I think there is a real intent; it would be helpful if the Bill were clear that it would not be against fiduciary duty and would not interfere with the FCA regulations that we are also subject to.

I am very thoughtful about how we carefully manage the weight of capital that might come into the market if there is mandation for the wider industry to move quickly into investing in the UK. Work will need to be done on the supply side as well as the capital side, to ensure that the UK can invest well the capital that should be being invested into the UK. So it is important that any use of mandation is very carefully considered, and that the laws of unintended consequences are really thought through.

[Mark Garnier]

Q Do you think there is a risk that mandation could come in on the LGPS by subtle, behavioural outcomes rather than necessarily through directive outcomes?

Rachel Elwell: I can understand why the Government would want to have a backstop power to direct pools, because the LGPS is significant—it is one of the top 10 globally by size. It has an impact on council tax, and on the economy more generally. If you have a pool that is not delivering and all the other mechanisms available to their stakeholders have failed, I can understand why that power would exist. But it is important that we clear the scenarios in which it is envisaged that it might be used.

[Mark Garnier]

Q On surplus extraction—because there are various different ways you could do it, one of which is a payment holiday or a contribution holiday for local authorities—do you worry that there could be surplus extraction by one form or another, that could reduce the surplus on these funds, thereby increasing risk of liabilities?

Rachel Elwell: History does not necessarily repeat itself, but it is important that we learn from that. The LGPS, and pensions more generally in the UK, have had many, many decades—including through the ’90s, having to manage the fact that there were contribution holidays taken that were using surpluses very quickly. Actuaries have the ability to work with all employers, including those in the LGPS, to smooth out that experience. Where you have a surplus, some of that could absolutely be used to help manage the costs over the long term, and when you have a deficit, you do not try to pay that all off very quickly, so I think there is an opportunity. I am not worried about it because I can see that the LGPS is a very well run, well governed scheme. It has good advice from its actuaries and is well used to making sure that both surpluses and deficits are smoothed over time.

[Mark Garnier]

Q I have one final question, if I may. You run a pool of 11 funds. This is taking 87 into six. Everybody seems to think that is a good idea. Are you included in the “everybody”?

Rachel Elwell: I do think there is a fantastic opportunity for us to harness the benefits of scale that come from being one of the top 10 globally by size, but it is important, as we do that, that we maintain the link to local people who are the members of this.

[Mark Garnier]

Q This is tricky, though, is it not? Because there is no geographical definition of those six pools, Cornwall could, as I mentioned earlier, find itself investing in Leeds. That would be lovely for you in Leeds, but it would not be so great for people down in Penzance.

Rachel Elwell: Border to Coast, if we do have those 18, will stretch from the Scottish border to the southern coast. Even today, we have partner funds who are right across England, which is brilliant because those are people who have actively chosen to come together, form a partnership and work together.

Time permitting, if it is of interest to the Committee, we could talk a bit more about local investment and the way of getting investment that is truly local for each individual fund but also a way of crowding investment from other people into the slightly larger opportunities that might be in a region. Every investment we make is local—it impacts local people.

You do not need to only have, for example, Durham council investing in Durham. You want all of the LGPS and all asset owners to feel that they can do that. Some of the ways that we are working through doing local investment with our partner funds have really got an eye to the different ways in which you can crowd in versus something very specific that needs to be addressed in the region or locality.

[Torsten Bell]

Q It is lovely to see you again, Rachel. Thanks for making the time today. A few people have asked questions about the LGPS through the lens of member engagement. There are obviously some implications with the move into greater pooling for that. Given that you are running that and seeing it up close, it would be good to hear your reflections on how that currently operates, as you have seen it over the last few years.

Rachel Elwell: Again, for all of us working in the LGPS, that sense of purpose is really important. I know my partner funds do a huge amount to make sure they are engaging directly with members, running events, as well as the importance of member representation on the pensions committees and on the pension boards, whether that is through union representation, pensioner representation or other scheme member representation.

We also have two fantastic scheme member representatives on our joint committee, which is the body that comes together across all of the partner funds to oversee and engage with what we are doing on their behalf. They are really bringing that voice into our considerations as a board and the wider organisation—the wider partnership.

--- Later in debate ---

[The Chair]

We will now hear oral evidence from Torsten Bell, who is the Minister for Pensions at the Department for Work and Pensions. We know who you are, but for the record and for those in the Public Gallery and watching the broadcast, would you kindly introduce yourself?

Torsten Bell: I am Torsten Bell, and I am the Pensions Minister.

[Mark Garnier]

Q Minister, thank you for coming to give evidence—we have a long few weeks together. I will start with the evidence we heard from the Deprived Pensioners Association and the Pensions Action Group. I was rather surprised to hear that a fund that had been put aside, worth £14 billion, has now been taken into the Government’s balance sheet, when in fact that money is there to pay for the exact issues that were raised by those two witnesses. However, we suddenly find that the money is being used to fill in a £50 billion black hole—discuss.

Torsten Bell: No, obviously. The change that you are referring to is a 2019 change under the last Government. It was taken not by the last Government but by the Office for National Statistics, and it refers not just to the PPF but to funded public sector pension schemes. The same issues apply to the LGPS in the same way. It is a 2019 change made by the statistics body following international guidance on accounting. The changes you are talking about have affected public sector borrowing since then.

[Mark Garnier]

Q Yes, but there is a serious issue here, which is that you are now the Minister for Pensions and in a position to be able to do something about this. We can look back on the last 14 years and have that conversation—let us get that out of the way—but here is your opportunity to resolve this problem.

Torsten Bell: In stark contrast to lots of my predecessors, I have to say, I have spent a lot of time meeting members of both the PPF and the FAS who have been affected by the issue of pre-1997 accruals. If I am honest, the issue has been a real one since then, but it is a significantly bigger one because of the recent phase of high inflation, which made the pace of inflation eating into the real value of those pensions significantly faster. As I said on Second Reading—this was raised then by a number of colleagues on the Committee—we are considering the issue, but it needs to be considered in the round because of the wider public finance implications. That applies to other issues in this space as well; you will have seen that in other pension schemes where the Government have a role.

[Mark Garnier]

Q When you talk about the wider public finance implications, I completely get it; we understand that there is a lot of debt and all the rest of it. The bit I am struggling with is that this is a fund that is set aside for exactly this type of thing. It worries me—and I hope it worries other colleagues on the Committee—that a fund that had been earmarked for specifically this type of thing is now being earmarked for something else.

Torsten Bell: To be clear, that is just wrong—it is not. The 2004 Act is very clear about the purposes for which the board’s assets can be used, and there is no question about that. The Office for National Statistics does not get to countermand Acts of Parliament on the use of resources—the 2004 Act is very clear on that. It is nothing to do with that.

If you look at the public sector finances in the round, there are all kinds of different forms of funds that are classified in different ways. The classification within the public finances is not determining the use to which funds can be put. The same applies to whether things are classified as taxes or not. They do their job, and obviously those classifications exist for an important reason, which is that we need to have clarity about the public finances. We use those for discipline in terms of making sure that Government objectives in fiscal policy have metrics that they can be tied to. It is totally reasonable for different parties to take different positions on what those metrics should be. There have been different choices made on that by lots of different parties in recent years, but I think everybody in this room probably accepts that you need to have those metrics. When you accept that, you will be in a situation where classifications by the Office for National Statistics impact on those.

[Mark Garnier]

Q I move on to value for money, something which, in the broadest sense, everybody seems to agree is a good thing, but I want to pick up on a couple of points. In the evidence given to us by Michelle Ostermann, she made the very interesting point that one problem we have in the UK is that we have not derisked our pension industry. People are still worried about the risks of the pension industry. But she did make the point, which I am sure you will agree with, that you can leverage growth of the economy through leveraging pension fund investment. I think that is something that we both agree with. It goes with the grain of the Bill, and we both want to do that.

We heard some interesting evidence from Phoenix, who referred to clause 15 and the consequences of an intermediate performance rating. While we are going to have big arguments about mandation—that is something we fundamentally disagree on—one thing I hope we can both agree on, as we progress this, is that certain elements of the Bill could have unintended consequences. It seems that this one, the intermediate rating, could have the effect of maintaining the derisking of pension funds, because you are trying to avoid getting an intermediate rating and therefore you will avoid doing the slightly more progressed growth. Sorry; I am being incredibly inarticulate after rather a long day, but you know the point I am trying to make.

Torsten Bell: I definitely get the point you are making. Let me say one thing about the big picture, and then I will talk about the specifics you raise with the intermediate rating. On the big picture, I absolutely agree that one thing we have done badly in the last 30 years is to think about how changes we make to our pension system, which exists to provide income in retirement for the vast majority of the population, also underpin our capitalism. That is a lesson we have learned painfully.

On the substance of risk reduction, I would put it slightly differently, because you have different things going on in the DB and DC landscapes. In the DC landscape, we have been building up a new system. Understandably, because it was starting from small scale, we did not jump to trying to solve all the problems that came with that system, not least getting it to scale, not least what happens in retirement, and not least small pots and the rest. I see this Bill as doing that—taking the next step forward and saying, “Right, we are building this new system. We made big progress in the last 15 years with that, but now is the time to put the change in place.”

On scale and on value for money, that will support the wider range of investments more broadly, not just in the UK, but with a wider range of assets. That is absolutely the right thing, in savers’ interests, to do. I also completely endorse your point on unintended consequences, and that is exactly why scrutiny of the Bill is important to make sure that we pick those up as we go. The last 40 years, not just in this country but in others, shows that that can be the case, for good and ill.

Specifically on your point about the intermediate rating, we are very much aware of the issue. We are not aiming to replicate a hard metric: “fall one side of this line, and suddenly you are de-authorised from taking auto-enrolment contributions”. That is exactly what we need to avoid, which is what we will be doing. There is a reason behind the provision for more than one level of intermediate ranking, and my view would be that you would not expect people who fall into some of those levels being banned from taking further contributions. It is absolutely right that you do not want an absolute binary—just one metric, one division. The consultations that the FCA and TPR have taken forward are all about making sure that we have worked all those issues through. There are lessons, for example, from what happened in Australia.

[Mark Garnier]

Q I have one very last question, if I may, going back to the mandation piece and the evidence that we heard from Helen Forrest Hall. The mandation piece is a reserved power, with a sunset clause in, I think, 2035. I have discussed with another member of this Committee how that reserved power will encourage pension funds to take action and potentially invest more into the UK, which is a good thing—we all agree with that. However, interestingly, Helen Forrest Hall made the point that because there are potentially 10 years in which this could happen, it may cause a reluctance to do the right thing. Actually, the right thing could be to invest in other countries. If we are having a fundamental problem here and there is growth in the economies of, say, the Asia-Pacific rim, the right thing might be to invest there. Investing there might support British businesses, by the way, although it would not necessarily benefit the UK economy. There could be perverse outcomes in investment management behaviour because that reserve power is something in reserve, even if it is never used. Have you thought that through?

Torsten Bell: I understand the point you are making. I think you have to step back to the big picture, which is a consensus right across the industry that savers’ interests would be better served by change. It does not make sense that the UK industry is a complete outlier compared with other pensions systems around the world when it comes to exposure to wider ranges of assets. What comes with that exposure to a wider range of assets? The nature of assets, where you are likely to see a larger home bias in that more of them would be in the UK.

There is a wider point: is there a good reason why the UK DC pension landscape has a particularly large exposure to equities rather than to a wider range of assets that we see around the rest of the world? No. That is why you have seen the Mansion House accord coming forward—because it is in savers’ interests to change how we are operating. The scale and value-for-money measures, and a lot of the other approaches that we are taking, will facilitate that, but the industry is saying that that is in savers’ interests, and it is right to do so.

Ultimately, we have to step back and say that we are not in the business of just making individual random decisions about the pensions system. The question is: what is there a consensus on about the world we need to move to that has a better equilibrium? One of the strong elements of that, along with larger scale, is investing in a wider range of assets because that is in savers’ interests. That is why there is a voluntary Mansion House accord, setting that out as the objective, with relatively low levels of target, particularly on domestic investment, compared with what we see in other countries. That is what is going on.

What we are saying is that when you speak to the industry, particularly in private, it is very clear that there is a risk of a collective action problem. Under previous Conservative Chancellors, it signed up to commitments that it has not been delivering. Why has it not been delivering? Because of the collective action problem—the risk of being undercut by somebody else who is not making that change because of the nature of a market that is too focused on cost and not focused enough on returns.

I make only one vaguely political point. It is easy to join people in being anxious, but we have to ask ourselves something. There is a reason why the first Mansion House compact was not delivered. Do we want to be here in 15 years saying, “Actually, we all signed up to it and said it needed to happen, but it hasn’t”? No—I am not prepared to do that. Change is going to come. Everybody says that change needs to come because it is in members’ interests. All the reserve power does is to say that it is going to happen.

[Mark Garnier]

Thank you very much.

[Steve Darling]

Q I have two key questions. We have heard repeatedly in evidence today about questions to do with secondary legislation and guidance. As we go through the Bill Committee and further stages, what confidence do you have as Minister that you will be able to give some clear signalling to the industry about what is likely to be in that guidance and legislation, to drive the confidence it needs in the short to long term?

The other area that I want to ask about relates to the information that we heard from Nest: only 40% of its members had signed up online. That demonstrates that the issue is about getting positive engagement from those who are perhaps less financially secure. Are you confident that we are doing all we can through the Bill to help those who are most financially challenged? How are you going to hold yourself to account as we proceed to ensure that that is the case?

Torsten Bell: Those are great questions. On regulations, you are absolutely right. This pensions Bill, like most recent ones—although there have been exceptions that have come with unintended side effects, to go back to what was just mentioned—does rely heavily on secondary legislation. My view is that that is the right thing to do and is almost in the nature of pension schemes. That is partly because the detail should rightly be consulted on and partly because things will change in the context.

You are right that there is a large reliance on secondary legislation. Yes, in some areas, as we go through the detail, clause by clause, we will be able to set out to you where our thinking is up to. In lots of cases you will already see consultations by the FCA and TPR, starting to develop the work that will then feed into the regulations—that is particularly true, for example, on value for money, which we have just been discussing. I also think that it is important for us to provide clarity on when we will bring forward those regulations and when we will consult on the input to them, so that people know that. That was why, when we published the pensions reform road map, and when we published the Bill itself, I set out when we anticipate bringing forward those regulations so that everyone in the industry and in the House can see when that will happen. Page 17 of the road map sets out how we envisage that happening, and it is absolutely right. When we come to the clause-by-clause discussion, there will certainly be things where we will not be able to say, “This is exactly what will happen,” and rightly, because there needs to be further consultation with the industry on those things.

On the broader question of engagement with people, particularly those with smaller pensions—there is a very heavy correlation between the chance of someone being engaged with their pension and the size of that pension pot, partly for obvious reasons, but for wider context reasons, too—the pensions dashboard that Chris Curry mentioned earlier is a large part of facilitating that engagement. Lots of countries have had versions of the dashboard; it does make a material effect. One of the lessons from Australia is that the average size of DC pots, as they start to build rapidly—as that becomes the default system in an auto-enrolment world—does have a material effect.

I was with someone who runs one of the big supers recently; her view was that they hit a tipping point when there was suddenly this huge engagement where people were looking at the app provided by the super every week. There are pros and cons to that, by the way. Remember that there is a reason why we default people into pension savings. There are good and bad ways to engage with your pension. We do not want people on an app, in the face of a short-term stock market downturn, making drastic decisions to do with their investments that have long-lasting consequences. It needs to be done right; that is exactly why, when it comes to the dashboard, we are user testing it extensively.

Pension Schemes Bill (Third sitting)

Mark Garnier Excerpts

Committee stage
Thursday 4th September 2025 Public Bill Committees

[Torsten Bell]

Before I turn to the amendments, I should briefly outline the reform of the local government pension scheme, for which chapter 1 provides the legislative underpinning. The LGPS is the largest pension scheme in the UK, with £400 billion of assets under management, projected to rise to almost £1 trillion by 2040. However, I think it is a matter of cross-party consensus that the LGPS has not realised its full potential, not least because it is too fragmented.

The first chapter of the Bill sets out the legislative basis for reform to modernise the LGPS’s investment framework and governance arrangements, setting robust new standards that all pools must meet, including Financial Conduct Authority authorisation, the capacity and expertise to manage 100% of their partner authorities’ assets, and the ability to deliver on local investment mandates. As part of the reforms, the LGPS will move from eight pools to six. We have set a deadline for the new pool partnerships to be agreed in principle by the end of this month, with new shareholder arrangements in place by March 2026.

The clauses in chapter 1 would mean that by this time next year we will see a world-class LGPS, made up of large pools of professionally managed capital, held to account by authorities who have confidence in robust and transparent governance structures, and who together are delivering the best value for members. I remind the Committee that LGPS members’ benefits are guaranteed in statute, and nothing that we discuss today will affect any of those benefits.

These amendments will extend the LGPS provisions to Scotland. There is a wide range of amendments, but they all have the same objective: to take the matters relating to England and Wales and ensure that those are provided for in the case of Scotland. The Government are making this provision following a formal request from the Scottish Government, and I have written again to the Scottish Government this morning for the legislative consent motion that they will need to put in train to go alongside it. Amendments will be needed in respect of clauses 1, 2, 4 and 7 to give effect to that objective, and that is what the Government amendments in this group do. I commend them to the Committee.

[Mark Garnier (Wyre Forest) (Con)]

It is great to be starting what I hope will be quite a quick canter through today’s work, Sir Christopher. The Opposition welcome the broad grain of this entire Bill; it seeks to do a lot of very useful things in the pension industry across the UK. We have some contentious points, but those will not come up today.

Regarding clause 1, we welcome the creation of asset pool companies. These are sensible and pragmatic steps towards modernising the local government pension scheme, and much of the work had already been done under the previous Government. Consolidating funds represents a responsible approach that should deliver more effective management and investment of pension assets. The LGPS, as we have heard, is among the largest pension schemes in the UK, with 6.7 million members and £391 billion of capital. Before pooling, of course, it was 86 separate local authorities, which caused huge inefficiency, inequality of opportunities and, in some cases, poorer outcomes for pension beneficiaries.

I should mention at this point, Sir Christopher, that I am a member of the LGPS and also that, as a councillor on Forest of Dean district council, I was responsible for looking after some of this activity in terms of pension management. It was not an efficient way of doing things, so pooling is an incredibly good idea. We welcome the Government’s continuing our work to make these pension funds work more efficiently and deliver better returns for members, and ultimately we all want to see improved returns and lower employer contributions. Small funds, whether in local government or elsewhere, are rarely fit for purpose in the global investment environment.

We have some concerns. The broad framing of the powers contained in chapter 1, clause 1 could allow for the mandation of certain investments by Government. Pools should be investing in line with the investment approach set out by their underlying asset owners in order to deliver against the fiduciary duties of LGPS funds. Governments should not take powers that would erode fiduciary duty.

There are concerns about the costs of the Government’s decision to reduce the number of asset pools from eight to six. This is an administrative cost. We have heard from one council, Wiltshire, which is one of 21 LGPS funds in England now looking for a new pooling partner. Jennifer Devine, head of the Wiltshire pension fund, has said that the cost of closing its asset pool could come to as much as £100 million. There will be some costs incurred, but, none the less, the general thrust of the whole process is one that we support and we certainly would not stand in the way of these amendments.

[Steve Darling (Torbay) (LD)]

As the Liberal Democrat spokesperson, and echoing the hon. Member for Wyre Forest, I broadly welcome the thrust of the Bill. We heard in evidence that a lot of the industry is playing catch-up and is about 15 years behind those who are best in class. As Liberal Democrats, we are keen to make sure that we are supporting particularly those who are more challenged in being able to save or to make the right decisions, and that we use what levers we can to tackle issues such as climate change and cleaning up our environment. We look forward to working with colleagues on this Committee.

On the local government pension schemes and the pots, we welcome the direction of travel. However, for us it is about making sure that we keep local links to communities, and driving positive change through that investment in our local communities is absolutely essential. I look forward to the debates over the next few weeks.

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[Torsten Bell]

We turn now to three technical amendments concerning the powers to direct asset pools, which I mentioned in my previous speech.

Amendment 9 ensures that a pool must comply with the use of the power to direct administering authorities to join a particular asset pool, matching powers brought forward in clause 1 of the Pensions Bill. These are powers of last resort. Amendment 13 responds to feedback and removes the power to issue directions to asset pool companies relating to specific investment management decisions. It was never the Government’s intention to intervene in those decisions by pools, so we are removing that sub-paragraph to provide clarity. Amendment 14 adds a duty for Ministers to consult the affected parties before issuing directions more generally. I commend the amendments to the Committee.

[Mark Garnier]

In the interest of speed, I will not speak to these amendments, other than to say that we have no objection to them.

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[Torsten Bell]

I beg to move amendment 15, in clause 1, page 2, line 34, leave out from “company” to end of line 40 and insert

“limited by shares and registered in the United Kingdom which is established for purposes consisting of or including—

(i) managing funds or other assets for which its participating scheme managers are responsible, and

(ii) making and managing investments on behalf of those scheme managers (whether directly or through one or more collective investment vehicles),

and whose shareholders consist only of scheme managers, and”.

The amendment revises the definition of asset pool company to clarify (a) that the company should be limited by shares held by scheme managers only and registered in any part of the UK and (b) that the mandatory main purposes described in sub-paragraphs (i) and (ii) need not be the only purposes of the company.

The amendment revises the definition of an asset pool company to clarify that they can be established anywhere in the UK and that only LGPS administering authorities can be shareholders of those pools. The amendment also removes limits on the purposes of an asset pool company, making it clear that asset pool companies are free to provide advisory services and perform other functions in addition to their primary purpose of providing management services. The Government do not want to stifle innovation from asset pool companies as they continue to evolve from strength to strength. The amendment makes sure that that is not the case. I commend the amendment to the Committee.

[Mark Garnier]

I have just one question for the Minister. How are the shareholdings to be decided? Will they be determined based on the size of the investment, and how will the Government decide between councils having shareholders or contracting with asset pool companies? That is my only comment.

[Torsten Bell]

It is for those forming the pooling companies to agree their own arrangements. The hon. Member rightly raises the question whether people are shareholders or clients of a pool. There is only one current administering authority that is a client rather than a shareholder of a pool, so in the overwhelming majority of circumstances we are talking about shareholders. However, the legislative basis for the pooling allows for that in future, if for some reason that was the way forward that some administering authorities and pools chose. Broadly, the same picture applies to most questions in this space: we expect administering authorities and pools to work together to agree their governance arrangements, and that is what they are doing.

Amendment 15 agreed to.

Clause 1, as amended, ordered to stand part of the Bill.

Clause 2

Asset management

Amendments made: 16, in clause 2, page 3, line 5, leave out “for England and Wales”.

The amendment would secure that Clause 2 applies to scheme regulations relating to pension scheme for local government workers for Scotland, as well as scheme regulations relating to a scheme for local government workers in England and Wales. Clause 1 does not extend to Northern Ireland (see Clause 100).

Amendment 17, in clause 2, page 3, line 23, at beginning insert

“in the case of a scheme for local government workers for England and Wales,”.—(Torsten Bell.)

The amendment would secure that, despite the general extension of the scope of application of Clause 2 to Scotland (see Amendment 16), subsection (2)(c) will remain of relevance only to scheme regulations relating to England and Wales.

[Mark Garnier]

I beg to move amendment 246, in clause 2, page 3, line 33, at end insert—

“(4A) Scheme managers must publish a report annually on the local investments within their asset pool company.

(4B) A report published under section (4A) must include—

(a) the extent, and

(b) financial performance,

of these investments.”

This amendment provides for scheme managers to report back on the financial performance of any local investments that they might make.

Clause 2 places important requirements on pension scheme managers regarding how they manage pension funds for local government workers, requiring formulation, publication and review of investment strategies. The Bill encourages investment through asset pool companies and emphasises local investments. However, the Opposition’s key concern is that the primary purpose must remain the delivery of strong financial returns for pension funds. Those returns ultimately belong to the pension fund members, but council tax payers also have a responsibility, as they support these schemes. Investment decisions must prioritise financial performance that ensures sustainable pensions while safeguarding public funds.

Although we acknowledge that local investments can bring benefits to local communities and local economies, they should only be a secondary focus and should not compromise returns. Local investment should be considered as an additional benefit, but the overriding duty of scheme managers is to act prudently and in the best financial interests of the scheme members and taxpayers. We caution against overweighing local investment priorities if that risks undermining the long-term financial health of these pension funds. In short, financial returns must come first; local investments can follow, but must not take precedence.

Pensions UK has questioned the need for these new powers and believes that they are too far-reaching. LGPS reform is already progressing at pace, and pools and funds are collaborating in line with the direction set by the Government. Pensions UK would like to understand what specific risks the Government are seeking to manage through the introduction of these powers, and it is seeking amendments to the Bill to ensure that if these powers remain in the Bill, they will only be exercised after other avenues have been exhausted, to guard against adverse outcomes for the pools, funds and scheme members.

The Pensions Management Institute has highlighted that the administering authorities will be required to take their principal advice on their investment strategies from the pool. Given that an administering authority is required to invest all of its assets via the pool, this is a major conflict of interest and puts a significant burden on the administering authority or scheme manager to ensure that the pool is performing effectively, with no independent checks and balances.

The Bill makes it clear that co-operation with strategic authorities, such as regional combined authorities, on appropriate investments will be required. However, there is a risk of investment decisions being influenced by political and local interests. The fiduciary duty should always prevail when local investments are considered. We do not oppose the clause, but we call on scheme managers to maintain discipline in prioritising sustainable returns, with local investments as a welcome but secondary consideration.

We are considering three amendments with this clause. There is uncertainty about what qualifies as a local investment for LGPS funds, how such investments are defined and what assets or projects will meet the requirements under the new rules. In addition, we do not want to shift the focus away from the fiduciary duty of trustees to local investments that might not deliver the best-value returns on schemes. Amendment 246 provides for scheme managers to report back clearly on the financial performance of any local investments that they might make. Scheme managers at local councils should charge the asset pool companies with finding the best value.

Although we are not opposed to local investment, the focus of trustees must clearly remain on achieving best value, and the better performance of a pension fund means that local councils can already use their powers under regulations 64 and 64A of the Local Government Pension Scheme Regulations 2013. Consequently, we can argue that LGPS megafunds with a focus on best returns can lead to more a fully funded council and therefore to employer contribution holidays.

Sir Christopher, would it be helpful for me to speak to the other amendments?

[The Chair]

No, it would not, because they are not grouped with this one.

[Mark Garnier]

That is fine. It has been a few months since I last participated in a Bill Committee, Sir Christopher, so thank you for your advice.

We are not proposing to press this amendment to a vote, but I would be very grateful if the Minister could respond to my points and undertake to take them away and consider how advice can be given to these pool managers to ensure that the issues I have mentioned are taken into account.

[The Chair]

I refer Members to the Chair’s provisional selection and grouping of amendments, which should give them a guide as to which amendments are grouped and which are not.

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[Torsten Bell]

I will try to confine my remarks to the amendment and the points made about it; I am not going to encourage us to focus on the grouping provided. I thank the hon. Member for Wyre Forest for the amendment. I agree with him on many points he made, including that the LGPS is a success story for local investment, with authorities and pools already playing a major role in their communities. We are committed to ensuring that continues, but we also need to ensure it is done in the right way, delivering the right returns for each scheme.

As I said, every LGPS authority will be required to set out its approach to local investment in its investment strategy, providing some of the transparency that the hon. Member for Aberdeen North just set out, including their target allocation. They will need to have regard to existing local plans and priorities. I want to offer the hon. Member for Wyre Forest some reassurance—this goes directly to the point made by the hon. Member for Aberdeen North—that via regulations and guidance, we will already require each pool to report annually on local investments made on behalf of their authorities. The intention of the amendment will be delivered via those regulations and that guidance. On that basis, I am glad that he intends to withdraw his amendment, but I recognise his point.

On the wider question of pool advice, and whether there is a risk of pressure from strategic authorities to make investment decisions that are not consistent with their fiduciary duty, the hon. Member for Wyre Forest should see these reforms as supporting in that respect. Remember that these pools will now all be FCA-authorised. There are significantly improved governance arrangements. If anything, this should provide certainty. It should already not be the case legally, anyway, but the stronger governance arrangements will support that.

The hon. Member for Torbay rightly asked about how administering authorities and pools will think about the balance, weighing the impact on their local economy. As he will be aware, the fiduciary duties are clear about what the objective is, and the Bill is clear on the respective roles, both of the administering authorities in setting their strategic asset allocation, including to local investments, and of the pools in making those decisions, taking into account the available returns. I think that provides much of the balance that he rightly pointed out is an inevitable issue within this. I should also be clear that the LGPS will invest not just across the whole of the UK—rather than just in individual areas—as the hon. Member for Torbay talked about, but also around the world. That is what the LGPS does today and will continue to do.

[Mark Garnier]

I am reassured by the Minister’s comments. I beg to ask to leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Mark Garnier]

I beg to move amendment 245, in clause 2, page 3, line 39, leave out from first “in” to end of line 39.

This amendment changes the definition of local investment to remove the reference to the benefit of persons living or working.

This amendment runs closely with amendment 246. Amendment 245 changes the definition of local investment to remove ambiguous reference to the benefit of persons living or working in the area. It is a small, technical amendment, but it is about giving more focus on the key need to members of the fund.

[Mr Bedford]

At present, the Bill arguably lacks a clear definition of how the priorities of the asset pools must follow, particularly on what qualifies as local investments. Our amendment seeks to address that gap by simplifying this. Put simply, we believe that local should mean local. These asset pools should prioritise investment in large-scale projects, actively promote local growth or make tangible improvements in local infrastructure—improvements that directly benefit the people in that local area.

Where no such opportunities exist, other investment options should be considered, but we cannot allow a situation where, for example, an LGPS fund raised in the midlands is continuously redirected elsewhere in the country. Unfortunately, the Bill appears to suggest that the other areas included in the consolidated LGPS schemes could benefit disproportionately. My constituents may ask me, “Why aren’t these funds being used locally by investing in local opportunities, rather than being gifted to councils in other areas of the country, assisting in the same way?” I believe the amendment will add clarity on that to the Bill, and I would welcome the Minister’s comments on it.

[Torsten Bell]

I will give a very short speech because the hon. Member for Aberdeen North has just made every single point that I was going to make. I understand the motivation behind the amendment, but we do not support it because it would prevent investments that straddle boundaries—for example, investments in transport and infrastructure that would benefit people living in both Wales and neighbouring English counties. We have heard other examples as well. It would be wrong to limit authorities in where they could invest in this way. I ask the hon. Member for Wyre Forest to withdraw the amendment as it unnecessarily limits the remit of local investment.

[Mark Garnier]

I thank the Minister and wish him many happy returns. I hope that he has a happy birthday. We are satisfied with the Minister’s comments. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause, as amended, stand part of the Bill.

[The Chair]

With this it will be convenient to discuss new clause 31— Guidance on utilising surpluses—

“(1) The Secretary of State must publish guidance on the utilisation of surpluses within the Local Government Pension Scheme.

(2) Guidance must include—

(a) information about maintaining scheme members’ financial security;

(b) how the surplus can best support local fiscal needs.”.

This new clause requires Secretary of State to publish guidance on how surpluses can be deployed to balance member security with local fiscal needs.

--- Later in debate ---

[Torsten Bell]

That is the only way that I have seen taken up by local authorities, and it is the main one that local authorities are discussing, although, as I have said, that is a decision for them. I hope that at least partially answers the hon. Lady’s question. I commend clause 2 to the Committee, and ask the hon. Member for Wyre Forest to withdraw his new clause.

[Mark Garnier]

On new clause 31, as we have heard, the local government pension scheme in England and Wales has reached a record surplus of some £45 billion, which is 112% of funding levels, as of June 2024, with some estimating that it will rise to more than 125% by the end of 2025. Despite that strong funding position, no measures have been introduced to make it easier to allow councils or employers to reduce contributions or take contribution holidays. The surplus could be used to create contribution holidays for local authorities, as we have heard, or potentially to reduce council tax or increase the money available for spending on local services.

The current Government focus remains on asset pooling and local investment strategies, rather than enabling the more immediate and flexible use of surplus funds. Councils can already reduce employer contributions under regulations 64 and 64A of the Local Government Pension Scheme Regulations 2013. The problem is that, in practice, actuaries and administering authorities hold the cards, and the guidance has been used to shut down reviews even when funding levels are strong.

The Minister needs to consider issuing better guidance to councils to make the process more transparent, to rebalance the power between councils and funds, and to ensure that actuaries properly consider reductions when the funding position justifies it. The mechanisms that are currently in place mean that the assumptions are overly prudent, reviews come only in cycles, and councils have no leverage in disputes.

New clause 31 seeks to introduce provisions to allow employers within the local government pension scheme to take contribution holidays or reduce employer contributions when surplus funding is confirmed, with actuarial valuations, subject to maintaining the security of member benefits. It would also require the Secretary of State to issue guidance on how surpluses could be prudently deployed to balance member security with local fiscal needs. That would enable councils to better manage budgets, support local services and stimulate local economies without compromising pension schemes.

However, the Minister seems to be working with the Opposition on trying to find ways to move all this forward, so for the sake of brevity we will seek to withdraw new clause 31.

[Steve Darling]

The Minister spoke of a couple of opportunities for regulation in this area, and we heard oral evidence about how an awful lot of this Bill is to be drawn out in secondary legislation. Will he give us timelines for when he plans to share the regulations, or at least begin the consultation on them, and say what he sees as the key elements of those regulations that will break cover in due course?

Question put and agreed to.

Clause 2, as amended, accordingly ordered to stand part of the Bill.

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[Torsten Bell]

I am happy to give that commitment. I am not aware of any administering authorities in Scotland that would be affected, but I am happy to take that point away.

Question put and agreed to.

Clause 4, as amended, accordingly ordered to stand part of the Bill.

Clause 5

Mergers of funds

[Mark Garnier]

I beg to move amendment 244, in clause 5, page 6, line 6, at end insert—

“(2) In the case of merger of schemes for local government workers, the Secretary of State must consider the geography of scheme areas and ensure these areas align with strategic authority boundaries before implementing the merger.”

This amendment requires the Government to explicitly consider the geography of new LGPS areas in any reorganisation.

The amendment would amend the Public Service Pensions Act 2013 to explicitly empower the Secretary of State to make regulations if there was a merger, including a compulsory merger, of two or more LGPS-funded schemes. The change in clause 5 would support flexibility for structural consolidation to enhance fund management and efficiencies; however, there is uncertainty about how the Government will confirm geographical boundaries for the local government pension scheme asset pools amid local government reorganisation.

Currently, LGPS reform aims to consolidate assets and strengthen local investment, but concerns remain about the implementation timescales and risks of disruption. Stakeholders highlight the need for clarity on new geographical boundary definitions and on alignment with new or existing local authority boundaries. Potential challenges exist in meeting asset-pooling and Government deadlines if changes coincide with wider local government changes.

Amendment 244 would require the Secretary of State to explicitly consider, for any LGPS scheme merger, the geography of scheme areas, and ensure alignment with strategic authority boundaries. This would help to provide clarity, promote smoother transitions and reduce disruption from concurrent local government reorganisations. The amendment emphasises the importance of integrating pension scheme boundaries with local government structures to support effective government and investment strategies. We hope the Government will reflect on this issue as the Bill progresses through the House.

[Steve Darling]

As the Lib Dem spokesman for this part of the Bill, I welcome the direction of travel.

[Torsten Bell]

I thank the hon. Member for Wyre Forest for the amendment and for the points he raised. Amendment 244 would amend clause 5 to allow fund mergers only if the two funds are in the same strategic authority, so it would be a highly constraining power. I recognise the logic, but our view is that it is far too constraining.

I emphasise to Members that the Government do not have any plans to require the mergers of LGPS funds, and that our strong preference is that when mergers take place, that happens by agreement between the administering authorities. The Government would use the power to require a merger of pension funds only as a last resort, if local decision making failed to deliver satisfactory arrangements.

I reassure Members that during the reform process Ministers and officials have looked carefully at how local government reorganisation, which is ongoing and very important, as the hon. Member for Wyre Forest rightly pointed out, maps on to the existing LGPS geography, and we will continue to do so. There should not be any friction between the emerging unitary structures and the LGPS. I reassure the Opposition that the administering authorities that were in the Brunel and Access pools are already carefully considering their choice of a new pool in the light of local government reorganisation.

In summary, it is important that local government pension funds and Ministers retain flexibility in their decision making so that decisions can be taken in the best interests of the relevant scheme. I ask the hon. Member to withdraw amendment 244.

[Mark Garnier]

I am reassured by the Minister’s comments and appreciate that he wishes to make the measure work in the interests, geographically, of local government or local authorities as they undergo a transition through the reorganisation of local authorities. Obviously, this provision needs to work concurrently with that process, but I appreciate that it is up to the authorities in the first instance. We wanted to be reassured, and the Minister has made the point that there will be no or little Government interference unless they really do disagree with themselves. I am reassured.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

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[Torsten Bell]

Thank you, Sir Christopher, for the progress through the local government pension schemes part of the Bill. We now move on to the defined-benefit clauses. Clause 8, which amends the Pensions Act 1995, enables trustees of private sector defined-benefit schemes to modify their schemes to safely share surplus funds with the sponsoring employer. Through that change, trustees will also be better placed to negotiate with sponsoring employers to get additional benefits from surplus for scheme members.

I know that Members here—that is, hon. Members rather than scheme members—are keen to ensure that the security of pensions is not impacted by these changes. We have consulted on this point and several restrictions are in place that are outlined in clause 9. I will outline the core protections.

First, trustees will remain in the driver’s seat, deciding whether to modify scheme rules to allow surplus release from their individual schemes in line with their duty to the interests of the beneficiaries. Secondly, a prudent funding threshold for surplus release will be set out in regulations, on which we will consult. Surplus will be released only where a scheme is fully funded at a low dependency, which means that the scheme funding is sufficiently high to allow trustees to meet future liabilities with a very low risk of future employer contributions. Thirdly, trustees must obtain actuarial certification to demonstrate that the scheme meets these funding requirements and members must be notified before surplus funds are released.

The amendments clarify two points. First, the treatment of particular cases, such as sectionalised schemes—schemes that have multiple parts to them—is usually set out in regulations. Amendment 27 enables regulations to specify how the new powers to modify by resolution will apply in such cases—for example, to ensure that each section in a sectionalised scheme is treated as a scheme in its own right for the purposes of this power specifically.

Secondly, the power in the clause is not intended to affect schemes in wind up where the majority of schemes will have existing rules about how surplus should be distributed at the point of wind up. The amendment clarifies that when trustees consider the exercise of the power to modify, any separate power to repay surplus on winding up is disregarded. Equally, the new power in clause 8 cannot be used to introduce a power or to modify an existing power to release surplus on winding up.

[Mark Garnier]

I thank the Minister for his comments. We agree that the law needs to be updated to reflect current circumstances, and it makes sense to ensure that companies that have not made pre-2016 resolutions are not unfairly penalised. We broadly support the update to the law because it corrects an important imbalance. However, it is crucial, as we move forward, that we maintain the necessary guardrails and uphold the independence of trustees to protect scheme members’ interests. These important aspects will be further discussed in relation to clause 9.

I will raise a couple of points made by people we have been engaging with while looking at the Bill. First, the Pensions Management Institute highlighted its disappointment that the Government did not take the opportunity of this legislation, which broadly talks about defined-benefit funds, to make it easier and more tax efficient for employers and schemes to use scheme surpluses to fund contributions under defined-contribution arrangements, including those not held in the same trust. That would have opened up possibilities for many entities that have long since moved their ongoing DC provisions to a master trust or contract-based arrangement.

The Phoenix Group also highlighted an issue. To protect funding levels after surplus release, schemes may adopt more cautious investment strategies, reducing allocations to private and productive assets. That could undermine the Government’s growth objectives. Aside from those points, we are happy with the clause.

[Steve Darling]

I very much echo what the hon. Member for Wyre Forest said. Clearly, surpluses have built up over a number of years since the last crash. There has been a level of overcaution. It is important for our economy that those surpluses are appropriately released, which could drive economic growth. I am sure that all of us in the room want to see that.

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[John Milne]

The purpose of amendment 5 is to ensure that regulations take account of the particular circumstances of occupational pension schemes that were established before the Pensions Act 1995. There is effective discrimination against certain pre-1997 pension holders. That is a long-standing grievance and has remained unresolved for far too long. This has been reflected considerably in my postbag, as I am sure it has been for pretty much every MP.

In the evidence session on Tuesday, we heard moving testimony from Roger Sainsbury of the Deprived Pensioners Association and Terry Monk of the Pensions Action Group. As they told us, many of those affected are, literally, dying without ever seeing satisfaction. Many of these pensioners are receiving a fraction of what they are entitled to and what somebody who paid the exact same sums is currently receiving. It is causing genuine hardship.

Members of the pre-’97 schemes 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, which creates unintended inequities.

The amendment would require regulations under clause 9 to explicitly consider these older schemes. It would allow such schemes, with appropriate regulatory oversight, to offer discretionary indexation where funding allows. The key impacts would be to provide flexibility while ensuring safeguards are in place, give trustees the ability to improve outcomes for members in a fair and responsible way, and help to address the long-standing issue of members who miss out on indexation simply because of the scheme’s pre-’97 status. It also ensures that members can share in scheme strength where resources permit.

Clearly, safeguards are needed, and the amendment makes it clear that discretionary increases would be possible only where schemes are well funded. Oversight by regulators ensures that employer interests and member protections remain balanced. The intention behind the amendment is to bring fairness and flexibility into the treatment of pre-’97 scheme members and to modernise the system so that it works for today’s savers without undermining scheme stability.

[Mark Garnier]

I will not take up too much of the Committee’s time, but suffice it to say that we all heard the evidence that was presented on Tuesday, and we in the Conservative party agree with the Liberal Democrats’ amendment. We will support it.

[Kirsty Blackman]

I will not say much just now. I would like to hear what the Minister says, and I might bob again after that, Sir Christopher.

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[Mark Garnier]

I beg to move amendment 247, in clause 9, page 8, line 23, at end insert—

“(aa) prohibiting the making of a payment unless the scheme’s assets have exceeded a buyout valuation,”.

This amendment requires that surplus extraction is only permitted once buyout funding levels are achieved.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 260, in clause 9, page 8, line 30, at end insert—

“(e) requiring the trustees to provide a prescribed notification, as set out in (f) below, with the members of the scheme (or their representatives) not less than 60 days before making any payment under this section;

(f) the prescribed notification should include—

(i) the proposed amount of surplus to be paid to the employer,

(ii) the reasons for the proposed payment,

(iii) the impact on member benefits,

(iv) the scheme's funding position after the proposed payment, and

(v) how members may make representations regarding the proposal;

(g) requiring the trustees to have regard to any representations made by members or their representatives having received the prescribed notification.”

This amendment would require trustees to notify members at least 60 days before making surplus payments to employers. It ensures members receive full information about proposed surplus payments, enabling informed participation.

Amendment 265, in clause 9, page 8, line 30, at end insert——

“(e) requiring the trustees to provide a prescribed notification to members of the scheme, or members’ representatives, not less than 60 days before making any payment under this section,

(f) requiring the prescribed notification under subsection (e) include—

(i) the proposed amount of surplus to be paid to the employer,

(ii) the reasons for the proposed payment,

(iii) the impact on member benefits,

(iv) the scheme's funding position after the proposed payment,

(v) how members may make representations regarding the proposal, and

(g) requiring the trustees to have regard to any representations made by members or their representatives having received the prescribed notification under subsection (e).”

This amendment would require trustees to notify members at least 60 days before making surplus payments to employers.

Amendment 267, in clause 9, page 8, line 30, at end insert—

“(e) requiring that, where the scheme actuary certifies under subsection (a) that the scheme’s assets exceed the cost of securing each member’s accrued rights with an authorised insurer for a continuous period of at least six months, the trustees must first secure a full buy-out of those rights before any payment of surplus may be made to the employer or any other person, and

(f) requiring that subsection (e) does not apply if the scheme actuary certifies that any surplus extraction would, after the extraction, still leave the scheme’s assets exceeding the cost of securing each member’s accrued rights with an authorised insurer.”

This amendment inserts a requirement to ensure that surplus extraction prior to a buyout does not adversely impact the scheme’s ability to reach buyout.

Amendment 261, in clause 9, page 8, line 36, at end insert

“and including confirmation that the proposed payment (surplus access) will not adversely impact members' benefits and that the prescribed notification has been completed in accordance with regulations made under subsection (2A).”

This amendment would aim to strengthen an actuary's role and oversight of schemes accessing surplus, by requiring confirmation that member notification has occurred before certifying surplus payments.

[Mark Garnier]

Any decision to release surplus funds from defined-benefit pension schemes should rest firmly, as we have discussed, with the trustees. It is important to emphasise that trustees bear the ultimate responsibility for such decisions. We believe that surplus repayments to employers should be permitted only when members’ benefits are fully protected and robust safeguards are in place to maintain the security and sustainability of the scheme.

The Bill notes that the detailed criteria for surplus payments will be set out in forthcoming regulations, and those regulations must be subject to close scrutiny with a primary focus on safeguarding members’ benefits before any funds can be released. There remain important unanswered questions regarding what appropriate guardrails for surplus release should look like. One firm belief is that defined-benefit pension funds should be funded to buy-out levels, to the extent that they are capable of securing members’ benefits with an insurer. Additionally, any surplus extraction should demonstrably provide clear benefits to scheme members, rather than simply serving the employer’s interest—although we heard evidence on Tuesday that did not necessarily agree with that.

We acknowledge that there are broader issues facing defined-benefit pension schemes that we intend to explore further when the Committee considers the new clauses. In particular, the post-Maxwell accounting framework is a significant constraint on defined-benefit pension funds. The requirement to show deficits on company balance sheets suppresses growth potential. The Bill should not miss an opportunity to address those structural hurdles.

One of the behavioural outcomes we have seen is that defined-benefit pension funds have been investing large amounts of money into bonds, including Government bonds, and not into equities where there is the greatest growth potential in the economy. That throws up a couple of problems in this area. First, the money is not going into equities, which are much more volatile than bonds. Secondly, if we see surplus extraction from some of those funds, that money will come from the Government bond market—the gilt market—and there may be an impact on the Government’s ability to borrow funds, which is something we will hear more about on 26 November. Crucially, the Minister will now be part of that, and I suspect he will be taking into account the bond market’s ability to meet Government borrowing requirements when he gets close to that date.

Moreover, there is nothing in the current legislation to prevent surpluses from being used for purposes that do not support economic growth, such as share buybacks or dividend payments by the host employer. Neither of those outcomes necessarily aligns with the Government’s growth agenda, although it could be argued that the money is going back into the wider economy and finding its way back. None the less, we would like to see more guidance on how that money is to be spent. Simply repaying—potentially—private equity funds a large dividend will not necessarily help the greater good.

The Bill proposes new flexibilities for defined-benefit schemes in surplus. Currently, the Bill is unclear on the level at which employers can extract that surplus and there is concern that, once a scheme is fully funded on a low-dependency basis, buy-out could happen. That is a lower threshold than for a gold standard buy-out and, while it may free up capital for employers and support investment, there are concerns that the change could risk members’ security, as buy-out remains the safest way to guarantee benefits. Amendment 247 would provide strong protection against a change of environment where DB funds start to slip back into deficit positions.

Our amendments 260 and 261 are linked. Just Group plc wrote to the Committee to highlight that members of pension schemes that undertake employer surplus extractions should receive proper notification. Engagement with members should be undertaken before extraction, because ultimately any decisions on surplus extraction could be impactful on them. Setting out clearly in legislation what effective engagement would look like, including the role of the actuary in the process, would help trustees to understand their obligations and Parliament’s intent.

Amendment 260 requires trustees to notify members at least 60 days before making surplus payments to employers, and ensures that members receive full information about proposed surplus payments, enabling informed participation. Amendment 261 aims to strengthen an actuary’s role in oversight of schemes accessing surplus, by requiring confirmation that member notification has occurred before certifying surplus payments. Both amendments strengthen the guardrails around DB surplus extraction, as part of our overall strategy of putting member interest first and protecting trustees. We will be pressing these amendments.

[Steve Darling]

I rise to speak in respect of amendments 265 and 267, which echo the issues already covered by the shadow Minister. Allowing 60 days’ notice to scheme members is extremely important to the Liberal Democrats—and, to be fair, I am sure it is also important to the Government—and the central intention is to protect outcomes for members of schemes and ensure that there is enough flexibility. That 60 days’ notice is really important to us.

Ensuring that there is enough money in the scheme for any buy-out is the second element, which the hon. Member for Wyre Forest has already alluded to. We think it is very important that the finances are there and that we put scheme members at the centre of the proposals before us. I look forward to hearing from the Minister what reassurance he is able to give us on those points.

Pension Schemes Bill (Fifth sitting)

Mark Garnier Excerpts

Committee stage
Tuesday 9th September 2025 Public Bill Committees

[The Parliamentary Under-Secretary of State for Work and Pensions (Torsten Bell)]

It is a pleasure to serve under you today, Ms McVey. We recommence our consideration of the small pots part of the Bill. I thank all Members for their engagement during the sittings last week.

Clause 27 is fundamental. It allows regulations to be made to create an authorisation and supervisory framework for pension schemes to become authorised consolidators. This framework will allow master trusts to apply to the Pensions Regulator to become authorised, on the basis that they meet certain conditions and standards, including the value for money test we discussed at length last Thursday.

The clause also ensures ongoing oversight. If a scheme no longer meets the standards, regulations can enable the Pensions Regulator to step in to require the trustees to take prescribed steps and, ultimately, to withdraw authorisation if necessary. That ensures better outcomes, not just fewer pension pots. The clause represents a vital safeguard in the small pots framework.

Clause 28 provides a definition of a “consolidator scheme” and “consolidator arrangement”. A “consolidator scheme” can either be an authorised master trust or a Financial Conduct Authority-regulated pension scheme that appears on a designated list published by the FCA. A “consolidator arrangement” refers to a specific part of the scheme that is intended to receive small pots.

This reflects the structure of pension providers that operate in the UK. Some pension providers offer multiple arrangements within their scheme whereas others may have a single arrangement or offering. The clause caters for both scenarios to ensure that regulators can focus on the particular arrangements that will require authorisation.

To simplify: in practice, all schemes will be authorised by specific arrangement, but there will be some occasions where schemes may only have a single arrangement so the whole scheme will be authorised. By having at least one authorised arrangement, schemes or providers will be authorised consolidators.

[Mark Garnier (Wyre Forest) (Con)]

This is a very uncontentious and highly technical part of the Bill. We have no objections to any of these provisions and so will be supporting them.

[Steve Darling (Torbay) (LD)]

As the Liberal Democrat spokesperson, I echo that this is a direction of travel that we welcome. The vast majority of the proposals that are before us today are uncontentious. They follow the correct direction of travel in growth and change that we want to see in our pensions system in the United Kingdom.

Question put and agreed to.

Clause 27 accordingly ordered to stand part of the Bill.

Clause 28 ordered to stand part of the Bill.

Clause 29

Further provision about contents of small pots regulations

--- Later in debate ---

[Torsten Bell]

Clause 29 will make the small pot consolidation framework work in practice, through allowing the small pots regulations to cover a range of operational, administrative, data protection and consumer protection matters. It enables the Pensions Regulator to charge a fee for authorisation and gives applicants the right to appeal if their application is refused. Regulations will be able to require trustees and scheme managers to maintain and improve records, and they will protect members from high transfer fees. The clause enables the delegation of functions and powers to the Pensions Regulator, the FCA and the small pots data platform operator. It ensures that data protection and privacy obligations are respected, while allowing necessary data processing to support the scheme’s efficient operation.

The clause will allow the Government to amend existing legislation to support the small pots consolidation framework. Examples of uses of the power include giving the Pensions Ombudsman new powers to investigate member complaints, and ensuring that the small pots data platform is properly funded through the general levy. Pensions law is complex and technical, and needs to evolve with time, so the Government need the flexibility to respond to those changes and regulators’ operational experience without having to table a new Bill every time.

The Bill clearly sets out the multiple default consolidator framework. With targeted amendments, the clause will allow us to fine-tune the framework over time, ensuring operational effectiveness. Any use of so-called Henry VIII powers will be subject to the affirmative procedure. The clause is essential for the practicality, reliability and integrity of the small pots consolidation framework to ensure it is fit for purpose now and for the future.

The Government amendments to the clause are purely technical drafting improvements. Amendment 36 clarifies that appeal rights for schemes are not limited solely to decisions regarding an application for authorisation, so one could appeal on other grounds. Amendment 37 provides further clarity on the liability framework that will be established to ensure that members are protected. It makes it clear that the small pots data platform operator or the trustees or managers of a relevant pension scheme can be made responsible for paying compensation to an individual who has suffered a loss as a result of a breach of the small pots regulations. Amendments 38 to 40 take account of the Data (Use and Access) Act 2025, which was passed by Parliament subsequent to the introduction of this Bill. The amendments do not alter the policy, and I ask the Committee to support them.

[Mark Garnier]

Again, this is all very technical and rather dry.

[Torsten Bell]

It’s very exciting!

[Mark Garnier]

Perhaps it is exciting for those who enjoy dry reading. We in the Opposition have no objections.

Amendment 36 agreed to.

Amendments made: 37, in clause 29, page 27, line 30, leave out—

“a relevant person, other than the FCA,”

and insert—

“the small pots data platform operator or the trustees or managers of a relevant pension scheme”.

This amendment ensures that the FCA cannot be required to pay compensation under small pots regulations.

Amendment 38, in clause 29, page 27, line 39, leave out “Subject to subsection (4),”.

This amendment is consequential on Amendment 39.

Amendment 39, in clause 29, page 28, line 3, leave out subsection (4).

This amendment removes provision that is no longer needed because of the general data protection override in section 183A of the Data Protection Act 2018, which was inserted by section 106(2) of the Data (Use and Access) Act 2025 and came into force on 20 August 2025.

Amendment 40, in clause 29, page 28, leave out lines 8 and 9.—(Torsten Bell.)

This amendment is consequential on Amendment 39.

Clause 29, as amended, ordered to stand part of the Bill.

Clause 30

Enforcement by the Pensions Regulator

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss the following:

Government amendment 41.

Clause 31 stand part.

Government amendment 42.

[Torsten Bell]

Clause 30 seeks to ensure that the rules and conditions set by the regulations are, in practice, followed. These regulations can allow the Pensions Regulator to issue three types of notices: a compliance notice, requiring a person to take specific steps to comply; a third-party compliance notice, directing someone to ensure another party’s compliance; and a penalty notice, imposing a financial penalty for non-compliance or a breach of the regulations. If a scheme fails to comply with the regulations or with a notice issued under them, the Pensions Regulator can impose a financial penalty capped at £10,000 for individuals and £100,000 in other cases. The clause also enables regulations to provide for appeals to the first-tier or upper tribunal, ensuring procedural fairness and accountability. All those are standard approaches to pensions legislation.

Clause 31 gives the Treasury the power to make regulations to enable the FCA to monitor and enforce compliance with the small pots consolidation framework for contract-based schemes. It ensures that the FCA can act decisively to protect consumers and uphold the integrity of the system. Clauses 30 and 31 ensure consistent standards across the pensions market as we look to enforce these measures. Any regulations made under clause 31 must go through the affirmative procedure, ensuring parliamentary oversight.

Amendments 41 and 42 seek to clarify the definition of the term “FCA regulated” when referring to an authorised person in the context of the legislation. The amendments seek to provide greater clarity by ensuring harmony and removing any ambiguity between clause 30(1) and clauses 31 and 34. They ensure that the Pensions Regulator is not inadvertently prevented from regulating a trustee of a pension scheme solely because that trustee is also regulated by the Financial Conduct Authority in a separate capacity. The amendments are purely technical clarifications, and I ask the Committee to support them. I commend the clauses to the Committee.

[Mark Garnier]

Again, I have no real comments, apart from to ask the Minister, perhaps when winding up, if he could explain how the Government came to the penalty levels of £10,000 for individuals and £100,000 for others. It would be useful to understand what the thinking was behind that.

[Kirsty Blackman (Aberdeen North) (SNP)]

My question was not dissimilar to the shadow Minister’s question on the amounts of the penalties—£10,000 for an individual and £100,000 in any other case. There is no delegated authority to raise it beyond those levels. There is an ability to set the amounts, provided they do not go above those. Would the process have to be in primary legislation should the Government wish to raise it above those levels? I am not generally in favour of a level of delegated authority, but if we end up in a situation where inflation is out of control, £10,000 may not seem a significant amount for an individual and £100,000 may not seem significant for a larger organisation. They may not be enough to prevent people or create the level of disincentive we wish to see. Have the Government looked at whether £10,000 and £100,000 are the right amounts?

On the clarification about FCA regulation, and the fact that if somebody is FCA regulated in another capacity, it may stop them from being subject to this, it is absolutely sensible that the Government have tabled the amendments. I am happy to support the changes and the clauses.

--- Later in debate ---

[Torsten Bell]

The clause provides the flexibility, as I have just said, to increase or decrease the threshold without requiring new primary legislation, enabling the Government to move quickly and efficiently as developments—whether it be wage growth or changes in contribution patterns—change our pensions landscape. Under the clause, any change to the pot limit must always be approved by Parliament through the affirmative procedure, something that we also discussed last week.

The Government are committed to engaging with industry and consumer groups to ensure any adjustments are evidence-based and informed by the relevant data at the time, enabling us to consider wider impacts such as market competition. Under clause 32, the Secretary of State must undertake public consultation, publish details of the proposed amendments and the reasons for making the proposal, and consider any representations made—putting flesh on the bones on the kind of review that would take place, as we have just discussed.

New clause 36 seeks to introduce a new provision to the Bill, which would establish a “pot follows member” model for pension consolidation. The new clause proposes that, on changing employment, an individual’s pension pot would automatically transfer into their new workplace’s pension scheme. This proposal is not aligned with the Government’s established policy direction, and it would present significant practical and operational challenges, although I recognise that that approach has been discussed extensively over the last 20 years. The approach taken in the Bill has been shaped through extensive engagement and formal consultation with industry, regulators and consumer groups. As part of that policy development work, largely under the last Government, they and we carefully considered the “pot follows member” approach, including its potential benefits and risks. Our impact assessment shows that the multiple default consolidator solution in the Bill is projected to deliver greater net benefits. The evidence in the impact assessment supports our view that that route offers the best value for savers and for the system as a whole.

New clause 36 would require a fundamental overhaul of the current framework that the Bill seeks to introduce. It is not consistent with the rest of the Bill. It would introduce a parallel mechanism that risks duplicating effort, creating confusion and undermining the coherence of the consolidation system. Two of its main downsides are significant administrative barriers for employers, if employees choose to opt out, and the risk that pots are transferred into schemes that offer poor value for money—or, at least, poorer value for money than the ones they are sitting in before they move between employers. For those reasons, I ask the hon. Member for Wyre Forest not to press new clause 36.

Clause 33 makes it clear that the small dormant pots consolidation measures in this chapter apply equally to pension schemes run by or on behalf of the Crown and to Crown employees, as we have discussed previously. Clause 34 provides clear definitions for key terms used throughout the small pots legislation to ensure clarity and consistency of interpretation, and clause 35 provides a definition of what constitutes a pension pot. That might be thought to be straightforward, but for the purposes of small pots consolidation we want to provide clarity on the accurate identification and treatment of individual pension pots. To provide an example, if someone is enrolled into the same pension scheme through more than one job and the scheme keeps the accounts separate, each is treated as a separate pension pot so that they can be consolidated together.

As Members will be aware, the Pensions Regulator oversees the trust-based schemes and the Financial Conduct Authority oversees contract-based schemes. Clause 36 amends the Financial Services and Markets Act 2000 to ensure that the FCA has the powers required to support the small pots consolidation framework through the existing financial regulatory system. This is a vital enabling provision to provide the FCA with the necessary statutory powers to regulate contract-based schemes that wish to act as authorised consolidators in the years ahead. It allows the FCA to make rules requiring pension providers to notify them if they intend to act as a consolidator pension scheme, and it allows the FCA to maintain a list of consolidator schemes and to apply appropriate regulatory standards to them.

More broadly, clause 36 ensures that members of FCA-regulated pension schemes benefit from the same level of protection, transparency and accountability as those in the trust-based system, while also avoiding regulatory gaps and ensuring that all consolidator schemes, regardless of their structure or legal framework, are subject to robust oversight.

Consistent with my arguments on clause 36, clause 37 repeals unused provisions of the Pensions Act 2014 related to automatic transfers, also known as “pot follows member”. This is tidying up the statute book. It was the previous Government who initially legislated for “pot follows member”, but they then decided that that was not the policy they wished to pursue and moved away from it between 2014 and 2024. The amendment recognises that and makes sure we do not have powers on the statute book that confuse the situation.

Finally, Government amendment 43 is a minor and technical amendment necessitated by the repeal of schedule 17 to the Pensions Act 2014 by clause 37(1)(b) of the Bill. The amendment is necessary to update the statute book and clarify a reference in section 256 of the Pensions Act 2004, which otherwise would have been unclear and was making hon. Members nervous. The amendment does not alter policy, and I ask the Committee to support it. I commend clauses 32 to 37 to the Committee.

[Mark Garnier]

I will speak to our new clause 36. I am grateful to the Minister for his comments; I will come to those in a minute. The Government dropped plans for the lifetime provider or “pot for life” model, which would have allowed individuals to direct all workplace pension contributions into a single, personally chosen pension pot throughout their career. That was first proposed by the Conservative Government. Although we appreciate that the initial lifetime pot model has not had support from the current Government or, to be fair, from the industry, we believe there is much merit in exploring a model that would allow for pensions to follow individuals between jobs. The new clause would ensure that fragmented small pots are not left as workers move between jobs. By changing our current proposals from a lifetime pot to a magnetic pot proposal where the pot follows the individual, we hope we can bring down some of the administrative costs of the initial lifetime pot proposal.

Our new clause 36 will provide for a pension pot that would follow members from job to job, consolidating with each new workplace scheme rather than relying on a single lifetime provider. This approach could reduce fragmentation while retaining the advantages of employer oversight and collective governance. This would have similarities with the Australian system, where a person can staple to their first chosen pension provider so that it follows them from job to job. That helps to reduce the administrative burden on individuals and the number of small pots, and that can reduce costs for consumers and help the overall consolidation of the market. These changes have been backed by some in the industry, including Hargreaves Lansdown, which has said that having a single pot would simplify someone’s pension investment, bringing transparency and clarity. It has said that for those who move jobs frequently, a single pension pot would be invaluable.

The Minister made a couple of points. The first was about the substantial overhaul of the system to be able to deliver reform. Although I appreciate that this may be outside the scope of the Bill, we should not worry about substantial overhauls to make things better for people who are saving for their retirement. It is incredibly important that we get this right. Just because it is a lot of work does not necessarily mean it is a bad thing to do, so I urge him to think about it.

The Minister made a very important point: somebody could move from one job to another and find that their pension moves from a fund that offers good value for money and is performing well to a fund that is performing worse. But exactly the opposite is also the case. If somebody frequently changes jobs, the law of averages and statistics means that over their lifetime they will get the average rate, which means they do not get stuck in one or the other. One would cancel the other out—it is a maths problem.

The Minister has made his points. This is not something we want to press, but we feel very strongly that the Treasury and Treasury Ministers should think very carefully about it, because, as I say, hard work is not a reason not to do the right thing. There is much more support from the industry for the magnetic pot rather than the lifetime pot, which stays with one provider.

[Mr Peter Bedford (Mid Leicestershire) (Con)]

It is a pleasure to serve under your chairmanship, Ms McVey. As a proud Englishman, it is not often that I admit the Australians are better than us at something. I am talking not about cricket, but about the immensely important issue of pensions adequacy. The Australians do it better, and what underpins their success is the super stapling model, a system that fundamentally changes how savers interact with their pensions. That is why our new clause 36 seeks to follow in Australian footsteps by establishing a model that would automatically amalgamate pension pots through an individual’s working life. Although I recognise and commend the Government’s work on small pot consolidation, I believe that real engagement and adequacy benefit lies in moving towards a lifetime pension pot model. It is a bolder, more engaging and more adequate model that would benefit pension funds and savers alike.

--- Later in debate ---

[Torsten Bell]

It was self-professed weak patriotism. But the hon. Gentleman is completely right to raise the adequacy issue, which is obviously the role of the Pensions Commission, launched in July, to take forward. He and several others are also right to say that making things easier for savers is a really important objective. That is what the pensions dashboard aims to do in the coming years as well.

Let me make a set of reflections directly on the question being raised. To be clear, the policy in 2014 was “pot follows member”. That is also the policy within new clause 36. The policy being more supported here is a lifetime pot, which is a different policy. The “pot follows member” is still that the employer chooses the pension scheme and the pot moves to the new employer’s scheme as the employee goes, so it is still an employer-to-a-single-scheme model. The lifetime provider model, also advocated by many in the industry but never part of Government policy—it was not in the 2014 Act—is that each individual holds a pension pot, and, on joining an employer, provides the details of that scheme to the employer, and the employer then pays to multiple pension schemes whenever it does its PAYE.

The comments I made refer to the “pot follows member” approach. There is a consensus across the industry that that is not the right way to go; I totally hear the points made in favour of a lifetime provider model. That is not the approach being taken forward by this Bill, but it needs to be kept under review in the longer term. I give hon. Members the reassurance that I will continue to do that.

[Mark Garnier]

I think the Minister has got this the wrong way round. It was the lifetime pot, which was being paid into as people went around, that the industry did not like, because that was administratively quite difficult. The stapled pot—stapled to the lapel, or whatever, to be dragged around like the Australian one—is what we are proposing this time round, which is the new version that the industry does agree with. I think the Minister might have got his notes upside down.

[Torsten Bell]

Never! No. We should clarify what we mean by “industry”: in a lifetime provider model, employers take on a significantly greater administrative burden, because they have to engage with potentially every pension scheme in the country. Admittedly, we are limiting the number of those in future, but still, that is what employers find burdensome about a lifetime provider model. That was the preferred model of the right hon. Member for Godalming and Ash (Sir Jeremy Hunt) when he was Chancellor, but it was never actioned as Government policy.

As I said before, the 2014 Act was about “pot follows member”—for good reason, to try to address the small pots worry. I hope that that at least reassures the hon. Gentleman that my notes were the right way up.

--- Later in debate ---

Other amendments are more general, ensuring that the legal wiring works between different parts of the legislation, improving legal language or removing any language that is unnecessary. I commend these technical amendments to the Committee.

[Mark Garnier]

I would like to speak to the wider clause before coming to our amendments. It is important to get on the record that this is a very bad clause. The Minister mentioned asset allocation, and this measure, which is known as mandation, has gone down incredibly badly with the pensions industry.

Mandation risks undermining the core obligation of trustees, which is to act in the best interests of savers. Pension savings reflect decades of work and are not an abstract figure on a balance sheet—they are the hope of a secure future for millions of people. Trustees and fund managers bear a legal responsibility to protect and grow these savings, investing wisely where the best opportunities may be found. Their role is not to follow political direction but to uphold the trust placed in them and the fiduciary duty they owe, which is the foundation of confidence in the pension system.

As has been said in multiple responses to the Bill, clause 38 as currently written undermines the UK’s reputation as a predictable and rules-based investment environment. When trustees select investments, they must find the safest and strongest options for beneficiaries. Can we even be confident that the Government will be able to provide a pipeline of investment opportunities? Pension funds could end up being forced to fight against each other for a selection of low-performing assets. If these powers are used, it changes accountability. If mandated investments fail, is it the trustees or the Government who should answer for those losses? Savers deserve clarity about who ultimately protects their hard-earned pension pots.

It has been said that this merely provides the powers to do mandation and does not necessarily force firms to do this, but I will come to that later. Our amendment 275 highlights the fact that there is a political party, whose Members are not in attendance here, which has already said that if it gets into government—and, let’s face it, it has a fighting chance—it will mandate pension funds to invest in the UK water industry in order to support the Government renationalising the UK water industry.

I would like to highlight some of the issues that have been raised. The Pensions Management Institute has said:

“this provision sets a dangerous precedence for Government interference in the fiduciary duty of trustees to act in members’ best financial interests.”

Pensions UK has said:

“this ambition is subject to fiduciary duties and is dependent on supporting actions by Government, namely that there will need to be a strong pipeline of investable UK assets. Without this, schemes will be competing against each other for the same assets, which risks asset bubbles and poor value for money.”

The Investment Association has said:

“It comes with significant risks for members in the form of capital being poorly allocated if political preferences take priority over member needs. Any resulting poor investment outcomes will be borne by the member. By creating the risk of political interference in capital allocation, the power undermines the UK’s global reputation as a predictable and rules-based investment environment”.

Which? has said that this measure

“may result in schemes making worse or riskier investment decisions that may not be in the best long-term financial interests of savers.”

Aviva has said:

“as currently drafted in Section 28C, the power in the Bill goes far beyond this policy intent and the scope of the Accord, with very limited constraints on how, and under what circumstances, the requirements could be introduced.”

The Institute and Faculty of Actuaries has said:

“We are concerned about the introduction of investment mandation powers, and potential interference of those powers—or their threatened use—with trustees’ fiduciary duties.”

Unison has said:

“We have significant concerns about these clauses. Fiduciaries are best placed to set the correct balance between asset classes, and equities have liquidity, governance, transparency of pricing, equality of treatment between investors, and other advantages for pension funds.”

Finally, the Association of British Insurers said:

“A mandation reserve power would undermine trust in the pension system and create a risk of political interference in capital allocation, which would undermine the UK’s reputation as a predictable and rules-based investment environment.”

I understand that this is a reserve power of mandation, but it sets a very bad precedent, so we will oppose the clause.

[The Chair]

Do you wish to speak to the specific, technical amendments?

[Mark Garnier]

We have no objection to the technical amendments, but we will oppose the whole clause.

[Steve Darling]

We have no issue with the technical amendments. However, for us the crucial issue in the Bill is driving an environment of positive investment, and a system in the United Kingdom that individual investors—as in, would-be pensioners—can believe in.

The mandation element causes concern. As has been alluded to, there are assumptions that Ministers are reasonable people; however, we do not have to look that far across the Atlantic ocean to see politicians behaving unreasonably. It concerns us as Liberal Democrats that giving powers in the Bill without clear management of them is potentially a step too far. While the Minister, and other Ministers in the current Government, may be reasonable, who knows what is coming down the line in a very turbulent political system?

We therefore continue to have grave concerns around mandation, and look forward to hearing what assurances the Minister is able to give. The key outcome for us is making sure that there is a stable pensions system in which people can have confidence, because confidence is crucial for driving the positive investment that I am sure everybody in this room wants to see.

--- Later in debate ---

[Torsten Bell]

I offer reassurance, as we will shortly come to the end of the amendments for substantive debate.

This group of amendments deals with the main scale default arrangement, along with the scale test and penalties. The MSDA is the pool of investments against which scale will be assessed. As I mentioned, the definition of that is obviously central to the effective enforcement of the scale requirements.

Key among these amendments are Government amendments 72 and 91, which set out some of the details of the MSDA for master trusts and group personal pensions, including that it can be used for the purposes of one or more pension schemes, and that the assets held within it are those of members who have not chosen how they are invested. Regulations will be made that cover other matters, including the meaning of “common investment strategy”. The details we set out in these amendments reflect the invaluable input we received from pension providers and regulatory bodies.

The remaining amendments in the group relating to the MSDA largely clarify how it fits into the wider approval requirements in the new sections 28A and 28B.

Moving on to scale, Government amendments 69 and 85 clarify the circumstances in which assets held by connected master trusts and group personal pension schemes, or where the same provider runs a GPP and master trust, can count towards the scale test. This is to ensure that, where appropriate, assets managed under a common investment strategy where there is a family connection between the master trust and GPP scheme, and where they are used for the same purpose, can be added together to achieve the £25 billion requirement.

Government amendment 71 ensures that the provisions governing penalties are consistent between the TPR and the FCA. Government amendment 90 ensures that regulations can provide for appeals to the tribunal in respect of penalties under regulations under new section 28C(9)(c).

Amendment 63 agreed to.

[Mark Garnier]

I beg to move amendment 250, in clause 38, page 37, line 12, at end insert

“or

(c) the relevant Master Trust meets the innovation exemption requirement.”

[The Chair]

With this it will be convenient to discuss the following:

Amendment 251, in clause 38, page 37, line 16, at end insert—

“(3A) A relevant Master Trust meets the innovation exemption requirement if the Trust can demonstrate that it provides specialist or innovative services.

(3B) The Secretary of State may by regulations provide for a definition of ‘specialist or innovative services’ for the purposes of this section.”

Amendment 252, in clause 38, page 39, line 11, at end insert

“or

(c) the relevant GPP meets the innovation exemption requirement.”

Amendment 253, in clause 38, page 39, line 15, at end insert—

“(3A) A relevant GPP meets the innovation exemption requirement if the Trust can demonstrate that it provides specialist or innovative services.

(3B) The Secretary of State may by regulations provide for a definition of ‘specialist or innovative services’ for the purposes of this section.”

Amendments 250, 251, 252 and 253 create an innovation exemption for pension funds that provide specialist or innovative services, as part of the new entrants clause.

[Mark Garnier]

The Bill sets a minimum asset threshold of £25 billion for workplace pension schemes to operate as megafunds by 2030. This is not, in itself, particularly controversial, and we are all fully aware of the arguments about scale being effective when running pension funds. The requirement is intended to drive consolidation, improve economies of scale and boost investment in UK assets, but there is concern that such a high threshold could disadvantage boutique or niche funds or new entrants into the market that provide specialist services to cater for financially literate members who prefer a more tailored approach to their pension management. For example, Hargreaves Lansdown has highlighted that its £5 billion fund serves members who value investment autonomy and expertise. The risk is that the policy could reduce competition, limit consumer choice and stifle innovation by making it harder for smaller, specialist providers to operate or enter the market

Clause 38 provides little detail of the meaning of the “ability to innovate” and how “strong potential for growth” will be measured, but it is essential that the Bill provides a credible route to support innovation. If we tie the pensions market up by restricting it to a handful of large providers focused on back-book integration and building scale, there will be less space for innovation aimed at pension member engagement. The benefit of the existing market is that its diversity provides choice and creates competition, and competition is an important part of this. Smaller schemes are chosen by employers for specific reasons. If we lose that diversity and essentially create a handful of the same scheme propositions, employers and members will lose out on this benefit.

Realistically, it will be extremely challenging for new entrants to the market to have a chance of building the required scale. Our amendments create an innovation exemption for pension funds that provide specialist or innovative services as part of the new entrants clause. This will allow boutique or niche providers to continue operating if they demonstrate diversity in the market or serve a specific member need, even if they do not meet the £25 billion threshold.

[Kirsty Blackman]

Amendments 250 to 253, as well as Government amendment 113, which we will discuss later, clarify the word “innovation” and look at how best to define it. There are two different approaches from the Government and the Opposition to what innovation means. I raised the issue of defining innovation on Second Reading, so I am glad that both parties are trying to clarify it here, but I am not entirely happy with the way in which the Government have chosen to do so.

When we come to Government amendment 113, I do not feel that the chosen definition of “innovative products” is necessarily right. There could be a way of working that is innovative not in the product but in the way people access the product. For example, some of the challenger banks that we have had coming up are not necessarily providing innovative products, but they provide innovative ways to access those products, and in some cases, their pitch is that they provide a better interface for people to use. I think there is potentially a niche in the market for innovative services rather than innovative products. Government amendment 113 perhaps ties too much to products, although it depends on what the definition of “products” is.

Obviously regulations will come in behind this that define “innovative”, but I think the pitch made by the Opposition for the addition of “or specialist” is helpful. “Innovative” suggests that it may be something new, whereas there could be specialist services that are not of that size but are specific to certain groups of people who value the service they are receiving, one that is very specific to their circumstances, and who would prefer that operation to keep running and to keep having access to it because of the specialist service that is provided.

I am concerned about Government amendment 113. My views are perhaps closer to the Conservatives’ amendment, but thinking particularly about services rather than the products, and the way in which the services are provided to people and the fact that there could be innovation in that respect. Also, as the hon. Member for Wyre Forest said, there could be particular niche areas that do not need to be that size in order to provide a truly excellent service to perhaps a small group of people. It depends on how the Government define “innovative” and what the regulations may look like this, but I am inclined to support the Conservatives’ amendment.

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[Mark Garnier]

I am not entirely happy with the Minister’s comments. I am slightly surprised, and I thought he might have listened a bit more carefully. We absolutely understand the economies of scale. A large, £25 billion pension fund can do amazing things. We are 100% behind that. We have not disagreed with that at all. However, I somehow feel myself listening to the Minister and hearing the reverse of the arguments we were making as we tried to allow new-entrant banks into the market after the financial crisis.

Those of a certain age—and the Minister turned 43 the other day, so he will remember the financial crisis—know that the problem was that a few very big banks were spreading the contagion. I remember being on the Treasury Committee and the Parliamentary Commission on Banking Standards after the financial crisis, when we were trying to sort out Labour’s previous mess, and not a single ab initio banking licence had been issued for 100 years. The only way that companies could get into the banking market—as Virgin and Metro were doing—was by buying dormant banking licences. I remember having long conversations—successfully, as it turned out—in order to try to allow companies such as Starling into the market. I think that Starling received the first ab initio banking licence for 100 years.

Having learned over the past 10 or 15 years about the effects of having large scale only, we are now having an argument about potentially stifling the pensions equivalent of companies such as Starling, Metro, Revolut and other innovators coming into the pensions market. I was hoping that from debating the amendments I could be convinced that the Minister would take away the thinking behind what we have come up with: that innovation should be good, and that there should permanently be new, fresh blood coming through. However, I do not think that he has got it. I was not going to push the amendments to a vote, but I now feel motivated to do so.

[Kirsty Blackman]

I want to make a brief comment about the definition of “specialist”. I appreciate the Minister’s clarification about the default products provided, but there could be a sensible definition of “specialist” that included, for example, that if providers can demonstrate that over 75% of their members engage in the management of their pension fund every year, that would be a very specialist and well-liked service. I understand that the scale is incredibly important. However, if a provider can demonstrate that level of engagement in its pension scheme, because of its innovative product or service, I think it would be sensible to look at the scale requirements, even if that provider does not yet meet them.

The Opposition have kindly left it up to the Minister and the Government to define what “specialist” would be, so I will support the Opposition amendments on that matter. However, when we come to Government amendment 113, I will require some clarification from the Minister about the definition of “products”.

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Division 10

Ayes: 6

Noes: 8

[Mark Garnier]

On a point of order, Ms McVey. Might it be easier, for brevity, if we vote on amendments 251 to 253 together?

[The Chair]

The amendments are consequential on amendment 250, so I cannot do that. I will now suspend the sitting while we consider how and whether to meet the hon. Gentleman’s request.

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[Torsten Bell]

I will be brief. The link between the definition of a main scale default arrangement and the common investment strategy is key to ensuring that the scale requirements apply to the correct elements of a pension scheme. Amendments 70 and 84 provide more detail on how the power to define a common investment strategy may be used to provide further information on the Government’s meaning when referring to that term.

Amendment 97 removes the “common investment strategy” element from the definition of default funds to avoid confusion with how that term is used in the main scale default arrangement approval in new sections 28A and 28B. I commend the amendments to the Committee.

Amendment 70 agreed to.

Amendments made: 71 in clause 38, page 38, leave out lines 32 to 38 and insert—

“(d) permitting the Authority to impose, on a person who fails to comply with a requirement under paragraph (c), a penalty determined in accordance with the regulations that does not exceed £100,000;”.

This amendment ensures that the penalties language used in section 28A is consistent with that used in new section 28B.

Amendment 72, in clause 38, page 39, leave out lines 1 to 4 and insert—

“(12) In this section ‘main scale default arrangement’ means an arrangement—

(a) that is used for the purposes of one or more pension schemes, and

(b) subject to which assets of any one of those schemes must under the rules of the scheme be held, or may under those rules be held, if the member of the scheme to whom the assets relate does not make a choice as to the arrangement subject to which the assets are to be held.”

This amendment defines “main scale default arrangement” for the purposes of new section 28A.

Amendment 73, in clause 38, page 39, line 7, leave out “relevant”.

This amendment removes an unnecessary tag.

Amendment 74, in clause 38, page 39, line 10, after “requirement” insert—

“by reference to the main scale default arrangement”.

This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.

Amendment 75, in clause 38, page 39, line 12, after “requirement” insert—

“by reference to a main scale default arrangement”.

This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.

Amendment 76, in clause 38, page 39, line 16, leave out “subsection (6)” and insert “subsections (5) and (6)”.

This amendment adds a further cross reference to new section 28B(4).

Amendment 77, in clause 38, page 39, line 17, leave out “held in funds”.

This amendment removes some unnecessary wording for the sake of consistency.

Amendment 78, in clause 38, page 39, line 18, at end insert—

“(ia) are held subject to the main scale default arrangement, and”.

This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.

Amendment 79, in clause 38, page 39, line 20, leave out “held in funds”.

This amendment removes some unnecessary wording for the sake of consistency.

Amendment 80, in clause 38, page 39, line 24, at end insert—

“(ia) are held subject to the main scale default arrangement, and”.

This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.

Amendment 81, in clause 38, page 39, line 27, leave out “held in funds”.

This amendment removes some unnecessary wording for the sake of consistency.

Amendment 82, in clause 38, page 39, line 27, leave out—

“one (and only one) relevant”

and insert “a qualifying relevant”.

This amendment corrects a reference to a relevant Master Trust in new section 28B(4)(c) to take account of new section 28B(8).

Amendment 83, in clause 38, page 39, line 30, at end insert—

“(ia) are held subject to the main scale default arrangement, and”.

This amendment clarifies how the concept of a main scale default arrangement fits into the approval framework under section 28B.

Amendment 84, in clause 38, page 39, leave out lines 38 and 39 and insert—

“(b) what it means for assets of a pension scheme to be managed under a ‘common investment strategy’ (including in particular provision defining that expression by reference to whether or how far the assets relating to each member of the scheme are allocated in the same proportion to the same investments).”

This amendment provides more detail as to how the power to define “common investment strategy” may be used.

Amendment 85, in clause 38, page 40, line 3, leave out from “(4)” to end of line 6 and insert—

“(a) a group personal pension scheme is ‘qualifying’ in relation to the GPP if the provider of the GPP is also the provider of the group personal pension scheme;

(b) a relevant Master Trust is ‘qualifying’ in relation to the GPP if the provider of the GPP is also the scheme funder or the scheme strategist in relation to the relevant Master Trust (within the meaning of Part 1 of the Pension Schemes Act 2017).”

This amendment clarifies the circumstances in which assets held by connected Master Trusts and group personal pension schemes can be counted for the purposes of the application of the scale test to a group personal pension scheme.

Amendment 86, in clause 38, page 40, line 19, leave out “relevant Master Trust or”.

This amendment removes an unnecessary reference to a relevant Master Trust.

Amendment 87, in clause 38, page 40, line 25, leave out—

“managers of the GPP that their”

and insert—

“provider of the GPP that its”.

This amendment replaces a reference to the “managers” of a GPP with “provider” (reflecting normal usage in relation to personal pension schemes).

Amendment 88, in clause 38, page 40, line 27, leave out “the managers” and insert “the provider”.

This amendment replaces a reference to the “managers” of a GPP with “provider” (reflecting normal usage in relation to personal pension schemes).

Amendment 89, in clause 38, page 40, line 35, leave out—

“considered by the Authority to have failed”

and insert “who fails”.

This amendment ensures consistency with the new language in section 28A.

Amendment 90, in clause 38, page 40, line 38, at end insert—

“(e) providing for the making of a reference to the First-tier Tribunal or Upper Tribunal in respect of the issue of a penalty notice or the amount of a penalty.”

This amendment ensures that regulations can make provision for appeals to the Tribunal in respect of penalties under regulations under new section 28C(9)(c).

Amendment 91, in clause 38, page 40, line 42, leave out from beginning to end of line 3 on page 41 and insert—

“(12) In this section ‘main scale default arrangement’ means an arrangement—

(a) that is used for the purposes of one or more pension schemes, and

(b) subject to which assets of any one of those schemes must under the rules of the scheme be held, or may under those rules be held, if the member of the scheme to whom the assets relate does not make a choice as to the arrangement subject to which the assets are to be held.” —(Torsten Bell.)

This amendment defines “main scale default arrangement” for the purposes of new section 28B.

[Mark Garnier]

I beg to move amendment 248, in clause 38, page 41, line 4, leave out from beginning to end of line 9 on page 43.

This amendment would remove the ability of the Government to set mandatory asset allocation targets for certain pension schemes, specifically requiring investments in UK productive assets such as private equity, private debt, and real estate.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 275, in clause 38, page 41, line 31, at end insert—

“(5A) A description of asset prescribed under subsection (4) may not be securities in any UK water company.”

This amendment would ensure that the prescribed percentage of asset allocation would not include assets in the water sector and fund trustees will not be compelled to allocate scheme assets to the water sector.

Amendment 249, in clause 38, page 45, line 3, leave out from beginning to end of line 27 on page 46.

This amendment is consequential on Amendment 248.

New clause 4—Establishment of targeted investment vehicles for pension funds—

“(1) The Secretary of State may by regulations make provision for the establishment or facilitation of one or more investment vehicles through which pension schemes may invest for targeted social or economic benefit.

(2) Regulations under subsection (1) must specify the descriptions of targeted social or economic benefit to which the investment vehicles are to contribute, which may include, but are not limited to, investment in—

(a) projects that revitalise high street areas;

(b) initiatives demonstrating social benefit;

(c) affordable or social housing development.

(3) The regulations must make provision for—

(a) the types of pension schemes eligible to participate in such investment vehicles;

(b) the governance, oversight, and reporting requirements for the investment vehicles and participating pension schemes;

(c) the means by which the contribution of such investments to targeted social or economic benefit is measured and reported;

(d) the roles and responsibilities of statutory bodies, including the Pensions Regulator and the Financial Conduct Authority, in authorising, regulating, or supervising such investment vehicles and the participation of pension schemes within them.

(4) The regulations may—

(a) make different provision for different descriptions of pension schemes, investment vehicles, or targeted social or economic benefits;

(b) provide for the pooling of assets from multiple pension schemes within such vehicles;

(c) require pension scheme trustees or managers to have regard to the availability and suitability of investment vehicles when formulating investment strategies, where consistent with—

(i) their fiduciary duties, and

(ii) the long-term value for money for members.

(5) In this Chapter, ‘pension scheme’ has the same meaning as in section 1(5) of the Pension Schemes Act 1993.”

This new clause would allow the Secretary of State to establish investment funds to encourage investment in areas such as high streets, social housing and investments with clear social benefits.

[Mark Garnier]

Amendments 248 and 249 talk about removing mandation—something I spoke about when we debated clause 38, so I will not cover those amendments other than to say that it is something we feel strongly about. Amendment 275 concerns mandation with regard to the water industry. It comes as a result of an announcement from the leader of Reform about potentially using pension fund money to invest in Thames Water, and part of Reform’s manifesto talked about nationalising the water industry, but using pension fund money to own 50% of those holdings. To a certain extent, that is performative because we are talking about a specific sector. This amendment specifically talks about the water companies, but it could be carried forward to any other potentially nationalised sector.

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[Mr Bedford]

I will come on to some of those points later, so I will address them then.

[Mark Garnier]

This is rather strange, because I wanted to intervene on the intervention, but I hope that my hon. Friend will come on to the various other things that we have proposed. For example, we have proposed looking at the Maxwell rules, which are driving the incentive of pension fund trustees to invest in gilts because of the implications of volatile markets for balance sheets. We are trying to look at the wider regulation that is driving certain behaviour, and I hope that my hon. Friend will raise that in due course. We are 100% behind the Bill—not every single part of it, although the thrust is very good—but, as my hon. Friend will mention, there are areas that could be changed to achieve its aims.

[Mr Bedford]

I hope to address some of those points.

The Government are willing to take investment decisions out of the hands of pension fund trustees to force investments into projects that may be politically convenient for them, but may potentially lead to financial loss for members. They are directing investment on the backs of ordinary UK savers. When people save into a pension scheme, they are entrusting their future security to a system that is working supposedly for them and not for political gain. To answer the point made by the hon. Member for Hendon, rather than coercing trustees to follow conditions set by Ministers, would it not be better to create the right economic conditions to make trustees want to invest in the UK?

The last Conservative Government, through their Mansion House reforms and the work of my right hon. Friend the Member for Godalming and Ash, brought in active commitment from the pension fund trustees who want to invest. We did not need to mandate that, and the Government should learn from that approach. Amendment 248 will preserve the fiduciary duty, but continue the trajectory to increase pension fund investment in the UK.