Pension Schemes Bill (Third sitting)

Debate between Steve Darling and Peter Bedford

Committee stage
Thursday 4th September 2025 Public Bill Committees

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

It is a pleasure to serve under your chairmanship, Sir Christopher. I hope that the Government consider amendment 246, which would require annual reporting by LGPS asset pools on the financial performance of local investments. This is not bureaucratic red tape; it is a necessary safeguard that would help trustees in upholding their fiduciary duties and responsibilities and protect the interests of scheme members and the people whose pensions are at stake. It would be a sensible addition to the Bill, especially when we consider the fact that the Government’s impact assessment offers very little on LGPS consolidation. There is no reference to the impact that the de facto mandation of local investment will have on the trustees’ fiduciary duty or on members’ outcomes. I urge the Government to consider the amendment, not only for those reasons but because it would give consolidated asset pools greater clarity over whether their investments are best placed.

[Steve Darling]

I start by wishing the Minister a happy birthday. [Hon. Members: “Hear, Hear.”] I am sure that for all of his life he has wanted to be sitting on a pensions Bill Committee on his birthday.

More seriously, when we were in desperate measures in my time as a local authority councillor in Torbay, we borrowed to invest and make money for the local authority—that was once upon a time, because it is no longer possible—so I know from experience that authorities often have to invest elsewhere in the country to get the best financial returns. Our experience in Torbay was that a lot of our investments in the south of England got in the money that we needed to keep the local authority ticking over.

I would therefore welcome the Minister’s thoughts on how we get the balance right. Clearly, investors would want to invest in the local area to drive economic development, but there is a need to balance that with getting positive outcomes for the pension fund. Some guidance from the Minister on how he sees that balance being struck, as the hon. Members for Wyre Forest and for Mid Leicestershire have alluded to, would be helpful.

Pension Schemes Bill (Second sitting)

Debate between Steve Darling and Peter Bedford

Committee stage
Tuesday 2nd September 2025 Public Bill Committees

[Steve Darling]

Yes.

Michelle Ostermann: We have several types of levies that support our organisation. If I may, I will just take a step back to help everyone to understand what role they play.

The PPF is not terribly well understood because we are a bit unique in this industry and there are only half a dozen bodies like us in the world. The UK is one of the few countries that have a protection fund such as this. In some ways we back as an insurer in that we collect premiums or levies from the industry from the 5,000 corporate DB schemes and backstop 9 million potential future members that still sit in those schemes. We collect the levies and hold them in reserve much like an insurance company. We are not an insurance company, but we do so much like they would mathematically and with similar models.

At the same time, if a corporation fails, we take its pension scheme, which is usually underfunded, and its orphan members and put them into a pension scheme. We are both a pension manager and an insurer of sorts. When there is a failure and a scheme comes to us with insufficient assets to make good on its pension liabilities, we take some of our reserves almost as a claim, and move them over to the pension fund so that it is fully funded at all times using a largely liability-driven investment-type strategy. The levies that we collect are twofold: first we collect a levy related to the risk of the industry. You may be familiar with our purple book and the industry-wide assessment we do. We monitor the risk of that entire complicated £1 trillion industry to decide how much to set aside as reserves.

Our reserves are often referred to as a surplus, but they are not a surplus; they are reserves sitting there for potential claims in 50, 80 or 100 years. We will be the last man standing in this industry. We are here as an enduring and perpetual solution. As long as there is DB in the industry, we will have to backstop it. We set aside those reserves for the 9 million members and current £1 trillion in case of future market environments that we cannot predict today. Those levies have been collected over 20 years from the constituents of that industry. We have collected just over £10 billion from that levy system and have paid out £9.5 billion of it as claims to the pension fund.

As those levies were coming in over that 20-year period we were investing them in an open DB growth-type strategy. As such, we have built up £14 billion of reserves and so now consider ourselves largely self-funding. We no longer need to collect that levy from the industry now that those reserves are sitting there—in so far as we can best tell with our models today. We prefer to reserve the right to turn it back on should we need it in the case of a market correction event, some unforeseen circumstance or an evolution in the industry. However, right now, those fees are no longer required by us; it is a risk assessment that is suggesting that.

[Mr Bedford]

Q Building on Steve’s question on the levy, some hon. Members have asked about surplus extraction feeding into the overall risk profile in the markets. Clearly, if that was to happen and there was perceived to be an increased risk, it could result in an increase in the levy. The Bill allows for the levy to be reduced to zero. What are your thoughts about that?

Michelle Ostermann: We have thought a fair bit about that. We do not see very many scenarios in which we would need to turn it on, although it is always difficult to predict. As you know, the industry evolves in many ways and over the 20 years we have seen quite an evolution, including the creation of new alternative covenant schemes and commercial consolidators. We will backstop those as well, and we will need to charge a levy for them. There could be an unforeseen market event, similar to that just described, so we need the ability to turn the levy back on—simply to keep it as a lever. Today, the legislation reads that if we were to lower it to 0%, we can only increase it year on year by 25%. However, 25% of zero is zero, so we are a bit cornered. We have asked for a measure that would allow us to increase it by as much as a few hundred million a year. The most we have ever charged in one year was just over £500 million.

As I said, we have collected £10 billion gradually over many years. The new measure allows us to increase it by no more than 25% of the ceiling number every year, which is currently £1.4 billion. That means we could go up as much as £350 million in a single year, if needs be. However, we are a very patient long-term investor. Even though we are taking on closed corporate DB schemes, we run it as if we were an open scheme, because we are open to new members all the time. As such, our investment strategy does most of the heavy lifting for our organisation now.

On our £14 billion reserves, we make over £1 billion a year in gains from that investment strategy, which funds the £1 billion we pay out in the pension scheme to members. We are now a mature organisation that should be able to maintain a steady state. The most we would be able to increase the levy by in one year is £350 million, but we would expect to be patient, wait a few years, and try to ride out the situation not needing it, only turning it back on should we need it. We consult before we turn it on and we take a lot of feedback on this. We are quite thoughtful, as we have always been, and I hope people agree.