Pension Schemes Bill

Viscount Younger of Leckie Excerpts

Thursday 18th December 2025 Lords Chamber

[Viscount Younger of Leckie (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Palmer, who, like me, has become a regular on the pensions circuit here. As this debate draws to a close, I thank all noble Lords who have contributed with such seriousness and expertise this afternoon. For my part, I will try to touch on the key themes raised but, before I do, I would like to pay my own tribute to the noble Baroness, Lady White of Tufnell Park, because she gave an assured, charming and exceptional speech. She comes with a distinguished career record and I have no doubt that we will be hearing much from her here in future.

The seriousness of this debate was exemplified by my noble friend Lady Stedman-Scott, who set out with great clarity our central concerns raised by this Bill. Those concerns, however, point to a wider issue with the legislation itself. This is a framework Bill, light on detail and heavy on intention, which has left your Lordships debating concepts and hypotheticals rather than the Government’s concrete plans. That is not only unsatisfactory but disappointing. These points were made by my noble friend Lady Coffey. Certainty in legislation comes from detail on the face of the Bill. When that detail is repeatedly altered, deferred and subject to numerous government amendments—by the way, there are over 50—even the limited certainty we believed we had is further diminished. I look forward to the Minister’s response, not just on the preparation of the Bill, or perhaps lack of it, but, as has been raised, on the report from the Delegated Powers and Regulatory Reform Committee.

Nowhere is the lack of certainty more evident than in the proposed value-for-money framework. This was one of the first themes raised, not least by the noble Baroness, Lady Warwick, the noble Lord, Lord Davies of Brixton, and my noble friend Lady Penn. This element of the Bill is thin, almost skeletal, yet it is pivotal—again, my noble friend Lady Coffey spoke about this. In practice, much of what this legislation seeks to achieve will stand or fall on how the value-for-money framework is designed and applied. If it is to drive genuine improvement rather than box-ticking, its methodology must be transparent, robust and genuinely comparable across schemes. Cost alone cannot be allowed to dominate decision-making at the expense of outcomes. A scheme that is cheap but delivers persistently poor returns is not offering value to savers, however attractive its headline fees may appear.

Against that background, I have two specific questions for the Minister. First, do the Government envisage the value-for-money framework operating as a standardised pro forma, with clearly defined and comparable metrics covering costs, net investment performance, and cost-to-return ratios applied consistently across schemes? Secondly, how will the Government ensure meaningful comparability between very different types of schemes? In particular, what steps will be taken where schemes meet fee thresholds but nevertheless deliver consistently weak investment outcomes? My noble friend Lord Trenchard touched on this.

This feeds into a wider concern about the order of priorities in the Bill. Rather than committing to the notion of the reserve power—so-called mandation, which I will touch on later—the Government should have concentrated first on getting value for money right. That should have been the central driver of this legislation. If value for money is properly defined, transparently measured and rigorously applied, it can strengthen outcomes for savers without trampling on the fiduciary duties of trustees. We have heard quite a bit about that this afternoon.

As the Minister for Pensions himself has said, trustees must remain free, and indeed obliged, to act in the best financial interests of their members, but I say that this should be guided by evidence and judgment rather than direction by mandate. We should be confident enough to demonstrate the benefits and drawbacks of widely used default strategies, such as global passive equities, which underpinned many DC schemes’ investment approaches. That case should be made openly and empirically, yet the Government have underplayed the extent to which a robust value-for-money framework could drive improvement without compulsion. If value is genuinely improved and transparently measured, much else should follow.

My noble friend Lady Stedman-Scott has already clearly set out the Opposition’s wider concerns about mandation. I will not repeat them at length, but the subject was raised by my noble friends Lord Ashcombe and Lady Noakes, the noble Lord, Lord Vaux, and a number of noble Lords. However, I wish to raise one further point that reflects a broader theme running through today’s debate: the need to strike the right balance between flexibility and discipline. My noble friend Lord Ashcombe spoke on this.

Beyond the constitutional and fiduciary issues already raised, there is also a practical market risk that should not be overlooked. This matter was raised by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Bowles, about market distorting effects, as the noble Lord put it. Mandation risks inflating asset prices if multiple funds are required to allocate to the same asset classes at the same time. I believe that the noble Baroness, Lady Altmann, raised this matter too. Markets may also interpret Government direction as an implicit signal of future price support, potentially amplifying distortions rather than improving capital allocation.

Against that background, I have two specific questions for the Minister. First, have the Government assessed the risk that mandated investment could lead to asset price inflation or wider market distortion? If so, what conclusions have they reached? Secondly, how do the Government intend to ensure that mandated allocations remain aligned with changing economic conditions, particularly in cases where schemes may reach a mandated threshold only after the relevant asset class is no longer aligned with economic need or the Treasury’s broader objectives?

There are a few further questions on this important subject. The noble Lord, Lord Davies, asked this as well. If, after mandation, or, in the case of mandation, if investments underperform or indeed fail, who takes responsibility, the Government or trustees? My noble friend Lady Penn asked how the qualifying assets will be defined. I think other Peers may also have asked that. The noble Baroness, Lady Bowles, asked some important questions in this sphere, so I am looking forward to the response from the Minister.

I should say also that I noted the constructive advice and ideas from the noble Baroness, Lady Altmann, on how the Government could better encourage pension funds to invest in the UK, short of introducing the reserved power. There were also some suggestions from my noble friend Lord Trenchard.

Next, let me touch on the treatment of surpluses in defined benefit schemes. I agree that surpluses can present opportunities, but they are not windfalls: they exist to absorb future shocks, manage demographic risk and ensure that promises made to members are kept. Flexibility in how surpluses are treated is sensible, but only if it is underpinned by robust safeguards. None of us wishes to see surpluses eroded by ill-judged extraction or quietly diverted into activities that weaken long-term scheme resilience. In that context, the forthcoming guidance from the Pensions Regulator will be pivotal. Can the Minister confirm when that guidance will be published, whether it will be subject to consultation and how Parliament will be able to scrutinise the balance it strikes between prudence, flexibility and long-term security?

Much of today’s debate has also rightly returned to auto-enrolment. The question of paucity of pensions adequacy has been highlighted by the noble Lords, Lord Sharkey and Lord Davies of Brixton, and my noble friend Lady Penn. Introduced by a Conservative Government, auto-enrolment has been one of the quiet successes of the past decade. I would like to remind the House that the operational aspects of this were progressed and tested going back as far as 2012. Participation among eligible employees now stands at around 88%. I would argue that this is a remarkable achievement. But success should not breed complacency, because upwards of 8.5 million people remain undersavers, and the question of adequacy remains unresolved. There is still work to be done, as the noble Baroness, Lady Bennett, said.

Crucially, auto-enrolment is highly sensitive to labour market conditions. Every percentage point increase in unemployment pushes more people out of workplace pension saving altogether. Against that backdrop, the recent “benefits Budget” is concerning. Unemployment is rising and, with it, the number of people falling out of pension saving. I therefore ask the Minister whether the Government have undertaken updated modelling on the impact of higher employment on future pension adequacy, whether those projections differ from earlier assumptions and whether they will be published so that Parliament can properly understand the long-term consequences of the Government’s policy choices.

As many noble Lords have noted, pension engagement remains the missing leg of the stool. Millions are saving, but fewer than half have checked the value of their pension in the past year. This is not simply apathy; it reflects a system that has become increasingly complex and opaque to ordinary savers. The pensions dashboard, which has been mentioned this afternoon, is therefore not a technical adjunct. It is central to enabling informed decision-making, and various questions have been raised about that. Can the Minister confirm when the revised staging timeline will be published, whether clear delivery milestones will be set out and how Parliament will be able to track progress so that savers can have confidence that this long-delayed reform will finally be realised?

Engagement, however, is also constrained by the current regulatory environment. In consultation with industry, we heard compelling evidence that FCA and the TPR regulation makes genuine member education extraordinarily difficult to design. The boundary between advice and marketing has become so blurred that most communications fall into a grey area, leaving schemes with very few compliant touch points for meaningful engagement. If we are serious about improving outcomes, the Government must enable better education and clearer communication. Perhaps the Minister could comment on this and what work is under way to review these constraints and how the Bill supports rather than frustrates the goal of informing saving.

I turn to salary sacrifice, because this decision strikes at the heart of pensions adequacy, individual engagement and, ultimately, trust in the system itself. The recent disappointing Budget has taken a sledgehammer to a mechanism that has for many years made pension saving both affordable for workers and sustainable for employers. For millions of people saving at or near the minimum auto-enrolment rate, salary sacrifice is not a perk but the difference between saving and not saving at all. Removing this relief will mean lower take-home pay, lower pension contributions and, over time, materially smaller pension pots. This is a short-sighted political choice—one that appears designed to plug immediate fiscal pressures while storing up greater dependency on the state in retirement.

The impact on employers is equally concerning. By reimposing employer national insurance on previously sacrificed earnings, the Government are increasing the cost of labour at precisely the wrong moment. For many medium-sized firms, this will translate into tens of thousands of pounds in additional annual costs—money that could otherwise have supported wages, investment or workforce expansion. The decision to charge both employer and employee national insurance on salary-sacrifice contributions above £2,000 introduces a sharp and, I believe, irrational cliff edge. The OBR estimates that 76% of the burden will fall on employees. Once again, private sector workers bear the cost, while public sector employees in defined benefit schemes remain largely insulated.

The figures are stark. An employee earning £45,000 and saving 5% through salary sacrifice will be £58 worse off in the first year and more than £15,000 worse off over the course of a working lifetime. In the light of this, can the Minister confirm whether the Government have undertaken a sector-by-sector distributional analysis of these changes, whether they will publish an assessment of the long-term impact on pension adequacy and future welfare expenditure and whether she accepts that this measure operates in effect as a tax on work and on responsible long-term saving?

Some noble Lords have rightly raised the broader macroeconomic implications of pension reform. UK pension funds and insurers together hold around 30% of the gilt market—this point was made earlier. If mature defined benefit schemes are nudged away from gilts into equities, the consequences for debt management, interest rates and mortgage markets could be profound. It would therefore be reassuring to hear from the Minister whether the Debt Management Office and the Bank of England have been consulted on these potential effects and whether their views will be made available to Parliament.

I realise that time is marching on. I hope the Government will reflect carefully on all the concerns raised across your Lordships’ House today and respond with the assurances that savers and schemes alike are entitled to expect—we owe them nothing less. However, in the spirit of Christmas, and as this is the season of good will—I am feeling more Christmassy now than I did before the Question this afternoon—I say to the Minister that, despite everything I have said, and in a rare outbreak of festive generosity, there are parts of the Bill that we agree with, such as the PPF changes and the terminal illness time extension. As others have said, we will work constructively with the Government in the weeks and months ahead. I look forward to the Minister’s response and wish Peers and staff in the House a very happy Christmas.