Pension Schemes Bill

Committee (5th Day)

Clause 40: Certain schemes providing money purchase benefits: scale and asset allocation

Amendment 91

91: Clause 40, page 38, line 34, at end insert— “(c) able to demonstrate that they deliver investment performance which exceeds that achieved by the average of all Master Trusts which hold an approval under section 28A in respect of a main scale default arrangement.”Member’s explanatory statement This amendment allows Master Trusts which deliver good investment performance to be excluded from the scale requirements.

My Lords, I will speak to my Amendments 91 and 95. I thank my noble friend Lady Neville-Rolfe for adding her name to them. Having had a little detour into asset mandation in the last group, we now return to scale. My Amendments 91 and 95 relate to master trusts and group personal pension plans, respectively, returning to the theme of size not being everything. They are intended to exempt from the scale requirements those schemes that deliver investment performance which exceeds that achieved by the average of all master trusts or all group personal pension plans.

We debated the general theme of size not being everything on the last day of Committee. I firmly believe that we should not let an obsession with size squeeze good performers out of the market. The Minister’s arguments on that day, despite protestations to the contrary, show that the Government have an obsession with size that overrides their professed desire for better outcomes for savers. If they really care about outcomes for savers, they should not be fixated on structural issues such as the size of assets under management, because good investment returns are not the exclusive preserve of schemes that reach the magic £25 billion of assets. The evidence for the Government’s policy cited by the Minister last week merely indicates that there is a correlation between size and returns achieved. That evidence, however, categorically does not demonstrate that good returns are obtained only by those which pass a size threshold.

At the heart of this debate is the problem that the Government are trying to use this Bill to force pension schemes to divert investment resources into things that the Government think will improve the UK economy, while at the same time claiming the objective of good outcomes for savers. I remind the Minister of Tinbergen’s rule: if policymakers wish to have multiple policy targets, they must have an equal number of policy instruments under their control. One instrument—mandating the size of pension provider—will not achieve the separate targets of improving savers’ outcomes and increasing UK productive investment without risking policy effectiveness and reduced transparency and accountability. By ignoring Tinbergen’s rule, the Government are actively inviting policy failure in this area.

My Lords, I, too, have a number of amendments in this group and I will address my remarks mainly to them. Amendments 99 and 106 recommend removing the specific figure of £25 billion from the Bill and replacing it with a figure to be determined by the Government nearer the time, I hope, after detailed consultation.

On the last day in Committee, when we debated Amendment 88 on small pots, in the name of the noble Baroness, Lady Noakes, which proposed a monetary limit of £10,000, the Minister rejected the amendment on the grounds that

“the Government are not persuaded that it is sensible to hardwire the cap in primary legislation”.—[Official Report, 22/1/26; col. GC 188.]

Quite right. The same applies here: my amendment follows exactly that principle. I am concerned about the risks involved in tying primary legislation to a fixed monetary sum.

First, a change in market conditions could render it inappropriate. Secondly, such a large sum risks stymieing the development of newer companies and gives an exceptional competitive advantage to those providers already of the required scale. There is no evidence—I have been searching—to suggest that big is always best and there is certainly no academic proof that £25 billion, £10 billion or any other number is the right dividing line between successful funds and failing funds.

Newer entrants with an interesting approach to member service, digital engagement or innovative investment may well take time to break into the market, but just because they have not reached what the Bill determines is the magic number should not mean that they are forced to close, which is what the Bill would do, in effect.

The Minister said that consolidation and scale will mean

“better outcomes for members … lower investment fees, increased returns and access to diversified investments, as well as better governance and expertise in running schemes”.—[Official Report, 22/1/26; col. GC 202.]

My Lords, I support Amendments 91 and 95 in the name of my noble friend Lady Noakes, to which I have added my name. I apologise for not being able to contribute to the Committee’s discussions on Thursday because of competing business on the Floor of the House. I have read Hansard and I should record that I share the reservations expressed about mandation, a subject on which I have received many well-argued requests and emails. I commend the arguments that have been well put by my noble friend Lord Younger of Leckie on the amendment from the noble Baroness, Lady Bowles. I particularly dislike powers delayed into the future. If the Government decide that they need to legislate later, they can bring in another Bill that the House can scrutinise in the light of contemporary evidence.

I turn to the amendments in this group, so well argued by my noble friend Lady Noakes. I am uneasy, as others are, about the overemphasis on creating size and scale in the Bill: £25 billion is a big fund and, as my noble friend Lady Altmann said, it does not seem to be well evidenced. It is a Labour trend that needs to be treated with some scepticism. We see it in local government reorganisation, in rail nationalisation and now in the proposals for the police. I know from my business experience, which noble Lords know I always come from, that mergers of any kind always have substantial costs and that you need smaller, pushy innovators to keep sectors competitive. This might be contentious, but Aldi was good for Tesco because it kept us on our toes—and even better for the consumer, the equivalent of the saver in this case. The point is that reorganisations of any kind always have costs and only sometimes have benefits.

We have seen the growth in recent years of money purchase funds that are almost entirely digital, and they have brought beneficial competition to the market. We risk eliminating the next generation of innovation, real value creation and indeed British unicorn funds, generated by competition, if we leave the Bill as it is.

My Lords, I will speak to Amendment 99 in particular but I generally associate myself with all the amendments in this group, including Amendments 95 and 98 in the names of my noble friends.

As we have heard, there is no conclusive evidence that bigger is best when it comes to investment management. Of course there are some large funds that do rather well, but, as I explained on a previous day in Committee, within the Local Government Pension Scheme it is the smallest fund in the Orkneys that has outranked the performance of all the 88 other schemes in the LGPS, and there is something to be said for that. It has never changed its investment manager, and there is a lesson there.

In my experience, the best returns are to be made in investing in companies where you either buy the product or know the management—not so that you can tap them for inside information, of course, but because it hardly ever pays to invest in bad people. I also like to buy when prices fall because, let us face it, buying high and selling cheap is never a good investment strategy. But there is no evidence at all that scale in and of itself is good. There is plenty of evidence that it is worse. As they say, the larger they are the harder they fall, and small ones are more juicy.

Back in 2014 I argued the point with a then local government finance minister that mandatory pooling would have marginal gains and there were other ways to be more cost efficient—a joint procurement of investment management in a framework agreement within the LGPS was just one example. My word counted for nothing against the massed ranks of all the City of London. They knew a payday when they saw one. They won, and since then the proportion of assets invested in the UK market by the LGPS has fallen from a third to less than a sixth. The UK economy and British companies lost out. Those are the facts.

There is an old saying that once you go beyond £1 billion, it is just a lot of money. I accept that you need some scale for the diversified asset allocation needed to optimise risk and reward from equities in the UK, the US, the rest of the world and emerging markets; government, corporate and junk bonds; property; cash; private equity; and other asset classes. That comes in at about £1 billion, possibly £2 billion, but certainly not the £25 billion that the Government appear to be fixated on. At this super scale, everybody chases the same things, driving up a bubble. The largest opportunities are beyond our shores, and that increases systemic risks and damages long-term returns. I will talk about herding on a later group.

The truth is that the largest schemes invest less in Britain, and that is because the schemes are just too big to invest in the smaller British companies with great growth potential that might need a few million quid to get to the next stage. The consequence of all this is that British companies, which are crying out for long-term patient capital, go hungry, while it directly contradicts the Mansion House objectives.

This lazy narrative that bigger is best suits the incumbents just fine. There are astonishing provisions here to lock out new, energetic and innovative newcomers. A few mergers here and competition will be reduced, and—hey presto—everybody pays more. Only this Government could prefer an oligopoly over competition and badge it as good for pension scheme members. It is crazy. Amplifying it into a default scheme, requiring the regulator to approve new entrants, is the old boys’ network keeping out a competitor. That is what this Government have come to. Fewer, larger funds will reduce competition, drive up costs, make the UK market less attractive to innovators and plug the tax gusher that is the City of London. We will all be poorer for it when everyone goes to Dubai.

There are loads of examples of big being bad: the Ontario scheme and Thames Water—I have mentioned that one before—the Swedish state scheme and the Northvolt disaster, and the poor returns on the Universities Superannuation Scheme. There is too much politics and too little return. There is no evidence that this pooling has saved money or improved performance in the LGPS over what could otherwise have been achieved. In essence, the enforced uniformity means that the star strikers in investment management have been replaced by the subs from the reserve team, as all the schemes try to bulk up and recreate and duplicate what the City has spent 200 years creating.

In 2014 it was said that £660 million could be saved. Now the Government say in their press release that we could save £1 billion. We have heard it all before. It was not right 10 years ago, and it is certainly not right now. The increased systemic risks by fragmenting investment management in the City of London, with the illusion that it can invest in the big infrastructure, is just crazy. It is not going to happen until the infrastructure pays a coupon. The Government would be much better employed in trying to turn investment into having a return so that a flood defence pays some interest or whatever.

Even if that was to happen, £25 billion is not large enough for an individual scheme because no scheme would sensibly invest more than 10% in infrastructure. That is only £2.5 billion in each scheme. It is just not enough. It is not going to touch the sides. They need to bulk up into bigger schemes, but the Bill prevents the LGPS in particular, and by extension the other schemes, participating in more than one pool. We know what the Government are trying to achieve, but this is not the way to deliver it.

My Lords, I will not go into too much detail. I should, because I was not here last week, declare an interest, in that I am a director of a Guernsey-based, open-ended protected cell company and a London-listed, closed-ended investment company. Neither of them begins to approach the necessary size to qualify under the scale criteria that this Bill introduces.

I agree entirely with the points made by my noble friends Lady Noakes, Lady Neville-Rolfe and Lord Fuller and the noble Baroness, Lady Altmann. Scale is nothing to do with this. I find it quite extraordinary that the Government assume that big is good and small is bad. All big funds were once small: they started with nothing and built up. There is also some evidence that, if you get really big, you become a big complacent and do not have to be quite as sharp as you do when you are making a small fund bigger and more successful and establishing its reputation.

Interfering with the fiduciary duties of pension fund trustees in this way is risky, bad, potentially dangerous and unlikely to be in the interests of the pension beneficiaries, so I strongly support all the amendments in this group. I do not think that the minimum size of a master trust should be specified in the Bill. Trustees will have their own criteria for the maximum proportion of funds that they may own in any one fund, and for the maximum percentage of their funds’ assets that may be invested in any one fund. I think these are better ways to achieve the obvious need to reduce risk, and pension fund trustees are the right people to deliver them.