That this House insists on its disagreement with the Lords in their amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88, insists on its amendments 88A and 88C to the words restored to the Bill by that disagreement, does not insist on its amendment 88B to the words so restored to the Bill, but proposes amendments (a) to (j) to the words so restored to the Bill.
I thank Members and peers for the continued scrutiny of the Bill before us. Our task today is to focus on the limited outstanding areas of disagreement, although that should not detract from the consensus behind this Bill—behind the case for a better pension landscape that sees bigger, better pension schemes focused on delivering stronger returns for savers. On the issues that remain before us, I hope that Members and peers will see that we have listened to the points they have raised and brought forward amendments that directly address what we have heard, while of course holding to the core principles of delivering against the Labour manifesto, which was clear on our policy intent around scale and productive investment.
First, I turn to the reserve power on asset allocation. Last week I set out the Government’s case for such a power at some length, and I will spare the House a full repetition today—[Interruption.] I know, I know, but there is so much more to discuss. We will not have time to discuss the hair of the hon. Member for Wyre Forest (Mark Garnier) if I offer a full statement.
In brief, since hon. Members have asked, there is a well-evidenced collective action problem in the defined-contribution pensions market. Providers want to diversify their asset allocations in their members’ long-term interests and in the interests of better pensions for savers, but they are clear publicly—and even more emphatically in private—that market dynamics, which focus on minimising cost rather than maximising long-term value for savers, are the single biggest barrier to doing so. That is not a theoretical risk; it is exactly why so little progress was made against the Mansion House compact under the last Government. The reserve power exists for the sole purpose of solving this problem.
Last week, we brought forward changes to make that absolutely explicit by writing the industry-set Mansion House accord targets into primary legislation through the 10% and 5% caps, and requiring any regulations to operate neutrally across asset classes. These were designed to make it clear in the Bill that the power can be used only in line with what the industry itself has committed to. The cap prohibits any move beyond the accord targets and the neutrality requirement rules out the possibility that any Government could direct investments into a particular asset or asset class.
I congratulate my hon. Friend on stewarding the Bill with such expertise, and I very much hope that the cultural change that he is hoping for sticks and that we do not just get an unwinding of the repatriation of UK investment. A necessary corollary of what he is proposing is a fiduciary duty and a fiduciary code that give pension fund trustees real clarity in investing in a wide range of investments that are good for the long-term health of the savings they are stewarding. It was unfortunate that the other place rejected the Government’s amendment that would have allowed a new statutory code to be implemented. Will the Minister confirm that the technical working group that he has set up to revise that code will proceed, and will he commit to bringing forward further amendments to future legislation to give effect to the ambition that he set out in response to my new clause 17?
I share my right hon. Friend’s frustration about developments in the Lords on those matters, not least because some of those who voted against amendments that would have introduced statutory guidance, as he says, have spent years calling for exactly that—but that is a matter for them. The Government will proceed on work to draft that guidance. The technical working group is well under way and is doing good work to provide clarity to the industry. We will come forward with proposals to put the guidance on a statutory footing in the months and years ahead.
As I was saying, the timeline tightly matches that of the accord. I hope that everybody can see that the framework is a long way from the characterisation of this power that we have occasionally heard. I understand that some Members of this House and the other place would prefer it if the power did not exist at all. I respect that view, but I do not share it. The evidence for the collective action problem is clear—we have lived it—and I have listened but heard no alternative proposal to address it. The consequences of not addressing it fall on pension savers—the people who rely on their defined-contribution savings for a comfortable retirement. That is not a risk that the Government are prepared to take.
The elected House has now considered this question twice. On both occasions, it has overwhelmingly endorsed the case for the reserve power to deliver our manifesto commitments in this area. The Government have listened to the concerns raised in the other place, and have responded not with warm words but with real concessions, through changes to primary legislation that directly address the arguments made. I hope that MPs and peers will now accept that the Government have moved significantly and provided the assurance they have been seeking.
Lords amendment 35B would require the Secretary of State, when making regulations across the scale measures and those for default arrangements, to have regard to
I do not claim to be a huge expert on pensions, which may be why, rather than focusing on the point last week, I made comments about the hair of the shadow Minister, the hon. Member for Wyre Forest (Mark Garnier). I will not do so again—but it is fantastic hair.
Pensioners in my constituency are passionate about ensuring that they get the best return on their savings—that is hugely important—and that their pensions are secure, as the Paymaster General said in his statement. What reassurance can the Minister give them that the provisions he has set out today and last week will give them the best returns and security?
As always, my hon. Friend asks an important question. As I have said, the entire focus of the Bill is on ensuring that we drive up returns for savers. I am sure that he has already read all 200-odd pages of the extensive impact assessment, which sets out clearly that we would expect an average earner who saves over their lifetime, in line with auto-enrolment levels, to see higher returns of around £29,000 to their pension pot when they head towards retirement. That is not an inconsequential amount when we want to ensure that future generations can trust the system to deliver them a comfortable retirement in the years ahead.
As I was saying, the Lords amendments in this area are unworkable, but we must recognise the importance of innovation. That is why we have taken our pragmatic approach. The evidence suggests that the benefits of scale are achieved once a threshold ranging from £25 billion to £50 billion of assets is reached. The scale requirements in the Bill not only target the bottom end of that range—£25 billion—but provide a long timeline for schemes to reach it, especially given that this is a fast-growing market. Smaller schemes require only £10 billion of assets in 2030 to qualify for the transition pathway.
To provide further reassurance, I have tabled amendment (a) in lieu of Lords amendment 37B to require the Secretary of State to publish a report about the effects of pension schemes consolidation and the extent to which innovative product designs are adopted or maintained following consolidation activity, as well as any barriers that may exist to preserving those features. The timing of the report, which is required to be published within 12 months, will ensure that the Government are then able to take necessary action in advance of the scale measures being commenced in 2030.
On Lords amendments 77 and 85, the Government agree with the points made during the Bill’s passage regarding the importance of transparency around, and clear accounting for, public service pensions. I discussed those issues yesterday with Baroness Neville-Rolfe, who tabled the amendments. I completely agree with her that it is crucial that the future cost of payments from unfunded pension schemes is understood and taken into account in Government decision making. That applies to the Treasury in aggregate, as well as to individual organisations making decisions about the nature and level of staffing. We will continue to ensure that accounting and budgetary processes support this.
What a difference a week makes. When the hon. Gentleman rose to conclude our debate last Wednesday, he delivered from the Dispatch Box what I can only describe as a tirade. Serious and considered concerns—not just from me and my hon. Friends, but from noble Lords and many respected people across the industry—were met with accusations. We were told that those concerns were “nonsense on stilts”. He said that I had been “infected” by my party. If by that he meant that I have strong opinions—that I believe in a smaller state because Governments do not have all the answers and often need to get out of the way—then I must break the news to him that I have held those views for many years. I came to Parliament after a career in business. I knew my views then, and I still know them now.
Last week I thought that the Minister could and should do better, and I am glad that since then he has. His tone has shifted, and I am grateful for the discussions he has had with me and my team. His engagement has been constructive, and we have indeed made progress.
Turning to the amendments tabled since our last debate, I first welcome the Government’s commitment on the local government pension scheme. A faster and wider review of the triennial valuation by the Government Actuary’s Department is sensible and significant. If the review is to be meaningful, it must focus on what actually drives employer contribution rates, and we welcome that the Government have now recognised that.
Secondly, the Government have committed, in their amendment in lieu of Baroness Neville-Rolfe’s amendment 77, to examine the costs and sustainability of public sector pensions. That too is welcome. That review should consider questions of intergenerational fairness, long-term sustainability and how best to protect the benefits already promised to people, particularly at a time when demands on the state are rising and taxpayers are being asked to contribute more than ever.
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Now to the question of scale, the Bill assumes that if schemes offer a strong proposition and good member outcomes, there is nothing to stop them growing. We disagree; it is not that simple. For instance, it is exceptionally difficult to win new business in today’s market without already being an incumbent or large insurer. Market structure, capital requirements and regulatory constraints all act as significant barriers to growth.
While pursuing the objective of scale, the Government must avoid entrenching advantage at the expense of performance. That would not serve the interests of members. It is on that basis that we tabled our amendments in the other place. The intention behind the amendments—indeed, the intention of the other place—was to preserve the Government’s policy objective and connect it to the underlying aim, which is not scale in its own right but improving outcomes for members. Scale is a means to that end, but it is not the only means.
Size alone does not equal success. Take football clubs as an example: a larger club may have greater resources, a bigger stadium, more expensive players and larger crowds, but none of that guarantees results on the pitch. I am told that one need look no further than Tottenham Hotspur to see that. We welcome the Government’s amendment to ensure that when regulations are developed, member outcomes will be placed front and centre, and returns, not just scale, will count. What the Government have brought forward today is not perfect, but it is a significant step in the right direction.
The review amendment is also welcome. It introduces a post-legislative reporting requirement on scale, which will allow this House to hold the Government to account for the real-world impact of these reforms.
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As is plain, however, we have not yet reached agreement across the two Houses. Rather than simply restating our position today, the Government are bringing forward a further package of changes.
First, we are bringing forward the current sunset date for the reserve power from 2035 to 2032. The Mansion House accord commits the industry to reaching its targets by 2030, and bringing forward the sunset clause aligns the power more closely with that timeline. If the power has not been exercised by the end of 2032, it falls away entirely. Secondly, because the power has only one purpose, we are providing that it may be exercised only once.
Thirdly—I want the House to understand the significance of this—we are providing for not just the power but any effects of it to fully fall away at the end of 2035. That goes beyond the sunset clause I have just described and means that even if the power has been used, the entire framework and any requirements on schemes will fall away at the end of 2035. This timeline reflects the fact that once the cultural shift has occurred and the impacts of the Mansion House accord are embedded, the collective action problem falls away. At that point, other elements of the Bill—greater scale and the impacts of the value for money framework—will help to sustain the change.
I want to return to a point made by the hon. Member for Faversham and Mid Kent (Helen Whately) in our previous debate. She observed correctly that the Bill referred to assets held in default funds as a whole, whereas the Mansion House accord applies only to main default funds. As the policy is intended to reflect the accord, the legislation would ideally use the same language, so we have tabled amendments to ensure that that is the case throughout the relevant provisions and have retabled the percentage cap with the same wording. I am grateful to the hon. Lady for pressing that point last week.
Let me be clear that the House today is being asked to consider a reserve power that is highly constrained and narrowly focused on solving a very specific problem. It is capped at the accord targets and provides for absolute neutrality among private asset classes. The Government cannot direct investments. The power explicitly applies only to main default funds, more explicitly matching the language used in the accord. The power’s timeline also matches tightly that of the accord. It can be used only once and lapses entirely in 2035 if not used; even if used, which is unlikely, the entire regime is repealed at the end of 2035. On top of all that, it remains subject to the savers’ interest test, the affirmative procedure and the statutory reporting requirements, both before and after any regulations are made.
“the benefits of competition among providers of pension schemes”.
The Government of course support the importance of competition as the market moves towards scale, and have done so in the Bill’s provisions. The market is already highly competitive, and the new entrant pathway is designed to ensure that it remains so. The same goal is reflected in a scheme’s ability to open new default arrangements.
However, we have heard the arguments that have been made during debates, and I recognise the desire in the other place to see that commitment in the Bill. This is why I have tabled amendment (b) in lieu of Lords amendment 35B. It sets out that the Secretary of State, in setting regulations in respect of both the scale measures and those relating to default arrangements, must have regard to the importance of competition and innovation. The amendment in lieu delivers on the proposals from the other place, but with an appropriately holistic approach to the issues to which a Secretary of State will need to have regard in the years ahead. That reflects that our ultimate focus is, of course, on delivering the best outcomes for members, of which competition in the market is one important driver. Under the Government’s amendment, regulations must have regard not just to scale, but to competition and innovation, alongside effective governance. The explanatory notes will make that clear.
On Lords amendment 37B, the case for scale has been made, and both Houses have broadly agreed with the benefits that it brings. Indeed, all main parties are on the record as recognising the key role of scale in delivering better outcomes for savers. We all made those arguments, recognising that moves towards scale would always mean some schemes exiting the market because we collectively prioritise the need to deliver for those who work hard to save for retirement, and we must ensure that they are saving into schemes that can deliver better outcomes.
Scale drives lower costs, better governance, investment expertise and a balance sheet that can provide a more diverse portfolio for savers, improving overall outcomes for them in the longer term. That focus on scale was explicitly laid out in our manifesto, and the evidence for the approach we are taking was detailed in the pensions investment review. The Lords amendment pays too little regard to that evidence and that manifesto. It would also be unworkable in practice, as it would enmesh regulators in years of legal proceedings while leaving providers and savers in limbo.
However, I have listened to the argument made in this House and the other place that the innovation some smaller schemes offer members should not be dismissed. I absolutely agree, which is a key reason our approach to ensuring that scale is achieved has been so pragmatic.
The Government invite the House to accept our amendment (a) in lieu, which recognises the important principle that Parliament, policymakers and the public should be able to see clearly the long-term cost of unfunded public service pension schemes. The amendment requires the Government Actuary to produce within 12 months a document setting out its analysis of the long-term impacts of public sector pensions, covering both expenditure on benefits and income from member contributions. The document must be provided to the Treasury and the Office for Budget Responsibility, and the former is required to make it available to Parliament. That approach is focused on the evidence base, using the Government Actuary to produce impartial numbers to aid understanding and debates on this issue.
I hope that Members will have heard our serious engagement with the issues raised by peers and by Opposition parties in this House. We are committed to delivering the policy intent in the Bill, given its crucial role in driving better outcomes for savers and the important place given to these pension reforms in our 2024 manifesto. We have tabled significant amendments to address the specific issues raised, aiming to further reinforce the consensus on the Bill that has been evident since its Second Reading in this House. On that basis, I hope that Members will be happy to support our amendments.