Pension Schemes Bill
Public Bill Committee, 2 September 2025.
(Morning)
Karl Turner (Labour, Kingston upon Hull East)
We are now sitting in public and the proceedings are being broadcast. I remind Members to switch electronic devices to silent. Tea and coffee are not allowed to be drunk during sittings. We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication and a motion to allow us to deliberate in private about our questions before the oral evidence session begins. In view of the time available, I hope we can take these matters formally and without debate.
Examination of witnesses
Karl Turner (Labour, Kingston upon Hull East)
Before we hear from witnesses, does any Member wish to make a declaration of interest in connection with the Bill?
Kirsty Blackman (Scottish National Party, Aberdeen North)
If the Government amendments in relation to the local government pension scheme go through, I have an interest as I am a deferred member of a local government pension scheme in Scotland.
Rachel Blake (Labour/Co-operative, Cities of London and Westminster)
I also wish to declare such an interest.
Damien Egan (Labour, Bristol North East)
So do I.
Gerald Jones (Labour, Merthyr Tydfil and Aberdare)
As do I.
Mark Garnier (Conservative, Wyre Forest)
So do I.
Sarah Edwards (Labour, Tamworth)
And I.
Karl Turner (Labour, Kingston upon Hull East)
We will now hear oral evidence from Rob Yuille, assistant director and head of long-term savings at the Association of British Insurers, and Zoe Alexander, director of policy and advocacy at Pensions UK. We must stick to the timings in the programme motion that the Committee has agreed. For this panel, we have until 9.55 am. Will the witnesses briefly introduce themselves for the record?
Karl Turner (Labour, Kingston upon Hull East)
I call Mark Garnier, the shadow Minister.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Sarah Edwards (Labour, Tamworth)
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 issueQ .
John Milne (Liberal Democrat, Horsham)
Do you think that the proposed value for money framework could have the unintended effect of causing excess caution or short-termism in investment decisions? If so, what mitigations would you suggestQ ?
John Grady (Labour, Glasgow East)
This question is for Ms Alexander. A lot of my constituents are driven mad by small pots; they have worked in different jobs and have no idea how much money they have saved for a pension, so please could you outline the benefits of the small pots reforms to people in my constituency, and the practical steps needed to make the small pots regime work—for example, by way of IT?Q
Steve Darling (Liberal Democrat, Torbay)
We have already had some exploration of mandation and other opportunities around getting greater investment within the United Kingdom. I would welcome some more drawing out of how investing in UK opportunities could be amplified without the need for mandation.Q
Kirsty Blackman (Scottish National Party, Aberdeen North)
Q There is a question around surplus release, and the power of trustees in relation to surplus release. It makes sense that there should be surplus release, but trustees may feel under pressure from employers to release the surplus when it might not be the right thing for scheme members. Do you think the Bill has got that balance right? How can that be monitored to ensure that trustees are not pressured when it is not the right thing for scheme members?
Peter Bedford (Conservative, Mid Leicestershire)
Many aspects of the Bill command cross-party support, but I want your view on where the Bill does not quite go far enough, and where it perhaps goes too far.Q
Rachel Blake (Labour/Co-operative, Cities of London and Westminster)
Q I want to probe the suggestion that the mandation sunset clause should come back from 2035. You alluded to your rationale for that, but can you expand on the argument about what difference that could make?
Rachel Blake (Labour/Co-operative, Cities of London and Westminster)
Q My understanding is that there is broad industry support. You have alluded to it in terms of recognising the direction and the purpose of the mandate. So there does not seem to be that much difference between those years, is my observation.
Rachel Blake (Labour/Co-operative, Cities of London and Westminster)
Q Mr Yuille, in terms of your analysis of why there is a higher rate of investment in the UK from international funds than UK funds, do you think that the direction of the Bill will address those causes?
Callum Anderson (Labour, Buckingham and Bletchley)
I have a short question about scale tests. Both organisations have reflected a concern that the drive to consolidating may be undermining smaller schemes. How can we ensure that there are sufficient reassurances in the Bill that support better transition pathway rulesQ ?
Karl Turner (Labour, Kingston upon Hull East)
Order. That brings us to the end of time allotted for the Committee to ask questions. On behalf of the Committee, I thank our witnesses for their evidence. I apologise for having had to cut you off.
Examination of Witnesses
Karl Turner (Labour, Kingston upon Hull East)
We will now hear oral evidence from Patrick Coyne, director of policy and public affairs at the Pensions Regulator, and Charlotte Clark, director of cross-cutting policy and strategy at the Financial Conduct Authority. Again, we must stick to the timings in the programme order, which the Committee has already agreed. For this session, we have until 10.25 am. Would the witnesses please briefly introduce themselves for the record?
Karl Turner (Labour, Kingston upon Hull East)
Thank you. I call the shadow Minister.
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
Or, indeed, when they first start to work. As somebody once said, compound interest is the eighth wonder of the world.
Torsten Bell (Labour, Swansea West)
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?
Karl Turner (Labour, Kingston upon Hull East)
I call the Liberal Democrat spokesperson, Steve Darling.
Steve Darling (Liberal Democrat, Torbay)
Q We have heard a little about value for money from the previous witnesses. I would welcome some reflections from you on how that could be shaped appropriately to allow risk taking without dumbing down the returns for members, because the crucial thing is driving maximum return without too much risk taking. I would welcome some reflections on how the proposed value for money terms could be tweaked in the best interest of investors, because it could force down returns significantly if people are playing it too safe.
Steve Darling (Liberal Democrat, Torbay)
Q The other element I just want to touch on briefly is whether you have any thoughts on educating firms’ trustees about what value for money really is? Quite often, as you have alluded to, it is the cheapest investment, rather than the one that gives the maximum return, that they might be seeing from the HR department of a company, rather than getting a broader perspective. That would be really helpful. Any thoughts around that world?
John Grady (Labour, Glasgow East)
Q With DC—defined contribution—schemes, as you know, savers themselves have discretion about where they put their money. The issue we face, illustrated by Dimson, Marsh and Staunton’s regular review of asset returns, is that people are not saving in things that will get them a long-term return, are they? The other issue we face is that there has been a real shift from public markets to private markets over the past 25 years or so. If you are not investing in those, you are missing out on returns that mean more money when you retire. I was just wondering, Ms Clark, if you could just put into context the work you are doing on the advice guidance boundary review and wider advice to savers, and how that will help pension savers and, therefore, help these reforms succeed?
Rebecca Smith (Conservative, South West Devon)
Obviously, a big part of the Bill is the assumption that mandation is a good idea. I would be interested to know to what extent you agree with the Bank of England Governor, Andrew Bailey, that mandating pension scheme investments is not appropriate?Q
Rebecca Smith (Conservative, South West Devon)
Q We are not all Government Members in this room, so we are quite keen to hear what bits you think might work and what bits might not work. That is where the question came from.
As a supplementary question, do you think trustees and scheme managers should be provided with a safe harbour if they are required to invest in assets that underperform? I think that is probably what a lot of the public would be interested in as well. You do not want somebody to be mandated to put money into something that is doing worse than it was doing before it was moved.
Rebecca Smith (Conservative, South West Devon)
Are there not going to be too many hoops to jump through to prove that the trustee is correct, if they have to prove it to a regulator? I suppose that is what the safe harbour means. Will the trustees have the benefit of the doubt, or are they going to have to be watertight in their belief that they are right, to make sure that they can stand up to the regulatorQ ?
Torsten Bell (Labour, Swansea West)
Q It is not right to say that mandation is at the centre of this Bill. There is one backstop power and there are a lot of clauses that we are going to spend a lot of the next few months—
Karl Turner (Labour, Kingston upon Hull East)
Order. We need questions to the witnesses.
Torsten Bell (Labour, Swansea West)
The question to the witness is to expand a bit more on that point. In reality, this provides a “comply or explain” power. In terms of the point Charlotte was just making there, it is absolutely right about the ability of the trustees to say, “This is not in the interest of our members.” It might be worth talking a bit about how when we move forward the consultation will allow us to set out how that would work in practice.
John Milne (Liberal Democrat, Horsham)
Do you think that the finance industry has a clear understanding of how to apply its fiduciary duty? Do you think the Bill makes that clearer or muddies the waters, or somewhere in between?Q
Kirsty Blackman (Scottish National Party, Aberdeen North)
Q I have a question about the balance of decision making. Trustees are obviously required to steward and grow assets on behalf of scheme members. This Bill slightly changes the priorities in relation to value for money. There is potential for future mandation, in that it basically allows the Government, or the regulators, more say in what direction trustees are taking. In practice, it is relatively difficult for scheme members to influence decisions that trustees take. My reading of the Bill is that it does not increase scheme members’ power over the direction. For example, if they wanted to disinvest in something, or if they felt strongly about investing more in UK assets, they will not have any more power to do that. Am I correct in my reading of that? Do you feel that some scheme members feel that they should have more influence over what trustees do and the direction of travel?
Kirsty Blackman (Scottish National Party, Aberdeen North)
Q Do the majority of trustees already take into account what they think scheme members would think about certain investments anyway, or about ESG, for example?
Luke Murphy (Labour, Basingstoke)
I want to ask about Unison’s point about LGPS funds requiring equal member and employer representation on boards—I should declare an interest as a member of said trade union. According to Unison, the Bill will mean a lack of member voice on LGPS board governance. I wonder how you respond to that criticismQ ?
Karl Turner (Labour, Kingston upon Hull East)
A last, short question.
Sarah Edwards (Labour, Tamworth)
Q I just wanted to ask for your reflections on the current levels of funding in the UK compared with other funds. Canada is often touted as having a higher rate of funding. Can you comment on what you think some of the barriers might be? Why is that not happening, and do you think the Bill will address that?
Karl Turner (Labour, Kingston upon Hull East)
Order. That brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank our witnesses for their evidence and apologise to hon. Members whom I am afraid time did not allow me to call.
Karl Turner (Labour, Kingston upon Hull East)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
Q Do you feel the Bill covers that management?
Mark Garnier (Conservative, Wyre Forest)
Q Christopher, do you have any thoughts on that, quickly?
Torsten Bell (Labour, Swansea West)
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?
Torsten Bell (Labour, Swansea West)
Q Could you explain a bit about what NEST has done in order to do that?
Karl Turner (Labour, Kingston upon Hull East)
I call the Liberal Democrat spokesperson, Steve Darling.
Steve Darling (Liberal Democrat, Torbay)
Q Thank you both for coming. My questions are for Christopher Brooks. From your perspective at Age UK, what are the three wicked issues that the Bill could help tackle—the ones that come most often across your desk at Age UK, which people find a challenge in later life?
Damien Egan (Labour, Bristol North East)
Q Christopher, a number of us are on the Work and Pensions Committee and we know that one of many big issues is people coming up to retirement and being prepared—even knowing how much they have got to take into retirement. How do you see this Bill—you have talked through some of the challenges—helping people to prepare for their future, know how much money they will have and make decisions at a better time?
Peter Bedford (Conservative, Mid Leicestershire)
Q I think financial education is the key to ensuring pensions adequacy. To build on Damien’s question about ensuring that members are fully informed about their pension assets and what the returns are going to be, what they will provide, what are your thoughts on what support the Bill offers, or does not offer, to ensure members are fully informed on the key decisions they have to make?
Peter Bedford (Conservative, Mid Leicestershire)
Q Where is that support going to lie—with organisations such as Age UK, charities or the pension provider? Where do you see that balance sitting?
David Pinto-Duschinsky (Labour, Hendon)
I want to build on the questions that the hon. Member for Mid LeicestershireQ and my hon. Friend the Member for Bristol North East were raising. Obviously, part of the challenge we face is around the proliferation of small pots; certainly, when I talk to my constituents about issues of long-term retirement planning, that is the consistent theme. The Bill obviously sets out a path to try to deal with some of that proliferation that has been caused since the introduction of auto-enrolment. What are your views on the extent to which the Bill provides the right framework for dealing with that kind of proliferation?
John Milne (Liberal Democrat, Horsham)
Q Do you think there is evidence that fiduciary duties are not interpreted in a way that optimises outcomes for pensions savers? If so, would you support any change in legislation to help?
Karl Turner (Labour, Kingston upon Hull East)
For the last question, I call Rachel Blake.
Rachel Blake (Labour/Co-operative, Cities of London and Westminster)
Q I want to go back to member and trustee transparency around surplus flexibility. Could you be more specific on what preparations and possible changes would be needed to give that confidence to trustees and members about any surplus flexibility?
Rachel Blake (Labour/Co-operative, Cities of London and Westminster)
Okay, so that is the one specific measure.
Karl Turner (Labour, Kingston upon Hull East)
Thank you very much indeed. We have a couple of minutes, actually—
Rachel Blake (Labour/Co-operative, Cities of London and Westminster)
Can I follow up, then?
Karl Turner (Labour, Kingston upon Hull East)
Please do.
Rachel Blake (Labour/Co-operative, Cities of London and Westminster)
Q Do you foresee any risks or additional challenges to the regulator in overseeing some of those decisions that might be made by trustees on surplus flexibility?
Karl Turner (Labour, Kingston upon Hull East)
Order. That brings us to the end of the time allotted. I thank the witnesses for their evidence, and we will move now to the next panel. Thank you very much indeed.
Karl Turner (Labour, Kingston upon Hull East)
Q We will now hear oral evidence from Colin Clarke, head of pensions policy at Legal and General, and Dale Critchley, policy manager for workplace benefits at Aviva. Once again, we must please stick rigidly to the timings in the programme order that the Committee has agreed. For this session, we have until 11.25 am.
Please could the witnesses briefly introduce themselves for the record?
Karl Turner (Labour, Kingston upon Hull East)
I call the shadow Minister.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Karl Turner (Labour, Kingston upon Hull East)
Can I ask for short answers now, please, because we need to move on to other Members.
Torsten Bell (Labour, Swansea West)
Q I want to move to DC pensions, not just DB, given what you do. One of the larger changes in this Bill for your providing to savers is on the default pension benefit solutions. Would you give us an update on your internal thinking about how you plan to operationalise those requirements, if this Bill receives Parliament’s support?
Torsten Bell (Labour, Swansea West)
Q So when you are thinking about segmenting, your main segmentation is size of pot and other pensions.
Torsten Bell (Labour, Swansea West)
Your metric for that is just other income sources plus size of pot?
Karl Turner (Labour, Kingston upon Hull East)
Could we have shorter questions and answers? Does Mr Clarke have anything to add?
Karl Turner (Labour, Kingston upon Hull East)
I call the Liberal Democrat spokesperson, Steve Darling.
Steve Darling (Liberal Democrat, Torbay)
Q Thank you both for coming. Reflecting on pensions systems around the world, what one silver bullet would you both say would help drive positive change through this Bill and strengthen it if applied to it?
Alice Macdonald (Labour/Co-operative, Norwich North)
My question is related to that. Aviva, in your written evidence, you spoke quite a lot about the value for money framework. Could you expand on what you think the benefits and challenges are? You also referred to the Australian regulator’s model, in terms of learning. You have already covered a bit of it, but if there anything you could add on what we could learn from that model about incentivising investments in the right areas, that would be great.Q
Rebecca Smith (Conservative, South West Devon)
Q This builds on something that was mentioned in the previous panel by Age UK—that a lot of the education that will need to be done to ensure that people understand what is going on, particularly with the small pots consolidation, could fall on Government, charities or providers. As pension provider representatives, what is your view on how far into the detail the Bill has gone in terms of who is responsible for that? We have seen in other, similar legislation an expectation put on businesses to provide the service, and it is often done at your cost rather than any sort of Government cost. I would be interested to know what you think about that.
Rebecca Smith (Conservative, South West Devon)
Q Are you effectively saying that if you put the customer first, which is ultimately what this entire piece of legislation is trying to do, then, at the moment, other regulations will stop that from happening, so we might want to look at that?
Rebecca Smith (Conservative, South West Devon)
The privacy piece came up earlier this morning as well, so that needs looking at.
Sarah Edwards (Labour, Tamworth)
Q I want to pick up on the changes around DC, and the fact that there are quite a lot of different things—we have talked about value for money, changes in scale and, obviously, default retirement ages. From your perspective, is there a sequencing that needs to happen to make sure that they work, and is that provided for? What would your guidance be around that?
John Milne (Liberal Democrat, Horsham)
Q From your perspective, what would be the main obstacles or difficulties in fulfilling the value for money requirement in the Bill?
Karl Turner (Labour, Kingston upon Hull East)
Mr Bedford, we do have a little time if you wish to ask a question.
Peter Bedford (Conservative, Mid Leicestershire)
Q I want to go back to your point around the value for money implementation, which a few Members have already raised. Specifically, there is always this competing challenge between satisfying the metrics that are in there and delivering returns for your investors. How do you see that balance in the Bill? Do you see it being too much one way, or do you see it hindering the performance of investment?
Karl Turner (Labour, Kingston upon Hull East)
If there are no further questions from Members, I thank our witnesses for their evidence. That brings us to the end of our morning session. The Committee will meet again at 2 pm in the Boothroyd Room to continue taking oral evidence.
Karl Turner (Labour, Kingston upon Hull East)
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?
Mark Garnier (Conservative, Wyre Forest)
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?Q64
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
Q So the key point is that every single investment must be done on a benefit analysis rather than a social good analysis?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
Q That is very helpful. Robert, would you like to add anything?
Mark Garnier (Conservative, Wyre Forest)
Q Would you suggest a higher hurdle for valuations in terms of surplus distribution?
Mark Garnier (Conservative, Wyre Forest)
Q Would you support that?
Mark Garnier (Conservative, Wyre Forest)
That is very helpful; thank you.
Luke Murphy (Labour, Basingstoke)
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.Q
Luke Murphy (Labour, Basingstoke)
Q But would that outweigh the fiduciary duty and the question of monetary benefits to lenders?
Luke Murphy (Labour, Basingstoke)
Q How do you measure the unpopularity or otherwise? Do you look at polling? Is it just a broad sense of sentiment? As a measure, it feels a bit vague. If you are weighing that up against fiduciary duty, are you doing any actual research? I am just trying to understand how you weigh it up against the fiduciary duty.
Luke Murphy (Labour, Basingstoke)
Q It does not appear to be easily definable. What the financial benefits to members of an investment will be is easier to define through the fiduciary duty, but what is popular locally feels like a bit of a value judgment.
Torsten Bell (Labour, Swansea West)
Q Since we have gone to mandation and surplus, I encourage you to clarify that the reserve power and the surplus measures in the Bill do not affect the LGPS in any way. Those are not within the remit of the Bill.
Torsten Bell (Labour, Swansea West)
indicated dissent.
Torsten Bell (Labour, Swansea West)
Q The reserve power is about automatic enrolment contributions; it has no impact on the LGPS. It is the same for surplus: the changes do not apply to the LGPS. Could you confirm that I am correct in saying that?
John Milne (Liberal Democrat, Horsham)
Earlier, you were touching on possible investments in local matters, such as affordable housing, which have a strong and desirable social benefit. Could it not be argued that there are extra interests for a local investor? Basically a council could both own the houses and effectively supply the customers via its housing lists, so there is an extra reason for investment from a local government pension fund versus other investors. Alongside that, do you think the Government need to help create these investment vehicles so that there is a sufficient pipeline to invest in?Q
John Milne (Liberal Democrat, Horsham)
Q But would you agree that that could have very stable returns—say a 5% return for affordable housing, or for a care home—because effectively the customers are also coming via the local authority?
David Pinto-Duschinsky (Labour, Hendon)
The Minister picked up a point that I was going to touch on, but I would like to ask about broader consolidation. Councillor Phillips, you mentioned that often councils are wrestling with multiple pools in a small area. I think there is broad consensus that consolidation is a good idea, and clearly this is the direction of travel being laid out by the Bill. What kind of challenges do you see to successful implementation of consolidation and how will the Bill drive that forward?Q
David Pinto-Duschinsky (Labour, Hendon)
Q How do you see the Bill helping?
David Pinto-Duschinsky (Labour, Hendon)
Q Clearly you are talking about a large administrative challenge, but also about building capacity. We know the funds need capacity to raise their investment sophistication and their ability to invest in a broader set of assets. What do you think the minimum efficient scale for this is, and how quickly could the pools get there?
Kirsty Blackman (Scottish National Party, Aberdeen North)
I am pleased to hear you talking about what scheme members want, not just in terms of the return that they are expecting, but also the projects that are invested in.Q
My question is about consolidation and local concerns that people might have. For example, they may not want a wind farm invested in because they are worried about the infrastructure that goes alongside that. If there is consolidation, will that remove the ability to take account of local concerns and to find great local investment opportunities? Will it dilute the input that people have locally, because it is taking it further away from them, or do you think it will be okay?
Kirsty Blackman (Scottish National Party, Aberdeen North)
Q Obviously, there is a mix of people on some of these boards that you would not necessarily find on other trust boards. I have been a councillor, so I am well aware of the different directions you are pulled in if you are a councillor or an officer in local government. Are boards able to find enough engaged members to be on them who have got enough skill? You were also talking about training and ensuring that they are better trained; is that something that you are working on currently?
Sarah Edwards (Labour, Tamworth)
I want to go back a little and talk about transfer of funds into pools. During the transitional phase there are funds that might have ordinarily been making investments and would have had a set of investment principles and a strategy, and who for 12 months may potentially not be making those decisions. Are there risks to the members in terms of value, or do you not foresee that being a problem?Q
Karl Turner (Labour, Kingston upon Hull East)
If there are no further questions from Members, I thank the witnesses for their evidence today. We will move on to the next panel.
Karl Turner (Labour, Kingston upon Hull East)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
Q So if this clause is passed, we could potentially see a drop-off in the performance of pension funds?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
But you would rather see the opportunities first?
Mark Garnier (Conservative, Wyre Forest)
That is very helpful; thank you very much.
Torsten Bell (Labour, Swansea West)
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.
Torsten Bell (Labour, Swansea West)
That is not the view of the whole industry, which points to the collective action problem of an exclusive focus on cost, as much as it is a barrier—
Torsten Bell (Labour, Swansea West)
It is.
Torsten Bell (Labour, Swansea West)
Q Again, I would look at the actual history of what happened. The industry committed to private assets under the previous Government, and it is failing to deliver on that because of collective action challenges. You have to face up to this at the level of the sector as a whole; I am afraid you are giving answers that are very happy with the status quo, the way you are describing it. I would reflect that it is definitely a failure of fiduciary duty over the last 10 years not to have made more progress.
Torsten Bell (Labour, Swansea West)
I was encouraging you to say that; you got there.
John Milne (Liberal Democrat, Horsham)
Q Pension scheme funding ladders can go up, and they largely have done in recent years, but also they can go down. Do you think that the proposals and the framework in this Bill for surplus extraction have the right balance of risk versus actually achieving the objective?
John Grady (Labour, Glasgow East)
IQ apologise: I should say that my wife sits on the committee of the Scottish Government pension scheme. I should disclose that to the Committee.
I would like to move on to a slightly different topic: small pots. Ms Singleton, the SPP made supportive comments in its submission about small pots. Would you like to elaborate on why you support the small pots element of the Bill, and are there any practical considerations you would like to draw to the Committee’s attention?
John Grady (Labour, Glasgow East)
No.
Damien Egan (Labour, Bristol North East)
I would like to move us on to the aspects of the Bill that place a duty on schemes to offer members default retirement products. We touched on it a bit this morning. What do you think they could look like?Q
Peter Bedford (Conservative, Mid Leicestershire)
I have just a couple of general questions. You have articulated this in your points already, but where do you think the Bill goes too far and may have an adverse impact, and where does it not go far enough to make progress in this space?Q
Kirsty Blackman (Scottish National Party, Aberdeen North)
Q On that last point about paying the surplus to scheme members—I am afraid we have had a massive pile of evidence—is that written in any of the evidence there, along with a suggestion of how to go about it?
Kirsty Blackman (Scottish National Party, Aberdeen North)
Thank you, that would be really helpful.
Karl Turner (Labour, Kingston upon Hull East)
If there are no further questions from Members, can I thank the witnesses for their evidence this afternoon? We will move on to the next panel. Thank you very much for your attendance.
Karl Turner (Labour, Kingston upon Hull East)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.
Torsten Bell (Labour, Swansea West)
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?
Torsten Bell (Labour, Swansea West)
Q You have both been involved in the discussions with the industry on the wider move to private asset investments. As you talked about earlier, you are further along the journey than most. You know the numbers in the Mansion House accord. In lots of cases, I know you are planning to be significantly above those de minimis levels. Tell us a bit—for the industry as a whole, not just for your individual schemes—about how we should think about those numbers, as de minimis or as targets, or where people are going to be in 20 years’ time. In the end, that is what we are always thinking about; we are not thinking about the next five years.
Torsten Bell (Labour, Swansea West)
And that compares to the Mansion House benchmarks of 10% and 5%.
Torsten Bell (Labour, Swansea West)
Q Are you already doing that because you think that that is what is in savers’ interests?
Torsten Bell (Labour, Swansea West)
Q Given that you think that it is in savers’ interests to be well above the Mansion House targets, why have some people not got to those targets? Are they failing in their fiduciary duties? Why have they not got there yet?
Steve Darling (Liberal Democrat, Torbay)
Default solutions are an important part of the Bill. I suspect that, for the more modest savers, they will colour the outcomes for a lot of their pensions. How can the final offer in that area be enhanced so that we get the best outcomes? What tweaks would you make to the Bill to ensure that we are looking after those with more modest incomes, around these final solutions?Q
Peter Bedford (Conservative, Mid Leicestershire)
Q Going back to the consolidation of small pots, have you any thoughts or comments on the timeframes involved in how that would be implemented, particularly in the context of the roll-out of the pensions dashboard, which has taken quite some time to be rolled out in the industry?
David Pinto-Duschinsky (Labour, Hendon)
Q Patrick, we have heard loud and clear your message that getting the value for money framework right is at the core of this. The Bill aims to put that on a sound footing. Which elements are required to get it right? How do you think the Bill will help to build them up?
Kirsty Blackman (Scottish National Party, Aberdeen North)
Q This is about people who do not get financial advice, which is the vast majority of people, and their understanding of pensions and what they are likely to get. On a DB scheme, you get an annual statement that says you will get x amount a month or x amount a year. On a DC scheme, it is more like, “This is your total pot.” As everybody’s circumstances are different, they have no idea what that might actually look like if they were to get it on a monthly basis. I appreciate your positive words about the guided retirement and the targeted support. Do you think there is potential in the future for moving towards ensuring people get that advice earlier, so they can ensure the sufficiency of their pot, as well as ensuring that they are making the right decisions when they take that pot?
Kirsty Blackman (Scottish National Party, Aberdeen North)
Q In relation to investments and some of the stuff that was not invested in historically, if we are talking about renewable projects and affordable housing—things that, historically, pension funds have maybe not invested in—you said that investing in these projects is a problem for smaller companies until they build up that level of scale. Are there other barriers? Are there legislative barriers, or other barriers—maybe finding schemes to invest in—that you or other companies could do with additional help in overcoming?
John Milne (Liberal Democrat, Horsham)
Q Auto-enrolment is a great success story. It has certainly got lots more people investing in a pension than would have done otherwise. However, the fact remains that large numbers of them are nowhere near on course to have a reasonable pension in retirement. Small pot consolidation helps, but we have to admit that it is going to be a modest contribution to solving that problem. Do you think we are missing a trick in the Bill? Is there something else that could or should be there to help—or is that a job for another day?
John Milne (Liberal Democrat, Horsham)
Q Is there anything you think should or could be in this Bill that would help?
Karl Turner (Labour, Kingston upon Hull East)
Thank you very much. That completes the questions from Members. I thank the witnesses for their attendance and evidence this afternoon.
Examination of Witness
Karl Turner (Labour, Kingston upon Hull East)
We will now hear oral evidence from Tim Fassam, director of public affairs at Phoenix Group. We have until 3.45 pm for this panel. Will the witness please briefly introduce himself for the record?
Karl Turner (Labour, Kingston upon Hull East)
I call the shadow Minister.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.
Mark Garnier (Conservative, Wyre Forest)
Q Very quickly, if you get an intermediate rating, is it published?
Mark Garnier (Conservative, Wyre Forest)
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.
Luke Murphy (Labour, Basingstoke)
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?
Luke Murphy (Labour, Basingstoke)
Q What would be the challenges of that extension and scope?
Steve Darling (Liberal Democrat, Torbay)
Q The bar for small pots is currently set at £1,000. Is that ambitious enough? Should it be £2,000? £5,000? Or is it a matter of eating an elephant and having to be sensible about what is achievable?
Karl Turner (Labour, Kingston upon Hull East)
I call Kirsty Blackman. Very quickly, please.
Kirsty Blackman (Scottish National Party, Aberdeen North)
Q In relation to private assets and the investment in them, is the balance between carrots and sticks correct in the Bill, or should more carrots, for example, be provided to encourage that investment?
Karl Turner (Labour, Kingston upon Hull East)
Order. I apologise for the interruption, but that brings us to the end of the time allotted for the Committee to ask questions of this witness. On behalf of the Committee, I thank the witness for their evidence this afternoon.
Examination of Witnesses
Karl Turner (Labour, Kingston upon Hull East)
We will now hear evidence from Michelle Ostermann, chief executive officer of the Pension Protection Fund, and Morten Nilsson, executive director and CEO of Brightwell. We have until 4.15 pm for this panel. Will the witnesses please briefly introduce themselves for the record?
Mark Garnier (Conservative, Wyre Forest)
Q The Bill provides for surplus extraction from funds. Do you see that as a good or a bad thing?
Mark Garnier (Conservative, Wyre Forest)
Q For defined-benefit pension funds?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
Q Do you stress test the pensions industry in the same way as the Bank of England stress tests the banking system?
Mark Garnier (Conservative, Wyre Forest)
And you war game it?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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.”
Steve Darling (Liberal Democrat, Torbay)
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?
Steve Darling (Liberal Democrat, Torbay)
Yes.
Peter Bedford (Conservative, Mid Leicestershire)
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?
Peter Bedford (Conservative, Mid Leicestershire)
Q I am just interested in examples of recent shocks that have happened, where you had to pay out significant sums and what those sums were.
John Milne (Liberal Democrat, Horsham)
Q It has been a long-standing battle over pre-1997 compensation rights. Would you agree that this Bill is perhaps an opportunity to at last address that issue, perhaps by a judicious amendment or two? Do you think that that is feasible, and what framework might that take?
John Milne (Liberal Democrat, Horsham)
Q The DWP argues that the funds are on the public balance sheet and therefore they object to using them for this purpose. Do you think that is fair, given that the funds were not acquired by the taxpayer?
Rebecca Smith (Conservative, South West Devon)
GivenQ the international experience that both of you have in this realm, I am interested to know whether there is either anything in the Bill that you think is a red flag or anything that you think is a missed opportunity and not in the legislation in front of us today.
David Pinto-Duschinsky (Labour, Hendon)
Q I am really glad that you both mentioned governance, because that absolutely stands at the heart of this. You also mentioned conflicts. We have not talked much about the role of consultants and things like that, but it is clear that you think the framework laid out by the Bill will be helpful and a key part of mobilising those things.
Conversations that I have had also flag up the importance of culture among trustees. We can give people the tools, the powers and the permission to invest, and we can be clear in the framework we set up, but, culturally, they may still be very risk averse. Of course, some of that is appropriate because they have to safeguard member benefits, but there is a point about whether they are overly cautious and about how one creates the appropriate culture to go with the change. From your perspective, what is needed to create the right culture to go alongside the right governance?
Karl Turner (Labour, Kingston upon Hull East)
If there are no further questions from Members, I thank the witnesses for their evidence. We will move to the next panel. Thank you very much indeed.
Karl Turner (Labour, Kingston upon Hull East)
We will now hear oral evidence from Chris Curry, director of the Pensions Policy Institute, and William Wright, managing director of New Financial. We have until 4.45 pm for this panel. Would the witnesses kindly introduce themselves?
Karl Turner (Labour, Kingston upon Hull East)
I call the shadow Minister.
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?
Mark Garnier (Conservative, Wyre Forest)
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?