I beg to move Amendment 25, in Clause 8, page 8, line 2, leave out paragraph (b).

This amendment is consequential on Amendment 27. It removes the power to disapply the section in prescribed cases, as this is now contained in new subsection (5A).

With this it will be convenient to discuss the following:

Government amendments 26 and 27.

Clause stand part.

Thank you, Sir Christopher, for the progress through the local government pension schemes part of the Bill. We now move on to the defined-benefit clauses. Clause 8, which amends the Pensions Act 1995, enables trustees of private sector defined-benefit schemes to modify their schemes to safely share surplus funds with the sponsoring employer. Through that change, trustees will also be better placed to negotiate with sponsoring employers to get additional benefits from surplus for scheme members.

I know that Members here—that is, hon. Members rather than scheme members—are keen to ensure that the security of pensions is not impacted by these changes. We have consulted on this point and several restrictions are in place that are outlined in clause 9. I will outline the core protections.

First, trustees will remain in the driver’s seat, deciding whether to modify scheme rules to allow surplus release from their individual schemes in line with their duty to the interests of the beneficiaries. Secondly, a prudent funding threshold for surplus release will be set out in regulations, on which we will consult. Surplus will be released only where a scheme is fully funded at a low dependency, which means that the scheme funding is sufficiently high to allow trustees to meet future liabilities with a very low risk of future employer contributions. Thirdly, trustees must obtain actuarial certification to demonstrate that the scheme meets these funding requirements and members must be notified before surplus funds are released.

The amendments clarify two points. First, the treatment of particular cases, such as sectionalised schemes—schemes that have multiple parts to them—is usually set out in regulations. Amendment 27 enables regulations to specify how the new powers to modify by resolution will apply in such cases—for example, to ensure that each section in a sectionalised scheme is treated as a scheme in its own right for the purposes of this power specifically.

Secondly, the power in the clause is not intended to affect schemes in wind up where the Majority of schemes will have existing rules about how surplus should be distributed at the point of wind up. The amendment clarifies that when trustees consider the exercise of the power to modify, any separate power to repay surplus on winding up is disregarded. Equally, the new power in clause 8 cannot be used to introduce a power or to modify an existing power to release surplus on winding up.

I thank the Minister for his comments. We agree that the law needs to be updated to reflect current circumstances, and it makes sense to ensure that companies that have not made pre-2016 resolutions are not unfairly penalised. We broadly support the update to the law because it corrects an important imbalance. However, it is crucial, as we move forward, that we maintain the necessary guardrails and uphold the independence of trustees to protect scheme members’ interests. These important aspects will be further discussed in relation to Clause 9.

I will raise a couple of points made by people we have been engaging with while looking at the Bill. First, the Pensions Management Institute highlighted its disappointment that the Government did not take the opportunity of this legislation, which broadly talks about defined-benefit funds, to make it easier and more tax efficient for employers and schemes to use scheme surpluses to fund contributions under defined-contribution arrangements, including those not held in the same trust. That would have opened up possibilities for many entities that have long since moved their ongoing DC provisions to a master trust or contract-based arrangement.

The Phoenix Group also highlighted an issue. To protect funding levels after surplus release, schemes may adopt more cautious investment strategies, reducing allocations to private and productive assets. That could undermine the Government’s growth objectives. Aside from those points, we are happy with the clause.

I very much echo what the hon. Member for Wyre Forest said. Clearly, surpluses have built up over a number of years since the last crash. There has been a level of overcaution. It is important for our economy that those surpluses are appropriately released, which could drive economic growth. I am sure that all of us in the room want to see that.

Perhaps it reflects my ideological position that I am much more comfortable seeing this happen with local authorities than I am here, and I am looking for more guardrails. In fact, there are more guardrails around how local government pension schemes do this. It can be done pretty much only if it is to reduce employer contributions, which increases the amount of money that local authorities have for either reducing council tax, as the hon. Member for Wyre Forest said, or for spending on whatever it is that they want to spend money on a day-to-day basis.

I would like to see more power go to trustees. I am concerned—this was raised previously—about the level of employer pressure that could come to bear on trustees about releasing surplus, when it may not be in the best interests of all the scheme members but the employer might be really keen to use the money. I am also concerned that we have had quite a lot of different ideas about what the surpluses could be used for. The Liberal Democrat spokesperson, the hon. Member for Torbay, made the same point as the Government about ensuring that employers could invest more to grow the economy, whether that is in bits of tech that make the company more productive or workplace benefits for those who are scheme members.

Why did the Government decide not to strengthen the powers of trustees in relation to the surplus release? Could the Government look in future at tightening what surplus release could be used for? Trustees have a fiduciary duty to ensure that members’ pensions grow as promised, and that they get the benefits that they were promised or that their defined-contribution scheme in other circumstances grows at the right level. However, if the fiduciary duty applies, why is there not a similar application in terms of surplus release? Why is there not a similar requirement on trustees to ensure that that surplus release goes the way that we think it should go?

On Second Reading, I said that there had not been enough clarity from the Government about how they want that surplus to be released. Are they encouraging or instructing trustees to release surplus to employers if it will be invested in the business, or if it is being done to invest in workplace training schemes? I am not convinced that there is enough clarity on this issue.

Given the Government’s drive to ensure that more people are working and that there is a reduction in the amount of economic inactivity, they could say, “Actually, if you are going to use this to improve access to work, to ensure that you can employ more disabled people, we will absolutely sign off a surplus release, provided that you have met all the other criteria.” The Government could encourage trustees to do that. I feel as though there are more levers that the Government could use and that they are not taking this opportunity.

I have not tabled any amendments on this issue, but I raised it on Second Reading. It would be great if the Government gave me some comfort that they are considering whether—in the future with the Bill or, down the line, in the guidance that is given to trustees—to strengthen the hand of trustees, so that they can direct employers better and so they do not come under pressure from employers; or whether the Government will take policy decisions or directions, and point them out to trustees so that they are encouraged to go in a certain direction to ensure that there is growth in the economy, which is apparently the Government’s first mission.

I welcome the broad consensus about the direction of travel from everyone who has spoken. I will come first to the remarks from the hon. Member for Aberdeen North, who made some key points. She understandably makes the direct comparison with the LGPS. To a large respect, that reflects the fact that the LGPS is an open scheme where the ongoing contributions are much more of a live question, but I take her point.

I will make a few remarks on her more controversial points about the role of trustees and what funds are used for. The powers of trustees are very strong. Trustees have an absolute veto on any surplus release under the Clause, as they do currently, and they have fiduciary duties about how they should use their powers. That is stronger than was implied in some of the remarks that we have heard.

As for the wider point about pressure on trustees from employers, that can affect lots of issues and is not specific to the one we are discussing today. That is what the fiduciary duties of the trust system exist to protect against and what the regulatory work of the Pensions Regulator ensures does not happen. If there was inappropriate pressure on trustees, it would be a very serious issue. That is not specific to the surplus question—that applies to trustees just doing their job. My strong impression with every trustee I talk to is that they take that duty very seriously indeed. I agree that we should always keep that under review.

There is an absolute veto power—a yes or no—but it is also about the power for trustees to be able to say to employers, “This is how we would like you to use the money.” There is less flexibility for trustees there. Once the money is handed over to the employers, there is no comeback for trustees if employers do not use it as suggested.

That is a factually accurate description of the situation. The hon. Lady is not the first person to have raised that point with me, and I understand the wish for greater certainty about how funds will be used. My view is that looking for that certainty through legislation is wishful thinking. Funding sitting within companies is fungible. The monitoring and enforcement of those things would not be practical in any sense. I am sure that part of the discussion between trustees and firms will be about exactly the kind of points that the hon. Lady is raising, particularly for open schemes, where there is a large overlap between employees and scheme. Members will be part of the discussion, but I do not think that that is practical for legislation. I am liberal enough, although I am certainly not a Liberal Democrat, to think that that is quite hard for legislation to manage, and that it is the role of trustees and employers to work through that.

On the hon. Lady’s wider point, I offer her some reassurance that the Pensions Regulator is taking very seriously its job of providing guidance for trustees about how they think about the questions of surpluses. I think that will offer her quite a lot of reassurance, particularly about how members benefit—she has focused on how employers benefit—from release.

Amendment 25 agreed to.

Amendments made: 26, in clause 8, page 8, line 2, at end insert—

“(4A) Any power to distribute assets to the employer on a winding up is to be disregarded for the purposes of subsections (2) and (3); and a resolution under subsection (2) may not confer such a power.”.

This amendment ensures that the scope of section 36B is confined to powers to pay surplus otherwise than on the winding up of the scheme.

Amendment 27, in clause 8, page 8, line 6, at end insert—

“(5A) Regulations may provide that this section does not apply, or applies with prescribed modifications, in prescribed circumstances or to schemes of a prescribed description.”—

This amendment, which inserts provision corresponding to section 37(8), allows for the application of section 36B to be modified in particular cases (for example, in the case of sectionalised schemes).

Clause 8, as amended, ordered to stand part of the Bill.