I beg to move Amendment 5, in Clause 9, page 8, line 18, at end insert—

“(2AA) Without prejudice to the generality of subsection (2A), regulations made under that subsection must include provision that takes into account the particular circumstances of occupational pension schemes established before the coming into force of the Pensions Act 1995 which, prior to that Act, possessed or were understood to possess a power to pay surplus to an employer.”.

This amendment would allow schemes where people are affected by pre-97 to offer discretionary indexation where funding allows, with appropriate regulatory oversight.

With this it will be convenient to discuss Amendment 6, in Clause 9, page 8, line 23, at end insert—

“(aa) prohibiting the making of a payment until annual increases to payments in line with Consumer Prices Index inflation have been awarded to members,”.

This amendment requires that payments in line with CPI inflation are awarded to members before all other considerations.

The purpose of Amendment 5 is to ensure that regulations take account of the particular circumstances of occupational pension schemes that were established before the Pensions Act 1995. There is effective discrimination against certain pre-1997 pension holders. That is a long-standing grievance and has remained unresolved for far too long. This has been reflected considerably in my postbag, as I am sure it has been for pretty much every MP.

In the evidence session on Tuesday, we heard moving testimony from Roger Sainsbury of the Deprived Pensioners Association and Terry Monk of the Pensions Action Group. As they told us, many of those affected are, literally, dying without ever seeing satisfaction. Many of these pensioners are receiving a fraction of what they are entitled to and what somebody who paid the exact same sums is currently receiving. It is causing genuine hardship.

Members of the pre-’97 schemes are often in a different position to those in later schemes. These schemes were designed under a different legal and regulatory framework. Current legislation does not always reflect those historical realities, which creates unintended inequities.

The amendment would require regulations under Clause 9 to explicitly consider these older schemes. It would allow such schemes, with appropriate regulatory oversight, to offer discretionary indexation where funding allows. The key impacts would be to provide flexibility while ensuring safeguards are in place, give trustees the ability to improve outcomes for members in a fair and responsible way, and help to address the long-standing issue of members who miss out on indexation simply because of the scheme’s pre-’97 status. It also ensures that members can share in scheme strength where resources permit.

Clearly, safeguards are needed, and the amendment makes it clear that discretionary increases would be possible only where schemes are well funded. Oversight by regulators ensures that employer interests and member protections remain balanced. The intention behind the amendment is to bring fairness and flexibility into the treatment of pre-’97 scheme members and to modernise the system so that it works for today’s savers without undermining scheme stability.

I will not take up too much of the Committee’s time, but suffice it to say that we all heard the evidence that was presented on Tuesday, and we in the Conservative party agree with the Liberal Democrats’ Amendment. We will support it.

I will not say much just now. I would like to hear what the Minister says, and I might bob again after that, Sir Christopher.

I thank the hon. Members for Torbay and for Horsham for their amendments and for giving us the opportunity to discuss the matter of defined-benefit members and pre-1997 accruals. I should be clear that Clause 9 and the related amendments refer to defined-benefit schemes, not to the questions of the Pension Protection Fund and financial assistance scheme compensation, which were discussed at such length—and, as several hon. Members have said, powerfully—at the evidence session on Tuesday.

The Government understand the intent behind the amendments. It is crucial that the new surplus flexibilities work for both sponsoring employers and members, for example through discretionary benefit increases where appropriate. That point was raised several times on Second Reading before the summer recess.

On pre-1997 indexation, it is important to be clear that most schemes—as I said, these schemes are not in the PPF or receiving FAS compensation—pay some pre-1997 indexation. Analysis published last year by the Pensions Regulator shows that only 17% of members of private sector defined-benefit pension schemes do not receive any pre-1997 indexation on their benefits, because different scheme rules specify whether someone receives that indexation.

Under the Bill, decisions to enable the scheme to release a surplus will always rest with trustees, who have a duty to act in the interests of scheme beneficiaries. Trustees, working with the sponsoring employer, will be responsible for determining how members should benefit from any surplus release, which may include discretionary indexation. My personal view is that, in lots of cases, it should, but that is where the discussion takes place. The Government are clear that trustees’ discretion is key to this policy. Trustees are best placed to determine the correct use of the surplus for their members, not least because that will involve making some trade-offs between different groups, particularly of members, and it is trustees who are in the position to do so.

It would not be appropriate for the Government to mandate that schemes provide uncapped indexation, in line with the consumer prices index, to all members prior to the making of a surplus payment. Where trustees plan to award discretionary increases, they are best placed to identify what increase is affordable and proportionate for the scheme and its members.

Although scheme rules may require an employer to agree to a discretionary increase—this point was made by several Members who were anxious about it on Second Reading—the trustees will have the final say when deciding to release surplus, and they are perfectly within their rights to request such an increase as part of any agreement that leads to a surplus release. That is a powerful power for trustees to hold on to.

The Pensions Regulator will publish guidance for trustees, as I previously mentioned, and for their advisers, noting factors to consider when releasing surplus and ways in which trustees can ensure that members and employees can benefit. That will happen following the passage of the Bill. These measures already give trustees the opportunity to secure the best outcomes for their members, which could include discretionary increases. I am grateful for the contribution from the hon. Member for Horsham, but on those grounds, I ask him to withdraw the Amendment.

As I said, I wanted to hear from the Minister. I agree that trustees should be the ones making the decision on how to spend any surplus and whether to make an uprating. However, as some schemes are barred by their scheme rules from making such an uprating, my concern is about allowing them the flexibility to make it in any circumstances if they decide that that is the best thing to do. It is not about tying their hands and saying that they have to make an uprating; it is about allowing every single scheme the flexibility to make it if they decide that that is the best thing to do.

Where there are employer blockers or other issues in the scheme rules, can anything be done, in the Bill or anywhere else, to remove those blockers so that we can ensure that trustees have an element of choice and remove some of the unfairness that we heard about on Tuesday?

I think I can offer the hon. Lady some reassurance. It is true that within some scheme rules it will be clear that discretionary increases of the kind that we are debating would require employer agreement. I know that that has worried some hon. Members who think that that could be a veto against such releases in a surplus release situation.

My view—and the guidance to be released by the TPR will make this very clear—is as follows. It may formally be for the employer to agree to those discretionary increases. The scheme rules may apply to that, although in some schemes the trustees may be able to make that decision on their own—that will be a distinction that will depend on the scheme rules. However, even when the scheme rules say that the employers must agree, they will have a strong incentive to agree with the trustees if they are asking the trustees to release. That is why I say that the process of surplus release will change the dynamic of those discussions, which I recognise are currently not proceeding in some cases because employers are saying a blanket no to discretionary increases. We do not need legislative change to make that happen.

Would the Minister encourage those schemes that find that they want to release the surplus in relation to the uplift, but are struggling to get that process across the line, to go to the TPR, look at the guidance that is coming out and ask for assistance with making those discretionary uplifts?

I absolutely would. I have been making exactly those points to anyone who will listen.

I thank the Minister for his comments. Over the coming weeks, as he will be aware, we will be discussing several amendments that relate to the same issue. It will be interesting to see whether we can reach a satisfactory solution. In the meantime, we will press our Amendment to a vote, because we feel that the issue has remained unresolved for such a long time that it needs everything we can give it to get it across the line, but we hope that in the next couple of weeks of debate we can find the best possible solution.

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 11.

Question accordingly negatived.

Amendment proposed: 6, in clause 9, page 8, line 23, at end insert—

“(aa) prohibiting the making of a payment until annual increases to payments in line with Consumer Prices Index inflation have been awarded to members,”.—

This amendment requires that payments in line with CPI inflation are awarded to members before all other considerations.

Question put, That the amendment be made.

The Committee divided: Ayes 5, Noes 12.

Question accordingly negatived.

I beg to move Amendment 247, in Clause 9, page 8, line 23, at end insert—

“(aa) prohibiting the making of a payment unless the scheme’s assets have exceeded a buyout valuation,”.

This amendment requires that surplus extraction is only permitted once buyout funding levels are achieved.

With this it will be convenient to discuss the following:

Amendment 260, in Clause 9, page 8, line 30, at end insert—

“(e) requiring the trustees to provide a prescribed notification, as set out in (f) below, with the members of the scheme (or their representatives) not less than 60 days before making any payment under this section;

(f) the prescribed notification should include—

(i) the proposed amount of surplus to be paid to the employer,

(ii) the reasons for the proposed payment,

(iii) the impact on member benefits,

(iv) the scheme's funding position after the proposed payment, and

(v) how members may make representations regarding the proposal;

(g) requiring the trustees to have regard to any representations made by members or their representatives having received the prescribed notification.”

This amendment would require trustees to notify members at least 60 days before making surplus payments to employers. It ensures members receive full information about proposed surplus payments, enabling informed participation.

Amendment 265, in clause 9, page 8, line 30, at end insert——

“(e) requiring the trustees to provide a prescribed notification to members of the scheme, or members’ representatives, not less than 60 days before making any payment under this section,

(f) requiring the prescribed notification under subsection (e) include—

(i) the proposed amount of surplus to be paid to the employer,

(ii) the reasons for the proposed payment,

(iii) the impact on member benefits,

(iv) the scheme's funding position after the proposed payment,

(v) how members may make representations regarding the proposal, and

(g) requiring the trustees to have regard to any representations made by members or their representatives having received the prescribed notification under subsection (e).”

This amendment would require trustees to notify members at least 60 days before making surplus payments to employers.

Amendment 267, in clause 9, page 8, line 30, at end insert—

“(e) requiring that, where the scheme actuary certifies under subsection (a) that the scheme’s assets exceed the cost of securing each member’s accrued rights with an authorised insurer for a continuous period of at least six months, the trustees must first secure a full buy-out of those rights before any payment of surplus may be made to the employer or any other person, and

(f) requiring that subsection (e) does not apply if the scheme actuary certifies that any surplus extraction would, after the extraction, still leave the scheme’s assets exceeding the cost of securing each member’s accrued rights with an authorised insurer.”

This amendment inserts a requirement to ensure that surplus extraction prior to a buyout does not adversely impact the scheme’s ability to reach buyout.

Amendment 261, in clause 9, page 8, line 36, at end insert

“and including confirmation that the proposed payment (surplus access) will not adversely impact members' benefits and that the prescribed notification has been completed in accordance with regulations made under subsection (2A).”

This amendment would aim to strengthen an actuary's role and oversight of schemes accessing surplus, by requiring confirmation that member notification has occurred before certifying surplus payments.

Any decision to release surplus funds from defined-benefit pension schemes should rest firmly, as we have discussed, with the trustees. It is important to emphasise that trustees bear the ultimate responsibility for such decisions. We believe that surplus repayments to employers should be permitted only when members’ benefits are fully protected and robust safeguards are in place to maintain the security and sustainability of the scheme.

The Bill notes that the detailed criteria for surplus payments will be set out in forthcoming regulations, and those regulations must be subject to close scrutiny with a primary focus on safeguarding members’ benefits before any funds can be released. There remain important unanswered questions regarding what appropriate guardrails for surplus release should look like. One firm belief is that defined-benefit pension funds should be funded to buy-out levels, to the extent that they are capable of securing members’ benefits with an insurer. Additionally, any surplus extraction should demonstrably provide clear benefits to scheme members, rather than simply serving the employer’s interest—although we heard evidence on Tuesday that did not necessarily agree with that.

We acknowledge that there are broader issues facing defined-benefit pension schemes that we intend to explore further when the Committee considers the new clauses. In particular, the post-Maxwell accounting framework is a significant constraint on defined-benefit pension funds. The requirement to show deficits on company balance sheets suppresses growth potential. The Bill should not miss an opportunity to address those structural hurdles.

One of the behavioural outcomes we have seen is that defined-benefit pension funds have been investing large amounts of money into bonds, including Government bonds, and not into equities where there is the greatest growth potential in the economy. That throws up a couple of problems in this area. First, the money is not going into equities, which are much more volatile than bonds. Secondly, if we see surplus extraction from some of those funds, that money will come from the Government bond market—the gilt market—and there may be an impact on the Government’s ability to borrow funds, which is something we will hear more about on 26 November. Crucially, the Minister will now be part of that, and I suspect he will be taking into account the bond market’s ability to meet Government borrowing requirements when he gets close to that date.

Moreover, there is nothing in the current legislation to prevent surpluses from being used for purposes that do not support economic growth, such as share buybacks or dividend payments by the host employer. Neither of those outcomes necessarily aligns with the Government’s growth agenda, although it could be argued that the money is going back into the wider economy and finding its way back. None the less, we would like to see more guidance on how that money is to be spent. Simply repaying—potentially—private equity funds a large dividend will not necessarily help the greater good.

The Bill proposes new flexibilities for defined-benefit schemes in surplus. Currently, the Bill is unclear on the level at which employers can extract that surplus and there is concern that, once a scheme is fully funded on a low-dependency basis, buy-out could happen. That is a lower threshold than for a gold standard buy-out and, while it may free up capital for employers and support investment, there are concerns that the change could risk members’ security, as buy-out remains the safest way to guarantee benefits. Amendment 247 would provide strong protection against a change of environment where DB funds start to slip back into deficit positions.

Our amendments 260 and 261 are linked. Just Group plc wrote to the Committee to highlight that members of pension schemes that undertake employer surplus extractions should receive proper notification. Engagement with members should be undertaken before extraction, because ultimately any decisions on surplus extraction could be impactful on them. Setting out clearly in legislation what effective engagement would look like, including the role of the actuary in the process, would help trustees to understand their obligations and Parliament’s intent.

Amendment 260 requires trustees to notify members at least 60 days before making surplus payments to employers, and ensures that members receive full information about proposed surplus payments, enabling informed participation. Amendment 261 aims to strengthen an actuary’s role in oversight of schemes accessing surplus, by requiring confirmation that member notification has occurred before certifying surplus payments. Both amendments strengthen the guardrails around DB surplus extraction, as part of our overall strategy of putting member interest first and protecting trustees. We will be pressing these amendments.

I rise to speak in respect of amendments 265 and 267, which echo the issues already covered by the Shadow Minister. Allowing 60 days’ notice to scheme members is extremely important to the Liberal Democrats—and, to be fair, I am sure it is also important to the Government—and the central intention is to protect outcomes for members of schemes and ensure that there is enough flexibility. That 60 days’ notice is really important to us.

Ensuring that there is enough money in the scheme for any buy-out is the second element, which the hon. Member for Wyre Forest has already alluded to. We think it is very important that the finances are there and that we put scheme members at the centre of the proposals before us. I look forward to hearing from the Minister what reassurance he is able to give us on those points.

I will speak specifically to amendments 260 and 265. Any communication with scheme members is a good thing, particularly if there are to be changes such as those we have been discussing. Sometimes, surplus extraction may not be for the benefit of scheme members; sometimes it may be for other reasons, and trustees have a duty to make clear what they think it is for and to release a surplus only if they think it is a reasonable thing to do. However, they may not have a full understanding of how members feel about what the surplus could be used for. For example, scheme members who are active members might feel that they would love their company to invest in something to make their lives and their jobs easier, and might be keener on that extraction than the trustees might think, so it would be great to have that input.

Amendments 260 and 265 are incredibly similar—surprisingly similar, in fact—and I am happy to support both, were they put to a vote. Amendment 261 is consequential; on amendments 247 and 267, I do not feel I have enough information on what trustees think to make a reasonable judgment on whether either amendment would be a sensible way forward for trustees to meet their fiduciary duty, which is to provide the best guaranteed return for scheme members. I will step out of votes on amendments 247 or 267, but I will support the amendment that requires members to be consulted in advance.

I rise to speak to Amendment 260. I thank my hon. Friend the Shadow Minister for outlining our rationale for the amendments. My comments regard informing members. I support the right to pay surplus to employers—I think that is the right thing to do, so long as the correct safeguards are in place—but it is right to inform members of that decision. Not only is it the right thing to do, but it will improve member engagement in the whole pensions process. I made a point in Tuesday’s evidence session on the importance of financial education, and a number of witnesses supported that position. By more actively engaging with members, we will ensure that they take part in their own pension provision and ensure that the right decisions are made in their own interests.

My overall reflection on the amendments is that in most cases what is being requested is already happening, or risks reducing flexibility for trustees. I will set that out in a bit more detail, but I am grateful to hon. Members for their contributions and for the amendments targeting important areas of concern.

Amendments 247 and 261 aim to maintain the buy-out funding threshold for surplus release from DB schemes. Member security is at the heart of our changes, as I have already set out. We are clear that the new surplus flexibilities must both work for employers and maintain a very high level of security for members, as we all agree. Under these proposals, surplus sharing will remain subject to strict safeguards, including the actuarial certification and the prudent funding threshold, which is the same threshold that the TPR under the previous Government had put in place for defined-benefit schemes to aim for more generally. The defined-benefit funding code and underpinning legislation require that trustees aim to maintain a strong funding position more generally, leaving aside the question of surplus release. They do that so that we have very high confidence that members’ future pensions will be paid.

However, the Government are minded to amend the funding threshold at which surplus can be released from the current buy-out threshold to the full funding on a low dependency basis, as I mentioned earlier. That is still a robust and prudent threshold that aligns with the existing rules, as I have just said. The goal here is to give more options to DB scheme trustees. Again, that is true across the Bill: we are aiming to provide trustees with more options about how they proceed.

Many schemes are planning to buy out members’ benefits with an insurer. In many cases that is the right thing for them to do, but other schemes might want to continue to run on their scheme for some time without expecting future contributions to be required from an employer. The low-dependency threshold will give flexibility to trustees to do so. It is right that they have a variety of options to choose from when selecting the endgame for their scheme.

The Government will set out the details of the revised funding threshold in draft regulations, on which we will consult. More broadly, we think it right that that is done via secondary legislation, not primary legislation.

Can the Minister give us some timescales? I asked previously about timescales, regulations and secondary legislation. I would be grateful if the Minister could address that.

The hon. Member rightly returns to an important question. As I set out at the evidence session on Tuesday, our pension policy road map, published at the same time as the Bill, details exactly when we are planning to bring forward regulations. My understanding is that these particular regulations should be consulted on in the spring of next year—if that is not right, I will make sure we come back to him with further details. As I say, the road map provides the details of that timeline. It is a very important question for people to be clear on. In that consultation, I am sure the evidence we have heard will be taken into account.

Amendments 260 and 265 correctly aim to ensure that members are well informed and represented when it comes to their pension schemes and retirement. The new paragraphs would be inserted into Clause 9 of the Bill, which amends section 37 of the Pensions Act 1995. Section 37 already provides that regulations must require members to be notified in relation to a surplus payment before it is made.

This is therefore not about the flexibility of trustees; it is redundant, given the requirements already in the Bill. It is similar to the existing requirement under section 37 of the Pensions Act 1995, and we will again consult on these draft regulations following Royal Assent. Furthermore, trustees already have a clear duty to act in all matters in the best interests of the beneficiaries of their scheme, and they are best placed to decide, in consultation with the sponsoring employer, what actions are best for members—I will not keep repeating that point as we go through the rest of this Bill.

Finally, I thank the hon. Member for Wyre Forest for proposing Amendment 261, with its requirement for actuarial confirmation that proposed payments from a DB surplus to employers will not adversely affect members’ benefits, and that members have been notified ahead of that release. Those are valuable objectives, but they are already achieved by the robust safeguards in place, including trustee discretion, the prudent funding threshold —on which we will consult—and the actuarial certification that a scheme is well funded.

In addition, the defined-benefit funding code and the underpinning legislation already require trustees to aim to maintain a strong funding position, and that is actively overseen by the Pensions Regulator. I believe the safeguards we have put in place put members at the heart of the policy, which is a point of cross-party agreement, and will allow trustees to continue to be the people who strike the correct balance between the benefits for employers and members. I hope this offers some reassurance to the Committee that, for the reasons I have outlined, these amendments are unnecessary; I urge hon. Members not to press them.

The Minister has said that trustees are required to act in the interests of and to the benefit of scheme members. However, they are required to act so that members will get the benefits that they are promised under the pension. They are not required to act to the benefit of scheme members. As I said earlier, there is a distinct possibility—particularly with surplus, which is not going into the pension scheme and which can only be paid if those benefits are already guaranteed—that the surplus is only a surplus in the case where members are definitely going to get those benefits anyway.

It is the case that trustees might not know what is to the benefit of members. Requiring them, or asking them, to consult members on what they would like, or to provide members with information about how money is going to be spent, could get better results for those members. It is not going to change the amount of pension they will get, which is the trustees’ requirement; however, it may change their lives in a more positive way. Whether or not they are people currently paying into the scheme and actively employed, there are ways that the surplus could be spent that would benefit or disbenefit their lives.

In making that case, I think there should be a consultation with members. The hon. Member for Mid Leicestershire made the point very well that we should encourage people to take more interest in and have more input into their pensions, so that they have a better idea of what is going on, of the possibility of surpluses and of how they are spent. I would appreciate it if the Minister, when he is considering the regulations and the changes being made, could think about how best to consult scheme members. Given that trustees have a duty to act not in the best interests of members, but in the best interests of members’ pensions, I would love to see, around the surplus, arrangements that benefit scheme members—whether they are currently paying, future or deferred members, or those already getting their pensions—rather than solely the employer and the employer’s intentions.

Ordered, That the debate be now adjourned.—(Gerald Jones.)

Adjourned till this day at Two o’clock.