House of Lords (HoL) peers have intensified scrutiny of the government’s £25bn scale threshold for defined contribution (DC) schemes, as the Pension Schemes Bill approaches the final day of committee-stage debate.

During the fifth day of Grand Committee, debate focused on Clause 40, which would require main scale default arrangements in workplace DC schemes to reach at least £25bn in assets or begin consolidating.

Ministers argued that scale delivered stronger governance, lower costs and improved access to productive finance.

However, a cross-party group of peers warned that mandating size risked undermining competition and innovation.

Baroness Noakes said the government was displaying “an obsession with size that overrides their professed desire for better outcomes for savers”.

“Good investment returns are not the exclusive preserve of schemes that reach the magic £25bn of assets,” she argued, adding that the evidence cited by ministers demonstrated correlation rather than proof that size alone drove performance.

“One instrument - mandating the size of pension providers - will not achieve the separate targets of improving savers’ outcomes and increasing UK productive investment," she stated.

Meanwhile, Baroness Altmann also criticised the decision to hardwire a specific monetary threshold into primary legislation, warning there was “no academic proof that £25bn, £10bn or any other number is the right dividing line between successful funds and failing funds”.

Lord Fuller described the narrative that “bigger is best” as “lazy”, arguing that very large schemes may be less able to invest in smaller UK growth companies.

“The truth is that the largest schemes invest less in Britain, because they are just too big to invest in the smaller British companies with great growth potential,” he claimed.

Responding for the government, Department for Work and Pensions (DWP) minister, Baroness Sherlock, defended the policy as evidence-based.

“Evidence suggests that there are direct benefits derived from scale; they include better governance and economies of scale […] and access to a wider range of assets,” she said.

Baroness Sherlock also maintained that funds of around £25bn to £50bn were better-placed to invest in private markets and negotiate lower costs, rejecting performance-based exemptions on the basis that “past investment performance is not a guarantee of future success”.

The amendments were ultimately withdrawn, but Baroness Noakes indicated the issue would return at report stage.

While Clause 40 dominated debate, peers have scrutinised a broad range of reforms across earlier committee days.

Reserve mandation power (Clauses 40 and 41)

Alongside the scale test, Clause 41 introduces a “reserve power” enabling ministers to mandate minimum allocations to specified asset classes if industry voluntary commitments fall short.

Although widely debated, particularly regarding potential government overreach, both clauses were agreed to without amendment.

Value for Money framework (Clauses 11-14)

Earlier sittings examined the structure of the forthcoming Value for Money (VfM) regime, with peers raising concerns about the breadth of delegated powers and the reliance on secondary legislation to define key metrics.

Amendments seeking to hardwire additional detail into primary legislation were not adopted, with ministers arguing that flexibility was required to adapt to evolving market conditions.

Defined benefit surplus flexibilities (Clause 9)

Peers also debated provisions allowing trustees of well-funded defined benefit (DB) schemes to modify scheme rules to share surplus funds with sponsoring employers, subject to safeguards.

Concerns were raised about member protections and trustee independence, but the government maintained that existing fiduciary duties and regulatory oversight provided sufficient guardrails.

Virgin Media remedy (Clauses 100-107)

The committee considered provisions to implement the so-called Virgin Media remedy and to clarify the validity of certain historic benefit amendments.

An amendment seeking to remove a carve-out for schemes already subject to legal proceedings was withdrawn, leaving the clauses unchanged.

Pre-1997 indexation for PPF and FAS members

Clauses introducing prospective pre-1997 indexation for members of schemes within the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS) were also debated.

The measure would apply from January 2027 for eligible members, but does not provide for arrears of past payments.

Industry reaction

Industry figures have echoed some of the concerns raised in the Lords.

TPT Retirement Solutions head of policy, Ruari Grant, said the scale debate and VfM framework discussions reflected legitimate scrutiny of the interaction between structural reform and performance.

“It’s worrying that structural reforms might be considered more important than scheme performance and value - the primary drivers of member outcomes,” he warned.

Aberdeen Investments head of closed-end funds and managing director of corporate finance, Christian Pittard, also criticised resistance to amendments seeking to recognise investment trusts and REITs within qualifying asset definitions.

“Investment trusts are proven vehicles for channeling long term capital into productive assets,” he said, arguing that excluding them risked narrowing access routes to private markets.

With the majority of clauses now agreed, the bill will move to report stage following the conclusion of committee on 23 February, before progressing to third reading in the Lords.

Despite recent attempts to accelerate its passage, the timing of royal assent remains unclear.

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