(1 day, 7 hours ago)
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“Purpose of the Act(1) The purpose of this Act is to—(a) deliver higher and more sustainable returns for pension savers;(b) address fragmentation across the pensions sector;(c) improve transparency and comparability in value for money;(d) enable clearer and fairer communication with members;(e) support greater consistency across pension provision;(f) support innovative and flexible approaches to saving;(g) provide employers with greater clarity to support their employees’ pension provision;(h) enable responsible and innovative use of pension scheme surplus;(i) improve understanding of pension liabilities and costs for local authorities;(j) strengthen actuarial transparency and routes to challenge contribution rates in the LGPS.(2) The Secretary of State, and any other persons taking actions under the provisions of this Act, must have regard to the purpose specified in subsection (1).”Member’s explanatory statement
This amendment sets out the overarching purposes of the Act, including improving returns for pension savers, addressing fragmentation, strengthening value for money and transparency, supporting innovation and flexibility in pension provision, and improving outcomes for members, employers, and local authorities.
Viscount Younger of Leckie (Con)
My Lords, it is a privilege to open today’s debate and to begin what I am sure will be five engaging and constructive days of scrutiny on this Bill in Committee. The proposed new purpose clause, in my name and those of my noble friend Lady Stedman-Scott and the noble Baroness, Lady Bowles, is not an attempt to rehearse the arguments advanced at Second Reading. Rather, it is intended to address a specific issue arising from the way in which the Bill has been framed and from the legislative approach that the Government have chosen to adopt.
The debate I seek to initiate is a principled one about legislative clarity and certainty, particularly in the context of what is, by any reasonable definition, a framework Bill. We believe that the Bill, as currently drafted, is light on detail and relies heavily on delegated powers. This has inevitably left your Lordships debating intentions, aspirations and hypothetical outcomes, rather than the Government’s settled policy. In those circumstances, is it not all the more important that Parliament is clear on the face of the legislation about what it actually intends to achieve?
The purpose clause amendment therefore intends to establish an overarching statement of intent, setting out the objectives against which the Bill and the regulations made under it should be understood and scrutinised. Where detailed provision is deferred to secondary legislation, such a statement provides Parliament, regulators and stakeholders with a clear point of reference. Without it, how are we to assess whether the powers being taken are exercised consistently with the will of Parliament, rather than merely within the scope of ministerial discretion?
More broadly, the amendment invites the House to reflect on whether Parliament is being asked to confer wide-ranging powers without sufficient clarity as to how they are intended to be used. At what point does flexibility begin to shade into uncertainty? How can proper legislative certainty be maintained when substantive policy choices are deferred, potentially amended repeatedly and then removed from direct parliamentary scrutiny? If there were an alternative procedural route that allowed the House to engage meaningfully with these questions, we would of course be willing to consider it. However, in the absence of such a mechanism, is it not reasonable to seek to debate these matters through a proposed new purpose clause, which would allow the House to test the Government’s intent within the normal amending stages of the Bill?
This concern is particularly acute in relation to value for money. Much of what this legislation seeks to achieve will ultimately stand or fall on the effectiveness of the value-for-money framework. Yet the provisions before us are thin and largely skeletal, despite the central role that the framework is expected to play. How can Parliament properly assess the merits of this approach when so much turns on detail that has yet to be set out?
I say at the outset that we are supportive of the value-for-money framework in principle, but its success will depend almost entirely on the detail of its design, the consistency of its application across schemes and the robustness of its enforcement. Without greater clarity on these points, how are trustees, regulators and members to understand the standards against which they will be judged?
That leads me to a wider question about the long-term purpose of the Bill. How do the Government envisage the pensions landscape to look like in 10, 15 or even 20 years’ time? Is the objective consolidation, greater scale, improved outcomes for savers or some combination of all three? How will we know whether this legislation has succeeded in delivering that vision?
We wish to engage not only with the immediate legislative mechanisms but with the broader strategic direction that underpins them. We fully accept that legislation must allow Ministers a degree of flexibility to respond to changing circumstances, but flexibility without a clear, articulated destination risks leaving Parliament and the industry uncertain about the direction of travel. Is it unreasonable to ask for the House to be told not only what powers are being taken but to what end they are intended to be used? It is in that spirit that this purpose clause has been tabled and I very much look forward to the debate that I hope it will provoke.
I wish to return briefly to the question of mandation, which, although I have not directly mentioned it, is an underlying issue in the Bill. It illustrates precisely why questions of purpose, process and limitation matter so greatly in the context of a framework Bill of this kind. We will of course turn to this in greater detail later in Committee but, as we are discussing the purpose of the Bill in this clause, it would be remiss of me not to mention it here at the outset as one of the most contentious provisions in the Bill—as we heard, broadly around the House, at Second Reading.
As drafted, the Bill establishes a broad enabling framework but leaves a great deal of substantive policy to be determined later through regulation. That approach inevitably creates uncertainty. It also places a heightened responsibility on Parliament to ensure that any powers taken are clearly bounded, carefully justified and firmly anchored to a stated purpose. In that context, we do not consider there to be a compelling case that asset allocation mandates are necessary to increase productive investment in the United Kingdom. Indeed, mandation risks cutting across the fundamental principle that investment decisions should be taken in the best interests of savers by trustees and providers who are properly accountable for the outcomes. I am sure that we will hear more about these arguments in Committee.
When the Bill itself provides only a skeletal framework, the absence of clarity around how such powers might be used becomes all the more concerning. If any future Government were ever minded to pursue mandation, it is essential that any such power be tightly limited, that savers’ outcomes are clearly protected and that asset allocation decisions are insulated as far as possible from political cycles and short-term pressures. Investment decisions should remain with those charged with fiduciary responsibility and not be directed by Ministers, however well intentioned. Those safeguards cannot simply be assumed; in a framework Bill, they must be explicit.
Moreover, the case for mandation is further weakened by the existence of credible and constructive alternative routes to unlocking greater levels of UK investment. Industry participants, including Phoenix Group, have identified a number of areas where policy reform could make a meaningful difference without recourse to compulsion. Government institutions such as the National Wealth Fund and Great British Energy could play a significant role by aligning guarantee products with insurers’ matching adjustment requirements, by engaging institutional investors earlier so that projects are structured to meet long-term investment needs and by continuing collaboration with the ABI Investment Delivery Forum to deliver investable infrastructure pipelines.
Similarly, the Mansion House Accord, building on the 2023 compact, has already driven tangible industry action. In our view, the priority now should be delivery, rather than the creation of new and potentially far-reaching powers. That includes implementing a robust value-for-money framework with standardised metrics; introducing minimum default fund size requirements, whether £25 billion or £10 billion, with a credible growth plan; and aligning the defined contribution charge cap with the Pensions Regulator’s approach by excluding performance fees where appropriate.
More broadly still, stronger capital markets are essential if the United Kingdom is to attract both domestic and international investment. This includes supporting the work of the Capital Markets Industry Taskforce, exploring measures to foster a stronger home bias in UK equities, considering whether stamp duty on share transactions is acting as a drag on competitiveness, and examining targeted tax incentives for pension fund investment in UK infrastructure. Ultimately, rather than mandating investment, policy should focus on understanding why UK investment has lagged. That requires serious engagement with questions of market structure, regulatory design, the quality of investment pipelines and the underlying risk-return characteristics of UK assets. Mandation risks treating the symptoms rather than addressing the causes.
I look forward to the Minister’s response. I make no apology for laying out certain aspects that I believe fit with the purpose of the Bill. However, as I said at the outset, I hope that we have a productive and interesting Committee. I beg to move.
Lord Davies of Brixton (Lab)
It is a pleasure to be here. Although for a while I was feeling a bit lonely, I very much welcome my noble friends; what we do not make up in numbers, I am sure my friends will more than make up for in the quality of their contributions. I declare an interest as a fellow of the Institute and Faculty of Actuaries.
It is worth at this stage spelling out that I have spent a lifetime advising people about pensions. I was the TUC’s pensions officer for a number of years. I was also a partner in a leading firm of consulting actuaries, and I worked for a number of years with a scheme actuaries certificate undertaking scheme valuations. In terms of sheer experience, I can fairly say that this is unique to noble Members of this House. I will not go on at length on future occasions, except when it is directly relevant.
The noble Viscount, Lord Younger of Leckie, declared his intention to avoid repeating a Second Reading speech—it is arguable as to whether he achieved that intention—but, in a sense, I welcome the opportunity to look at the Bill as a whole. While I support the Bill and I support my noble friends—there are some really good measures in here—the text underlying the opposition amendment suggests that we have a pensions system in chronically bad condition.
It suggests that returns are inadequate, that the system is fragmented and that it lacks transparency, with people unable to assess what they are getting. It provides inadequate communications. It is inconsistent across the different forms of provision. It prevents, or makes hard, innovative and flexible solutions to the problems that are faced. It needs to provide greater clarity for employers. It currently does not achieve responsible and innovative use of pension surpluses. To me, this suggests a system at risk of chronic failure.
To be honest, I accept those criticisms because underlying this system is the personal pension revolution introduced by the Conservative Government 40 years ago, which has proved to be unfit for purpose. We are having to make all these changes because of the failure of the system that the Conservative Government introduced. We need these changes because personal pensions did not work out. Collective provision is the answer to decent pension provision, and the Bill supports and develops collective provision and moves across this idea that everyone can have their own pot which they look after for themselves. I oppose the amendment and look forward to further discussions on the individual issues as they arise.
Lord Fuller (Con)
My Lords, it is always a pleasure to follow the noble Lord, Lord Davies of Brixton. He reminds me of that old joke about the dinner of actuaries where they are all complaining that everyone is living longer and it is getting worse.
I agree with this purpose clause, although I am surprised that it does not establish the balance between risk and reward, where pensions help people build secure futures by taking appropriate qualified risks. The pensions industry seems obsessed with risk minimisation, but without any form of risk there can be no reward; even cash is at risk from inflation.
The success of this Bill and why we need a purpose clause is to be grounded in how it makes it easier for people to take personal responsibility, to save for their futures, themselves and their families and to make their savings secure while permitting appropriate and manageable returns and providing risk capital to grow the economy. Inspiring people to save for their future is important, and pensions are long-term savings plans. Long-term returns dynamised through dividends, and boosted by employer contributions in many cases, are the best way to set yourselves up for later life.
Viscount Thurso (LD)
My Lords, I am not entirely certain that I am wholly in favour of the concept of a clause at the beginning of a Bill that sets out its purpose in the way that the noble Viscount has set down, but I appreciate the opportunity to speak to one of the points that it makes.
First, I am not sure whether it is a declarable interest but I will declare it anyway: I am a trustee of the Parliamentary Contributory Pension Fund, for which I do not get remunerated—none of us does. As far as I am aware, nothing in the Bill affects that scheme, and therefore I am declaring it just in case. Secondly, I apologise for not having been here at Second Reading. I had to attend something extraordinarily rare: a hospital appointment in Inverness. I am afraid that not even I could get from Inverness to here in the required time for the Second Reading. I apologise for that, but I have read the Second Reading debate and was very taken by what was said.
The specific point that I want to come to is the point that the noble Viscount makes in proposed new subsection (1)(h) and his reference to
“responsible and innovative use of pension scheme surplus”.
What does he mean by an innovative use of the surplus? When the Minister comes to respond, will she say what the Government’s purpose was behind what they are doing on surpluses? I know we will come to that in much greater detail later on.
It seems to me that two things are behind this. One is doing something with a surplus, which begs the question: how much of a surplus should actually be taken? Also, how is that surplus calculated, bearing in mind that a range of actuarial factors—including the strength of the employer covenant, the level of risk of the investment, the actuarial factors regarding life and death, and so on—go into making up a surplus? All those factors can, at each valuation, move the surplus considerably. Therefore, how much is considered surplus surplus, as it were, as opposed to prudent management by the trustees?
The second thing is, I think, the underlying thought that the money given back to the employer will be used for investment. I see no evidence to suspect that will be the case. I have a horrible suspicion that, although we might have a desire to have more money for companies to invest, with the best will in the world, it is more likely that they will take the money, run it through the P&L and use it to pay dividends.
Those are the two issues I am looking at: the quantum of surplus and, in general terms, the principle behind that; and, secondly, the extent to which the Government expect it to be used for investment. If they do expect it to be used for investment, how do they hope that will happen?
Lord Kirkhope of Harrogate (Con)
My Lords, I declare my interests as a current member and director of a pension trust. I want to take us back to the amendment for a moment. I shall refer to the reference to surpluses made by the noble Viscount, Lord Thurso, because it is an indicator of how this Bill is going to move; I suspect we shall get a surplus of comments about surpluses.
I go back to the amendment. We are starting to hear remarks suggesting that this amendment is critical. I do not criticise it at all because this is an enormously complex and comprehensive piece of legislation. Bringing our minds closely to the purpose of what we are going to debate, if ever a piece of legislation required it, this amendment is an essential ingredient. I fully support all parts of this amendment, which seem to encapsulate all the different areas to which we shall give more detailed consideration as we proceed.
However, I want to refer briefly to something already referred to: the matter of pension scheme surpluses under subsection (1)(h) of the proposed new clause to be inserted by Amendment 1. I referred to this at Second Reading; I will not repeat word for word what I said then—that would not be appropriate—but I want to probe my noble friend and, in particular, the Minister on this matter a little.
We all know that, historically, when we had low interest rates in this country, deficits often used to be repaired with any surpluses that might occur in schemes. As a result, employers that did not have DB schemes were obviously at a disadvantage. I am interested in how we might deploy surpluses in future. For instance, will they be deployable for capital expenditure? That seems quite desirable, particularly looking at the economy at present.
My second point concerns crossovers, referred to here, enhancing the contributions that already exist in DC schemes. How on earth can crossovers be legitimately and properly handled? That seems rather difficult to me.
Finally, I turn to surplus sharing. There is a case going on at the moment; I referred to it in my speech at Second Reading so I will not go back to it now. The encouragement of surplus sharing between employers and between members is terribly important. How can that be done fairly and equally? Will we be able to rely—as we should, I believe—on the powers of trustees always to do everything in the best interests of members? Pressures from employers, for instance, must be curbed when it comes to those decisions that might be taken.
It is a difficult area. I know that we will look at it in more detail, but it is worth mentioning at this starting point because this list is perhaps another example of how complicated things are and how we need to get a grip. Whoever has been responsible in the past for legislation in this field, this is an ideal opportunity, which I greatly support, for us to get this right. I therefore fully support Amendment 1 and hope that, as we move forward, we will use those objects as the basis for our discussions.
Lord Wigley (PC)
My Lords, I apologise that I, too, missed Second Reading, for reasons outside my control. When you are in a party with two or three Members, it is very difficult to spread yourself in all directions. I have an interest in this area going back to when I was a trustee of the National Assembly’s pension scheme some years ago and, before that, I had involvement as financial controller of the Hoover Company and with Mars Ltd, which is one of the foremost companies in these islands.
I want to flag up one point as we look at the generalities in this comprehensive umbrella amendment—the position of employees such as those of Allied Steel and Wire in Cardiff in 2002, who found themselves on their backs without adequate safeguards for the pensions that they had. Over the almost quarter of a century since, those still surviving did not get justice out of the system. Whatever balance we have to strike in terms of risk—which is inevitably part of the equation—benefits, security and the longer term against the shorter term, we must also have some safety nets for those who fall through, through no fault of their own, as did the employees of Allied Steel and Wire.
I commend the Government for the steps they have taken for the coal miners, who have been in a difficult position, but if the coal miners were justified so are the workers at Allied Steel and Wire. I draw to the Government’s attention that the First Minister of Wales, the noble Baroness, Lady Morgan, spoke about this last month and called on them to take action to recompense those who have lost out so badly.
Baroness Bowles of Berkhamsted (LD)
I no longer have any financial interests to declare, having retired from the board of the London Stock Exchange at the end of 2025 after a long tenure, although that indicates that I have some history in that regard. I also have a history of policy engagement with local authority pension funds, the Local Authority Pension Fund Forum and IPO test marketing with various local authority pension funds. That is for background, so that people can understand some of where I have obtained my information.
I added my name to this amendment because I thought it was a good idea to have a list of purposes. We have before us a very long list of regulatory empowerments and, in some places, to do with value for money, I put a little list on the front of them. Somewhere or other, whether in this proposed list at the front, listed throughout or as a mixture of both, it would help us with structure and understanding. We ought to make our Acts of Parliament as readable as possible for the non-specialist. It is also quite important in that regard. It may not be a perfect list; you could ask for “more” instead of “greater” or take the “-er” off the end of words and make it look like it is not criticising. I do not want to go into that, but I did not take it as a criticism. I thought it was a list of what we are trying to do to make things better and, on that basis, I support it.
I would be very pleased if we could all work together to build a list that we were all happy with and that reflected a true convergence of minds. During the passage of the previous Pension Schemes Act, there was an awful lot of working together to try to find the right wording. The Minister was on this side then, and we went through it together with many of the other people in this Room. We should be getting something good up front that tells everybody what it is about, not using it as a way to tie the Government’s hands. I do not look at it like that; I look at it as something that is explanatory. But if it helps in the interpretation, so be it.
If we cannot produce a list like that, I have reservations about whether one should go forward and jump straight into a list. If you do not want it here, you have to put one in every clause, so maybe it is better to try to do a shorter one here. Those are the reasons why I support the amendment. I support the principle of it, and I am more than happy to work at trying to make it something that everybody could sign up to.
Baroness Altmann (Non-Afl)
My Lords, I will be brief. I declare my interests as a board adviser to a pension scheme and a non-executive director of a pension administration and consultancy firm.
I support this amendment because, with such wide Henry VIII powers, it is really important to have some framework to hang our discussions and thoughts on or for future people looking at the Bill to understand its intentions. I was tempted to try to amend this amendment to change the word “savers”, which pervades the discussion about the Bill and lots of the background reading about it. Anyone who thinks that someone who is invested for the long term in a pension is a saver has misunderstood what saving is about. It should be “investors”, “members” or “customers” rather than “savers”. That is an important distinction when talking about providing for the long-term future of retirees in this country via a savings or investment mechanism which uses money that is put in to build up funds for the long term.
I would also have added to this list something that I think is really important. I hope, perhaps against hope, that we might be able to improve the excellent measures in the Bill by improving the compensation and payments for pre-1997 accrual by the Pension Protection Fund and the Financial Assistance Scheme, in particular for members who have been denied inflation protection. We ought—within this Bill, I hope—be able to give them extra for the future.
Viscount Trenchard (Con)
My Lords, I support this amendment, which was so well introduced by my noble friend Lord Younger and so well spoken to by the noble Baroness, Lady Bowles of Berkhamsted. The Bill is very complicated. It is not absolutely clear to me what it means. It is also, as my noble friend Lord Younger explained, a skeletal Bill without a clear purpose to improve the outcomes for savers. In particular, looking at the value-for-money part of the Bill, it is not clear how this is going to work, what the metrics will be and how they will be assessed.
I think it is right to table this amendment in order to understand the purpose of the Bill. I am not clear that the Bill is primarily intended to improve the outcomes for pensioners or to find ways to fund government initiatives to make certain investments with pension savings that the trustees and managers might not have decided to make, which may require them to compromise on what should be their complete and clear duty to exercise their fiduciary responsibilities.
Can the Minister tell the Committee how the Bill is certain to improve outcomes for pensioners beyond what they would have been without government interference in the management of these funds? The Bill interferes with the trustees’ fiduciary duties not only with the mandation powers to direct investments, which apply only to very large DC schemes—the kind to which less well-off pensioners have contributed—but with the powers to require the 93 local government pension schemes to pool their funds together. How is this going to work if, at the same time, the Government are forcing many local authorities to merge or demerge under local government reorganisation?
I look forward to hearing the Minister’s response and approach to this amendment.
Lord Palmer of Childs Hill (LD)
My Lords, I thank everyone for their contributions. I do not intend to go on at length.
It is a novel view, is it not, that a Bill should have a purpose? This ought to be applied to many other Bills to show what their purposes are. This Bill has a wide range of powers affecting consolidation, investment, surplus extraction, defaults and retirement outcomes, but nowhere is a clear statement of purpose listed. I do not think that is symbolic; it is very useful. I have a simple question for the Minister: what is lost by clarity? We are looking here for a piece of clarity that does not undermine the Bill in any way but sets out what people are meant to see and expect from the Bill. It would set a pathway for other Bills to set out their purposes. From these Benches, I support this amendment.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I am grateful to the noble Viscount, Lord Younger, for introducing his amendment, and all noble Lords who have spoken. It is a particular delight to hear from so many colleagues so early in Committee.
I should begin by saying two things. First, I am a member of the parliamentary pension scheme, so I thank the noble Viscount, Lord Thurso, for his service and urge him to give the scheme even greater attentiveness in future; I would be very grateful for that. Secondly, I am about to disappoint most Members of the Committee, but I may as well start as I mean to go on. Many of the points made and questions asked will come up in subsequent Committee days—that is what Committee is for—so I hope that noble Lords will forgive me if I do not go into the detail of how surplus operates, how value for money operates or how asset allocation will work; I will come back to all of those. I should probably apologise to the noble Lord, Lord Fuller, because I cannot promise to go back to Star Wars figurines, but I will try to pick up most of the rest of the points at some stage.
The Bill delivers vital reforms to strengthen the UK pensions system, safeguarding the financial future of around 20 million savers while driving long-term economic growth. The Bill focuses on improving value and efficiency for workers’ pension savings, with an average earner potentially gaining up to £29,000 more by retirement. These measures will accelerate the shift towards a pensions landscape with fewer, larger and better-governed schemes that deliver for both members and the wider economy.
To support market consolidation, the Bill introduces superfunds, megafunds and Local Government Pension Scheme pools, creating scale and resilience. The value-for-money framework will ensure that schemes provide the best outcomes for savers, while guided retirement provisions will help members when accessing their savings. Other measures in the Bill will enable pension schemes to operate more effectively by streamlining governance, improving transparency and reducing unnecessary complexity. The reforms delivered through the Bill will create a more efficient, resilient pension landscape; they will also lay the foundation for the Pensions Commission to examine outcomes for pensioners and set out how to develop a fair and sustainable system, ultimately benefiting both individual savers and the UK economy.
To achieve these ambitions, the Bill makes a number of essential changes to the framework of law relating to private pension schemes and the LGPS, rather than pursuing a single overarching objective. To insert a purpose clause could cause legal uncertainty as a court could assume that a provision included in a Bill was intended to have some additional operative effect. The practical effect of the requirement to have regard to the purpose of the Bill, as expressed in this proposed new clause, is unclear.
The purposes of individual provisions are instead made clear through their drafting and the accompanying explanatory material, including the Explanatory Notes and the impact assessment. There is no need for an additional new clause at the start of the Bill setting out the purposes, as this is covered elsewhere more appropriately. This approach is in keeping with established practice; for example, the Financial Services and Markets Act 2023 was twice the size of the Pension Schemes Bill. Like the Bill, it deals with a complex legal landscape and made a number of separate and necessary changes to the law relating to financial services and markets. There is no purpose provision in that Act, just as no overarching purpose clause has been included in the Pension Schemes Bill. We will return to matters related to secondary legislation in the debate on a subsequent group of amendments tabled by the noble Lord, Lord Sharkey.
I will pick up the point made by the noble Viscount, Lord Younger, about this being a framework Bill; he used that as an argument for a purpose clause. I say to the noble Lord, Lord Palmer, that, if he has not seen a purpose clause debate, he has not been in many debates in the Chamber recently, because they have appeared; unfortunately and inadvertently, they mostly resulted in long Second Reading debates at the start of many other pieces of legislation. I stress that that was neither the purpose nor the result here, but many of those debates have happened.
We do not consider this to be a framework Bill. The noble Viscount mentioned the idea of setting legislation now and setting policy later. Manifestly, that is not what is happening. The Bill clearly sets out the policy decisions and the parameters within which delegated powers must operate. It brings together a broad package of reforms in pensions into a single piece of legislation. Many of those reforms build on long-established statutory regimes, where Parliament has historically set the policy in primary legislation and provided for detailed measures that will apply to schemes to be set out in regulations. The policy direction is clearly set out here.
As we all know, the successful implementation of pensions depends heavily on trustees, schemes, providers and regulators, which makes engagement and operational detail essential rather than optional. There has been extensive consultation and there will be further extensive consultation. I do not think that this matter will be solved any further by adding a purpose clause.
Finally, the Long Title of the Financial Services and Markets Act 2023 was also described in neutral terms—
“to make provision about the regulation of financial services and markets”—
rather than providing a practically unworkable narrative explanation of the purpose of that legislation. The same applies here.
While I welcome the comments and look forward to returning to many of them in our debates, I hope that I have made the case not only for the Bill as a whole but as to why it is unnecessary and unhelpful to add a purpose clause. I ask the noble Viscount to withdraw his amendment.
Viscount Younger of Leckie (Con)
My Lords, I thank all noble Lords who have contributed to this relatively short debate. Many of the points raised strongly reinforce the view that my noble friend and I are seeking to advance: that this is indeed a framework Bill, which in its current form would benefit from greater explanation, greater articulation of purpose and more fully developed safeguards. I believe that the debate has drawn out views on some of those listed purposes and that it has been helpful at the outset of Committee.
As my noble friend Lord Trenchard said, it is complicated—that adds to my argument. I was very grateful to have the support of the noble Baroness, Lady Bowles. I am grateful to the Minister for her response and for beginning to provide some additional context around the Government’s intentions. It has been helpful up to a point, but I am not quite sure why she thinks a purpose clause would provide some uncertainty.
I remain of the view that a broader and more holistic articulation of where the Government would like the pensions system to be in five, 10 and 15 years’ time is still lacking. In fairness, that is likely to extend beyond what the Minister can reasonably be expected to provide today; I understand that. I accept her valid point that Committee is for delving into the detail of these matters, which we will be doing.
I will pick up just a few points from the debate. First, my noble friend Lord Fuller is absolutely right that we need a purpose clause to inspire people, particularly young people, to save for the future. That is a very valid point; it levels us, or brings us down to base, in terms of what we are trying to do here with this complicated Bill.
Member’s explanatory statement
This amendment seeks to probe why the Secretary of State requires the power in subsection (2) to direct scheme managers to participate in, or withdraw from, particular asset pool companies, given the need to preserve their independence and fiduciary duty to act in members’ best interests.
Viscount Younger of Leckie (Con)
My Lords, the amendments in this group begin a series of groups related to the Local Government Pension Scheme. We start with amendments that seek to improve what is already in the Bill. However, as later groups will demonstrate, the Bill remains light on the LGPS.
I am sure that the Minister and other noble Lords will have noticed that we have de-grouped a number of our amendments ahead of today, where they are most relevant to this group. I shall briefly explain our reasoning at the outset. We have no intention of frustrating the passage of the Bill. Rather, we have de-grouped those amendments where we felt it would facilitate a clearer and more focused discussion, enabling noble Lords to put more targeted questions to the Minister without requiring her, or indeed other noble Lords in Committee, to traverse an undue amount of technical detail in a single debate. I hope that our intentions on this point have been made clear.
I do not accept the characterisation that this is simply a private pensions Bill—the Local Government Pension Scheme is clearly included within its scope—nor do I accept the argument that addressing the problems of the LGPS is either too complicated or not a priority. If we are legislating on pensions, we must be prepared to deal properly with the LGPS. I will refrain at this stage from going into the specifics, but later we will bring forward six additional proposed new clauses about the LGPS aimed at making the scheme operate in a more coherent, transparent and practical way. We very much hope that the Minister will engage seriously with these proposals. They go to the root causes of the problems facing the LGPS: how contribution rates are set; how these rates can be challenged; why transparency matters; how opacity undermines confidence in the system; why valuations and methodologies are so important; and, crucially, why many employers are currently getting a bad deal.
However, let us begin with what is already before us in the Bill and why it must be properly probed. These amendments give rise to specific and important questions that we wish to put to the Minister. They concern not only the intent of the provisions but how they will operate in practice, how they will interact with existing LGPS governance and funding arrangements, and whether they genuinely address the problems that they are purported to solve. Clarity on these points is essential if we are to ensure that the Bill strengthens, rather than inadvertently weakens, confidence in the Local Government Pension Scheme.
The first amendment in this group, Amendment 2, would remove subsections (2) to (8) of Clause 1 in order to probe the breadth and necessity of the powers being taken by the Secretary of State. As drafted, Clause 1 goes far beyond enabling regulation. It gives the Secretary of State the power to direct individual scheme managers to participate in or withdraw from specific asset pool companies and to issue binding directions not only to those scheme managers but to the asset pool companies themselves. Trustees have clear and well-established fiduciary duties to act in the best interests of their members and beneficiaries. Decisions about investment structure, risk, performance and value for money are central to those duties. The question this amendment seeks to pose is therefore simple: why does the Secretary of State require the power to override those fiduciary judgments by direction?
The Government have already made clear their policy objective of encouraging greater pooling. What is not yet clear is why compulsion, backed by direction-making powers of this breadth, is considered necessary. I am also concerned about the precedent this sets. Once Ministers have the power to dictate where pension assets must be pooled, it is not difficult to imagine future pressure, real or perceived, for an overinvestment strategy, asset allocation or wider policy objectives, even where these may conflict with members’ best interests.
The amendment therefore invites the Minister to explain, first, what safeguards will exist to ensure that any direction does not conflict with the fiduciary duty of scheme managers to their members. Secondly, over what timeframe will a scheme manager be expected to comply with a direction to enter or leave an asset pool? How will this align with long-term investment strategies? Thirdly, have the Government consulted the Border To Coast Pensions Partnership and other LGPS pools about the potential impact of this power? Fourthly, does the Minister recognise that forced entry or exit from asset pools could disrupt investment strategy, reduce stability and deter private sector partnerships? Have the Government considered this risk?
I am afraid there are a lot of questions, but they are worth putting. How do the Government propose to deal with the risks of cross-subsidisation of employers with very different funding positions that are merged into the same asset pool by direction of the Secretary of State? What safeguards will be put in place to ensure that deficit management remains fair and proportionate across employers after such a merger? Will administering authorities be given the ability to ring-fence liabilities or negotiate separate funding arrangements if they are compelled to merge? Have the Government undertaken any modelling of the financial consequences of merging employers with very different funding positions? If so, will this analysis be published? Can the Minister set out what these prescribed circumstances might be?
I appreciate the letter the Minister sent to noble Lords last week, in which she set out the Government’s recognition of the importance of fiduciary duty. I recognise that and I am sure the whole Committee would therefore welcome some clarity on this question and how these powers can operate while satisfying that duty.
I appreciate that I have asked a lot of questions of the Minister. I do not expect a reply to them all now, but will she write to me to address any points she is unable to speak to today, copying in those who are in Committee today? As she will be aware, these questions are being asked by the industry as well as by noble Lords in Committee, and it is important that we get proper responses to them. This is a probing amendment, intended to elicit reassurance and clarity. Asset pooling can and should be done well, but it must be done in a way that respects trustee independence and preserves confidence in the governance of the Local Government Pension Scheme.
The second amendment in this group, Amendment 4, would remove Clause 2(2)(b), not because we are necessarily opposed to asset pooling but to probe why the Bill places a clear and binding destination in primary legislation while saying almost nothing about the journey required to get there. As drafted, Clause 2 requires the vast majority of Local Government Pension Scheme assets to be held and managed by asset pool companies, with the only acknowledgment of the practical complexities of that transition being a brief reference to
“transitional arrangements permitted by the regulations”.
We are talking about the transfer of very substantial sums across multiple funds with differing asset mixes, contractual arrangements and liquidity profiles. The question that this amendment poses is straightforward: why are transitional arrangements not set out in the Bill, even at a high level? Parliament is being asked to approve a mandatory structure without being shown how legacy assets, illiquid investments, existing mandates and contractual obligations will be unwound or migrated, and over what timescale. That is a significant delegation of policy detail to secondary legislation, particularly given the scale of assets involved.
I would be grateful if the Minister could explain how the Government envisage this transition being managed in practice, what safeguards will be in place to prevent forced or value-destructive transfers and how scheme managers can be confident that they will not be required to move assets in a way that conflicts with their fiduciary duties. The approach set out in our amendment would avoid ambiguity, provide greater clarity for scheme members and reassure taxpayers that pension funds are being managed in a consistent and accountable manner.
Local government pension schemes vary significantly in size, resources and operational approach and without clear statutory provision, there is a risk that practice could diverge across schemes. Given that pension funds involve very substantial sums of public money, it is appropriate that the most fundamental rules governing their management are set out in primary legislation rather than left solely to regulations. Doing so would ensure a higher level of parliamentary scrutiny and durability and help guard against the risk of standards being diluted in future through ministerial discretion.
This is also a probing amendment intended to elicit reassurance. We are clear, and I know the Minister appreciates, that confidence in the system depends on clarity about the transition, not simply an end state written into primary legislation. I hope she will take this opportunity to address that point today.
My Amendment 5 would remove Clause 2(2)(c). To be clear, this is not because we are opposed to local or place-based investment. Rather, it is a probing amendment designed to explore how the Government envisage the relationship between scheme managers and so-called strategic authorities operating in practice. Clause 2 introduces a new statutory duty requiring scheme managers to co-operate with strategic authorities to identify and develop appropriate investment opportunities. However, the Bill does not define what is meant by “appropriate” or set out the process by which this co-operation is to occur, the weight to be given to the priorities of strategic authorities or how disagreements are to be resolved. This vagueness will create a degree of ambiguity which could prove problematic in practice, particularly where different actors may have very different interpretations of what constitutes an appropriate investment.
One obvious question, therefore, is whether such opportunities are intended to be those defined by a fund’s investment strategy statement. As the Minister will know, the investment strategy statement sets out the fund’s objectives, asset allocation, risk management framework, ESG considerations and approach to pooling. If “appropriate” is not clearly anchored to that framework, there is a risk that scheme managers, strategic authorities and Ministers could each apply the term in rather different ways. This matters because scheme managers are trustees, bound by fiduciary duties to act in the best financial interests of scheme members. Strategic authorities, by contrast, have mandates to pursue local growth, regeneration and wider place-based objectives. Those aims may often align, but they will not always do so. Without clarity, there is a risk of politicisation, however unintended, whereby investments that are politically attractive or locally popular, such as particular infrastructure projects, are promoted despite not meeting the risk and return criteria appropriate for pension funds.
This amendment therefore seeks to probe how the Government will ensure that the statutory duty to co-operate does not place scheme managers under implicit pressure to prioritise wider government or regional objectives over their core fiduciary obligations. Is this duty intended to be advisory or directive? Will scheme managers be expected to justify decisions not to invest in opportunities advanced by strategic authorities? What safeguards will exist to ensure that pension investment strategies remain firmly anchored in members’ best financial interests?
Baroness Bowles of Berkhamsted (LD)
My Lords, I share some of the concerns that have been expressed. I added my name to Amendment 6, and I could have added it to Amendment 5 as well. Before I go further, as it is an early part of discussing this Bill, I should say that I am a great supporter of the notion that there should be investment in productive assets that support the UK economy. Although I am not that heavy on mandation, if anything I lean in that direction quite a lot. It is obviously done through advisers, and maybe that is one reason for being concerned about advisers—perhaps they have pushed it too much the other way in times past. Noble Lords can take it as background that I am very supportive.
I am concerned about too much forcing of particular kinds of investment, and restricting the routes to those investments or the resistance of the opportunity if the trustees think that it is not the right thing to do. That is why I have some support for Amendments 5 and 6, because I think they may go too far. One of the good things about Clause 2(3) and (4) is that they are optional. However, it still hints at a lot of things that could be done.
I am concerned about any kind of dictation on which advisers can be used, because they have been very powerful. If there is any control over which advisers are used, that is another way of controlling the fund. Given the obligations of trustees to consult advisers, and the liabilities attached to that, they have to remain independent. That is the direction that I am coming from; therefore, I do not want the Bill to give powers that could go too far. That is why I added my name to Amendment 6, and why I have some sort of regard for the content of Amendment 5 around the investment opportunities.
Lord Davies of Brixton (Lab)
This group is about asset pools in the Local Government Pension Scheme. I had not intended to intervene on this group, but I want to comment on the remarks made by the noble Viscount, Lord Younger, in introducing this group of amendments on the Local Government Pension Scheme. I am relatively agnostic about asset pools. I am not sure that I am totally convinced by the Government’s line that big is necessarily beautiful, but I am open to that debate.
In introducing this group, the noble Viscount set it in the context of a large group of amendments introduced on much wider issues around the Local Government Pension Scheme than were originally expected—it was really just about investment in the Local Government Pension Scheme—and at a very late stage. It makes no difference to me personally, but fundamental questioning of the structure, running and management of the Local Government Pension Scheme was introduced at such short notice; we found about it only on Thursday or Friday. I can live with that, but I think that it was a little unfair to the people working in and running the scheme suddenly to produce this level of uncertainty. That was unwise. When you want to discuss these things, you start talking to the people involved first, but it is my understanding that it came out of the blue and everyone was totally surprised. Obviously, the issue was always there for discussion, so the fact that it has come up is not a surprise, but doing things at this moment and in this way was unfortunate and is causing problems for those trying to provide the pensions.
I believe that the fundamental premise introduced by the noble Viscount is wrong. The Local Government Pension Scheme is a notable success. Rather than setting up inquiries to discover what went wrong, we should be inquiring about what it got right, because it provides good pensions for a large number of people providing essential services. The average pension in the Local Government Pension Scheme is £5,000; that is because the scheme provides pensions mainly for people on low pay. It provides good pensions for people—often, for women with part-time jobs. It does so in a way whereby, in the forthcoming valuations—as I will expand on and discuss at greater length when we get on to the eighth group of amendments, because that is where the substantive discussion will take place—it faces a better record than private sector occupational pension schemes. We should be looking at its success and not, as the noble Viscount argued, the difficulties and failures.
Lord Fuller (Con)
My Lords, once again, I follow the noble Lord, Lord Davies of Brixton. I wish, perhaps uncharacteristically, to associate myself with many of his comments. I support the thrust of Amendment 2, and offer wider support for the other amendments in this group.
My qualifications to speak on this Bill as far as the LGPS elements are concerned is that I led a local authority for 20 years and have been a member of the Norfolk Pension Fund’s Pensions Committee since 2007. I have also been a member of the Local Government Pension Scheme’s advisory board since its inception in 2014. I am a past member of the fire service scheme’s advisory board, as well as a trustee of a number of private schemes. I also benefit from my own SSIP.
Today is about the LGPS. It is different, because not many of the public sector schemes have money put aside for their members’ retirements—although I accept that the scheme for MPs is one of them. In aggregate, the LGPS comprises 89 separate schemes cast throughout the entirety of the four home nations. Collectively, the 2024 scheme census reports a total of 6.7 million members, a third of whom are, directionally speaking, active; a third of whom are deferred; and a third of whom are actually in payment. In 2024, its total assets under management were worth £390 billion; it is much more than that now. These things change but, by whatever measure, the LGPS is the world’s fourth-largest or fifth-largest pension scheme.
When I came on to the Norfolk board in 2007, assets under management were £1.8 billion. They are now more than £6 billion. I echo the comment of the noble Lord, Lord Davies, that if only the UK economy had risen in that proportion. The LGPS delivers significant value. The typical member is a 47 year-old woman earning about £18,000 a year, for whom the pension is, as the noble Lord, Lord Davies, said, about £5,000. It is incredibly efficient. Operational costs are about half those of typical unfunded schemes. In the Norfolk scheme, of which I am a member, the cost per member is less than £20 per head. I accept that other schemes have costs higher than that, but it is an enviable record. We have saved for our future, but you would not know any of this from the thrust of the Bill and its overbearing tinkering.
What is the problem to be solved here? After some difficult times when interest rates were low, most schemes are now fully funded. It is a British success story that will be undermined by fettering the independence of schemes to make the best long-term investment decisions for their members and local taxpayers, muddling accountabilities by divorcing assets from liabilities and introducing new conflicts of interest. That cannot be right. The success has been delivered despite being buffeted by complications such as McCloud, the pre-2015 and post-2015 schemes, GMP, the rule of 75, dashboards, changing rules on inheritance and divorce and all the other things that happen when you have the best interests of 6.7 million workers in mind. The truth is that the LGPS is a million miles away from the fat cattery that the popular newspapers would have you believe.
That brings me on to the substance of Amendment 2. I have the greatest concerns that the fiduciary duty contemplated to members in this Bill, fairness to the taxpayer and ham-fisted interference from a merry-go-round of Local Government Finance Ministers will weaken this jewel in our economic crown. Taken together, subsections (2) to (8) promote the notion that the government nanny knows best, with broad powers down to the level of detail to determine the fine structure of the pooled schemes. This approach has already damaged the scheme for no good reason. The exemplar ACCESS band has been told to disband. It was doing a good job. With nearly £40 billion-worth of assets under management, it rented the best globally viewed FCA-qualified professionals in the City of London, one of the world’s top three financial centres. Now it is being forced to join a pool of other authorities headquartered miles away in the provinces, miles away from the cut and thrust and that leading intellectual property. There is a provision in subsection (7) that these pools should take steps to get FCA accreditation—I suppose we should be grateful for that—but these pools have no business even being on the battlefield until they are FCA qualified. Thus is the muddle of this Bill. In essence, this enforced uniformity means that star strikers have been replaced by subs from the reserve team. A global success story has been weakened with the risk of lower returns for members.
Moving on, this Bill talks about local government members, but the scheme is not about just councils. In the Norfolk scheme, which I know best, there are eight principal councils, but we now have more than 500 sponsoring employers—parish councils, care homes, catering companies, youth and social workers, classroom assistants and charities. Each has different scale, covenant strength and longevity. It is complex. Yet ministerial interference wants to shove them all into a one-size scheme that cannot fit all. In subsection (5) we see touching faith in the judgment of the experts and regulators who forced private schemes into LDIs and ruined them. I do not know why the Pensions Regulator and GAD are not on the Government’s list. I suppose we should be grateful that they are not. This whole Bill promulgates pensions groupthink on the altar of reduced risk and lower returns.
I will deal with Amendment 5 later because it talks about investment and there is a later group for that. I have heard the Minister say that bigger is better. Here again, I align myself with the noble Lord, Lord Davies. It is the thrust and the theme of this Bill more widely. Indeed, I heard the noble Baroness at the Dispatch Box lionise the Ontario teachers’ scheme in the week that it was rinsed for £1 billion in the collapse of Thames Water.
We see in Clause 2 that there will be directions as to what things can be invested in. When they tried that in Sweden, the public schemes lost another £1 billion in the Northvolt disaster, where virtue-signalling political investment directions made the members and taxpayers poorer. The harsh lesson is that the schemes become the plaything of meddlesome Ministers to require or prohibit, or to opine on lofty ideas, but without the responsibility or accountability of paying out. It is wrong.
Captain of the King’s Bodyguard of the Yeomen of the Guard and Deputy Chief Whip (Baroness Wheeler) (Lab)
Order. The noble Lord can see that he has reached his 10 minutes.
Lord Fuller (Con)
I am coming to a conclusion. I spent 20 years at the coalface with some of the brightest and smartest professionals from around the world. If we persist with subsections (2) to (8), we will be further in hock to a Treasury that has demonstrated that it does not understand the interplay between revenue and capital, or the underlying principles of a capitalist economy. If it ain’t broke, don’t fix it. Now is not the time to meddle in the LGPS.
Baroness Altmann (Non-Afl)
My Lords, I will be brief. I have added my name to Amendments 2, 5 and 6. I support the thrust of these amendments. I agree wholeheartedly with the noble Lord, Lord Davies, that the local government pension schemes have been successful. One reason is that they have been able to take higher risks—in other words, earn higher returns—than many of the traditional private sector pension schemes, which were so constrained and had the problem of LDI.
I have concerns about the cost to taxpayers because the Bill effectively suggests that, by reducing the number of asset pools for local government pension schemes from eight to six, somehow the returns will magically improve and the Government will be able to direct local authority pension schemes into the right place. As we have heard from so many noble Lords, it does not appear to me that the Government are best placed to direct where people invest.
With £402 billion in these schemes at March 2025, with about a quarter of council tax being spent on contributions into them and with so many areas of the economy needing investment, it is right that we expect local authority schemes to be able to support the local—and, potentially, the national—economy. The Government might well be tempted to turn this £400 billion into a sovereign wealth fund, given that taxpayers at the national scale underwrite local authority pension schemes—they do not belong to the PPF; they do not pay a PPF level. If a council goes bust, taxpayers bail it out and the pensions are still paid. I argue that, unless the Government want to do that—
Baroness Altmann (Non-Afl)
My Lords, I had basically finished—I just wanted to say that, if we are not going to turn the £400 billion or so into a sovereign wealth fund, it would be preferable if the Government did not try to direct the investments.
Lord Palmer of Childs Hill (LD)
I simply ask the Minister to explain how local accountability will be preserved, how fiduciary duties will be protected in practice and why so much of this is not in the Bill.
Lord in Waiting/Government Whip (Lord Katz) (Lab)
My Lords, I am grateful to noble Lords for these amendments in the names of the noble Viscount, Lord Younger, and the noble Baronesses, Lady Stedman-Scott, Lady Bowles of Berkhamsted and Lady Altmann. Before I proceed, as we have had a bout of putting things on the record and making declarations, I should say that I served for a mercifully short time as a councillor in the London Borough of Camden from 2010 to 2014 and, as a consequence, am a member of that council’s pension scheme, but I think that has pretty scant bearing on our discussions this afternoon.
On Amendments 2 and 6, I recognise the intention to preserve the independence of the Local Government Pension Scheme administering authorities and to reduce the burden of regulation on their function. I will say now, so that I do not forget, that I appreciate that the noble Viscount, Lord Younger, asked a great deal of questions on amendments not just in this group but in groups to come. It was very helpful to have his explanation about degrouping; we are very happy to debate the Bill in the way the Committee sees best. I also put on record the welcome recognition by many Members who spoke on this group, particularly the noble Lords, Lord Davies and Lord Fuller—although in slightly different ways—of the importance and success of the LGPS. It is worth being clear that the Government are determined to make sure that success continues.
The Deputy Chairman of Committees (Baroness Watkins of Tavistock) (CB)
There is a Division in the House. The Committee will adjourn and resume after 10 minutes.
The Division has been cancelled. If noble Lords are content that everybody is back who needs to be, the Committee stands resumed.
Lord Katz (Lab)
My Lords, the Government share the noble Viscount’s aim of ensuring that administering authorities can continue to comply with their fiduciary duty to act in LGPS members’ best interests. I assure the Committee that the Government are not seeking to undermine the fiduciary duty of local pension funds in any way. The responsibility to set an investment strategy, which is the key driver of investment returns, will remain with funds.
As part of the reforms, we are consolidating all assets under the management of the LGPS asset pools; internal advisory capability is a key benefit of that scale. Integrated models in which strategic advice and investment management are both delivered by the same fiduciary manager are commonly used both in private sector schemes and internationally. These models can deliver greater value for money and economies of scale, and can reduce conflicts of interest. The Government recognise that there will be situations where administering authorities may feel that the advice of pools needs to be supplemented with or tested against advice from other sources. However, the Government are clear that such cases should be exceptional rather than routine.
This is probably a good point to address a couple of questions. The noble Viscount, Lord Younger, asked about cross-subsidising. It is fair to say that asset pooling does not lead to one administering authority subsidising the surplus of another. Administering authorities will remain responsible for the surplus or deficit of the fund that they manage, and each fund will continue to be valued separately.
The noble Lord, Lord Fuller, asked about the scale of the pools disincentivising investment in smaller British businesses and creating bubbles; he used the example of AI. Pools will be able to invest in small companies, including small and growing businesses that contribute to the economy. This could be achieved at scale by using actively managed funds, which aggregate opportunities. As set out in the Pensions Investment Review: Final Report, there is
“clear evidence that, in general, larger schemes are better able to invest in productive asset classes”.
This includes investment in private markets, which are key to financing fast-growing British companies. So I believe that the new pooling model will see more money invested in small British companies.
The Government are pleased that decisions about which of the six continuing asset pool companies LGPS funds wish to work with have been made on a voluntary basis and at a local level, and certainly do not intend to intervene in these decisions. However, the Bill provides for regulations to include powers to direct which asset pool a pension fund participates in, so as to be able to safeguard the scheme in future in the unlikely event that satisfactory arrangements cannot be agreed at the local level; this may include where relationships have broken down within a pool or where an administering authority finds itself without a pool willing to accept it.
The noble Viscount, Lord Younger, asked about consultation on the powers; basically, he asked why we are introducing a power to direct which asset pool an administering authority participates in. The Government’s strong preference is for decisions on pool membership to be made on a voluntary basis and at a local level. However, the Government need to be able to safeguard the scheme in the unlikely event that satisfactory arrangements cannot be agreed at a local level, such as if an administering authority were to find itself without a pool willing to accept it or, as I said, if relationships break down. Regulations are expected to require consultation; that is carried out prior to using the power, of course.
The noble Viscount, Lord Younger, also asked about the transition of assets that are held or managed. The guidance allows room for pools’ discretion where transfer of ownership is not reasonably practical, so there will not be any need for authorities to make such unnecessary losses in the process of pooling.
More generally, the noble Viscount and other noble Lords asked about the fiduciary duty and it being undermined. This provision is not a new power. It replicates a provision in the existing Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016, which will be repealed when the new Local Government Pension Scheme (Pooling, Management and Investment of Funds) Regulations come into force.
I do not want to single out anyone in particular, but the noble Lord, Lord Fuller, talked about meddling. To be clear, this power is a backstop power that would be used only as a last resort to safeguard the scheme, following, as I said, consultation with the relevant administering authority.
On Amendment 4, I recognise that the noble Viscount’s intention is to test why transitional arrangements for LGPS administering authorities are not set out in the Bill. There is more than 50 years’ precedent for the rules of the Local Government Pension Scheme being set out in secondary legislation, going back to the Superannuation Act 1972. We therefore consider that it is more appropriate to change what may and must be included in the rules of the Local Government Pension Scheme through the use of secondary legislation created using existing powers and, where necessary, new powers provided in the Bill, rather than using primary legislation to amend existing secondary legislation. Moreover, given the range of circumstances faced by administering authorities and asset pool companies, the Government will retain some flexibility by setting out transitional arrangements in regulations and can work with the sector to ensure that new requirements are workable and agreeable.
My noble friend Lord Davies of Brixton raised the spectre of this introducing uncertainty. We collectively have a duty to ensure that every penny of members’ hard-earned money is well invested and that the LGPS’s extraordinary scale is harnessed. That includes making the best use of some of the excellent capabilities that exist in the LGPS, rather than building from scratch, which is why we are moving to fewer pools. We recognise that implementing these reforms may cause significant upheaval and require resources, but the reward is enabling a bigger and better LGPS to fulfil its potential as an engine for growth. The Government are considering responses on the proposed transitional arrangements included in the recent technical consultation on the pooling, management and investment of funds regulations and will set out their response in due course.
Regarding Amendment 5 in the name of the noble Viscount, Lord Younger, I recognise the intention to examine the practicalities of co-operation between administering authorities and strategic authorities, especially in the light of the English Devolution and Community Empowerment Bill. The English Devolution White Paper published in December 2024 set out our plan to rewire England by devolving power and funding from central government to local leaders who know their area best. A key aspect of this is the development of ambitious local growth plans by mayoral strategic authorities, including local investment opportunities for institutional investors, including the LGPS.
Clause 2 includes a requirement for LGPS administering authorities to co-operate with strategic authorities, including corporate joint committees in Wales, in order to identify and develop appropriate investment opportunities. This will mean that the investment potential and requirements for pension investments are factored into thinking on local strategic projects from the beginning. It will be for the asset pools, not politicians, to conduct due diligence and take the final decisions on whether to invest. I hope that that addresses the questions posed by the noble Viscount, Lord Younger, around ensuring that schemes are acting in their members’ interests and the interplay between strategic authorities and other authorities.
This high-level requirement to co-operate allows strategic pools and administering authorities to design the most effective ways of working. To ensure a clear, firm trajectory to consolidation and benefits of scales for the scheme as a whole, along with the assurances that I have provided, I think that it is important to understand that the intention behind the LGPS clauses that we have been discussing is to get a balance between retaining flexibility and introducing scale.
There is one remaining question that I have yet to respond to, which was from the noble Baroness, Lady Bowles, about using the power to direct asset pools as to the manner of their investments. The Government are introducing the backstop power to be used, as I said, as a last resort to protect the scheme in the unlikely event that a pool’s decision-making puts it or the underlying pension funds at risk. This power is consistent with existing powers that the Government have to direct administering authorities in specified circumstances, which include powers to give directions about how they should exercise their investment functions. To safeguard the scheme, these powers will need to apply to asset pools instead of administering authorities in future. The Government’s intention is that scheme regulations will require all LGPS asset pool companies to be authorised by the Financial Conduct Authority. It would not make sense for government direction to contradict any requirements of such authorisation.
As I said when I began responding to this group of amendments, there were a lot of questions. I hope that I have answered most of them, but we will of course revisit Hansard after the debate, and I undertake to write to anyone whose questions I have missed. Given that, I respectfully ask the noble Viscount to withdraw his amendment.
Lord Fuller (Con)
May I gently invite the Minister to review the comment he made about the ACCESS pool voluntarily asking to disband itself and then, if necessary, write to me afterwards and make a correction on the record? My understanding is that the ACCESS pool did not wish to be disbanded and, in fact, the response to the fit-for-the-future consultation was that the ACCESS pool’s
“proposal does not meet the Government’s vision for the future of the LGPS”.
There was compulsion; it was not voluntary.
Lord Katz (Lab)
I had better write to the noble Lord. I am afraid I do not have the details of that particular case to hand, but it is our understanding that it was coming from a voluntary perspective. But rather than speculating—I do not have the details here—I am very happy to write to him with more detail.
Baroness Noakes (Con)
I listened carefully to the Minister’s response, but I am not sure that he answered the question about why the Government need to take power to specify the sources of advice that scheme managers must take and whether that would result in a closed list of scheme advisers that had to be used in any event. Not only is that undesirable from a competition standpoint; it also seems likely to work against producing better returns longer term, because you will just ossify the situation as you find it at the point that the Government decide to make that decision.
Lord Katz (Lab)
I thank the noble Baroness for that question. I do not know whether this will give her complete satisfaction, but I understand that requiring funds to take advice from their pool could potentially be a conflict of interest. I would say that, first, asset pool companies will be required to have robust conflict of interest policies and procedures for identifying and managing those areas of conflict. As I said fairly early on in my remarks, integrated models—
Baroness Noakes (Con)
It has nothing to do with conflicts of interest; it is about whether the Government can specify a limited number of sources of advice that can be given to scheme managers, what the purpose of that is and whether that does not in fact work against achieving the best returns for members over time.
Lord Katz (Lab)
I am sorry; I probably misunderstood the direction of the noble Baroness’s questions. I had better write to her to set that out. I think it is fair to say that—this might help a little—in contrast to external advisers, because asset pools are solely owned by old GPS administering authorities, they exist to provide services of their interests and they do not stand to gain financially, even from partner funds taking their advice or providing poor-quality advice. I am not entirely sure that that gets at her question, but the point is that we do not feel that there will be that impact from limiting sources of advice. I will write to her to provide more detail on that point.
Baroness Bowles of Berkhamsted (LD)
I got a bit lost in the explanation, because the Minister also mentioned internal advisers. In replying, will he lay out where he thinks the advice is and what that power is doing? If it is providing a sort of override, as the noble Baroness, Lady Noakes, suggested, to a particular type of adviser, as I was trying to suggest it might, then that is unacceptable. Perhaps if the Minister just lays out exactly what is there, that might clarify it. I hope that he will tell us that he will not override anything.
Lord Katz (Lab)
That is very helpful. When I write to the noble Baroness, I will certainly make sure that we address the point around independent advisers. I appreciate the noble Baroness, Lady Bowles, asking for that kind of clarification, so my written remarks will address that point.
Viscount Younger of Leckie (Con)
My Lords, I am grateful to the Minister for his responses; I am also grateful for the debate we have had on this group of amendments.
I am grateful to all noble Lords beyond me who have asked further questions, particularly in the latter stage of this short debate. It is fair to say—I am saying this against myself—that, with so many questions having been directed originally to the noble Baroness, Lady Sherlock, but applying to both Ministers, it would be extremely helpful to have a full letter with the answers. This has been an important debate; some clear issues have been spoken to, and answers are required.
I will start by picking up some points made by the noble Lord, Lord Davies. He gave the impression—indeed, he said this; I cannot remember his expression—that I was being negative about the Local Government Pension Scheme. I reiterate the point made by my noble friend Lord Fuller: the Local Government Pension Scheme is efficient and is very much a British success story. In addition to that, my noble friend Lord Fuller set out—very eloquently, I thought—the concerns around both the complexities in the Bill and the unintended consequences. There are two clear sides to this. I agree with the noble Lord, Lord Davies, on the success aspect; I want to be quite clear that he knows my position on this.
What unites the amendments in this group is not opposition to reform, nor hostility to pooling local investment or good governance. Rather, it is a concern about how far the Bill reaches into areas that have traditionally, and rightly, been the responsibility of trustees exercising fiduciary judgment. The noble Lord, Lord Katz, said that intervention by government is very much a last resort. I accept what he says but, as the noble Baroness, Lady Altmann, asked—very tellingly—are the Government best placed to direct? Further, she made an interesting point on whether the £400 billion should be part of a sovereign wealth fund. That just shows that it is worth having this sort of debate on this important area of the Bill.
Across these clauses, the Bill moves from setting a framework to conferring powers of direction, compulsion and prescription; direction over participation in asset pools; compulsion towards a particular end state without a clear transition; duties to co-operate with strategic authorities without defined boundaries; and regulation-making powers that reach into advisory pathways and the content of investment strategies themselves. I feel from the debate that each of these elements raises the same underlying question: how will these powers be exercised in a way that is genuinely compatible with fiduciary duty, rather than merely being stated to be so?
With that, I beg leave to withdraw the amendment, but I also acknowledge that there is much work to be done in this area.
Lord Sharkey
“(7A) Scheme regulations made under this section are subject to the super-affirmative procedure, as defined by section (Super-affirmative procedure).”Member’s explanatory statement
This probing amendment seeks to clarify the Government’s willingness to subject regulations made under this section to the super-affirmative procedure, as defined in another amendment in the name of Lord Sharkey to after clause 120. It is connected to other amendments to clause 120 in Lord Sharkey’s name.
Lord Sharkey (LD)
My Lords, in moving Amendment 3, I will speak also to Amendments 221 and 222. These amendments would enable meaningful scrutiny of any of the Bill’s nearly 130 delegated parts when it seemed appropriate to Parliament.
The Bill before us is a skeleton Bill. The DPRRC says that the test for a skeleton Bill is whether it is
“legislation containing so many significant delegated powers that the real operation of the legislation depends entirely or in very large part on regulations made under it”.
This Bill, with nearly 130 delegated powers, clearly passes that test; in fact, it is an obvious and extreme example of a skeleton Bill. This means that parliamentary scrutiny of the Bill is severely restricted. That is because, as things stand, statutory instruments cannot be amended and, by convention, are not rejected. As a result, the Government are taking powers to make policy before they have decided what that policy should be or before critical policy details are in place.
The Constitution Committee was clear in its 2018 report The Legislative Process that:
“Without a genuine risk of defeat, and no amendment possible, Parliament is doing little more than rubber-stamping the Government’s secondary legislation. This is constitutionally unacceptable”.
The DPRRC, in its recent report on the Bill, is equally critical and alarming. It says, among other things:
“We take the view that this Bill is in large part a licence for Ministers to make subordinate legislation … We would have found helpful an explicit declaration from the Department that the bill is a skeleton bill, accompanied by a full justification for adopting that approach, including why no other approach was reasonable to adopt and how the scope of the skeleton provision is constrained”.
The committee’s report, one of the most damning and disturbing that I have read, goes on to say:
“We would also have welcomed an opportunity to examine indicative regulations for at least some of the more important delegated powers given the large part played by delegated powers in this Bill”.
Can the Minister say whether and when the Government will comply with the committee’s suggestion on indicative regulations? We have seen no such indicative draft regulations. I understand that such drafts were circulating among government and industry after the summer. Is that the case? If it is, why has Parliament not been included in the circulation? It is hard to avoid the conclusion that Parliament is being deliberately bypassed.
The affirmative procedure proposed in my Amendments 3, 221 and 222 is designed to deliver a measure of real scrutiny. Together, they would deliver a form of super-affirmative statutory instrument. Paragraph 31.14 of Part 4 of Erskine May characterises the super-affirmative procedure like this:
“The super-affirmative procedure provides both Houses with opportunities to comment on proposals for secondary legislation and to recommend amendments before orders for affirmative approval are brought forward in their final form. (It should be noted that the power to amend the proposed instrument remains with the Minister: the two Houses and their committees can only recommend changes, not make them”.
The noble Baroness, Lady Penn, who is not in her place at the moment, when a Minister gave this House a helpful summary of how the procedure would work in practice, once the House had decided that the procedure should be followed in a particular case. She said that
“that procedure would require an initial draft of the regulations to be laid before Parliament alongside an explanatory statement and that a committee must be convened to report on those draft regulations within 30 days of publication. Only after a minimum of 30 days following the publication of the initial draft regulations may the Secretary of State lay regulations, accompanied by a further published statement on any changes to the regulations. They must then be debated as normal in both Houses and approved by resolution”.—[Official Report, 19/10/20; col. GC 376.]
According to the Library, the last time I asked, the last recorded insertion into a Bill of a super-affirmative procedure was by the Government in October 2017 into what became the Financial Guidance and Claims Act. When they are not doing it themselves, they have traditionally opposed its use on any or all of three grounds. The first is that it is unnecessary because the affirmative procedure provides sufficient parliamentary scrutiny. The second is that it takes too long and the third is that it is cumbersome. We may hear any or all of these objections from the Minister today.
The first objection, that the affirmative procedure provides sufficient scrutiny, is plainly and simply wrong—unless the Government regard no effective scrutiny as sufficient. The second objection, that it takes too long, is to misread its purpose; the super-affirmative procedure takes longer, but that is because it contains provisions for real scrutiny, which necessarily takes time. This is not a negative—it is the merit of the procedure and the point of it. The third traditional objection, that the super-affirmative could turn out to be cumbersome and a disproportionate use of parliamentary time, has no force in the proposed use of the super-affirmative procedure set out in my three amendments. The procedure would be used only if either House decided that an issue was important enough to require the extra scrutiny that the procedure provides.
The House has debated the use of super-affirmatives before. In 2021, we addressed the matter in Committee and on Report on the Medicines and Medical Devices Bill and other notorious skeleton Bills. There was very broad support for using super-affirmatives from around the Chamber, including from the late and much-lamented Lord Judge, who said:
“The wider use of the super-affirmative process would ensure better parliamentary scrutiny and control of the Executive, which for too long have simply ignored the constant urgings of the parliamentary committees in this House”.—[Official Report, 12/1/21; col. 654.]
When the proposal on that Bill was put to a vote, the result was: Content 320, Not-Content 236. Many distinguished Members voted for the use of super-affirmatives, including the noble Baroness, Lady Sherlock. I beg to move Amendment 3.
Baroness Neville-Rolfe (Con)
I will speak simply to support the noble Lord, Lord Sharkey. It seems to me that there is an extraordinarily wide use of delegated powers in the Bill and, for all the reasons that he set out, we should look at that again. If the Government do not feel able to make a change to respond to his very persuasive points, we should at least have a full list of every delegated power that will be used, what the plans are in each case, and perhaps some specimen regulations of the kind that we have seen in some of the Department for Business and Trade legislation.
Viscount Younger of Leckie (Con)
My Lords, this group of amendments focuses on scrutiny, clarity and responsibility, and I am grateful to the noble Lord, Lord Sharkey, for setting out the merits of the super-affirmative procedures and their historical context. It was interesting to hear what he had to say.
As the Committee will have seen, the provisions to which these super-affirmative procedures would pertain allow Ministers, through secondary legislation, to impose requirements and prohibitions on scheme managers, to direct participation in asset pool companies, to require withdrawal from them and to impose obligations on those companies themselves. These are significant powers, exercised in an area that is highly technical, operationally sensitive and financially consequential.
This is precisely the sort of context in which unintended consequences can arise, as alluded to by the noble Lord, Lord Sharkey. These clauses are dense, complex and interconnected. They interact with fiduciary duties, local accountability, financial regulation and long-term investment strategy. Small changes in drafting or approach could have material effects on risk, returns, governance or market behaviour.
That is why I am glad that the amendment places particular emphasis on representations. The ability for Parliament, and expert stakeholders, to examine draft regulations, to make these representations, and for those representations to be meaningfully considered before regulations are finalised, is essential to the responsible exercise of these powers.
The super-affirmative procedure would ensure that Parliament is not simply asked to approve a finished product but is given the opportunity to understand the Government’s intent, to hear from those with deep expertise in pensions, asset management and regulation, and to see how concerns raised have been addressed. That is especially important where the primary legislation quite deliberately leaves so much to be filled in by regulation, as I explained earlier in Committee.
I hope the Minister will engage constructively with this point and explain why the Government believe the ordinary affirmative procedure provides sufficient scrutiny in this case, given the scale, complexity and potential impact of the powers being taken. I appreciate the short debate on this matter.
Baroness Sherlock (Lab)
My Lords, I am grateful to the noble Lord, Lord Sharkey, for introducing his amendments, and to all noble Lords who have spoken. This gives us an opportunity to talk about how best to balance the way we structure matters between primary and secondary legislation. However, the proposals from the noble Lord, Lord Sharkey, would significantly expand the way Parliament scrutinises regulations made under the Bill. I understand why he would want to do that, but his proposals would introduce a level of rigidity into the process that is not only unusual in this area but obviously would be markedly more elaborate than the Bill currently provides for.
The super-affirmative procedure is generally reserved for exceptional circumstances, such as legislative reform orders or remedial orders under the Human Rights Act. I am not aware of any examples of it being applied to pensions regulations, but I am very open to being advised on that. In our view, it would be disproportionate to the nature of the powers conferred by the Bill, and I will explain why.
I will look first at Clause 1. The coalition Government introduced the Public Service Pensions Act 2013. Through that, Parliament established the way it would go about governing the making of scheme regulations. It was a comprehensive and well-tested scrutiny framework. It still operates today, including where new powers were created, for example, by the Public Service Pensions and Judicial Offices Act 2022. The framework created by that Act provides extensive safeguards, including mandatory consultation, enhanced consultation if changes have or might have retrospective effect, and Treasury consent. Introducing a substantially more onerous procedure for regulations under Clause 1, as proposed by Amendment 3, would sit uneasily alongside that established approach.
There are also practical considerations. Administering authorities and asset pool companies are preparing for regulations to be introduced shortly after the Bill has passed its parliamentary scrutiny. The Government have already published draft regulations on the LGPS measure. They were open to public consultation, which has recently closed. Adding a 30-day pre-scrutiny stage through the super-affirmative procedure would clearly extend that timetable and risk creating more uncertainty at a critical moment for those involved in implementing this.
Amendment 221 would allow either House to require that any affirmative regulations made under this Bill be subject to the super-affirmative process. That would already represent a significant expansion of parliamentary involvement compared with the long-standing approach to pensions.
Amendment 222 would go further still. It does not simply describe how the super-affirmative procedure would operate in this context; it would create a new statutory scrutiny process, more prescriptive and more inflexible than the mechanisms Parliament has used to date for pension regulations—or indeed most regulations. It would require a fixed 30-day scrutiny period in any case where either House decided to impose the new procedure. It would mandate a committee report, even for minor or technical regulations, and would prevent regulations being laid until Ministers had responded formally to all representations. The result would be a significant departure from the flexible way Parliament normally manages delegated legislation.
I hear the concerns the noble Lord has expressed about the way Parliament deals with secondary legislation, but scrutiny procedures are normally determined by the House through its practices and Standing Orders. Replacing those arrangements with a rigid statutory framework of this kind for this Bill would set a far-reaching precedent for delegated legislation more broadly, extending well beyond the requirements of this Bill.
I would submit that such a process would also make it harder for Parliament to focus scrutiny on the most significant instruments and would slow down the making of regulations in areas where timely and predictable implementation is crucial for funds, administering authorities and scheme members.
A certain amount of this comes down to whether the Committee accepts that the level of delegated powers is appropriate. I fully understand that the noble Lord does not. I disagree and I will tell him why. In answer to the noble Viscount, Lord Younger of Leckie, in the previous group I said that the Government do not regard this as a framework or skeleton Bill, because it sets out clearly the policy decisions and parameters within which the delegated powers must operate. The Bill brings together a broad package of reforms. Many of those reforms build on long-established statutory regimes set out by previous Governments—Governments of all persuasions, as well as previous Labour Governments—in which Parliament has historically set the policy in primary legislation and provided for the detailed measures that will apply to schemes to be set out in regulations.
The noble Baroness, Lady Neville-Rolfe, asked for a full list of delegated powers. My department produced a very detailed delegated powers memorandum, which went through all the delegated powers at some length and in some detail, explaining what they meant. I would be very happy to direct the noble Baroness to that if that would be helpful.
One of the key questions the noble Lord, Lord Sharkey, asked was: why are there so many delegated powers? Our view is that this is not out of kilter with other similar transformative pension Bills. We counted 119 delegated powers covering 11 major topics plus some smaller topics. For example, in the Pension Schemes Act 2021, there were almost 100 delegated powers covering three major topics. In the Pensions Act 1995, which was a transformative Bill, there were approximately 150 delegated powers.
This Bill brings together a number of distinct pensions measures in a single legislative vehicle, many of which amend or build on existing regimes that are already heavily reliant on secondary legislation for their detailed operation. In many areas, we are simply reflecting a similar framework to previous pensions legislation or amending it, so there is continuity rather than a step change.
A crucial point I want to lodge is that pensions policy is not delivered directly by government. Implementation depends on trustees, pension schemes, pension providers, administrators and regulators who have to design systems, processes and administration that work in practice. That level of detailed operational design can begin only once there is sufficient certainty that legislation will proceed. As noble Lords who have worked in or with industry will recognise, before there is sufficient certainty, industry cannot reasonably commit the significant time and resources needed to work through complex delivery arrangements where the legal basis may still change or not materialise. Delegated powers therefore allow the Government to set the policy framework in primary legislation and then work with those responsible for delivery to ensure that the technical detail is workable in practice, rather than attempting to prescribe detailed operational rules in primary legislation. That reflects established pensions practice and good lawmaking in a complex and fast-moving regulatory environment.
Lord Fuller (Con)
I am conscious that this is not the Minister’s area of specialism, because we are talking about the Local Government Pension Scheme, which is under MHCLG, not the DWP, so I do not expect her to be fully up to speed with this part of the Bill. Members of the various pensions committees of the administrating committees—by and large within county councils, but there are some joint arrangements as well—are legally not trustees. I accept that what the Minister said is correct for the generality of private schemes and some other schemes, but I do not believe it is for the LGPS. I do not expect her to respond immediately, but it is important. It is a shame that we do not have an MHCLG Minister here, because this scheme is the closest we have to a national wealth fund and we are transacting this business without the appropriate expertise here. However, clarity on that is important.
Baroness Sherlock (Lab)
I was going to say that I am grateful to the noble Lord, but I am not sure that I am, really. I am sure he has not missed the fact that the amendments put forward by the noble Lord, Lord Sharkey, do not apply simply to the LGPS provisions in the Bill. They would have widespread application throughout the Bill and implications beyond it. I say that they would have all these implications and I am talking about trustees because they would have a significant impact on the way that all those actors in the pension space would be able to engage in future.
In the past, I have heard people around the House criticise Governments for making decisions at the centre without engaging with those in industry and business who have to deliver them. I know that, if the Government had given huge amounts of certainty and left nothing out there, the criticism would simply be the reverse of what we have heard today. We have to find a balance. The Government believe we have found the right balance. Some Members of the Committee will disagree. I have looked carefully into this, and I am defending the balance that the Government have come to, but I accept that if noble Lords disagree, we will have to come back to this in due course.
We think the existing framework already strikes the right balance between scrutiny and practicality, enabling Parliament to oversee policy development while allowing essential regulations to be made in a timely and orderly way. In the light of my comments, particularly about the proportionality of this, its comparability with previous pensions legislation and the degree to which it is in continuity with the way pensions legislation has traditionally been made by successive Governments, I hope the noble Lord will feel able to withdraw his amendment.
Lord Sharkey (LD)
I am grateful to all those who have contributed to this brief debate. The complexity described by the Minister is obviously real and clearly important, but one of the ways of dealing with complexity is to have the instruments to simplify it and discuss it. My response to the scenario painted by the Minister would be to say: let us have super-affirmative procedures and accept that they will take up a bit more time and involve a bit more work, but, as I pointed out, that is their entire point.
Skeleton Bills always limit parliamentary scrutiny, and the Pension Schemes Bill is not an exception to that; in some ways, it is a confirmation of it. I understood the Minister’s case, but the Government’s desire to limit parliamentary scrutiny is a mistake. The SIs generated by this Bill will have real consequences for the real economy. We cannot usefully discuss these consequences until we have the detail. It seems to me as simple as that. Of course, having the detail helps only if we can do something about it, and the super-affirmative procedure provides that opportunity.
Lord Davies of Brixton (Lab)
I am still mystified as to why Amendment 220 is not included in this group. It is left bereft, right at the end of the Marshalled List. Is there a reason?
Lord Sharkey (LD)
If the noble Lord is asking why it is there, I am afraid I will have to plead the Public Bill Office.
Baroness Sherlock (Lab)
I am advised that Amendment 220 had been withdrawn, not just not debated. We will look into that, and the noble Lord will need to clarify it.
Lord Davies of Brixton
Member’s explanatory statement
This is a probing amendment that seeks to explore how and to what extent LGPS assets might be used to provide social housing as an investment.
Lord Davies of Brixton (Lab)
I emphasise that this is not about mandation. Mandation is a big issue, but this is not about that; it is about the possible ways in which Local Government Pension Scheme assets could be invested. It is a probing amendment and I am sure that it is not word perfect in achieving its objective.
It arises under subsection (4) of this clause. It mentions various issues with how the strategy that is set out should be implemented. It is a probing amendment that seeks to explore how, and to what extent, Local Government Pension Scheme assets might be used to provide social housing as an investment. The oddity about this debate is that I am sure we all share the belief—tell me if I am wrong—that housing is an ideal investment for a pension fund. What I want to know from the Government is the extent to which that will be possible within the structure being established by this Bill.
I start with the fund, which is a long-term defined benefit pension scheme with inflation-linked liabilities. Social housing assets provide long-dated stable income streams that closely match this profile, so the sheer logic of these funds investing in local housing is clear. This issue has been debated extensively, within the relevant field, among the think tanks and so on that support local authorities and are interested in the investments of the Local Government Pension Scheme. For example, a think tank called Localis produced a report recommending that council pension assets should be a funding solution to the UK’s affordable housing crisis; that issue is widely discussed and widely supported.
Of course, that has already happened and is already happening. The London CIV has a substantial investment on behalf of the London pool of investments in social housing. I refer to social housing; personally, I have a preference for council housing, but the issue is broader and includes all forms of social housing. For example, the head of real estate at the London CIV says:
“Our UK Housing Fund is designed to help increase the supply of good quality affordable housing while delivering income-driven returns to our Partner Funds”.
Again, in the heart of the industry and the sector, the value of this approach is strongly supported.
More specifically, are funds investing in local housing? They might be investing in housing, but it could be anywhere. However, the synergy with a local fund investing in local housing has a massive attraction in terms of both the councils involved and the members of a scheme seeing how their funds are being invested in the local community. That is a very attractive perspective on how the funds should be decided.
At the same time—this point does not need spelling out—we face a severe housing crisis. There is a need for extensive housebuilding. We have the resources and the need, so why do we not just get on and do it? Council pension funds are, by their nature, patient, long-term investments; that is such a good match for housing delivery. Of course, it is accepted, from the number of funds that have already gone this way, that the fiduciary responsibility is suitable. The committees managing these funds see that investing in housing matches their fiduciary responsibility.
Everyone agrees that there is a great deal of synergy here. Local pension schemes investing in social housing is financially prudent and low-risk, provides a long-term strategy and delivers clear public value. What is there not to like? Can my noble friend the Minister assure the Committee that this synergy will be recognised in the forthcoming regulations and the accompanying statutory guidance?
We are debating this matter in terms of the Bill here, but, as the previous debate made clear, it is the regulations that count. The regulations that will govern how these pools can invest are currently being discussed—an extensive consultation is taking place—but, alongside that, is a closed consultation on the statutory guidance that will accompany the regulations. There may be a debate as to why it is not a public consultation on the statutory guidance, because the two things—the regulations and the guidance—mash together closely.
The problem is that the draft statutory guidance limits the extent to which local funds can set requirements on the actual decisions that will be taken by the pools. I am getting into the detailed structure of how the administering authorities and the investment pools will work together. The point relates generally to all forms of local investment but it is particularly acute in this area, where we are talking about building houses for local people. More specifically, does the proposed pooling framework act as a potential barrier to Local Government Pension Scheme investment in social housing?
There is a broader, more general issue here; I am gear-shifting. The specific issue is whether the pooling arrangements interfere with local investments, particularly in housing, but there is the general issue of whether administering authorities—local councils, in effect, for these purposes—can pass their ESG considerations, for example, on to the pooling arrangements. We need to be clear at this stage. I have raised this issue specifically in relation to housing—it would be good to get a clear answer on that—but there is a wider point around the other ways in which these funds should be investing in the local community. Are the new structures going to stop that happening in practice?
On the other amendments in this group, I think that I agree with Amendment 9, but I will listen to my noble friend the Minister’s response on it. I look forward to hearing the reasons for Amendment 10; I do not understand it, but I shall listen carefully. I do not really understand Amendment 11 either, so, again, I look forward to the explanation from the noble Viscount. In the meantime, I beg to move the amendment standing in my name.
Baroness Warwick of Undercliffe (Lab)
My Lords, I have no extant interests to declare—my interest in pension schemes is in the past—but I have considerable sympathy with my noble friend Lord Davies’s Amendment 7.
We suffer from chronic underinvestment in genuinely affordable and social housing, which is undermining the social fabric of this country and limiting the opportunity for the growth that we so badly need. The Government have vowed to build 1.5 million homes by the end of this Parliament, with a longer-term aim of resolving the housing crisis; other Governments have attempted to do the same. The Government have already committed substantial sums towards that aim, but demands on public funding are increasing and more resources will clearly be needed to deliver it.
I had a particular interest in housing associations in the past. These raise private debt to put alongside public grant to fund social housebuilding, and currently have more than £130 billion of debt facilities in place. The social housing sector is a great example of harnessing public and private investment to drive economic growth and build the homes that we need. Net additional dwelling figures for the 2024-25 financial year showed that 208,600 homes were added to England’s stock—well short of the 300,000 homes a year needed to meet the Government’s target of 1.5 million homes by the end of this Parliament. With the right funding, investment and financial capacity in place, social and affordable housing can play a key role in boosting supply and meeting that ambitious homes target.
There is a general recognition of the need to increase institutional investment in the UK and that pension schemes, with their long-term characteristics, could and should be part of that solution. This part of the Bill refers specifically to the LGPS. The Chancellor has already cited the LGPS as a means of achieving that necessary level of investment. In fact, several LGPS funds already have a strong track record of co-investment in affordable housing, and that potential needs to be maximised. I hope that the Government will ensure that all large pension schemes have the right incentives and strategic tools, coupled with an effective regulatory regime, to provide returns to the scheme while protecting scheme members’ interests and ensuring enduring social impact.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will speak to my Amendment 12 in this group. I hate to disappoint the noble Lord, Lord Davies, but he will have to wait a while before we get to Amendment 10.
As I mentioned earlier, a few years ago I had engagement with local authority pension funds concerning investment opportunities that could be tailored to their own areas. I discovered that they did not want it only in their own areas. They wanted to look at wider areas that included nearby local authorities, in some instances, as well as those further away where the economic responses to recession had fared better. There were some that wished that they had not just invested in some shopping centres in their own area but also in some in London and the south-east that had not lost so much money. That is not what I was trying to involve them in at the time, but these were the examples that came to me.
Those that were in more rural areas wanted some action from the cities. They viewed local investment through a broader lens of meaning things that help localities generally. They wanted to invest in local-sized infrastructure, but not necessarily only in their own areas—especially where some of these things could serve their areas from the outside. There is an example of waste management in Milton Keynes that goes beyond its area. Another example is that of a local waste management facility that recycles all the waste from kitchens. Normally, because there is quite a lot of toxic stuff in it, that waste will go to landfill, but this facility deals with all the nasties and converts it into energy. That facility is not just of interest to the local authority area in which it sits but to other ones too.
There is no suggestion that I wish to compel this in any way; I just want to draw attention to the fact that my personal experience brought this, which I was quite surprised about at the time. There was a focus on saying, “Do good in your own area”, but there was also a desire for the diversity to do good in other areas as well. Maybe you need it under a separate heading, but I just thought I would table this amendment to draw attention to this point and to make sure that, when it comes to regulations, maybe it is in the mind of the Minister and others that there should be some wriggle room around what is defined as local.
Baroness Altmann (Non-Afl)
My Lords, I added my name to the amendment tabled by the noble Lord, Lord Davies, and I endorse his remarks. There is a clear need for social housing and I would be grateful if the Minister could explain to the Committee the impact of asset pooling and whether it perhaps interferes with funds from local authority pension schemes being invested in social housing.
There is a clear need across the country for improvements in the housing stock. Local areas can know what the need for build-to-rent might be or the need for social housing that is disability friendly or friendly for an ageing population. These areas are not necessarily the focus of some of the private sector housebuilders. Using this resource to improve the lives of local residents—perhaps it would improve the futures of pension scheme members themselves—as well as areas around the country, would be important and I would be grateful to hear the Minister’s views.
I also support Amendment 12, which was so well introduced by the noble Baroness, Lady Bowles. It is essential that the resources in both local and national pension schemes are invested to benefit local and national growth. The diversification benefits of investing in areas much wider than just the local area are clear in terms of using pension fund assets to boost long-term growth, which is an aim the Government rightly have.
I know the Government want to use pension fund assets to benefit Britain, and it seems that local authority pension schemes offer an ideal opportunity for that. If these asset pools can invest more broadly than just the local area, and local authority pension schemes are encouraged to have a diversification spread across the country, I hope that would be a significant improvement and a tangible benefit from the funding that goes into these schemes and from the strong position they have built.
Lord Fuller (Con)
My Lords, I want to focus in this group on the nature of local investment. Once again I find myself in broad agreement with the noble Lord, Lord Davies; I am not quite sure whether I should be concerned or he should be.
Clause 2 of the Bill places a duty on LGPS administering authorities to co-operate with strategic authorities, which are defined in the Bill, to
“identify and develop appropriate investment opportunities”
in relation to local investments.
The Bill defines what a local investment is and encourages co-operation, but does not define what constitutes appropriate investment opportunities, how co-operation is to be structured and what the core governance is. Of course, governance leads to covenant strength—in turn to coupon and thus to viability, so this is quite important—and the metrics for assessing local impact. We need further explanation of the duty to co-operate between LGPS authorities, not just within the pool but possibly elsewhere.
If you restrict investment opportunities just to a local area, as other noble Lords have said, it leads you to concentration risk, which is bad for two reasons. First, it is inherently more risky, but it also locks other investors out of the closed shop that then exists between the local pool and its home strategic authority. I have to ask the Minister, who I assume is going to respond here: why would the Government want to make it harder for a northern pension fund to invest in the south—or, probably the other way around, why would they make it difficult for a southern pool to be able to invest in a northern opportunity? As we heard in the previous group, there are provisions in the Bill that will prevent a scheme being involved in any more than one pool.
For “co-operation” I sometimes read “connivance”, and that can never be a good thing when you get a statutory and enforced failure of the separation of duties between those selling investment opportunities and those buying them. Thinking more widely, we know that there is a national infrastructure bank, which is to morph into the National Wealth Fund—I am possibly not the only noble Lord to have been invited to a reception it is holding in our House on 28 January. But the clue is in the name: it is the National Wealth Fund, not the local one. So, where might the order of priority be in the funding and financing here: national or local? When we think about local, we need to have a deep understanding, if we are to start making these investments, of greenfield versus brownfield, and I am concerned about the capacity and capability of funds to manage greenfield development, especially under pooling. That is another perverse consequence of getting too big.
This is where I align myself with the noble Lord, Lord Davies, because during the passage of the Planning and Infrastructure Act, I proposed amendments so that mayoral development corporations could have the financial instruments to go to bodies such as local pension funds and issue debt, so we could build affordable housing or new towns and so on. I divided the House, and noble Lords on the government side defeated us. So, now that the principle of development corporations for the purposes of new towns or affordable housing has been taken off the table, can the noble Lord say how they intend to legislate to enable these local investments with strategic authorities? By their votes they have shown that they are dead against that.
However, there is more, because I am very anxious about the definition of a “responsible investment”, which is in Clause 2(4). Clearly, nobody wants irresponsible investment, but what is responsible? Do we prohibit investments in alcohol, tobacco or sugar, or in supermarkets because they sell the sugar, tobacco and alcohol, or in arms, oil or bookmakers? I have seen it all before. Everybody has an opinion, and some beneficiary members sometimes think they own the scheme. There is much virtue signalling to be had, where long-term returns take a back seat, which results in fewer returns and less business ideas with solid, repeatable cash flows, and the poor member and the taxpayer ultimately suffer from the vanity.
I have seen with my own eyes the letter writing from these people who purport to tell pension committee members and trustees what they should invest in, but where does it end? It ends in the limits of the constellation of investment ideas, so that everybody else ends up chasing the same stocks in a value-destroying bubble, creating systemic risks when everyone does the same thing. It also ends up with the so-called ethical investment funds that disproportionately have gone into ESG investments, putting those ahead of returns, being the lemons in the market. Yet that is what the Bill encourages. There should be no role for ministerial direction in the type of investments. If we want a dynamic economy, you do not create it by wrapping the flow of capital in red tape.
If the Government wish to make infrastructure more investible, whether nationally or locally, they need to create investible opportunities. I know that toll roads are not popular and that a flood defence does not pay rent, but the Government would be better employed creating new asset classes where desirable investments can be matched with long-term returns, rather than herding them into the same old asset classes.
I realise that this is a probing amendment, but I accept that the Government should seek to promote the alignment between pension funds, affordable housing, new towns and other investment opportunities. However, by their actions, they put every obstacle in the way. Can the Minister say what steps will be taken, presumably when we get to Report, to breathe fresh life into the possibility, which was contemplated in the Planning and Infrastructure Act, whereby local bodies may issue local bonds for debt or whatever else, so that we can get the flow of capital to make this country richer, rather than just herding into the same old asset classes that we compete with everybody else for?
Viscount Thurso (LD)
My Lords, I will briefly give my support to the noble Lord, Lord Davies. I believe that many schemes would absolutely like to put money into social housing. The scheme of which I am a trustee, and which I mentioned earlier, has recently put 5% into social housing—it is entitled to do that, and it did so based on an investment case. It has put a further 5% into social infrastructure—it has also done that based on an investment case; it is part of the protection assets within the fund. We are allowed to do that, so can the Minister therefore say whether anything in the Bill prevents the funds that we are discussing from doing exactly the same thing?
Baroness Stedman-Scott (Con)
My Lords, we come to another group of largely probing amendments, which I welcome. A good deal of the process on the Bill will be about unpacking what the Government intend, how these provisions will work in practice and what the industry can anticipate. Certainly, those are the questions that have been raised with me in my engagement with representatives.
I will speak briefly to the amendments in the names of other noble Lords, many of which are clearly probing in nature and raise important and legitimate questions about how Local Government Pension Scheme assets might be deployed to support wider economic and social objectives. We welcome that debate. It is right that Parliament explores how long-term patient capital can help support UK growth, infrastructure and social outcomes. I recognise the spirit in which these amendments have been brought forward.
However, from our side, we believe that it is important to be clear about a central principle: LGPS funds are, first and foremost, fiduciary vehicles. Scheme managers have a legal duty to act in the best financial interests of members and beneficiaries, and that duty must remain paramount. However, I note that the Local Government Pension Scheme’s advisory board has already warned that:
“New government regulations could ‘directly usurp’ the most fundamental duty of council pension funds”.
Could the Minister address that in his response?
Opportunities for investments in areas such as UK growth assets or social housing should therefore be presented, structured and made investable in a way that meets risk-adjusted return requirements and not mandated or directed through statute. There is a clear difference between creating a strong pipeline of investable opportunities and compelling capital allocation. Once we move from encouragement to prescription, we risk undermining trustee independence.
Many of the amendments in this group helpfully test where that boundary should sit, and I hope that the Minister can reassure the Committee that the Government’s approach is to enable, not to direct, in order to attract pension investment through quality and value, not through compulsion. If we keep fiduciary duty at the centre and focus on making UK opportunities genuinely competitive investments, growth and good pensions will go hand in hand. That is the balance that we are keen to see maintained.
I shall speak to my two amendments in this group, Amendments 9 and 11, which are intended to improve clarity, accountability and future-proofing in Clause 2, rather than to change the underlying investment powers of the scheme managers.
Amendment 9 would require scheme managers to publish an annual report on the local investments held within their asset pool companies, including both the extent of those investments and their financial performance. If local investment is to play an increasing role within LGPS portfolios, transparency is essential. Members, employers and taxpayers are entitled to understand not only where capital is being deployed but how it is performing. This amendment would not mandate local investment; nor would it direct decision-making. It simply asks that where such investments are made, they are visible, measurable and open to scrutiny. The question it poses to the Government is straightforward: is transparency, rather than compulsion, the right way to build confidence in local investment? We believe that it is.
I add at this point that a great many Bills are coming before your Lordships’ House in which the interaction with post-devolution structures is far from clear. The Government should be making more of an effort to provide clarity on the post-devolution picture when drafting legislation. I therefore ask the Minister—here come the exam questions—how do the Government intend to keep the definition of strategic authorities under review as devolution evolves? What assurances can be given that future legislation will align properly with the new devolved arrangements? Do the Government accept that there is a risk of confusion and overlap if these definitions are not regularly updated to reflect constitutional changes? More broadly, what steps are the Government taking to ensure a coherent and consistent approach to the interaction between the new powers and devolution settlements? Crucially, how will assets and liabilities be carved up post devolution, and can the Minister assure us that this will be done independently? I am very happy for the Minister to write, rather than bombarding him with a massive amount of work now—although maybe we should; I do not know.
Amendment 11 is probing in nature and concerns the definition of strategic authorities. Currently, the Bill hard-codes a specific list of bodies in primary legislation, yet the architecture of English devolution is changing rapidly, not least through the forthcoming English devolution Bill. This amendment therefore asks whether that definition is sufficiently agile and future-proofed or whether it risks becoming outdated almost as soon as it is enacted. It invites the Minister to explain how the Government intend to ensure that LGPS governance can adapt to evolving local and regional structures without requiring repeated primary legislation.
Taken together, these amendments seek to strengthen Clause 2 by reinforcing accountability on the one hand and flexibility on the other, while preserving the core principle that investment decisions must remain firmly rooted in fiduciary duty. I look forward to the Minister’s response to the questions the amendments raise and his reassurance that the Government’s approach is to enable good investment decisions through transparency and clarity rather than prescription.
Lord Katz (Lab)
My Lords, I am grateful to noble Lords for these amendments and for the probing and helpful debate that we have had on this group.
I turn first to Amendment 7 in the name of my noble friend Lord Davies of Brixton, which explores how LGPS assets might be used to provide social housing. The Government aim to ensure that LGPS investments support the prosperity and well-being of their local communities, just as members did throughout their working lives—an aim that is certainly reflected in my noble friend’s amendment. However, the Government do not wish to direct asset pools as to the manner of their investments—to be fair to my noble friend, he said that this was not about mandation. To respect the independence of LGPS funds, it remains the responsibility of administering authorities to set their investment strategy.
The reforms will require administering authorities to co-operate with strategic authorities to identify and develop appropriate investment opportunities, which may include social housing-related investments. While social housing is a high priority for local areas and may provide suitable opportunities for investment, it should be for strategic authorities to consider and set priorities appropriate for their areas.
My noble friend asked whether the revised regulations might act as a barrier to investing in social housing. We would say that that is not the case; there will not be a barrier. Administering authorities will continue to set the investment strategy for their fund, including local investment priorities. They must have regard to local growth priorities in setting their investment strategy and can recommend opportunities to their pool. Local investments are not restricted to any asset classes. The Government see housing as one of as the investment sectors with the greatest potential for local government impact.
My noble friend Lady Warwick of Undercliffe spoke cogently and with some passion on the importance of increasing social housing. That is something the Government would align with. She asked whether we were confident that, without reference to social housing in the Bill, the LGPS will invest in it. I say to her—to be fair there was some acknowledgement of this in her comments and in those of my noble friend Lord Davies—that there is a long history of local investment by the LGPS. Cornwall Pension Fund, for example, has committed more than £100 million to a local impact fund with a focus on solar farms and affordable housing. Greater Manchester Pension Fund has backed major housing and regeneration projects in the north-west, to which it commits 5% of its total assets. The LPP pool is a major investor in the Haweswater Aqueduct Resilience Programme. The London and LPP pools have established the £250 million London fund, to which my noble friend Lord Davies referred. It invests in opportunities in London, including in residential property and affordable housing, as well as community regeneration, digital infrastructure and clean energy.
My noble friend Lady Warwick asked whether the Government would ensure that all LGPS have the right tools to provide the best returns for members. The Government’s expectation is that the reforms will deliver the wider benefits of professionalised asset management, including long-term savings and efficiency. We are also aiming to strengthen LGPS fund governance. Better governance ensures decisions are more effective, with decision-makers able to be agile, better at managing risk and able to pick up opportunities.
Amendment 11 was mentioned by a number of noble Lords and was tabled by the noble Baroness, Lady Stedman-Scott. I agree that the definition of strategic authority should be consistent across all relevant legislation. This Bill and the draft regulations that the Government have prepared will ensure that the authorities that are treated as strategic authorities in England for the purpose of the English Devolution and Community Empowerment Bill are treated as such for the purpose of LGPS investments. If any new authorities become strategic authorities, the Government will use the regulation-making powers to ensure that their treatment remains the same. I hope that addresses some of the concerns raised by the noble Baroness, Lady Stedman-Scott. She talked about her concerns about potential confusion over a changing and emerging landscape. I am happy to write to her with more details, as she was so kind in setting so few exam questions compared with her Front Bench colleague on my earlier group. Her restraint is commendable.
Regarding Amendment 12, I understand the noble Lord’s intention is to encourage greater domestic investment across the whole of the UK and, indeed, growth is the number on mission of this Government. The LGPS already invests approximately 30% of its assets in the UK. Greater consolidation will build on this success story as the pools will have greater capacity and expertise to invest domestically, including in infrastructure and unlisted assets.
The noble Lord, Lord Fuller, asked about the duty to co-operate and whether it would make it difficult for schemes to invest outside their locality. I reassure him that the proposals do not prevent investment outside the area of the funds or the pool. Administering authorities are free to set whatever local investment target they consider appropriate. While investment across the UK is strongly encouraged, the purpose of this requirement is to promote investment that has tangible benefits to the fund or its pool. Expanding the definition to the whole of the UK would go too far and local benefits would be diluted.
Viscount Thurso (LD)
Does the Minister agree that ESG and responsible investing is perhaps best summed up in the stewardship code, which most responsible investors use?
Lord Katz (Lab)
I could not have put it better myself. We have to be careful in regarding ESG as fashionable politics, inserting itself into a fashionable investment space. We have to be careful not to throw the baby out with the bathwater and to really appreciate that there are good reasons why certain investments are more popular and investments in other areas are being shunned. There are trends in industry and society as to what products and classes of investment are popular. Sometimes, we can overthink these things.
I am pleased that the noble Viscount, Lord Thurso, popped up because I was just about to address his question about the Bill preventing funds setting targets on local investment, on this theme. I hope this answers his question: they must set a target, but it can be any value that the fund considers appropriate. They retain that element of flexibility, which I hope is helpful.
Regarding Amendment 9, the Government will require some administering authorities to report on their local investments, including the total investment, and on the impact of investments, in their annual reports through guidance. We consider that Amendment 9 would be an unnecessary duplication of a requirement that was already set out in guidance and in regulations. We think that it would not add anything to the Bill, as that regulation is already good practice—it is already there.
Amendment 12, spoken to by noble Baronesses, Lady Bowles and Lady Altmann, seeks to expand the definition of local investments beyond stretching point: it could mean investments for the benefit of persons living or working in any of the administering authorities’ local areas. Our fear here is that the amendment would, in effect, break the definition of local investment, as it could mean any investment in England and Wales. We contend that local investment, as it stands, has a broad definition, as it can refer to investments that have measurable beneficial impact for people living or working in areas local to, or in the region of, the administering authority, or of its pool partner administering authorities. As a consequence, this is broad enough to capture an appropriately wide geographic range while ensuring that there are still benefits for the local area.
To ensure a clear and firm trajectory to consolidation and benefits at scale for the scheme as a whole, along with the assurance I hope I have provided to the noble Lords in discussing these amendments, I respectfully ask my noble friend Lord Davies to withdraw his amendment.
Lord Davies of Brixton (Lab)
I thank my noble friend the Minister for his reply. As I made clear, my amendment was not about mandation or compulsion but the ability for local authority funds to invest in ways which are seen as socially beneficial. There was general agreement about the synergy, as I put it, between investing in social housing and the investment needs of local authority funds. The Minister was clear that it should not be a barrier, but, as the regulations are still being discussed, and as the statutory guidance has not been agreed yet, this is a moving feast. I hope that, at some stage, we will be able to get a specific statement on the ability of funds to invest in housing, and in the other ways which have been suggested. I beg leave to withdraw the amendment.
Baroness Altmann
“(d) specifying the percentage of new contributions which must be invested in United Kingdom growth assets.”Member's explanatory statement
This probing amendment would allow investment strategies to require a particular percentage of new contributions, which include added taxpayer reliefs, to be invested in UK assets which could improve the outlook for UK growth and provide a better retirement environment for members in future.
Baroness Altmann (Non-Afl)
My Lords, in moving Amendment 8, I will speak also to Amendment 13, in my name. The aim of this amendment is to focus on the flow of money going into these schemes, rather than just the investment of the stock of assets that are already held, which has been the focus so far and is generally the focus of everything else in the Bill. Both are important.
Take, for example, value for money for taxpayers and members. With so much money going in each year—the latest estimates are £10 billion a year of employer contributions alone, let alone the members who are local workers—there seem to be strong reasons why we should expect targets to be set. If we are setting targets for other types of areas of investment, and for the investment of new contributions, we should have a local or national focus, or both.
This is obviously a probing amendment. As I declared at Second Reading, I support all private pension schemes also having an incentive to invest a certain percentage—I have suggested 25%—in UK growth assets. I have described UK growth assets in Amendment 13 as including listed and unlisted equities, infrastructure and property, as we have been discussing, all designed to boost long-term UK growth. I hope that the Minister will be able to explain whether the Government have specific objections to this idea and, if so, why?
If the Government are intent on mandating specific asset pools to invest in certain ways, why would they be reluctant to set certain aims or requirements for the new contributions of what are, in effect, publicly underwritten pension schemes? If we are intent on having mandation, requiring asset pools to invest in certain ways and requiring these funds to invest in them, and if we are not, as we will come to later, looking at ways of permitting employers to either significantly reduce their contributions or have a contribution holiday, would it not be sensible for the Government to look at directing those contributions—which are being paid into a scheme that does not need the money, as far as the actuarial certifications are concerned—to invest to boost long-term growth? I beg to move Amendment 8.
Lord Palmer of Childs Hill (LD)
This is an important, basic matter. Directing investment by asset types raises difficulties. If pension funds or individuals knew which assets were going to go up, there would be no problem, but there is no guarantee of that, so, my question to the Minister is: are pension funds primarily long-term investors acting for members or instruments of policy delivery? The answer matters a lot for confidence in Local Government Pension Scheme governance. I am all for productive investment, but it can be a slippery slope if you get it wrong. I wonder whether the Minister can give us some guidance on that.
Viscount Younger of Leckie (Con)
My Lords, I thank the noble Baroness, Lady Altmann, for her two amendments in this group, for the remarkably brief discussion that has been prompted and for the opportunity that they provided for her and us to probe the Minister on these important issues. Noble Lords will be pleased to hear that I will not rehearse the arguments at length, as I touched on them in some detail earlier. However, I wish briefly to reiterate what I regard as a central and non-negotiable principle: the Local Government Pension Scheme exists first and foremost as a fiduciary vehicle. Scheme managers are under a clear legal duty to act in the best financial interests of members and beneficiaries, and that duty must remain paramount.
Against that background, Amendment 13 raises a particularly important question, one that has been put to us repeatedly by industry representatives from a wide range of backgrounds; namely, what type of assets do the Government have in mind in which funds should be directed to invest? I think this is the essential argument of the noble Baroness, Lady Altmann. Is the intention to focus on infrastructure, debt servicing or supporting new towns and similar developments? The noble Baroness also raised the point of what percentage should be invested in UK assets. As she pointed out, perhaps 25% should be invested in UK growth assets, and, therefore, what is the definition of growth? Lots of questions arise from the noble Baroness’s amendments.
I recognise, and I think the noble Baroness alluded to this, that we will return to this issue in greater detail when we come to consider the reserve power, but like the noble Baroness, I wish to flag this matter at this stage as it has been a theme this afternoon on this first day of Committee and a live and pressing question not only for us but, I reiterate, for the many third-party stakeholders with whom we have engaged.
Lord Katz (Lab)
My Lords, I, too, thank the noble Baroness, Lady Altmann, for tabling these amendments. I cannot speak on behalf of the whole Committee, but I would say that it is most people’s intention to encourage greater investment in UK assets. Growth is certainly the number one mission of this Government. If you did not realise that, you have probably been hiding under a rock these past few months and years.
These amendments would direct LGPS funds to make investments in certain UK asset classes. Supporting UK growth by making investments in such assets, in tandem with seeking appropriate returns, is a valuable function of the scheme and the noble Baroness is right to be interested in this important topic. As I have mentioned, the LGPS already invests around 30% of assets in the UK. Greater consolidation will build on this success story, as the pools will have greater capacity and expertise to invest domestically.
Baroness Altmann (Non-Afl)
I stress that the amendment is a “may” or “must”; the group does not require a “must”. This was intended to help the Government understand that there are merits in considering the flow and the stock. If there is new contribution flow of a particular size going into an area—this can be part of regulations; it is not required—that could well have a less damaging impact on the market than mandating or aiming. For example, Clause 2(4)(c) talks about “target ranges” for strategic asset allocation to growth assets and income assets. With a fund of this size, when talking about a target range for growth assets or any other assets, we might be moving the markets, because so much money would need to be shifted around. That is much less of an issue with the new contribution flow, but it could still achieve some of the objectives that the Government are seeking to attain.
Lord Katz (Lab)
I thank the noble Baroness for that intervention and clarification. I do not want to comment specifically on whether the scale of that investment would be market moving; I do not have the expertise to say that. I want to underline that, ultimately, we think it is for administering authorities and the pools to decide where these investments are made. That is right, because it is the way they fulfil their fiduciary duties. I am happy to look at her contribution again and, if I can add to that explanation, I will happily write to her.
The noble Lord, Lord Palmer of Childs Hill, asked whether pension funds are investments of policy delivery. As I stated earlier, the responsibility for setting investment strategy remains with the funds. The Government are not taking powers to direct asset pools to make or not make investments in specific projects. To be clear, it goes back to the fact that it is for those administering authorities and pools to make those decisions.
Baroness Altmann (Non-Afl)
I am so sorry, but this is a really important point. In Clause 2(4), paragraphs (a), (b) and (c)—in particular paragraph (c), to which my amendment seeks to add something—state that we are talking about
“strategic asset allocation or target ranges for growth and income”.
That absolutely sounds as though the Government could—it is “may”, not “must”, so it may not happen—leave the door open to directing investments in the way the Minister says the Government do not wish to do. I would be grateful for some clarification; I do not need it now, as I am happy either for the Minister to write or for us to meet to discuss it.
Lord Palmer of Childs Hill (LD)
I have always reckoned that the duty of pension fund managers is to the members. What we are trying to do now is say that they have other duties; however, it is not very clear where the borderline is.
Baroness Stedman-Scott (Con)
I know how frustrating it is when Members keep getting up to ask questions, but I have to do this. The Minister referred to a backstop. For what purpose? In what circumstances would it be used? Can the Minister help us understand that?
Lord Katz (Lab)
The backstop power relates to our earlier discussion on previous amendments. It would be used in extremis. The problem is that the noble Baroness is asking me to conject on what are hypothetical situations. Some of these issues will be set out in some of the regulations that will follow.
I am happy to go back a couple of interventions and pick up the point made by the noble Baroness, Lady Altmann. I would be happy to write to try to clarify the distinction that we are making. Of course we want to see good levels of investment in a range of different asset classes, but we are absolutely not saying that this is a slippery slope to taking powers of direction or mandation. We are very clear on that. Ultimately, this is the nature of pensions legislation: some of the clarity comes down stream. We are clear that the Government’s intention in the Bill is purely to provide the framework to ensure that we can harness the potential of these asset pools to make some meaningful investments.
Baroness Stedman-Scott (Con)
This is in the Bill. I know that the Minister cannot do this now—I accept that he can write to me—but can he please help us? If it is in the Bill, we need to know what it means before regulations come.
Lord Katz (Lab)
I am not sure whether I can provide much more clarity than I have done so far, so I would be very happy to write to the noble Baroness to spell that out.
I realise that I have not given the levels of satisfaction and clarity that Members perhaps wanted but, as these are probing amendments, we contend that they would have a minimal impact. On that basis, I ask the noble Baroness to withdraw her amendment.
Baroness Altmann (Non-Afl)
I thank the Minister for his answers; I feel for him in his position. I am happy to withdraw the amendment; we can have further interaction at a later stage.
“(4A) An investment strategy under subsection (3)(b) may not specify preferences between comparable or competing investment vehicles.”
Baroness Bowles of Berkhamsted (LD)
My Lords, Amendment 10 says simply:
“An investment strategy under subsection (3)(b) may not specify preferences between comparable or competing investment vehicles”.
This concerns the same part of the Bill that we were discussing in the previous group. In other words, if the Government are taking powers over what assets pension schemes may hold, even if that is a reserve power, those powers must not discriminate between comparable routes to access those assets.
It is a defensive amendment. Why do I need to table such a basic safeguard? It is because, later in the Bill, in new Section 28C of FSMA, the Government do discriminate for DC default funds. It excludes listed investment companies even when they can hold exactly the same underlying assets as the favoured long-term asset fund, the LTAF wrapper. That is how creeping cartels begin. Who is to say such direction will not next be targeted at a local authority pension fund, many of which have historically favoured listed investment companies as ideal for local infrastructure investment?
The Minister’s letter, which arrived on Friday, explains how the Government are now creeping the cartel onwards. The letter puts this front and centre. The Minister confirms that the exclusion of listed investment companies is deliberate and that the purpose of these powers is to
“support the Mansion House Accord”.
We have already been alerted to the competition law risks around the Mansion House Accord. An article by competition lawyer Matthew Hall in the Times last May warned that the accord risked co-ordinated investment intentions that could raise competition law concerns, and that government encouragement does not create a legal exemption. Those comments came before we learned about exclusions. Government legislation—which would mean regulations, not just the framework of this Bill—could override competition law, but only with a clear public interest justification and far more scrutiny than cosy discussions behind closed doors.
Let us look at the public record. In public, the accord—from the ABI, the City of London and the Pensions and Lifetime Savings Association—refers simply to
“allocating at least 10% to private markets … and within that, at least 5% … to UK private markets”.
At the bottom, it defines UK private markets as being
“where the underlying assets are based in the UK”.
Thus, it is not looking at the wrapper they sit in; it does not exclude listed investment companies; and it does not require the use of LTAFs. It explicitly acknowledges looking through to the underlying assets.
In the Bill, that has been transposed to an exemplary asset list and a definition that deliberately excludes listed securities, and for that to cover listed investment companies, despite the fact that they are slightly different as they have exemptions for growth markets. Rhetoric has followed that anything listed is excluded. If the accord does not say it and no consultation or public document has said it, but according to the Minister it is being done in the name of the accord, something has happened in private—what and with whom?
Baroness Altmann (Non-Afl)
My Lords, I strongly support the amendment in the name of the noble Baroness, Lady Bowles, and all that she has said so far on the ramifications and the importance of this issue to the Bill—indeed, to the wider UK financial market landscape.
The Government require from the Mansion House Accord investment in unlisted assets, private equity, infrastructure and so on. The Minister stressed in writing that she can confirm that the aim is broadly limited to unlisted assets and consistent with the scope of the Mansion House Accord. If that is the aim of the reserve powers and an overriding objective of this Government, it makes the explicit exclusion later on of this particular asset type—the wrapper, as the noble Baroness, Lady Bowles, called it—even more mystifying.
I have amendments later to the relevant clauses that would specifically make the Bill include these closed-ended investment companies, rather than exclude them, which is more opaque.
As regards the LGPS, using closed-ended listed companies is an ideal way for these funds to invest in local infrastructure where the council and local residents can see the impact. It fits with the Government’s aim too. But by explicitly excluding closed-ended funds and because of the regulatory undermining of this type of fund, which makes up one-third of the FTSE 250 and is an important element of the asset management industry of the City of London and, in particular, of Edinburgh, we are starting to see—I am told that West Yorkshire is an example—that local authorities which have previously invested are disinvesting from these investments.
At the moment, there is a regulatory driver making these closed-ended investment companies appear more expensive than they are. Trying to favour open-ended structures over closed-ended structures, even when the closed-ended structure is the most suitable for holding long-term illiquid investments, makes no sense to me or to many in the industry. Why should investors have to be told that investing in a closed-ended company is costly to them when the costs are paid by the company? They are merely a shareholder. They are not directly charged. With an open-ended fund they are, but not with a closed-ended fund.
Will the Minister explain or write to me to explain—I recognise that there are complexities here that he may not wish or be able to deal with at the moment—why the Bill has excluded these types of investment, reassure the Committee that local authorities will not be directed to exclude these investments and explain why our Government seem to be moving in the opposite direction from other countries, which are apparently now considering launching closed-end investment companies to invest in these kinds of assets?
The FCA designed and authorised the long-term asset funds which the Government seem to favour. They are open-ended structures. One argument that illustrates perfectly the perversity of the Government’s position and the importance of this issue—I make no apology for labouring the point because it is so important to pension scheme investments—is that long-term asset funds will be allowed to hold up to 50% in listed assets. Although the Government want long-term asset funds specifically to promote and guide the investment of long-term pension funds into unlisted assets, their favoured structure—the long-term asset fund, or open-ended funds in general—will have to have listed assets to help manage their liquidity. Closed-ended funds are not constrained in the same way.
Lord Davies of Brixton (Lab)
This is really a debate by proxy on Section 40 and new Section 28C; I am sure that we can all look forward to a repeat of this discussion.
I am not against mandation in principle; it is entirely reasonable for a Government to adopt that approach. What worries me here is that, for some reason, they are putting investment classes into statute. That is just wrong. The point here is broader than the one just made by the noble Baronesses. To pick out sectors of investment, the Government are giving their imprimatur to these particular classes of investment; however, they will go wrong at some stage, and the Government will be on the hook for having advocated for them. I am against having any of these references in the Bill. I do not want to see anything added; I want them to be taken out.
Lord Fuller (Con)
My Lords, now I am really worried—every time I have followed the noble Lord, Lord Davies of Brixton, I have tried to amplify the points he has made.
I congratulate the noble Baroness, Lady Bowles, on her masterful exposition of a technical piece of detail; she brought it down to the ground and made it alive. She put her finger on it when many of us have not been able to put our finger on what makes us so uncomfortable about the Bill. We know that it is not right. When you get meddlesome Ministers fiddling around in stuff where they do not really know what they are doing, there is not just co-operation but—as the noble Baroness exposed—a connivance and a cartel. She explained how those two things have led to conflicts of interest; there will be a lot of Cs in the words I am about to use. It is anti-competitive, and it has restricted choice.
The noble Baroness has wedged open the door because, later on in the Bill, there are provisions—I will not defer to them too much now—for the existing operators to lock out new entrants. I was instinctively uncomfortable with that but, now, I am worried because there seems to be a guiding hand here to reduce choice, stifle innovation and damage the reputation of the City. I do not think that that was purposeful, but this is what happens when you get a Bill that is so overly complicated and takes people away from saving for their long-term retirement.
I nearly feel sorry for the noble Lord, Lord Katz, because I have never seen such an evisceration. I am sure he is going to defend it and do the best he can. But what the noble Baroness, Lady Bowles, has shown is that it is rather like the Chancellor, who now says she had no idea what was really happening when she put the rates on the pubs. It was a mistake, and she did not have all the information to hand. While I accept that the noble Lord, Lord Davies, has said we will come back to this on another day, I thank the noble Baroness, Lady Bowles, because she has given an opportunity—a breathing space or an air gap—for the Government to now go back to look at this in more detail.
The noble Baroness, Lady Altmann, also laid out the import of this amendment when she said that one-third of all the FTSE 350 is engaged in this. I expect the Minister in winding to say, for a third time, that growth is the number one priority of this Government. Let us hope he does say that because, if he does, he will either accept this amendment here and now, or give an undertaking that, at some stage before we get to this in the main part of the debate, it will be accepted and we can move on.
It is not just casting a shadow over the LGPS and the parts of Yorkshire which are disinvesting; it is accidentally casting a shadow over the City of London, which is the world’s second or third largest financial centre. It must be stopped. I think the noble Baroness, Lady Bowles, has done the Committee and our nation a great service in the last half an hour, and she is to be congratulated for it.
Viscount Younger of Leckie (Con)
My Lords, I was due to give a very short speech. It is still short, but it has got slightly longer in terms of the content of this debate. I am particularly grateful to the noble Baronesses, Lady Bowles of Berkhamsted and Lady Altmann, for tabling Amendment 10, which we welcome and which I understand to be a sensible and proportionate safeguarding measure. I want to go a bit further because there were two particularly powerful speeches, in particular that from the noble Baroness, Lady Bowles.
As we read it, the amendment seeks to ensure that investment strategies cannot be used to favour particular investment vehicles over comparable or competing alternatives. In doing so, it would help to guard against strategies becoming a back-door means of directing capital, rather than serving their proper purpose as high-level statements of investment policy.
That distinction matters. Investment strategies should guide objectives, risk appetite and approach and not hardwire specific vehicles or delivery mechanisms into statute or regulation. Preventing the embedding of such preferences also reduces the risk of political or regulatory pressure or—I will use the word—interference, being reflected in investment strategy documents and helps to preserve trustee independence and proper decision-making. Although it is a serious subject, the noble Baroness, Lady Bowles, gave us a succinct, well-argued speech with her bucket wrapper analogy. She gave a hard-hitting speech with some important questions which I hope the Minister will be able to answer.
One issue that has been made clear today, which has arisen in a number of debates, and was encapsulated in this short debate, is the opaqueness of “government direction”. I was very taken by the equally hard-hitting speech from my noble friend Lord Fuller. The confusion—by the way, the C is for confusion, just to add that in—is over the responsibility with the grey areas, notably in respect to the understandings, or not, from the Mansion House Accord and those who were the signatories.
One question to ask is whether those signatories now realise what they have got themselves into, or what their understanding was then and what it is now. I ask that as an open question, particularly in relation to the inclusion or exclusion of different types of investment. The noble Baroness, Lady Altmann, focused particularly on open-ended or close-ended. There is a lot of emphasis here. Most unusually, I was in total agreement with the noble Lord, Lord Davies. I am not sure that that has happened with me in the past.
To conclude, we therefore welcome the intent of Amendment 10. It would be very helpful if the Minister could indicate whether—and if so, how—the Bill as currently drafted already guards against this risk. It is a crucial question and relates to all the questions that have been asked. What assurances can be given that investment strategies will not be used to prescribe or favour particular investment vehicles in practice?
Lord Katz (Lab)
My Lords, I am grateful to the noble Baronesses, Lady Bowles of Berkhamsted and Lady Altmann, for this amendment. I agree with them that funds in the LGPS should not be specifying preferences between similar investment vehicles in their investment strategies. I fear that the rest of my response may well disappoint the noble Baroness, Lady Bowles, and—though perhaps not to such a great extent—the noble Baroness, Lady Altmann. I say in passing to the Committee that it is always good to hear consensus breaking out, even if it rather gets to the horseshoe theory of politics when it is my noble friend Lord Davies and the noble Lord, Lord Fuller. But let us try to end today’s Committee session on a positive note.
I will now go into the detail. Under our reforms, decisions on implementation of strategies, including selection of appropriate vehicles and managers, will be made by the LGPS pools, which will have the capacity and expertise to deliver the benefits of scale that we have discussed. It is the Government’s view that the draft regulations are already clear in that respect. This will be supported by guidance, setting out that investment manager selection is solely the responsibility of the pool. LGPS pools will make the decision on whether to invest through external managers and which managers to use, and there is nothing whatever to prevent them using investment trusts should they consider it beneficial.
This is where the space for disappointment potentially arises. I am aware of the concerns expressed in relation to the treatment of listed investment funds, notably investment companies and trusts, under the reserve asset allocation powers, which are relevant to DC pension schemes. That was set out very powerfully by the noble Baroness, Lady Bowles. The Committee will have the chance to debate these concerns when we reach Clause 40 and discuss Chapter 3, which deals with asset allocation for DC schemes.
To get to the heart of it, the noble Baroness, Lady Altmann, asked about the impact on the LGPS. To give reassurance, we are not excluding closed-ended investment funds from the LGPS. I can be absolutely clear that that is the case. We are not excluding them, and neither will local authorities be directed to exclude them. I hope that provides clarity as we discuss the LGPS elements of the Bill.
Having said that, we have had comments around investment and asset types, particularly from my noble friend Lord Davies, as well as others, on this group of amendments. We will take what has been said and consider it in time for the debate on this issue when we get to it in greater detail. In anticipation of that day—which we are all looking forward to, particularly at two minutes to Committee rising—I ask the noble Baroness, Lady Bowles, to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD)
I will be as brief as I can. I thank all those who have spoken in the debate, particularly for the support that I have received. The noble Lord, Lord Davies, is to some extent correct in that this is a proxy for what comes later, but I wanted to give the Committee that reflection time over competition law issues, because it is not necessary: exactly the same will happen without defaming listed investment companies and doing them down. The channels of how the investments are going to go will be the same. But the Minister has still not answered the question. Who asked for the exclusion? It is not in the accord. We have been told that it is in the accord but, as I have explained, the wording gives the opposite direction.
We have been told by Ministers that it is the pension funds, or anybody except the Government. It is somebody’s fault that it is there. I regret that I think it is deliberate rather than accidental but never mind that as long as it goes because it is not necessary to defend what the Government want to defend. That would be fine by me. It is relevant to local government funds because they invest so much that way. Therefore, it was a genuine concern that a reserved power could begin to replicate the reserved power in new Section 28C. It was not a totally bogus proxy, if I could put it that way. I have elaborated the point; as I have said I can do much more yet. With that, I beg leave to withdraw my amendment.