Pension Schemes Bill

Baroness Watkins of Tavistock Excerpts

Committee stage
Monday 12th January 2026 Grand Committee

[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.