Pension Schemes Bill

Baroness Noakes Excerpts

Committee stage
Wednesday 14th January 2026 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, as has been stated, this clause introduces compulsory mergers of Local Government Pension Scheme funds, and the word “compulsory” worries me. We on these Benches accept that consolidation can sometimes improve efficiency and governance, but compulsion—I emphasise this—is a serious step that demands strong justification and clear safeguards, as the noble Baroness, Lady Stedman-Scott, stated.

At present, the Bill establishes the power without clearly setting out the criteria, process or routes of challenge. That sequencing matters. Trustees, employers and members need confidence that mergers will occur only when there is compelling evidence of benefit to the people—that is, the pensioners themselves. We on these Benches are concerned that forced mergers, if poorly handled—and some may well be poorly handled—could undermine trust rather than strengthen it. Before endorsing compulsion, which we are asked to do, Parliament should understand how decisions will be made, how dissent will be treated and what protections exist if a merger proves detrimental.

At this stage, it is quite right that there should be probing as to what is behind all this and what will happen in all the various circumstances that need to be in place to protect members of the Local Government Pension Scheme. I wait to see further information as the Bill progresses.

[Baroness Noakes (Con)]

My Lords, I apologise for speaking after the Liberal Democrats—the noble Lord got up rather quickly.

[Lord Palmer of Childs Hill (LD)]

I apologise. I did not see you.

[Baroness Noakes (Con)]

I endorse everything that both speakers have said about understanding more about the use of this power. I want to go back to the Explanatory Notes. They say that Clause 6 amends Schedule 3, et cetera,

“to clarify that, in the case of the LGPS, the responsible authority’s powers also include the power to make regulations”.

That implies that the Government believe that this is a declaration of an existing power. If that is the case, can they explain why they feel it is necessary to put Clause 6 in this Bill? Can they also explain the history of mergers with the involvement of the regulatory authority and what problems, if any, have led to the need to insert this in Clause 6? As the noble Lords who have spoken said, it looks like a very draconian power to be taking and yet the Explanatory Notes imply that they already have the power. It would be useful to have some more background.

[Lord Fuller (Con)]

My Lords, Clause 6, as your Lordships have just heard, includes the powers to merge funds. It is a slim clause, so I will be briefer than you might expect, but I want to ask the Minister what the circumstances are in which these powers would be used and to what end the Minister would require the compulsory merger of funds.

On Monday, when we debated the earlier groups, I pointed out that the country’s smallest fund, the Orkney fund, has the best performance of all the funds in the LGPS. I think that there are lessons to be learned from that—and, furthermore, it has never changed its investment manager. What would happen if the two funds happen to be in different asset pools? What steps would be taken to indemnify the losing and the gaining members and taxpayers for the quite exceptional transition costs in these circumstances? You would be ramming some schemes together, having split them asunder beforehand.

In another Bill before your Lordships’ House, we will shortly contemplate local government reorganisation. I do a bit of work on this and I can certainly contemplate that mergers of councils across county boundaries could be contemplated. With Wiltshire already unitised, it is not unthinkable for Swindon to be placed either in Oxfordshire or perhaps in Berkshire. Paradoxically, the efficiencies of merging councils under LGR may result in the demerging of pension funds to different pools. What discussions have been had and what contingencies have been put in place as Ministers start to take decisions on local government reorganisation?

Going back to scheme mergers, can the Minister tell us whether similar criteria have been published, as with LGR, and how we would consider comparing the relative merits of different proposals for schemes merged? Having announced that schemes are candidates for merger, it is not unthinkable that several competing bids may come forward: “We want this particular scheme”, or rather, “We don’t want that particular scheme, for all sorts of reasons”.

What criteria might be published so that, on an evidential and neutral basis, the decisions can be justified? Are we going to consider population size, assets under management, the number of members, the cost per member, or geography? That is important, because under the earlier parts of the Bill a scheme may be a member only of a single pool, and those pools have become geographically focused, because there are provisions, if the Bill is enacted, for the schemes to connive with their local strategic authorities. You can see straightaway that there could be a mismatch between the host strategic authority and its pool, which may not be local.

This is a small clause, but with big consequences. Following a merger, how might decisions be taken as to which successor authority would be the administrating authority? That begs the LGR question of which authority will assume the pension administration if all the councils in that territory have been abolished. How will we ensure that appropriate governance structures are in place so that all parts of the disaggregated territory are appropriately represented? We see this in local government, at parish council level when two parishes come together. So that not all the members of this community council come from one parish and none from the other, there is a process of warding: the representatives on the board must be distributed from among the previous constituent authorities. What steps might be taken in that case?

I do not think that this clause has been thought through at all. If I think of the Norfolk scheme for a moment, of which I have been a board member since 2007, we have over 100,000 members and I am sure that they would all want to know who is going to be sending P60s, helping with IHT valuations and answering questions. I have previously complained about the length of the Bill, but this shortest of clauses may have the biggest impact. It will directly impact up to 6.7 million workers in our nation, so I support my noble friends because, without the detail that I, as well as the noble Lord, Lord Palmer, and other Members who have spoken, have asked for, Clause 6 is inadequate and cannot and should not stand part of the Bill as currently constructed.

--- Later in debate ---

[Lord Fuller (Con)]

Your Lordships will be pleased to know that peace has broken out again: I agreed with much of what the noble Lord, Lord Davies, said, and I do not accept the characterisations that the noble Baroness, Lady Altmann, laid out in full.

I have sat on five triennial actuarial revaluations of the Norfolk scheme over 20 years, and I can tell noble Lords that we are not unique. We agonise over how we deal with the valuation over months. We look at the assumptions, the different types of employer and the different scenarios that we might realistically use. There is a fan of opportunities that the actuaries run; I would say a thousand or a very substantial number—many hundreds—of different potential scenarios based on membership of the scheme, the sponsoring employers and even the life expectancy per member calibrated by postcode, using the Club Vita methodology. Of course, we think primarily about governance as well.

To a certain extent, if that is going on, one might ask why we need these amendments at all. We do because, as those of us who are involved in the LGPS know, brighter days ought to be ahead after some pretty tricky periods over the last 20 years. But just because the sun is coming over the horizon today, it does not mean it might not set in the future. A Bill like this will have longevity, so we need to get it right rather than be overly optimistic. Overoptimism is the counter to excessive prudence.

I support many of the amendments in this group, but I will start with Amendment 18. I have seen schemes with valuations in the low 70s, when interest rates were low, but some schemes are now funded well into the 130s or 140s. We have heard today about a scheme that is funded 150%. Without excessive prudence, more of them might have been in that bucket.

The sums of money for these fluctuations are enormous. For a mid-sized county scheme with £5 billion under management, 10% could still be £0.5 million—a large sum that can go a long way. So there is a temptation to trim employer contributions when times are good, safe in the knowledge that there is still a substantial cushion to fall back on. I have no problem with that as a principle: after all, when times were bad, employers had to chip in a lot more, so it is only fair that there is a two-way street and hoarding is no good to the member, employer or taxpayer when there is a bypass to pay for.

The problem is how you apportion that rebate or discount to the members if there is a surplus. When times were bad and more contributions were needed, the contribution rate was calculated differently for each employer depending on the maturity of that scheme, the number of members of the employer, the covenant strength of the employer and their individual deficit and funding position. Clearly, a tax-raising council, which does most things itself and can jam-spread those changes over many employees, will have a lower contribution rate for the deficit than a largely contracted-out services authority with much fewer staff. That is why one authority that used to employ a lot of people, but had to let them go by outsourcing most of their services to private contractors, has a contribution rate of 50% on salaries. That is a huge sum of money. However, a well-run council like my own—we do most things ourselves—was in the 20s. That is not unfair; it is just the arithmetic.

As an aside, I would say that outsourcing is all very well but, as the litany of failed outsourcers has shown—Carillion, Connaught, Mears, Steria and many more—when they go bust, those pension liabilities come boomeranging back to the host council that thought it was being smart but was not. One city not far from where I live has had to learn that painful lesson on more than one occasion. At least those councils that are tax-raising bodies, with ratings typically one notch below sovereign, can stand those shocks.

Let us consider one class of admitted body: the academies, which are admitted to the scheme of local government workers for their classroom assistants. There are maybe only a few per school, but they benefit from a Department for Education underwriting. That is a pretty good state-backed guarantee there. They may not be able to raise taxes, but their liabilities are gilt edged. However, when you then think of the small youth work charity which could go bust tomorrow if its local authority cuts its funding, there is a risk there. My point is that all the employers play a different contribution rate within each scheme that relates to their circumstances. That is for one scheme, but there are 89 such schemes, each with their own circumstances. Yes, it is untidy, but matching assets and liabilities to the exact and precise needs of those cohorts provides the best value to the taxpayer and accuracy in computation. So, when you add or take away those contributions, if you are in surplus, the value of the rebate can be calculated accurately.

I am not just trying to be difficult; I am just providing the reality of the situation. To focus on Amendment 18 for a moment, which requires the repayment of surpluses, it is a good proposal, but we need to allow for a much greater degree of complexity there. I hear what my noble friend has said, and there is a specimen number of 120% there. My instinct is that it is significantly more complicated than that, and there should be some sort of covenant-strength weighting—a hard-coded number is not right. Different schemes need different numbers. The underlying principle that, when the surplus gets to a certain amount, there should be a rebate is sound, but I am just really concerned that we overly simplify it and miss the target there.

We certainly need to be aware, as the noble Lord, Lord Davies, mentioned in an earlier group, about the cost cap, and be aware of the situation, which is mainly in the statutory unfunded schemes, where valuations are split between the employer and employees. I was a member of the fire services scheme, an unfunded scheme, and we nearly got into the situation in 2018-19 where there was an excess and we had to take money away from the employees; then in 2023, I think it was, or possibly four years later, it was going the other way. Mercifully, it was so complicated that nothing was done, so we ended up where we were. Just the cost cap in and of itself is a blunt tool. But I am getting ahead of myself.

Each scheme needs its own methodology for its own circumstances, and, of course, there are four separate actuarial companies in competition, so there is innovation which we must welcome—it is invidious to mention their names; some of us know who they are. They get their fees by constantly becoming more and more accurate and refined, and that is a good thing, not just for them but for the taxpayer, the members and employers. So, we need to have that combination of flexibility, but I can see the virtue of standardisation, or at least a standard method of expressing those particular schemes on a common basis so they can be consistently compared, so that my good friend Roger Phillips—who is newly OBE-ed, for the record—can publish his scheme advisory board census annually.

I have explained why each scheme needs its own bespoke valuation, but that does not help Roger. And, in the non-LGPS schemes, the GAD—the Government Actuary’s Department—provides figures because they are a provision for risk sharing between government and members, and so forth.

Amendment 19, and to a certain extent Amendment 17, on benchmarking, are important, but they cannot be the substitute nor override for bespoke measures in each scheme. In the case of benchmarking, the amendment would have been strengthened had we been able to look at cost per member, and there are other metrics too which can help people develop confidence in the schemes.

It is in the public interest that the amendments are accepted. Just because brighter years are ahead—we hope—does not mean that there is no value to these amendments. We need to allow for circumstances when those silver linings may have clouds again, to mix metaphors. I do not want to dilute the thrust and importance of the statutory funding objectives for the LGPS, because it ultimately provides a method by which we can balance appropriate risk with reward for each of the scheme members and the taxpayer who underwrites it all in the end—and that is a good way of doing it.

To a certain extent, the thrust of these amendments would put on a statutory footing the work that the LGPS advisory board does on a voluntary basis. That would be a very good thing for transparency and confidence, demonstrating further the success that is the local government scheme in this country. It is the closest thing that we have to a sovereign wealth fund, and anything that improves its standing has to be a good thing, so I commend this set of amendments.

[Baroness Noakes (Con)]

I shall just comment on Amendment 19. To summarise what the noble Lord, Lord Davies of Brixton, said, there are actuaries’ reports that have all this information, and actuaries understand those reports. Amendment 19 concentrates on publishing something in a form accessible to employers and the public, and I think that that is very important, because actuarial practice is quite difficult to understand sometimes. It cannot be assumed that a member of the public could understand actuarial language. We need to be able to communicate in a way that is accessible to the people who actually bear the costs of the local authority pension scheme—the council tax payers. I do not think that that is met by the actuaries’ reports, which doubtless comply with all kinds of standards issued by the FRC and long-standing actuarial practice but, in my limited experience of looking at these things, are pretty difficult to understand.

[Lord Davies of Brixton (Lab)]

I do not think that I said that it was okay if actuaries understood the report even if no one else did. I have in front of me the last valuation report from the pension panel of the London Pensions Fund Authority. I have been looking through it and I think that it is a wonderful example of presenting difficult actuarial information in a way that is understandable to any member of the fund who is prepared to put a modicum of effort into understanding it. The report starts with a very clear and concise executive summary, picking out the important points, then goes through all the issues that need to be explained, around levels of prudence and why particular assumptions have been made. It is all in there, with lots of appendices alongside if you want a deep dive into the detailed data.

I do not think I said that these reports were understandable only by actuaries; these are big commercial organisations which support their clients by providing information in an accessible manner. That is part of their job and it is what I always tried to do when I was a scheme actuary. The feedback that I received was that people were pleased to understand what was happening to their money.

--- Later in debate ---

[Lord Fuller (Con)]

I speak as the vice-chair—former chairman—of the Local Government Pension Committee, the body that represents the employers’ part of the LGPS in the scheme advisory board. I welcome this set of amendments because it gives us an opportunity to place on record the breadth of what it takes to run a pension scheme: not just the sexy bits—investment and all that sort of stuff that you might read about in the Financial Times—but the real boilerplate of operating a scheme for nearly 7 million people.

It is wise to put on record some of the nuts and bolts that hold that boilerplate together. It is not just about risk management, governance, data quality, member engagement or the huge dashboard project. There are benefits statements, which have to be calculated accurately of course, within timeframes, and engaging with the department—I see in the Box some faces that I recognise in that respect. It is about advising on bulk transfers in and out, AVCs, commutation, tax, survivor benefits, McCloud, GMP, the exit cap, ill health adjustments and subject access requests—to name a small subset of about 100 different activities that pension fund administrators undertake. There is interpretation of regulations and helping software providers to keep up with the torrent of regulations so that pensions can be paid to the beneficiaries accurately and in a timely manner.

This work often encompasses helping bereaved families at a difficult time in their lives to navigate changes in benefits, inheritance tax and so forth. It is also a very important part of it that the scheme works together to train up a new generation of administrators alongside engaging with the Local Government Association, their Welsh colleagues, COSLA in Scotland and the Northern Irish scheme. I have had the pleasure of meeting many of these people engaged in these activities, and when you meet them you realise the fragility of the behemoth that is the LGPS. I pay tribute to their dedication, which is completely unsung, which ensures that the promises made to local government workers are kept and will be kept.

All those things that I have mentioned the Bill is silent on, which is a real shame. While it is not the purpose of a Bill to enumerate every single detail, more could have been said about the breadth of the work that is involved in running a pension scheme, which goes beyond fund management. These amendments from my noble friend seek to right that wrong, and I commend them.

[Baroness Noakes (Con)]

My Lords, without wishing to take anything away from what my noble friend Lord Fuller has just said, it is true that this definition of management relates to the funds and assets of the scheme, not the totality of the operation of everything that is managed within a scheme. Having said that, non-exhaustive lists are always problematic. However, the issue raised by my noble friend Lord Younger is crucial to the management of assets, and its absence seems strange to me.