Scottish, Welsh and Northern Ireland legislative consent granted. Relevant documents: 42nd and 47th Reports from the Delegated Powers and Regulatory Reform Committee.
My Lords, it is a pleasure to open Report on the Pension Schemes Bill. As we start, we should be clear that the Bill’s success will be measured on the extent to which it makes it easier for people to take personal responsibility and save for their future, and make their savings secure, while permitting appropriate risk-taking and capital to grow the economy.
I should declare some interests. I have been a trustee of the Norfolk pension scheme for well over 20 years and a member of the Local Government Pension Scheme advisory board since its inception—in fact, I will retire from that on Monday. During that period, I have served on the Firefighters’ Pension Scheme and been chair and vice-chair of the Local Government Pension Committee, which is the body representing the employers in the scheme.
Today is about the Local Government Pension Scheme. The LGPS is different from most of the other public schemes because members have put money aside for their retirement—and that is important. My Amendments 1, 2 and 5—to which the noble Baroness, Lady Altmann, has added her name—relate to the overarching structural organisation of the 87 schemes that feed into a number of pools.
Let us dispose of Amendment 1 first. In my personal experience, I have found that just limiting the list of consultees to the FCA would be insufficient. I think there has probably been a misunderstanding in the department about the fact that the Government Actuary’s Department and the Pensions Regulator really do get involved there. While I would not press the amendment to a vote, I think it is pretty straightforward. If we do not have the Pensions Regulator and GAD—which look after 50 or so other things, apart from investment—the Bill would be holey.
I have my reservations about government interference in the structure of pools. It damages the purity of the relationship and accountability of the trustees to act in the members’ best interests. Rachel Reeves will be a footnote in history by the time the cows come home with the consequences of some of the provisions in Clause 1. The approach of mandating pools has already damaged the scheme. For no good reason, the exemplar ACCESS scheme was told to disband; it had £40 billion-worth of assets under management, but that was not good enough. It had access to the best FCA global professionals in the City of London. Now it is being forced to join a provincial pool, which—for goodness’ sake—does not even have an FCA qualification.
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My Amendment 2 would allow a scheme to be a member of more than one asset pool. Here I have in mind a specialist national infrastructure asset pool. Let me explain. The LGPS has about £400 billion under management. The Government set a target of about 10% into infrastructure—£40 billion for the whole lot. That is a chunky piece of change, but it is going to be jam spread across half a dozen pools—£4 billion or £5 billion each. It is not even a needle mover. A billion, which would be 20%, does not go far nowadays. As those promoting the Lower Thames Crossing—a critical piece of infrastructure—will tell noble Lords, £0.5 billion was spent on fees before a brick had been laid. With only £4 billion or £5 billion per scheme—and you cannot make those chunky investments, because they would be too big and give the fund indigestion—it could be more than sensibly allocated by the trustees of a single pool, driving a concentration risk.
If the schemes could not club together, as my amendment contemplates, the local pool would need to have a 20% asset allocation to a single piece of infrastructure in its patch. It is a nonsense. It breaks every investment rule in the book: concentration risk and lack of diversity. It cannot be right. The Government prevent all the other schemes jumping on the bandwagon of an otherwise good opportunity. The effect is that a pension pool in the south would not be able to invest in an infrastructure opportunity in the north. How crazy is that?
What about border effects? If there is a pool, there will be a border somewhere. My amendment seeks to get rid of the edge effects of preventing a fund investing just over the border, possibly the other side of the street—those of us who have been involved in local government for a long time know that there is always a street between boroughs where the bin collection and recycling are different.
The Government say they want scale. Let us give it to them. But it happens only by allowing the scheme in aggregate, the closest thing we have to a national wealth fund, to have the scale and heft to make those chunky investments.
I know that the DWP Minister will want to help the MHCLG. That is the right way—other than in the previous debate, when the noble Lord got in a muddle. But can the Government not see the nonsense and jeopardy in preventing the LGPS, structurally and by law, investing in the infrastructure that the Chancellor says she wants?
There is a further complication. 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 the mergers of authorities across county boundaries will happen. Wiltshire is already unitised, but it is not unthinkable for Swindon to be placed in Oxfordshire or partly in Berkshire. Paradoxically, the efficiencies of merging those councils under LGR would result in a wholly unnecessary demerging of some funds to reconstitute them elsewhere, because you would arbitrarily fall on the other side of a boundary. That is nuts.
To summarise, there really should be a single national specialist infrastructure pool if we are serious about the LGPS investing in the long-term future of our nation. All the pools should be able to join—a southern pool investing in the north and vice versa, and other pools investing just over the boundary in opportunities where their members gain. If we do not permit this, it will contribute to poorer incomes in retirement and damage trust and confidence in a pension scheme that is already on shaky ground. I beg to move.
My Lords, I have Amendment 4 in this group. This concerns mandation, which we will debate more extensively later this week in connection with defined contribution schemes. Amendment 4 seeks to ensure that mandation cannot apply to the LGPS. This amendment should be easy for the Government to accept. This mandation amendment, unlike the ones we shall debate on Thursday, reflects what the Government have said is their policy.
Clause 1 gives the Government very extensive powers to tell local government pension funds what they may or may not do in relation to asset pool companies and scheme managers. Clause 2 says that any Clause 1 regulations must—not may—
“make provision about the management of the funds and other assets”.
As is usual with regulation-making powers, they are unconstrained. While Clause 2 lists some of the things that could be included in the regulations, it contains no restrictions on the use of the power.
I have tabled Amendment 4 seeking to ensure that the power cannot be used to tell local government schemes to invest in particular assets, asset classes or locations of investment. I firmly believe that fiduciary duties are paramount and should never be interfered with by the Government, whether in relation to public sector schemes such as the LGPS or private sector ones, which we will debate on Thursday. The noble Lord, Lord Katz, said in Grand Committee on 12 January:
“To be absolutely clear … we are not mandating asset pools to invest in certain ways in the LGPS. The power to direct pools is a backstop power. It does not allow government to mandate investment in specific assets or asset classes”.—[Official Report, 12/1/26; col. GC 244.]
The issue is not whether the power is a backstop power or whether the Government intend to use it but whether the Bill could be used—by this Government or some future Government—to mandate investments in the LGPS.
My Lords, I will speak to Amendments 2 and 5, which address the same underlying issue—whether pooling and expertise in the Local Government Pension Scheme is intended to support good investment decisions or to constrain them. I will speak in support of Amendment 4, to which I have added my name.
No one disputes that there can be value in scale, but scale does not require exclusivity. Nothing in the case for pooling requires funds to confine to a single pool, unable to access specialist expertise developed elsewhere. The LGPS is a federation of, I think, 89 funds with different demographics, liabilities and investment strategies. It is entirely foreseeable—indeed, it is already happening—that one pool will develop a particular strength in, say, infrastructure, and another in renewables or local investment opportunities, or, as has already been outlined, it may be that the investment opportunity is large and accessible only by more than one joining together. Why should a fund be prevented from accessing that expertise or that scale simply because it sits in a different pool? Looking at it from the non-scale end, I have personally spoken to fund managers who wanted to invest local to support infrastructure at local scale but who do not want all that exposure in their own area, for reasons of diversification. They have had their fingers burned with shopping centres. The current drafting would make that unnecessarily difficult.
In Committee, the Government were clear that they want to avoid forced or value-destructive transfers of assets between pools. Allowing funds to participate in more than one pool and allowing cross-pool investment is one of the simplest ways to avoid exactly that. If a fund can access a specialist vehicle without having to replicate it internally or move assets unnecessarily then that is a win for the scheme members. The purpose of pooling was to broaden access to expertise, not to narrow it; to create economies of scale, not to create silos; and to support better long-term investment decisions, not to restrict the routes through which those decisions could be implemented.
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Elsewhere in the Bill, there are restrictions that prevent a scheme from belonging to more than one pool. For reasons I will now explain, this incomprehensible restriction will mean that the Government thwart their own ambitions to bring the LGPS assets to bear to invest in other wise and appropriate investible infrastructure opportunities outside their home patch.
My amendment would allow any good opportunity that has been signed off, so to speak, by one LGPS fund to be available to all the others, whether the fund was in that pool or not. The LGPS is the closest we have to a national wealth fund. Two years ago, its total assets under management were valued at more than £390 billion—and it is much more than that now. These things change but, by some measures, it is the world’s fourth- or fifth-largest scheme. Some 6.68 million Britons belong to that scheme. It may be a large scheme, but the members are not fat cats: the typical member is a 47 year-old person earning £18,000 a year and who may, after a period of very long service, attain a pension of £5,000 a year. In the next group, I will refer to this number, but investment returns for 2024 on the LGPS were 8.9%, with a broad asset allocation of equities, bonds, property, and so forth. The investment and management costs grew by much less than inflation—2.9%.
The scheme that I am a member of in Norfolk has a cost per member of less than £20; it is half the cost of anywhere else. When I came to that scheme in 2007, there were £1.8 billion of assets. That is now nearly £6 billion. When I leave the trusteeship in May, I will look back with satisfaction. It is a British success story. The noble Lord, Lord Davies, trumpeted this in Committee. With all this interference and fettering of the ability of the trustees to put the members’ best interests first, what is the problem that the Government are trying to solve here?
I make no apology for rehearsing this as I open Report. The success story that is the LGPS should play an important part in investing in and renewing our nation. I am not against scale. I know there are some schemes at £500 million that need to bulk up, although I am bound to say that one of the smaller schemes in the Orkneys has the best performance of all the schemes in the whole scheme. There is something to be learned there.
Clause 2 is clear that regulations under Clause 1
“must make provision about the management of the funds and other assets for which the scheme managers are responsible”.
Subsection (2) goes on to require an investment strategy, and subsections (3) and (4) allow the Secretary of State to specify what is in that strategy, including strategic asset allocation. On any ordinary interpretation, this adds up to very considerable power over LGPS investments.
In the other place, the Government removed from the original Bill a more explicit power of direction that would have allowed the Secretary of State to direct LGPS investment activities. It was pretty shocking, and the Government sensibly removed it before the Bill arrived in your Lordships’ House. That removal, however, does not mean that the Bill we now have before us could not be used to mandate investments using the powers that remain in Clauses 1 and 2. I hope the Government will agree that certainty is required in this area. My amendment would put matters beyond doubt. If the Government do not accept Amendment 4, I am currently minded to test the opinion of House when it is reached.
The noble Lord, Lord Fuller, has reminded us of many of these issues, as he did in Committee. The LGPS is a British success story, delivering strong returns, low costs and high efficiency for 6.7 million members. His warning was and is that the Bill risks fettering the independence of schemes to make the best long-term decisions for their members. These amendments go directly to that point, and it would be beneficial if the Government could recognise this—I really cannot see what they would take away.
I therefore suggest that the Government seriously consider adopting these amendments. They are modest but important. They would not weaken pooling but strengthen it, they would not undermine scale but enhance it, and they would not challenge the Government’s policy direction. They would simply ensure that the LGPS could operate as a coherent system, rather than a set of sealed compartments. I hope that the Minister will see them as constructive corrections to support fiduciary duty, improve efficiency and help deliver the very outcomes that the Government say they want.
I turn to Amendment 4. The noble Baroness, Lady Noakes, has already explained in detail why it is a good amendment, and we on these Benches support it. It would be a safeguard to make sure that the same kind of mandation that the Bill contains for default pension funds did not creep across through regulations into the LGPS. That may not be the intention now, but, as elsewhere in the Bill, there are no safeguards against the future intentions of we-do-not-know-who in a change of circumstances. It is a bad thing in legislation to continually have these open abilities to make regulations, billed as doing one thing but completely open sometimes to do almost the opposite. The precedent has been set elsewhere in the Bill by the drafting and, no matter how it ends up, we need to be certain that it cannot creep into local government. I therefore support Amendment 4, and we will support the noble Baroness, Lady Noakes, if she is minded to divide the House.