Pension Schemes Bill

Committee (2nd Day)

Clause 6: Mergers of funds

Debate on whether Clause 6 should stand part of the Bill.

Member’s explanatory statement

This amendment seeks to probe the process that the Secretary of State will be required to follow in order for a compulsory merger to take place, and the wider considerations that will be applied in deciding whether such a merger is appropriate.

My Lords, it is a pleasure to open today’s debate on the remaining groups of amendments relating to the Local Government Pension Scheme. We are conscious that Ministers have already undertaken to write to the House on a number of points, and we do not wish to add unduly to that correspondence or set exam questions. However, we hope that today’s debate may allow some of these issues to be addressed in real time.

Let me be clear at the outset that this is a probing stand-part notice intended to seek clarity from the Government. Clause 6 is striking in its brevity, but the power it confers is anything but modest. It would allow scheme regulations to provide for the merger explicitly, including a compulsory merger, of local government pension funds. Compulsory merger is a significant and, in many cases, irreversible intervention. It has profound implications for governance, funding positions, local accountability and, ultimately, the retirement savings of millions of scheme members and the obligations of employers. We are dealing here with very substantial sums of public money and the livelihoods of millions of people.

Before such a power is afforded to a Secretary of State who may have little or no specialist expertise in pensions, it is only right that the Committee understands clearly how this power will be exercised and what safeguards will apply. The clause itself, however, tells us very little. It provides no indication of the process that will be followed, the criteria that will be applied or the protections that will be in place for members, employers and administering authorities. I therefore hope that the Minister can assist the Committee on a number of points.

First, on expertise and decision-making, pension scheme governance is highly complex and technical. What confidence can the Government offer that the Secretary of State is the appropriate decision-maker for imposing compulsory mergers, particularly in the absence of any requirement in the Bill to obtain independent expert pensions advice?

Secondly, on process, what precise procedural steps will be required before a compulsory merger can be ordered? Will there be a statutory consultation and, if so, with whom? Will affected scheme managers, administering authorities, employers and scheme members have a formal opportunity to make representations before a decision is taken?

Thirdly, on safeguards and accountability, what independent checks and balances will exist to ensure that the Secretary of State cannot act unilaterally? Will decisions be required to meet defined tests, such as necessity or proportionality, and to be supported by evidence? Will there be any right of review or challenge where a fund believes a compulsory merger is not in the best interests of its members?

Fourthly, on financial risk, given the scale of the assets involved, what assurances can the Government provide that members’ savings will not be exposed to undue risk or that decisions will not be influenced directly or indirectly by political or short-term considerations rather than long-term fiduciary interest?

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.

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

I apologise. I did not see you.

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.

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”.

My Lords, it is a pleasure to be opening for the Government on the second day of Committee on the Pensions Schemes Bill. Once again, for the sake of the record, I am not sure whether it is otiose but I repeat that I am a former councillor in Camden and, as such, a member of its councillors’ pension scheme—but for four years, so I am not going to retire rich on it.

I am grateful to all noble Lords who spoke in the debate on this probing stand part question on Clause 6. I recognise the intention to scrutinise the process to be followed if compulsory mergers of LGPS funds are undertaken.

As noble Lords are no doubt aware—and I hope this answers the question that the noble Baroness, Lady Noakes, raised about the history and rationale for including the clause—Schedule 3 to the Public Service Pensions Act 2013 confers powers on the Secretary of State to make regulations about the administration, management and winding up of any pension funds. Clause 6 amends the 2013 Act to clarify that, in the case of the LGPS, the Secretary of State’s existing powers include the power to make regulations about the merger of two or more LGPS pension funds, and this includes compulsory merger. At this point, I reassure the Committee that the Government do not currently have any plans to require the merger of LGPS funds and that their strong preference is that mergers take place by agreement between administering authorities. However, it is essential that the Government have sufficient powers in place to be able to fulfil their stewardship role towards the scheme.

The purpose of the clause is to ensure that sufficient powers are in place to facilitate the merger of pension funds if needed—for example, as a consequence of local government reorganisation, something that the noble Lord, Lord Fuller, spoke about. He referred to this in slightly less positive terms, but the Committee will be aware of the Government’s ambition to simplify local government by ending the two-tier system. A consequence of this is that in some areas a new administering authority, as he said, will need to be designated to administer Local Government Pension Scheme funds, because the existing administering authority will no longer exist. One potential solution to this may be the merger of two or more pension funds. These decisions are local ones, but any such change will require agreement from the Secretary of State to make legislation for transferring the pension assets and liabilities of the previous administering authority and other councils involved in unitarisation to the new administering authority. MHCLG will write to affected local authorities with guidance on what they should consider when deciding on their preferred approach to designating a new administering authority for their pension fund.

The noble Baroness, Lady Stedman-Scott, in particular, talked about the process. Any merger of pensions funds, compulsory or otherwise, would require the Government to lay a statutory instrument to effect that merger in law. I think this answers one of the noble Baroness’s questions: the Secretary of State has a statutory duty to consult any persons, or a representative of those persons, who appear likely to be affected by LGPS regulations prior to laying them. For regulations affecting a merger, this can be presumed to include the relevant administering authorities, their asset pool or pools, and the members and employers participating in the affected local schemes.

This is the minimum required in statute; however, government practice has been to consult publicly on LGPS regulations, ensuring that views and evidence from all parties, including industry experts and representative groups, is considered prior to finalising the regulations. The department works closely with the Government Actuary’s Department and the LGPS advisory board and would engage them prior to any decision. There is no intention to explicitly require tests on necessity or proportionality in legislation prior to requiring a merger; however, the normal public law rules about proper decision-making would still apply. They are expected to take into account all relevant considerations, which may include obtaining evidence from relevant experts where appropriate and considering the impact on employee contributions and scheme administration.

I reassure LGPS members that their pensions and benefits are protected, as they are guaranteed in statute and so will not be affected by any merger. A further safeguard on the use of this merger power is that all LGPS regulations require Treasury consent prior to being made. This ensures—this addresses another one of the questions from the noble Baroness, Lady Stedman-Scott—that the Secretary of State cannot act unilaterally to merge funds.

I come back to the point that Clause 6 is a provision to clarify an existing power, not to make one. The process to be followed and the accompanying safeguards are exactly the same as those for the existing power, which enable the Secretary of State to fulfil the stewardship role for the scheme.