Arrangement of Business
The Deputy Chairman of Committees (Baroness Fookes) (Con)
My Lords, I issue the standard warning that, if there is a Division in the Chamber, we immediately adjourn for 10 minutes.
Rehabilitation of Offenders Act 1974 (Exceptions) (Amendment) (England and Wales) Order 2025
(1 day, 9 hours ago)
Grand CommitteeRead Hansard Text Read Debate Ministerial Extracts
Lord Timpson
That the Grand Committee do consider the Rehabilitation of Offenders Act 1974 (Exceptions) (Amendment) (England and Wales) Order 2025.
Relevant document: 44th Report from the Secondary Legislation Scrutiny Committee
The Minister of State, Ministry of Justice (Lord Timpson) (Lab)
My Lords, as many noble Lords will be aware, I am passionate about the rehabilitation of offenders. I have seen at first hand how transformative employment can be for those seeking to rebuild their lives after offending.
The Rehabilitation of Offenders Act 1974, which I will refer to as the ROA, governs the disclosure of cautions and convictions for most employment purposes. Its purpose is simple but vital: to ensure that, once a conviction is spent, individuals are not defined for ever by their past. For most people, once a conviction or caution becomes spent, it does not need to be disclosed when applying for work. This supports rehabilitation, helps to reduce reoffending and allows people to move on with their lives. However, this must always be balanced against the need to protect the public. That is why the ROA is accompanied by the exceptions order 1975, which sets out specific roles and activities where fuller disclosure is required. This is typically work involving vulnerable people, such as children, or a high degree of public trust. This instrument amends the exceptions order in a targeted and proportionate way.
Before I turn to the detail, I want to make something clear: even when an employer is aware of a spent conviction or caution, that should not amount to an automatic bar to employment. The Government encourage employers to take a balanced and thoughtful approach, considering factors such as the age of the individual at the time of the offence, how long ago it occurred, its relevance to the role and what safeguards can be put in place. In my own business experience, I have employed many people with criminal records. Time and again, they have proved to be among the most loyal, committed and capable colleagues. That experience has shaped my belief that disclosure rules must be fair and proportionate. They must give employers the information that they need to manage risk responsibly while still giving people the chance to rebuild their lives. We know that finding employment after release can reduce reoffending by up to nine percentage points, which is why we are strengthening links between prisons, probation and employers through employment advisory boards and the new regional employment councils.
In developing these proposals, officials have looked at evidence around gaps in the current framework and have considered the findings of the Independent Inquiry into Child Sexual Abuse. This instrument addresses those gaps and does so carefully. The instrument makes four amendments to the exceptions order. First, it extends access to enhanced DBS checks to self-employed individuals or personal employees working closely with children and vulnerable adults. Secondly, it brings within scope staff employed by the MoJ’s contracted provider of electronic monitoring and field services. Thirdly, it includes registered healthcare professionals employed or engaged by the Secretary of State for Work and Pensions or by their contractors and subcontractors. Finally, it enables appropriate disclosure checks for pedicab drivers in London, bringing them into line with taxi and private hire vehicle licensing following the Pedicabs (London) Act 2024. In each case, the amendment allows spent convictions to be considered as part of an informed and proportionate decision-making process, when assessing suitability for the role or licence in question. Relevant departments have committed to producing or updating guidance to support fair and consistent decision-making.
There is a compelling case for these changes. The first amendment closes a clear safeguarding gap. Families increasingly hire tutors, carers and therapists directly, often in unsupervised settings, yet without this change those individuals can only be asked for a basic criminal record check. Extending access to enhanced checks, including barred lists where appropriate, gives families the same reassurance that they would have if services were provided through an organisation such as a school. It also delivers on a key recommendation of the Alexis Jay inquiry.
The second amendment relates to electronic monitoring staff. These individuals play a crucial role in maintaining the integrity of court orders and release conditions. They have access to sensitive systems and exercise significant discretion. By enabling standard rather than basic disclosure checks, providers can better identify and manage risks and protect public confidence in the justice system.
Thirdly, the amendment covering registered healthcare professionals working for the DWP or its contractors reflects the vulnerability of the people they support. Around 2 million health assessments are carried out each year for individuals with long-term conditions or disabilities. Enabling fuller disclosure ensures that suitability for these roles can be properly assessed and appropriate safeguards maintained.
Finally, on pedicabs in London, following years of operating without regulation, TfL is now introducing a licensing regime. For that regime to command public confidence, pedicab drivers must be subject to the same safeguarding standards as taxi and private hire drivers. Without this amendment, TfL would be limited to basic checks, which is simply not sufficient, given the nature of the work.
This instrument strikes a careful and necessary balance. It strengthens safeguarding where it is needed, closes identified gaps and maintains the central principle of the ROA. The people who have moved on from their offending deserve the chance to rebuild their lives. I beg to move.
Lord Keen of Elie (Con)
My Lords, I am grateful to the Minister for his clear exposition of this matter. From these Benches, we are supportive of the order before us. The Rehabilitation of Offenders Act has, for more than 50 years, played an important role in supporting rehabilitation and enabling people who have offended to move on with their lives. That principle commands strong support, but it has always been recognised that rehabilitation cannot be an absolute and that there are particular roles, especially those involving children, vulnerable adults or positions of trust, where fuller disclosure is both reasonable and necessary to protect the public.
This order is modest in scope and targeted in nature. It does not represent a wholesale expansion of disclosure but rather responds to specific and well-evidenced gaps in the current framework. In particular, extending eligibility for enhanced DBS checks to self-employed individuals and those employed directly by families who work with children is a sensible and overdue step. The Independent Inquiry into Child Sexual Abuse commissioned under a Conservative Government made it clear that safeguarding should not depend on the technicality of whether someone is employed through an organisation or directly by a parent. Families deserve the same level of assurance in either case.
Similarly, we recognise the logic of bringing electronic monitoring contractor roles within the exception order. These are sensitive positions with real risks of corruption and serious consequences if safeguards fail. Ensuring that employers can properly assess suitability is essential for maintaining confidence in the criminal justice system. The inclusion of registered healthcare professionals carrying out DWP assessments is also proportionate. These individuals occupy positions of trust and have access to sensitive personal data. It is reasonable that the department is able to take a full view of suitability when making appointments to such roles.
Finally, aligning the DBS regime for pedicab drivers in London with that already in place for taxis and private hire vehicles is both logical and, indeed, necessary. Regulation without proper disclosure would expose Transport for London to unnecessary operational and reputational risk and would be out of step with public expectations.
However, as my honourable friend Kieran Mullan noted in the other place, support for these changes comes with a note of caution. The system for obtaining enhanced DBS checks is already under strain, with delays in some police force areas. As eligibility is expanded, it is incumbent on the Government to ensure that the system can cope and that safeguarding improvements are not undermined by avoidable backlogs.
Taken together, these measures strike the right balance between rehabilitation and public protection. They are proportionate, targeted and consistent with existing safeguarding frameworks.
Lord Timpson (Lab)
My Lords, I am grateful to the noble and learned Lord, Lord Keen, for his contribution. I hope that noble Lords will agree that this instrument is necessary and proportionate. The amendments before the Committee address clear and specific safeguarding gaps, covering individuals working closely with children and vulnerable adults, electronic monitoring staff, healthcare professionals supporting vulnerable claimants and pedicab drivers in London. They strengthen public protection in high-trust roles, while remaining true to the purpose of the ROA, supporting rehabilitation and enabling people to move on. The noble and learned Lord, Lord Keen, mentioned Kieran Mullan’s comments in the other place. I have been assured that the DBS system can cope with this volume coming through. I commend the instrument to the Committee.
Pension Schemes Bill
Wednesday 14th January 2026
(1 day, 9 hours ago)
Grand CommitteePension Schemes Bill 2024-26 View all Pension Schemes Bill 2024-26 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 152-II(b) Amendments for Grand Committee (Supplementary to the Second Marshalled List) - (14 Jan 2026)
Baroness Stedman-Scott (Con)
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?
Finally, on precedent, does the Minister accept that conferring such a broad enabling power sets an important precedent for ministerial intervention in pensions governance more widely? If so, how do the Government justify that approach, and why are the limits of this power left entirely to secondary legislation?
We ought to have answers to these questions before the conclusion and passing of the Bill. Clause 6 confers wide discretion in a highly technical and sensitive area, with potentially far-reaching consequences. It is therefore entirely appropriate for the Committee to press the Government to explain how this power will be exercised, what safeguards will be in place and how the interests of scheme members will be protected. I look forward to the Minister’s response.
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.
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.
Lord in Waiting/Government Whip (Lord Katz) (Lab)
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 power may also be used in the unlikely event that an independent governance review finds particularly grave issues with an administering authority’s governance of their pension fund. This intervention will be considered by the Secretary of State only in exceptional cases, as an option of last resort after discussions about governance and compliance with the administering authority, and where there is no credible action plan for improvement.
Lord Willetts (Con)
I have one question following the Minister’s very helpful explanation. I was involved in the internal government discussion leading up to the 2013 legislation, and at the back of our minds was the whole issue of merging local government pension schemes for economic and investment reasons. The model that emerged of seven or eight umbrella bodies shaping their investment strategy was seen as the best way to deliver that. The Minister’s list of reasons why there might be compulsory mergers excluded any investment or economic argument, so is he assuring the Committee that the Government do not envisage using these powers to secure specific economic or investment objectives?
Lord Katz (Lab)
I am seeking help from my noble friend Lady Sherlock in a helpful conference on the side. The investment assets are in pools, so that is not necessary. The backstop powers are very clear: if there is a need for a merger or we are worried about a failing scheme, there is that backstop power and this is why. It would not be used to direct particular investment strategies.
Baroness Stedman-Scott (Con)
My Lords, I thank all noble Lords who have taken part in this debate, and I also thank the Minister for his full and detailed response to the questions that were asked. The Minister talked about perhaps using these powers when there are local government reorganisations; that is highly likely in the current climate, I would think.
The purpose of this stand part notice is not to resist sensible reform but to underline the importance of clarity, certainty and proper accountability where Parliament is being asked to confer powers on this scale. Clause 6 is framed at a very high level, yet it opens the door to decisions that could permanently reshape local government pension arrangements, where powers are capable of compelling structural change. It is vital that those affected understand not only that the power exists but the principles that will govern its use. Clarity matters for scheme managers, employers and, above all, scheme members, whose long-term interests depend on confidence in the stability and predictability of the system. Certainty matters because pension funds operate on long horizons, and opaque or open-ended powers can create risk.
Most of all, the responsible exercise of delegated powers depends on transparency. When Parliament is asked to delegate authority in a highly technical and sensitive area, it is entirely reasonable to expect a clear account of how that authority will be exercised and what safeguards will guide it. However, in view of the response given by the Minister—I am sure that all noble Lords who have taken part in this debate will look at Hansard; if there are any issues, we will go back to the Minister—I beg leave to withdraw the stand part notice.
Baroness Stedman-Scott
“Review of the cost and sustainability of the Local Government Pension Scheme(1) The Secretary of State must conduct a review of the long-term cost and sustainability of the Local Government Pension Scheme.(2) The review must give particular consideration to admitted bodies, including housing associations.(3) A report must be laid before Parliament within 12 months of the day on which this Act is passed.”Member’s explanatory statement
This amendment requires the Government to review the long-term cost and sustainability of the Local Government Pension Scheme, with particular consideration given to admitted bodies such as housing associations, and to report its findings to Parliament.
Baroness Stedman-Scott (Con)
My Lords, this group of amendments is the first of three groups that together seek to ensure that the Local Government Pension Scheme operates more effectively and proportionately, protecting member benefits, supporting long-term sustainability and remaining affordable for employers.
The context is critical. The financial position of the scheme has changed profoundly. On a low-risk basis, the LGPS was around 126% funded in March 2025, rising to around 147% by September, with surpluses of £87 billion and £147 billion respectively. This is a striking shift from the 2022 valuation, when the scheme stood at around 65% funded. In short, the scheme has moved decisively from deficit recovery into sustained overfunding.
That shift has unavoidable implications for contribution rates. On prudent assumptions, future services costs are around 15%—falling closer to 6% once surplus is taken into account—yet employers continue to pay contributions of around 21%, costing roughly £9 billion a year across the scheme. Even under highly cautious assumptions, those levels now appear materially higher than is necessary to maintain long-term solvency. These amendments do not seek root-and-branch reform; they ask whether the regulatory framework is still operating as intended and whether contribution setting remains fair, transparent and proportionate.
Amendment 14 therefore requires a review of Regulation 62 of the Local Government Pension Scheme Regulations 2013, which lie at the heart of how employer contributions are determined. The concern here is not actuarial prudence in valuing liabilities but contribution prudence—the policy choice to extract additional buffers from employers, even where funds are demonstrably in surplus. At the centre of this issue are the undefined concepts in Regulation 62(6): desirability, stability, long-term cost efficiency and solvency. Their ambiguity has allowed increasingly conservative interpretations to become embedded in valuation practice, driving contribution rates beyond what the funding position alone would justify.
So I would like to ask the Minister three questions. How do the Government define “desirability”? How do they define “stability”? And how do they define “solvency” in this context? If the Government cannot clearly articulate what these terms mean, how can they be applied consistently when determining contribution rates? If Ministers cannot explain their intent, how can those responsible for applying the regulations be expected to reflect the Government’s wishes rather than their own interpretation? Does the Minister accept that, in the absence of clear guidance, it will be pension funds and actuaries that end up defining these terms in practice? This interpretation will shape outcomes.
In practice, expansive interpretations of “stability” and “long term cost efficiency” can justify unaffordable contribution rates, diverting resources from adult social care, housing delivery and other front-line services, while offering employers little scope to make legitimate trade-offs. There is also a clear imbalance of power. Employers bear the full cost of contributions yet often have limited influence over outcomes. Practice on the treatment of surpluses varies widely, with some funds permitting release and others prohibiting it on opaque grounds. Does the Minister agree that greater clarity and consistency would plainly be beneficial?
Amendment 15 asks a simple but necessary question: is the Local Government Pension Scheme affordable in the long term? It requires a review of long-term costs and sustainability, including impacts in respect of admitted bodies such as housing associations, with the findings reported to Parliament. This is an attempt not to undermine the LGPS but to ensure transparency, proportionality and long-term affordability—principles this House has always upheld.
This analysis is not abstract; a growing body of concrete cases now demonstrates how these regulatory interpretations are operating in practice. I would be very happy—indeed, delighted—to share the full set of these examples with the Minister, should he not already be aware of the scale and consistency of the issue. I trust that he will feel free to take up this offer if it helps.
I will briefly outline one such case. In this instance, the fund in question is assessed as being 107% funded on a gilts minus 0.2% basis. This compares with the previous valuation basis of gilts plus 2.3%. At the current valuation, the council had a reported surplus of £57 million. Despite that clear surplus, measured on an exceptionally prudent valuation basis, the contribution outcome is, frankly, striking. Under the fund’s stabilisation policy, the employer’s primary contribution rate is permitted to reduce by no more than 2%. At the same time, the employer is still required to pay approximately £20 million per year in secondary, or so-called deficit recovery, contributions. That outcome is extraordinarily difficult to justify. Secondary contribution rates exist for one purpose only: to repair deficits. In this case, there is no deficit. Assets exceed liabilities, even under assumptions more conservative than those typically employed by insurers, whose pricing is generally close to a gilt-flat basis. Yet, notwithstanding that surplus position, the employer is still being required to make substantial deficit recovery payments. The council involved has been forced to seek exceptional financial support from MHCLG.
Lord Davies of Brixton (Lab)
The noble Baroness cited a particular case and gave considerable detail about the circumstances. Is there any reason why the Committee cannot be told which authority it concerns? As things stand, there is no way that I or any other Member of the Committee could comment on that case. If the noble Baroness can tell us which authority it is, in the interest of transparency, I urge her to do so.
Baroness Stedman-Scott (Con)
I have always been a supporter of transparency. I do not know the answer to the noble Lord’s question, but I will find out and let him know either the name of the council or the reason why I cannot give it to him. We have other examples that we are happy to share. I hope that answers the noble Lord’s question. I beg to move.
Lord Davies of Brixton (Lab)
It is a pleasure to take part in this debate. It is an important issue and public money should always be open to scrutiny and deep thought about how we approach these issues. The noble Baroness, in introducing the amendments, quoted the significant switch round in the financial state of the Local Government Pension Scheme. She will be able to have an interesting discussion with her former colleagues, Liz Truss and Kwasi Kwarteng, as to why exactly that has happened. They have had more influence on it probably than the actuarial profession.
My message essentially is, “If it ain’t broke, don’t fix it”. What we have here is the Official Opposition attempting to make a crisis out of a significant success. The Local Government Pension Scheme has been successful, as attested to by the noble Lord, Lord Fuller, yet here we are being presented with it as if there is some crisis to address. We should recognise that, in actuarial terms, the financial management of the scheme has been a significant success. It is up to those suggesting reviews—two in this group of amendments and two more in the following group, which should more accurately be here—to explain, rather than providing anonymous details, what the problem is.
The context is that, compared to private sector funded schemes, where contributions have been increasing, what we are going to see in the coming year is the opportunity of significant cost reductions. This is for two reasons. First, it is because of the successes of Local Government Pension Scheme investments, with returns of around 9% per annum since the last valuations. As a result, that has generated significant surpluses—significant excess of assets over liabilities. I shall come back to that in a later group. Following the latest set of triennial valuations, substantial reductions will be available. It is up to individual authorities to make their decisions, but the opportunity will be there, certainly for most funds.
As far as actuaries who support and work within the local government sector are concerned, as I explained on Monday, this discussion comes as a bolt from the blue. What we really need in this area is stability. It would be far better to promote discussion first within the sector, with those who know what they are talking about, before producing these proposals, which inevitably lead to uncertainty.
It is not a surprise, given the environment we are in, that there has been no consultation on this, unlike the investment changes, because it is part of a programme that we see with amendments submitted later in this Bill. There are some people who just do not like successful collective pension provision. There is an agenda at work here. As I say, I do not oppose consideration of the issues, but we should understand where it is coming from.
It is important to understand that the last valuations were in 2022. The current valuations, as at 31 March last year, are under way and we do not yet have the full results. Early results have been provided and we know the direction of travel, but we do not know the final results, which is why I question the figures being quoted. We do not yet know the results over the sector as a whole of the current series of valuations. Any speculation about that outcome misses the point.
The second point I want to make is that there is no one-size-fits-all solution to the funding of local government pension schemes. They vary widely in their size. The staff membership has to be taken into account, and that varies, and you also have to understand that some of these funds have significant numbers of non-local government members through the admitted body process and each of those has to be assessed in a proper way. There is no way you can have a one-size-fits-all approach to the actuarial management of these funds. You need the professional knowledge and judgment of actuaries—you may think I am promoting my own profession—to decide what is the best approach.
Clearly, that judgment should be open to review and, of course, it has been reviewed. That is what is so nonsensical about these proposals. Under Section 13 of the Public Service Pensions Act 2013, the Government can ask for reviews of the funded public service schemes, which effectively means local government schemes. Indeed, such a review has been carried out and a full detailed report produced by the Government Actuary, setting out the approach that has been adopted, comparing the different approaches—there are four firms of actuaries, which all have slightly different approaches—reconciling them and judging the assumptions that have been made.
Broadly speaking, the Government Actuary has given these valuations a clean bill of health. Therefore, any suggestion that there is anything wrong about the actuarial approach that is being taken is denied by the Government’s own actuarial adviser. Funds need to take account of local needs and public interest has a role in deciding how services can be employed in these funds. There is no question of refund in these funds, but the way in which it affects contributions is crucial.
Another point, which I think the noble Baroness ignored, is that these funds are all subject to the cost- capping arrangements set out in the coalition Government’s review of public service pensions of 14 or 15 years ago. There is a cost cap. I made a note of what the noble Baroness said: that the full cost of the contributions “bears on the employers”. That is just wrong. It bears on the employers and the members together. It is the employers’ costs that are capped under legislation and it is the members who bear the risk of increasing costs and stand to enjoy the benefit of reducing costs. The cost cap is crucial in these schemes and to ignore its important role fails to understand what we are doing. I am sorry—I could go on, but I think the situation is clear.
There was just one other point—I will go on. It arises under the next group and it is the idea of a statutory funding standard. Of course, we tried that with private sector pension schemes and it was a disaster. Everyone agreed it was a disaster and we had to have a new system—whether the new system was any better is a matter for debate. However, the idea of having a statutory funding standard just did not work.
To conclude—I hope it is a conclusion this time—there is no evidence that the existing system has failed. Indeed, we expect to see the benefits of the current approach when we decide what these funds should be in the light of the forthcoming valuation results.
Lord Fuller (Con)
My Lords, I knew my love-in with the noble Lord, Lord Davies, could not last, having got on so well with him on our first day in Committee on Monday. I want to come to the defence of my noble friend Lady Stedman-Scott because I do not think that she was talking about a disaster. It is common ground that the Local Government Pension Scheme—by some measure, the fourth-largest or fifth-largest scheme in the world, although it is in 89 separate pots, all of them aggregated—is a strong British success story. There is wide alignment on that on all sides of this Committee.
Having defended my noble friend, I shall part company slightly with some of the points she made—but only in one small regard. My noble friend spoke of a council—we do not know which one it is, but that does not really matter; it is illustrative—whereby the numbers were fixed in time, and that led, as the result of a revaluation, to an exceptionally high contribution rate. I do not want to trespass on the next group of amendments, but I will return to this idea. My noble friend almost came to a point where she wanted to deny—she did not say this, but I took it this way—that we should have some sort of stabilisation. I want to talk for stabilisation in the periods between revaluations in the LGPS.
We have done this in our scheme in Norfolk, so you avoid the peaks and the troughs. There is a stabilisation method whereby you take, if you like, a floating average over a number of things to give stability in the public finances. I accept that, as my noble friend said, if you have these huge differences—and it is not small change; you have to find lots of money—if it is overly variable every three years, that is not conducive to the public good. So I shall speak in favour of stabilisation, which is partly to do with longevity risk, which is referred to in Amendment 16.
The noble Lord, Lord Davies, accurately stated that the LGPS valuation that is currently under review was dated 31 March 2025—10 months ago. I am sure that noble Lords do not need reminding that, on the very next day, the President of the United States announced a whole load of trade barriers and the stock market fell like a stone. You might say that the LGPS got away with it. Had the President made his announcement just one day earlier, those reductions in stock market values would have been crystallised in a much less favourable outcome than we hope will be the case, or are expecting, for this current valuation.
Given the vicissitudes of all of these varied changes and events, it is important that we have attenuation and stabilisation between things. I do not think that my noble friend quite made that point, so I want to make it. The further points made by the noble Lord, Lord Davies, will be covered in our debate on a later group, but I want to talk for stabilisation as a counter, if you will, to the case made by my noble friend Lady Stedman-Scott.
Baroness Altmann (Non-Afl)
My Lords, I support Amendments 14 and 15; I thank the noble Baroness, Lady Stedman-Scott, for her explanation of the thinking behind them. I apologise to the noble Lord, Lord Davies, that on this occasion I find it difficult to agree with much of what he said.
I agree that these schemes have been a success. I do not see these amendments as suggesting that there is a massive failure, but I am frightened that we could be about to snatch defeat from the jaws of the victory that these schemes have so far been able to provide. It is vital that there is a cost and sustainability review, as well as a review of the actuarial valuation methodologies. I do not feel that this issue can be swept under the carpet; to some extent, there is, or has been, a desire to do just that.
Excessive prudence and hoarding of excess assets are not, in my opinion, good governance. At least part of the surplus belongs to the employer, who is the council tax payer. This series of amendments, and indeed the whole Bill, need to be approached with the view that defined benefit pension schemes are no longer a problem that needs solving. We had that mindset for so many years that it seems we cannot easily get away from it but, actually, these funds have turned into a national asset, which needs to be stewarded responsibly. It can help to deliver both good pensions and long-term support for the economy, if we just use the opportunity that is presenting itself now.
The LGPS has very much changed position, especially because the needs of local and national economies have also changed. Council tax should be used responsibly and not to keep putting money into pension funds that already have more than they need. The risk of non-payment of these pensions is extremely low anyway, but the risk of council failure has been rising. The same is true for some other employers that are contributing here, such as special schools, academies, care homes and housing associations; a number of authorities and groups that are really important to our national well-being have also been caught up in this situation.
I must thank Steve Simkins of Isio, who has been helping me to understand some of what is going on at the local authority level. I have found his insights extremely valuable. Although the noble Lord, Lord Davies, said that we had the 2013 review under the local authority regulations—I think he quoted LGPS Regulation 62. That is in place but, as the years have gone on, the review and its terms have been used as a smokescreen for super-prudence. I have something of a problem with the argument about stability, because we were not as worried when we thought there were massive deficits in schemes, but we do not seem to want to take even a temporary respite from the ongoing contributions, which actuaries say are not needed, when things have become better.
I support the comments made by the noble Baroness, Lady Stedman-Scott, about the need for these regulations. They are meant, as the noble Lord, Lord Davies, suggested, to help review contributions in the interim, but it is not clear what the definitions on which the review is based mean. The word “desirability” is so vague: desirable to whom? Even the word “stability” can be interpreted differently, depending on whether you are talking about stability immediately or over the long run. Does “long term cost efficiency” include the cost of holding too much money? Is that efficient? We also have “solvency”, of course; on what basis is that measured?
I have enormous sympathy with the noble Lord, Lord Davies, in imploring the Committee to have supreme confidence in the actuarial profession’s conclusions about these funds—I have to declare an interest in that my daughter is an actuary, although I stress not on the pension side. Of course, actuaries are a very professional, well-educated group, but the issue for me is not so much with the wording of the regulations but the mindset that is behind what is done with those valuations. The LGPS, the scheme advisory boards, the MHCLG and even the LGPS officers, advisers and investment managers themselves seem to want to interpret everything in the most negative way, so I think that the noble Baroness has done the Committee a service in raising these issues.
We will talk more about this in the next group, but I urge the Minister to consider carefully, in the context that councils are running out of money and cannot afford basic services, that 20% to 25% of council tax goes on employer pension contributions into schemes that do not, as I say, seem to need the money. Could we be stewarding this national resource, and even the local authority budgets, far better and use the opportunity of the pension success to drive better growth and better local well-being?
Lord Palmer of Childs Hill (LD)
My Lords, I must first remind myself to declare that I am a member of the Local Government Pension Scheme: I could not fail to be, having been 28 years on the London Borough of Barnet Council, but I tend to forget about it because it is quite a while ago. A payment does come monthly into my bank account, so I must declare that I am a recipient. I also served on the pensions committee of the London Borough of Barnet, so I have some knowledge of the things that the noble Lord, Lord Davies, has been very eloquent about.
These amendments propose reviews of the Local Government Pension Scheme, and I think we have to get back to exactly what these amendments are asking for, which is sustainability and actuarial practice. We on my Benches support both, in principle. The Local Government Pension Scheme is a long-term, open scheme with unique characteristics, and pressures on admitted bodies, including housing associations, merit careful examination.
The noble Lord, Lord Davies, spoke eloquently about the profession of actuaries. I have always found that actuaries do not have a unified view. There are different actuaries and different views, and as a chartered accountant I have always thought they were impressively prudent with what they said the funds needed to be protected against.
Similarly, actuarial practices such as desirability, stability and solvency are not always applied consistently, despite our applause for actuaries as a profession. Greater clarity would help employers plan and would reduce disputes. Reviews, which is what these amendments ask for, are not admissions of failure; they are tools of good governance. We on these Benches therefore see these amendments as constructive and not critical.
The noble Lord, Lord Fuller, spoke very eloquently about stabilisation and the noble Baroness, Lady Altmann, talked about cost and stabilisation review. Excess prudence, or super-prudence, is not sensible, and it is so easy to be prudent as the easy way out. There is an argument for temporary respite. All these come into the question of review, which is what these two amendments ask for. Our question is whether the Government can accept the value of structured, evidence-based review in strengthening confidence in the Local Government Pension Scheme. Review is not a question of failure; it is a question of prudence, which I would have thought actuaries would be in favour of.
Lord Katz (Lab)
My Lords, this has been another interesting and wide-ranging debate, and I am sorry to see that the accord that we had on Monday— the horseshoe accord, I am going to call it—between my noble friend Lord Davies and the noble Lord, Lord Fuller, has broken down. Sadly, in my experience these things do not last that long.
Lord Katz (Lab)
Where was I? I was simply going to say that I of course defer to the noble Lord, Lord Palmer of Childs Hill, who was very much my senior partner in local government service. For the Committee’s information, I did not represent a neighbouring ward, but we are in neighbouring wards, although in different local authorities. It is good to know that north-west London—NW6 or NW2—is well represented in Committee this afternoon.
Before we look at the amendments relating to the triennial valuation of funds, it might be helpful to explain some of the basic principles relating to the valuation. The central principle and pride of the Local Government Pension Scheme is that it is a locally managed scheme. Administering authorities are responsible and accountable for meeting pension promises to members over their lifetimes. Striking the right balance between the cost to employers, risk management, intergenerational fairness and the needs of an open scheme is a matter for authorities.
This takes place through the fund valuation process, which is robust and well established, with strong safeguards. Administering authorities can work with their actuaries to develop assumptions and then carry out a valuation of the fund. Contribution rates are set for each employer, and administering authorities consult their employers as part of the rate-setting process. It is right that employers understand and are able to challenge their contribution rates and factor them into their medium-term financial planning. Valuations and rates are published and made available to all employers.
The valuations are reviewed by the Government Actuary’s Department, under Section 13 of the Public Service Pensions Act, which assesses whether compliance, consistency, solvency and long-term cost efficiency in the scheme have been achieved. Each fund and each employer is different. Valuations and rates will vary, depending on both the performance of investments and the make-up of each employer.
As we have heard from many noble Lords—including very forcibly from my noble friend Lord Davies—the 2025 valuation will conclude in a few weeks, setting rates for 2026-27 onwards. We should acknowledge the importance of that timing in our consideration of these amendments.
If I may, I will respond to Amendments 14 and 15 together. I am grateful to the noble Baroness, Lady Stedman-Scott, and the noble Viscount, Lord Younger of Leckie, for tabling them. Amendment 14 would require a review into the affordability of the scheme. I recognise the concern that we have heard to ensure that the scheme remains affordable for employers, including local authorities and admitted bodies such as housing associations. But, to everyone’s credit—I will perhaps single out my noble friend Lord Davies but, to be fair, I include the noble Lord, Lord Fuller, and the noble Baroness, Lady Altmann—the LGPS is a success story. It has gone from deficit to surplus and currently has returns of 7% to 9%. It is in a strong financial position, with the majority of funds expected to show a surplus following the latest valuation. As a result, employer contributions are expected to reduce from April. Some reductions will be bigger than others, and that is part of the nature of the process that is in train. We should not pre-empt the result of that valuation.
The statutory cost control mechanism, which applies to all public sector schemes including the LGPS—which my noble friend Lord Davies referred to—ensures that the cost of benefits remains sustainable for employers. This mechanism operates on a four-year cycle, following the scheme-level valuation conducted by the Government Actuary’s Department. As we have heard, the most recent valuation was in 2024. An additional cost management process for the LGPS is operated by the scheme advisory board, with the aim of controlling the contributions paid by employers, which are set locally.
In addition, the Government Actuary’s Department, under Section 13 of the Public Service Pensions Act 2013, will undertake a review of all fund valuations for the Secretary of State and on whether compliance, consistency, solvency and long-term cost efficiency have been achieved across the scheme. An additional review into the affordability of the scheme would therefore simply replicate the existing processes built into the scheme. The Section 13 report will be based on the 2025 local valuations, which will conclude in a few weeks, and will deliver recommendations on the long-term cost effectiveness of the scheme, which the Government will consider carefully. We are very much not sweeping this issue under the carpet.
Baroness Stedman-Scott (Con)
My Lords, I thank those taking part in this interesting debate, and the Minister for his response. I completely agree with the noble Lord, Lord Davies of Brixton, that discussion and consultation is best first. I will take advice on the naming of the authority, and I will certainly take advice on speaking to Kwasi Kwarteng. This is not a matter of political inheritance; it is a matter of changed circumstances. In 2022, when many Local Government Pension Scheme funds were still in deficit, higher employer contribution rates were, on balance, the correct and responsible course of action. At that point, the application of prudence, both actuarial and contribution-based, were broadly aligned with the financial position of the scheme.
What has changed is the context. Market conditions have shifted materially in recent years. Higher interest rates, improved funding positions and stronger asset values have transformed the balance sheets of many funds. This has been underscored by the most recent triennial valuation in 2025, which has revealed the scale of surplus that was neither anticipated nor problematic in earlier cycles. It is precisely at this point that the interpretation of the regulations, particularly Regulation 62(6), has come to the fore. The issue is no longer whether prudence is appropriate but how it is being applied in a materially different financial environment. Rules that operated sensibly when schemes were in deficit are now, through interpretation rather than legislation, producing outcomes that risk becoming disproportionate and unaffordable.
That is why the amendment matters. It is not an attempt to rewrite history or to relitigate past policy decisions; it is a forward-looking attempt to ensure that a regulatory framework designed for balance and sustainability remains fit for purpose as conditions change. This should not be a partisan issue. It is about ensuring that regulation keeps pace with reality, that prudence remains proportionate and that employers are not locked into contribution levels that no longer reflect the underlying financial position of the scheme. I hope noble Lords have appreciated the spirit in which we have tabled these amendments but, for now, I beg leave to withdraw the amendment.
“Local Government Pension Scheme: statutory funding objective(1) The Secretary of State must by regulations specify a statutory funding objective for the Local Government Pension Scheme. (2) The funding objective must have regard to—(a) the long-term ability of scheme employers to meet contribution costs,(b) the fair distribution of costs and risks between current and future taxpayers,(c) the open and ongoing nature of the Scheme, and(d) the appropriate management of investment and longevity risk.(3) In setting or revising the funding objective, the Secretary of State must publish an assessment of the extent to which the objective prioritises—(a) risk elimination,(b) contribution stability and affordability, and(c) intergenerational equity.(4) Administering authorities must have regard to the statutory funding objective when commissioning actuarial valuations.(5) Regulations under this section are subject to the affirmative procedure.”Member’s explanatory statement
This amendment requires the Secretary of State to set a clear statutory funding objective for the Local Government Pension Scheme, clarifying the balance between prudence, affordability and intergenerational fairness.
Viscount Younger of Leckie (Con)
My Lords, we have a changing of horses: I will speak to the four amendments standing in my name and under the name of my noble friend Lady Stedman-Scott, which together develop and expand on the arguments already made from this Dispatch Box on the LGPS. These amendments address four specific concerns, each going into greater depth on the holistic and wider interpretation of Regulation 62(6) of the local government regulations discussed in the previous group.
I should at the outset address a point made on the last group by the noble Lord, Lord Davies. I reiterate that we are not questioning and never have questioned the success of the LGPS. I made that clear on Monday, as he will know, because indeed it is a British success story. But surely he would agree that it is right to debate and to challenge the Government on what happens next in the context of this Bill and the future of the LGPS, not least concerning decisions over the increasing values of the surpluses and their management. The noble Lord, Lord Fuller, has raised the important point about stability as a debating point. That has to be a good thing, and I am sure that it will be returned to.
The noble Baroness, Lady Altmann, also made some basic, high-level points about the importance of and challenges around long-term planning and opacity in solvency definitions and actuarial valuations. I mention this because it is relevant in the context of these four amendments.
I want to be clear at the outset on what these amendments do and do not seek to achieve. They do not seek to weaken the scheme, undermine members’ security or prescribe a particular actuarial approach. Rather, they are intended to probe policy discipline, transparency and proportionality in a framework in which prudence has increasingly become an end in itself, and to bring four specific and important debates to the fore.
I begin with the first amendment, on funding objectives. At present, the LGPS has no explicit statutory funding objective. That is an extraordinary omission given the scale of public money involved and the consequences for employers, taxpayers and local services. In practice, actuarial valuations have defaulted to ever greater conservatism without any clear statement of what that conservatism is intended to deliver or whose interests it is prioritising.
This amendment would, therefore, require the Secretary of State to set a clear statutory funding objective for the scheme—one that explicitly has regard to affordability for employers, fairness between current and future taxpayers, the open and ongoing nature of the LGPS, and the appropriate management of investment and longevity risk. Crucially, it would also require Ministers to be transparent about trade-offs. Prudence is not value-neutral. Prioritising the near-elimination of risk will inevitably come at the expense of contribution affordability and intergenerational equity. That may be a legitimate policy choice, but it is a policy choice none the less and should be made consciously, openly and with accountability.
Without such an objective, risk aversion can ratchet in one direction only. Funding assumptions increasingly resemble those of a closed insurance scheme, despite the LGPS being open, long-dated and, ultimately, tax-backed. The absence of a statutory objective allows this drift to continue unchecked, regardless of value for money or wider public sector affordability. So I ask the Minister: does he see merit in such an objective? If not, how does he believe we can otherwise ensure that the balance between prudence, affordability and fairness is being struck correctly? It is not clear to us how the fund has reached this conclusion, based on the information provided to date.
I turn to my second amendment, which addresses a closely related concern: the absence of effective bench- marking in the valuation of liabilities. It would require administering authorities to publish benchmark liability valuations, based on insurer pricing and gilt-based discount rates, alongside their primary funding valuation. This amendment would not require LGPS funds to adopt insurer pricing, and it would also not impose any particular funding outcome. It simply poses a reasonable and necessary question: why is an open public service scheme so often valuing its liabilities more conservatively than insurers, which actively assume, price and manage longevity and investment risk for profit? I would be grateful for the Minister’s view as to whether that position is genuinely appropriate.
From the most recent valuation cycle, we have seen numerous case studies in which actuarial assumptions appear to value liabilities as though they were safer than sovereign-grade certainty of payment. In one case study that was shared earlier, the councils in question had liabilities measured at gilts minus 0.2%. In another, liabilities were measured at gilts minus 0.1%. We even encountered an admitted body whose cessation basis was funded at gilts minus 2.5%. That single difference in assumption resulted in a £70 million cessation debt were the employer to exit, compared with a £30 million credit if the liabilities were valued on an insurer-aligned basis—namely, gilts flat.
This has direct consequences for the measurement of surpluses, and we know that reported surpluses would be materially higher under less extreme assumptions. In the latter case, the outcome is, in effect, regulatory deadlock. The employer cannot afford a £70 million cessation debt. The regulations do not permit exit on an insurer-aligned basis. Buyout is not permitted. The employer is therefore overfunded, legally trapped, and compelled to continue paying unaffordable contributions.
The LGPS is a long-term open scheme, explicitly linked to investment growth and supported by a strong employer covenant. Earlier today, we discussed the scale of reported surpluses—which are measured on assumptions approaching sovereign-grade certainty. There is a clear tension here, and it merits proper scrutiny.
At present, there is no obligation to show how LGPS assumptions compare with market pricing, no requirement to justify materially higher levels of prudence, and no visibility of the opportunity cost, most notably in the form of higher employer contributions borne by councils, and ultimately by taxpayers. Benchmarking would bring those assumptions into the open, render prudence contestable rather than axiomatic, and strengthen democratic scrutiny of decisions with substantial fiscal consequences.
Even in policy areas far less complex than public service pensions, we readily acknowledge that different measures and benchmarks can produce materially different outcomes. Given the scale, the duration and complexity—
Viscount Younger of Leckie (Con)
My Lords, even with policy areas as complex as public service pensions, we readily acknowledge that different measures and benchmarks can produce materially different outcomes. Given the scale, duration and complexity of the LGPS, it is surely reasonable to expect those comparisons to be made explicit, so I would welcome the Minister’s reflection on that point.
My third amendment relates to the treatment of surplus. In a growing number of funds, funding levels now exceed 150%, yet employer contribution rates often remain high, surplus is not meaningfully released, and employers are sometimes required to inject fresh cash to meet strain costs—even when substantial excess assets are already being held. There is currently no public interest test governing these decisions; as a result, surplus can become effectively trapped, while councils face rising costs and local taxpayers face higher council tax bills.
This amendment would not mandate the release of surplus or weaken member security; it would simply require administering authorities to publish and justify their policy on contribution flexibility and the use of surplus, where funds are materially overfunded, and, crucially, to explain how they have balanced prudence, affordability and the interests of taxpayers. Requiring authorities to give reasons when surplus is retained as a matter of principle is, I believe, a modest step, but it is also a necessary one if we are serious about transparency, proportionality and accountability in the stewardship of public money.
Let me be clear: the 120% funding level refenced in this amendment is not intended to prevent councils or admitted bodies from reducing surplus through lower employer contributions. It is a signalling threshold, one that identifies funds where surplus is clearly material and where policies on its use should be made explicit and open to scrutiny.
I turn to my fourth amendment, which concerns transparency, accountability and actuarial assumptions. Actuarial judgments now determine billions of pounds-worth of public expenditure, yet transparency remains pretty limited. Consistency is weak and changes in assumptions are too often left unexplained. In practice, the actuaries’ view has become decisive but rather opaque; assumptions harden over time, the impact on contributions is insufficiently set out, and there is no clear or consistent standard of proportionality.
I fully accept that the Minister cannot comment on the specifics of a case that he has not seen. However, in the interests of the Committee I wish to share a further example raised with the shadow team by an admitted body within the Local Government Pensions Scheme—and this example is, mercifully, relatively straightforward. That body recently received its valuation results as at 31 March 2025, and the results show the following. Its section of the fund was in surplus, as at 31 March 2022; both the funding level and the surplus in cash terms have increased since then and are larger at 31 March 2025, yet employer contributions are set to increase from 1 April 2026.
Baroness Altmann (Non-Afl)
My Lords, I support these amendments and I have added my name to Amendments 19 and 20, which deal with issues around surpluses and distribution.
There are important issues in all these areas, in particular when there is a surplus and councils are considering how to spend the money that they have under their control or will be receiving from council tax payers. We have to ask: where is the balance of interest between national and local taxpayers? Who picks up the tab if council tax cannot cover the costs of the local authority and its expenditure needs, whether it is on social care, filling potholes, providing housing or whatever? These are vital national services.
It is important when we are discussing this Bill that we seriously consider these issues, because there is a mindset within local government that seems to ignore the principles of accountability, openness and good governance when it comes to their pension funds. I do not quite understand why, but that seems to be the case. In Amendment 18, when we are talking about the use of the LGPS excess funds, I would like to understand whether the Government object to the idea of having a review or a report into whether and how contributions can be reduced or offset against other employer spending needs. What is the balance between prudence, affordability for the employer and the council tax payer interests—and indeed the national taxpayer interests? National taxpayers underwrite the schemes.
On transparency around actuarial assumptions, as the noble Viscount, Lord Younger, said, there is no proper transparency around how any of the assumptions feed through to the conclusion on contributions. Would the Government object to the administering authorities being required to publish statements showing the actuarial assumptions; comparing them between now and previous valuations; providing justification for the changes and for any prudence level; or explaining the impact and showing that they have considered the impact on the various scheme employers? These employers are struggling in the current environment because there is not enough resource to cover the commitments that these important bodies are being required to make.
I hope that the Minister can help the Committee understand the Government’s view on how these pension schemes should be run in future—including, perhaps, a mindset change away from how we have been thinking about them up to now.
Lord Davies of Brixton (Lab)
There is a phrase, “esprit d’escalier”—is that how you say it?—for when you are walking down the stairs and you suddenly think of the thing you wish you had said in a previous discussion. Well, this group of amendments provides an ideal opportunity to avoid that very problem.
I do not want to delay the Grand Committee unnecessarily but I feel forced to say something. In essence, these amendments are fundamentally misconceived. I do not object to these questions being asked, but have the two previous speakers ever looked at a Local Government Pension Scheme valuation report? All the information for which they are asking and more is set out in those reports, in accordance with the professional standard that all actuaries must meet.
It is worth saying that that professional standard is set not by actuaries but by the Financial Reporting Council, which sets technical standards for the actuarial profession. The profession looks after professional standards but technical standards, and specifically what should appear in a valuation report, are set by the Financial Reporting Council, which is not part of the actuarial profession. Obviously, there is big actuarial input, but the final decision is made by the council, and all the information called for by the noble Viscount and the noble Baroness is in those reports. Of course, there may be cases where it does not appear in those reports, in which case that is a case of technical malpractice and the Financial Reporting Council should be told.
Baroness Altmann (Non-Afl)
I apologise for intervening, but I feel that there is a bit of misdescription here. Yes, it is true that Regulation 64, for example, includes this information, but the FRC does not have the authority to insist on these issues being fed through. Indeed, there is non-statutory guidance that seems to override all this. For example, it says that you should not consider changes in contribution rates on the basis of liabilities that have changed due to market changes, so the interest rate environment, which has changed so fundamentally, is supposed not to feed through to the conclusions on contribution rates. That is part of this mindset which, I feel, it is so important for us to try to adjust as we go forward, given the fundamental changes that have happened.
Lord Davies of Brixton (Lab)
I apologise, but I do not understand what the noble Baroness is saying. Actuaries have to comply with these professional standards; any valuation report they produce has to meet them—that is not a question for debate. If a report does not meet those standards, it should be pursued on its merits. To claim that this information is not available is simply untrue: it is there in the valuation reports. I always have problems with the word “transparency”, because to me it looks like something you can see through and you cannot see it, but I take it to mean that a full explanation of the degree of prudence, a wide evaluation of the assumptions chosen, what effect different assumptions would have and the outcome in terms of the contribution rate all have to be set out. They are publicly available.
The second point is that actuaries do not decide on the valuation assumptions; the management committee decides, on actuarial advice, what the assumptions should be. The local, democratically elected representatives take the decisions, including about what the contribution rate should be. We are currently in an odd state where lots of information on the situation is becoming available, but that is because we are at the end of a three-year cycle of valuations. By the end of this year, all these issues will have been resolved. Not everyone will be pleased; it is entirely possible that some admitted bodies will find that their contributions go up. Perhaps they had significant changes in their workforce—who knows? But the mere fact that some contribution rates go up while the overall move is a reduction does not in itself mean that the system is broken.
I find it difficult to understand what exactly these amendments intend to achieve. The information is available, the decisions are made by the local government bodies involved, and they take the decisions based on their democratic responsibility. What more could we want?
Baroness Altmann (Non-Afl)
Perhaps I could assist the Committee. These amendments are asking for a publicly available report that clarifies and sets out all this information on a basis that council tax payers, for example, whose money is being used, can see with clarity: it is provided to them. With all due respect, they will not read the actuarial report, but having a properly set-out review that explains all this clearly, in language that people can understand, would have huge value.
Viscount Thurso (LD)
My Lords, I am sure that my noble friend on the Front Bench will give our view on the generality of these amendments. I have one small question that I want to put to the noble Viscount in respect of Amendment 16.
Broadly, I am in favour of clarity of investment function, and I suggest that any well-run fund has a very clear statement of its objectives that everybody can see. My question is simply about the use of the phrase “risk elimination” in subsection 3(a) of the proposed new clause. This goes to the heart of one of the problems of discussing surpluses and everything else: it seems to me that anybody making investments who is seeking to eliminate risk is in the wrong industry. They really ought to be doing something else, because you cannot have any reward without risk. I humbly suggest that it should refer to “risk appetite”. It is perfectly correct for any set of investing trustees or any fund to have clarity as to the risk appetite that they wish to have to achieve the investment objectives that their pension fund has; I just question the use of the word “elimination”.
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.
Lord Fuller (Con)
In my scheme, and in the one that the noble Lord, Lord Davies of Brixton, talked about, we take pride in what we do—but if only all the schemes did that. The value of these amendments is in taking the best schemes, which set the bar, and making sure that other schemes meet that bar in terms of transparency. Just a few of them doing it is not good enough; we want all of them to be doing it.
Lord Palmer of Childs Hill (LD)
My Lords, I support these amendments because I believe that transparency is good. I will need to address some of the things that the noble Lord, Lord Davies, said. He is right from an actuarial point of view, obviously. He said the decision is made by the council; in fact, it is made by the management committee of that council. The management committee of most councils will consist of councillors who are neither actuaries nor particularly great financial wizards. What happens in practice is that those people on the council’s management committee that is deciding take the advice of its pensions advisers, stockbrokers and actuaries. It happens on that basis. Do they understand it? My general view is that they are swayed by the people who make the arguments to that committee.
So this group of amendments addresses transparency, benchmarking and surplus. To most people, these are technical matters and ones on which the noble Lord, Lord Davies, speaks with great expertise from an actuarial point of view. But the impact on employer contributions and public services is real. Where valuations are materially more prudent than market benchmarks, we need to understand why.
My noble friend Lord Thurso talked about risk appetite. Most local authority pension committees will not have a great deal of appetite for risk. Their idea is that they are custodians of their employees’ pensions and they will naturally fall on the opposite side of taking risk. That is probably quite right. These amendments are a step in the right direction: they are a clearer explanation of assumptions and benchmarks, which strengthens the local government pension schemes by improving accountability and understanding.
Our question is whether the Government and the Minister agree that transparency is a safeguard and not a threat. This is what the amendments talk about—transparency. We need to make it as transparent to the management committees of these pension funds as it can be. That is what these amendments try to do: they would bring this on to a more generalised basis, not just picking the ones that do well in the Orkneys or wherever, but ones that maybe need guidance. Therefore, these Benches support these amendments, and I hope that they see some light at the end of the tunnel.
Lord Katz (Lab)
My Lords, this has been another interesting and wide-ranging debate. I am pleased to see that the horseshoe accord has, to some small measure, broken out again. I must say that I am not as pleased to see the conversion—maybe I am being unfair in characterising it as a Damascene conversion—of the noble Lord, Lord Fuller, and other Members opposite into the prudence of having well-funded local government to provide local services, after the underfunding of local authorities for a fair amount of time. Would that that sentiment had been shown by the Benches opposite when they were on our side of the Committee, but we are where we are.
These amendments show a clear desire to provide greater transparency in the triennial valuation and contributions rate-setting process. I agree it is important that all scheme employers understand how their contribution rates have been set, and members need to have confidence in the long-term sustainability of the fund.
These amendments also show a keen interest in the funding level of the Local Government Pension Scheme and the balance that administering authorities must strike between the long-term sustainability of the fund and affordability to its employers. As a public sector scheme, it is right that we are mindful of the costs to the taxpayer of funding the scheme.
I will address up front why the surplus extraction measures in Clauses 9 and 10 do not apply to the LGPS, to avoid confusion. The LGPS already has a triennial valuation process where contribution rates for employers are set. This is effectively a point where surplus extraction can take place, as this is where contribution rates can be reduced in response to an improvement in the funding level. As we will come on to later, there is also an interim contribution review process for employers who find themselves in difficulty. Therefore, an additional surplus extraction process is not required.
Furthermore, I urge caution in viewing surpluses in the LGPS as a potential windfall or as a means of managing broader revenue pressures for scheme employers. As in all defined benefit schemes, surpluses are maintained to absorb future shocks, manage demographic risk and ensure that promises made to members are kept. Poor decision-making can now lead to higher costs for future generations of taxpayers.
For context, the 2025 valuation will conclude in a few weeks, as we have discussed, with employer contribution rates set for April 2026 onwards. Following this, the Government Actuary’s Department, under Section 13 of the Public Service Pensions Act 2013, will undertake a review for the Secretary of State of all fund valuations, on whether compliance, consistency, solvency and long-term cost efficiency in the scheme has been achieved. Under usual timeframes, the report will be published in mid-2027.
Although I appreciate that the Committee is concerned about rising surpluses in the scheme, it surely cannot be right that we make amendments that would have a material impact on future valuations without having a full review of the outcomes of the 2025 valuation. It is anticipated that there will be reductions in contribution rates for many employers from April, and we need to take account of how the current system has coped with the significant changes in market conditions since that 2022 valuation—we discussed that on both this and the previous group—before making changes to the valuation process.
The LGPS is a locally administered and managed scheme. It is administering authorities that are responsible for managing their surpluses through employer contribution rate changes, and for working with their actuaries to set appropriate assumptions as part of the valuation. Authorities are required under government regulations to provide valuation reports to employers to support them in their longer-term financial planning. So we must consider whether it is right for the Government to exert a more significant level of influence over the setting of contribution rates through these amendments, and whether this is compatible with local accountability.
It is right, in a locally managed scheme, that funds are able to set their own approaches to stability and prudence, reflecting both the needs of employers in understanding their medium-term financial obligations and the different risk profiles of their investments. The balance of these is key to delivering the intergenerational fairness mentioned by noble Lords opposite, particularly the noble Viscount, Lord Younger—and indeed we all want to see that.
On transparency, revised statutory guidance on the funding strategy statement, which all LGPS funds must publish, was issued by the scheme advisory board on behalf of MHCLG in January 2025. Under this guidance, administering authorities should consult all employers in the fund on their funding strategy statement, which should outline how administering authorities will manage surpluses and deficits, outline the approach to contribution rate stability, and summarise the main actuarial assumptions used at the valuation.
Amendment 16 would require the Secretary of State to set a statutory funding objective for LGPS funds, including considerations for administering authorities, setting their funding strategy and contribution rates. There is already detailed guidance on how funds should manage surpluses and deficits in their funding strategy, but, as locally managed schemes, it should be for administering authorities to consider how to strike the right balance in setting the contribution rates, with appropriate considerations of prudence and the long-term sustainability of the scheme and contributions. Furthermore, a funding objective would still require a degree of interpretation and so would not provide the clarity that the noble Lord seeks to achieve with his amendment.
In 2020, the Supreme Court found that LGPS money is not, in fact, public money, but that it belongs to its members, which further justifies why a statutory funding objective is not appropriate for the scheme.
Amendment 17 would require fund valuations to be benchmarked against insurer and gilt-based pricing, with a report laid before the relevant local authority. The triennial valuation and contribution rates-setting process is already a robust and collaborative process between administering authorities, actuaries and employers. Many authorities already follow best practice in consulting scheme employers alongside the contribution rate-setting process. This gives employers the opportunity to challenge contribution rates and consider whether they are sufficiently stable, or whether excessive prudence is built in.
Statutory guidance already sets out that funds should publish the actuarial assumptions used as part of the funding strategy statement. The noble Baroness, Lady Altmann, referenced the role of the Financial Reporting Council in the valuation. The valuation reports, which are publicly available, will include Financial Reporting Council compliance statements that technical actuarial standards have been complied with. In addition, I have already raised the Section 13 report by the GAD, which reviews the fund-level actuarial valuations. As part of the review into the 2022 valuation report, for example, when assessing consistency, there was a review of assumptions, including the discount rate.
Finally, this amendment points to a perceived excessive risk aversion undertaken by the LGPS. This is not an accurate characterisation. In fact, around three-quarters of LGPS assets are invested in return-seeking assets, vastly outweighing the equivalent figures in private schemes, which are heavily geared towards matching assets.
Amendment 18 would require administering authorities to publish and justify their approach to the treatment of surpluses over 120%. First, we must consider if this is the level that we would wish to set in the context of the LGPS. Elsewhere in defined benefit schemes, the Government are considering the funding threshold for surplus release, and there has already been consideration of what this would be. But we must remember that the valuation process already provides a route to return surplus to employers, which allows for changes every three years, whether or not a threshold—whatever it is—has been met.
Furthermore, each valuation is prepared on a local basis, meaning that the funding level will depend on the discount rate set. The discount rate converts the value of future benefits to a current value so it can be compared to the current value of assets; it is used to determine the employer contribution rate required to pay future benefits. It is based on the assumed future returns of the individual fund’s investments, taking into account the portfolio of assets held by the fund, the demographic profile of its members and its attitudes to risk. That means that a funding level of 120% in one fund will simply not be comparable to that of another if the discount rates applied are significantly different.
I think that the Committee will surely agree that the purpose of a buffer is to provide a surplus in well-funded times and guard against a fall into deficit in more challenging times. As a locally managed scheme, it is for the funds, not for the Government, to decide what the right level of surplus is. Introducing these additional reviews and requirements would risk undermining the valuation process and the locally managed nature of the scheme.
On Amendment 19, we had an interesting discussion on transparency—certainly transparency and accessibility is something that we should all seek. I appreciated the discussion between my noble friend Lord Davies and the noble Baronesses, Lady Altmann and Lady Noakes, on the accessibility of the actuarial statements. Maybe I would say this, but I thought that my noble friend put up a good defence of the professional standards that actuarial firms set themselves with regard to matters of accessibility.
I appreciate that the intent of Amendment 19 is to increase the transparency of actuarial valuations for all scheme employers and for members of the public. In addition to the requirements that I have already mentioned, regulations also require the administering authority to publish and send copies of any valuation, report or certificate made under Regulation 62, or Regulation 64, to all employers. I do not recognise that as limited transparency, but I concede that there is scope for greater visibility—and that is something that we should always seek to pursue. While there is scope to look at whether these publications could be made easier to understand for employers, that should be considered in the round—I suggest following the conclusion of the 2025 valuation.
The noble Viscount, Lord Younger, asked me to comment on his example of valuations increasing despite surpluses, and I would say that there is a robust valuation process in place into which employers feed. We must wait for completion of the scheme valuation and its formal result—but if this is the case as set out by the noble Viscount, the Government Actuary’s Department will review the results in the valuation under regulations in Section 13.
The noble Lord, Lord Fuller, asked about funds not using a discount rate that is more prudent than a gilt basis. I have already talked about the wider inaccurate characterisation of excessive risk aversion, but at this point I add that the LGPS is a funded scheme with diversified assets and its discount rates are set by fund actuaries on a scheme-specific, prudent basis that reflects long-term expected returns. The valuations are reviewed nationally by the GAD on compliance, solvency and long-term cost efficiency. Without the results of the 2025 valuation or the Section 13 review, we cannot say for certain what the current approach is, taken across all funds.
Viscount Younger of Leckie (Con)
I thank the Minister for his remarks and explanations. I will look carefully at his replies in Hansard, given the technical nature of the debate—in fact, I think it is fair to say that about all the debates we are having. In closing, I emphasise that these amendments are united by a single, simple concern that decisions of very large fiscal consequence are being taken within a framework that we believe lacks sufficient clarity, transparency and accountability. It has been helpful to have this debate, and I hope that view is shared by those who have contributed, particularly on this side of the Committee.
I will pick up on a number of points. I am grateful for the support of the noble Lord, Lord Palmer, and the noble Baroness, Lady Altmann, for these amendments. It is fair to say that they have had slightly more lukewarm support from my noble friend Lord Fuller, but I appreciate his thoughtful comments, particularly on Amendments 18 and 19. Again, we will look carefully at his responses in Hansard.
I am of the opinion that at my peril do I get caught between the opinions of the noble Lord, Lord Davies, and the noble Baroness, Lady Altmann. I listened carefully to the exchange about the quality of reports. My noble friend Lady Noakes made the very good point that it is important to have reports that are full of clarity and are understandable to those who are new to this or do not understand it. As the noble Lord, Lord Davies, said, some reports may be very clear to read, but reports vary, as my noble friend Lord Fuller rightly said. It is an important point to raise.
The noble Viscount, Lord Thurso, made a very fair point about subsection (3)(a) of the proposed new clause in Amendment 16, picking up on the description of risk elimination and seeking to change it to risk appetite. I might even add a third one: risk minimalisation. That is probably the wrong term, but it is a serious point. It may be that the term I have used, risk elimination, is the right one but refers to minimal risk. He made a very fair point which I will take away.
To conclude, the Local Government Pension Scheme is open, long-dated and underwritten by the public sector. Yet we believe that, over time, the practice has drifted towards assumptions and behaviours more consistent with a closed insurance arrangement, often without those choices being clearly articulated or justified. When prudence becomes the default, rather than a consciously chosen balance, the costs fall quietly but heavily on employers, taxpayers and local services.
Therefore, if the Government believe that the current framework already achieves that balance, explaining why would be valuable—this debate has been valuable as far as it has gone. If not, I suggest that these amendments offer a measured and constructive way of restoring discipline, transparency and trust in a system that matters enormously, I believe, to local government and to taxpayers alike. However, for the moment, I wish to withdraw my amendment.
Baroness Stedman-Scott
“Interim reviews of employer contribution rates in the Local Government Pension Scheme(1) The Secretary of State must by regulations made under section 3 of the Public Service Pensions Act 2013 (scheme regulations) amend the Local Government Pension Scheme Regulations 2013 (S.I. 2013/2356) as follows.(2) After regulation 58(4), insert—“(5) The funding strategy statement must comply with regulation 64A(2) and be published in a form accessible to non-specialist readers.”(3) Regulation 64A (revision of rates and adjustments certificate: scheme employer contributions) is amended as set out in subsection (4).(4) For paragraphs (1) and (2), substitute—“(1) The administering authority may obtain a revised rates and adjustments certificate where the funding strategy statement sets out the administering authority’s policy on revising contributions between valuations and one or more of the following conditions is met—(a) there has been a significant change in the liabilities arising or likely to arise since the last valuation;(b) there has been a significant change in the employer’s ability to meet its obligations to the Scheme, consistent with that employer’s obligations to deliver value for money and services for local taxpayers;(c) the employer requests a review and agrees to meet the reasonable costs of that review.(2) The funding strategy statement must include a clear and accessible policy on revising contributions between valuations, including—(a) the process and evidential requirements for employers to request a review,(b) indicative timescales for the administering authority to determine such a request,(c) the criteria the administering authority and fund actuary will apply (including risk appetite and prudence levels), and(d) the approach to apportioning reasonable costs of any review.(2A) Where an employer makes a request under paragraph (1)(c), the administering authority must—(a) acknowledge the request within 10 working days,(b) determine the request within 12 weeks (or such longer period as is agreed with the employer), and(c) provide written reasons for its decision.(2B) For any review under this regulation, the fund actuary must prepare an Actuarial Methods Statement which— (a) explains, step by step, the models and methodologies used to project liabilities, assets and funding needs,(b) sets out all material assumptions, including discount rates, inflation, salary growth, mortality, longevity improvements and any smoothing or damping mechanisms,(c) specifies the level of prudence applied and how that prudence has been determined, and(d) provides sensitivity and scenario analysis showing potential outcomes under varying market conditions and employer covenant assessments.(2C) The administering authority must publish the Actuarial Methods Statement alongside the decision under paragraph (3)(c), subject only to the redaction of information which is commercially sensitive or relates to individuals. (2D) The Secretary of State must issue statutory guidance on—(a) how councils and other employers may make requests under paragraph (1)(c),(b) the matters administering authorities should take into account when considering such requests, including the balance between Scheme solvency and local taxpayers’ interests in the continued delivery of core services, and(c) the minimum standards for actuarial transparency under paragraph (5).(2E) Administering authorities must have regard to guidance issued under paragraph (6)(a).(2F) The Secretary of State must publish the guidance within six months of the day on which this Act is passed and keep it under review.””Member’s explanatory statement
This new Clause aims to strengthen Regulation 64A of the Local Government Pension Scheme Regulations 2013 to make interim reviews of employer contribution rates more accessible and transparent.
Baroness Stedman-Scott (Con)
My Lords, I hope the Committee will forgive me for the length of this amendment, which is tabled in my name and that of my noble friend Lord Younger of Leckie.
Despite its length, its purpose is in truth a simple one. It seeks to ensure that the provision for interim reviews of employer contribution rates under the Local Government Pension Scheme is not merely available in theory but genuinely usable in practice. At present, while the regulation allows interim reviews, the circumstances in which they may be triggered are so narrowly framed and so conservatively interpreted that many employers find them effectively inaccessible. The consequence is that contribution rates can remain detached from the financial reality and workforce profile for prolonged periods, even when there has been a clear and material change in circumstances.
I will not revisit the funding position of individual schemes, but it is important to note, once again, how sharply the position of the Local Government Pension Scheme has changed. Recent low-risk analysis shows the scheme moving from around 65% funded in 2022 to significant and sustained overfunding in 2025, with all funds now above 100%. That shift has clear implications for contributions. Even on prudent assumptions, implied future service rates are far below the roughly 21% that employers currently pay, at a cost of around £9 billion a year.
The difficulty is that the formal valuation process is not designed to respond quickly to changing circumstances. In this case, the 2025 valuation cycle in a number of cases has already concluded. As a result, councils now face contribution rates based on assumptions that no longer reflect current financial conditions, with no realistic prospect of adjustment through the normal valuation timetable. In those circumstances, the interim review mechanism becomes the only viable route to a fair and proportionate outcome.
Valuations are infrequent by design, but financial reality does not always conform to that schedule. Where there has been a material change in funding position, workforce composition or employer risk, interim reviews are intended to act as a safety valve, allowing contribution rates to be reassessed before costs are locked in for years at a time. In practice, however, access to that mechanism is so constrained that it often fails to perform the role it was created to serve. For that reason, although previous amendments address the deeper structural drivers of the current contribution pressures, I will turn to the interim mechanism.
The proposed new clause before us does not change the intent of the law. It seeks only to ensure that the safeguards Parliament has already provided can be used effectively by councils whose contribution rates may no longer be justified by the scheme’s underlying financial position. Specifically, it strengthens Regulation 64A of the 2013 regulations by addressing the practical barriers that councils face when seeking a review. It clarifies when a review may be requested, requires funds to set out clearly how requests are made and assessed, introduces transparency around the actuarial assumptions and underpinning contribution rates, and promotes greater consistency through statutory guidance.
Taken together, these changes do not weaken prudence or undermine solvency, but they make the process intelligible and navigable for the employers expected to engage with it. The underlying problem, therefore, is not that councils lack the right to request an interim review but that they lack a realistic means of exercising that right. Processes are unclear, evidential thresholds are opaque, and actuarial models are often presented in ways that make meaningful engagement extremely difficult.
In those circumstances, Regulation 64A functions less as a practical safeguard and more as a theoretical reassurance. That matters, because the financial consequences for councils are immediate and real. Pension contributions represent a significant and growing share of local authority expenditure. When contribution rates remain misaligned with financial reality, they absorb resources that would otherwise support front-line services. Yet councils remain fully accountable to local taxpayers for their financial decisions, even when the assumptions driving those costs are neither transparent nor consistently applied. The result is a system that undermines sound financial management at precisely the moment when many authorities are already under severe strain.
This brings us directly to the statutory duties that already rest on local government. Section 151 of the Local Government Act 1972 requires every authority to appoint a Section 151 officer, typically the chief financial officer, who bears personal responsibility for the proper administration of the authority’s financial affairs. These officers are legally obliged to ensure that expenditure is lawful, prudent and sustainable, and that duty does not stop at pension cost. Where long-term liabilities appear misaligned with risk, or where contribution volatility threatens service delivery, it is entirely reasonable that a Section 151 officer should be able to seek closer scrutiny through an interim review.
If such an officer believes that the assumptions underpinning contribution rates warrant examination, the system should enable that scrutiny rather than obstruct it. This clause does not ask actuaries to abandon prudence or funds to compromise solvency; it simply ensures that those charged with financial stewardship are given the transparency and procedural clarity necessary to discharge their existing legal responsibilities. Indeed, this is the most significant change made by the amendment. It clarifies the trigger conditions for an interim review by amending the second condition so that an employer’s ability to meet its LGPS obligations is assessed in a way that is consistent with its statutory duties to deliver value for money and to maintain services for local taxpayers.
At present, actuarial assessments tend to treat local authorities as possessing an effectively risk-free covenant, on the assumption that central government would ultimately step in to prevent failure. As a result, actuaries are understandably reluctant to accept that a council might be unable to meet its pension obligations, and contribution rates are set on the basis that payment is in practice guaranteed. However, that assumption does not reflect the financial reality facing local government. The strength of a council’s covenant is not unlimited; it is ultimately constrained by its local tax base and its legal obligation to balance its budget. Councils cannot borrow indefinitely to meet pension costs, and they also cannot insulate those costs from their wider responsibilities to residents.
This amendment would require the actuarial assessments to recognise that balance. Prudence must not operate as a one-way ratchet, where contribution levels can only ever rise or remain elevated, regardless of changing circumstances. Instead, prudence must be weighed alongside councils’ duties to local taxpayers, while continuing to protect and secure the benefits of scheme members. In short, this change does not undermine member security but simply ensures that assessments of affordability reflect the real-world constraints under which councils operate rather than an abstract assumption of unlimited state backing. The law already allows interim reviews in principle but, in practice, the system makes them inaccessible. This proposed new clause would close the gap, clarify the rules, improve transparency, introduce consistency and strengthen accountability, ensuring that interim reviews function as a real safeguard rather than a theoretical one.
Baroness Altmann (Non-Afl)
My Lords, in speaking to my Amendment 20A, I shall also speak in support of Amendment 20, to which I have added my name. I thank the noble Baroness, Lady Stedman-Scott, for both her clear exposition and her support for my amendment.
Amendment 20A seeks to benchmark the Local Government Pension Scheme’s employer contributions rather than just the liabilities. It asks the LGPS to
“report publicly the employer contribution rates being paid by each scheme and establish a benchmark for employer contribution rates”
as a proportion of, for example, salary. It also asks the LGPS to
“collect and publish data from each local authority council employer in the scheme, to report the percentage of council tax receipts that are represented by employer pension contributions”.
I have struggled long and hard to compile some information that would give us a picture, across local authorities, of what proportion of council tax receipts is spent on pension contributions in each area. I have to say that I ended up coming back to a national average, because that was the only figure that I could readily find.
I thank Steve Simkins at Isio, who told me about a council where the actuarial valuation implied an employer contribution of zero but the council was asking for a 15% contribution anyway. Unless you have a benchmark for this kind of information, you would not know it. Before the noble Lord, Lord Davies, asks me about this, let me say that I will have to seek permission to let him know which council it is; if I am able to do so, I will, of course.
The Minister and the noble Lord, Lord Davies, have suggested that those of us who are laying these amendments are somehow concerned about the surpluses. I do not believe that there is concern about the surpluses; the concern is around how the surpluses are dealt with. We have concerns that there have been significant overpayments, amid pressure on both local and national taxpayers, while urgent local and national expenditure has had to be either cut or not made, and while councils remain underfunded and government borrowing keeps rising. Those are the consequences of not allowing the surpluses to feed through to the expenditure on the employer contributions—and that, I think, is the concern that this suite of amendments is trying to address.
When we are talking about these pension schemes, we are talking about a funding level that is an estimate. The assets make no allowance for future returns, for example, even though they are invested to earn future returns, as would be expected of any long-term investment. However, the liabilities fully build in assumptions— expectations—of what the future liabilities will be over the very long term. The money for the contributions is required now and has to be paid today, but a one-year or two-year cessation of extra contributions surely does not undermine a scheme that is already overfunded for the next 50 years, never mind the next two years. And of course it can improve local well-being.
I hope that the Minister will consider accepting these amendments on the basis on which they are proposed, which is in seeking not to cause problems but to help both local and national funding. Yes, it is true that local authority employers pay varying percentages of salary into the different schemes, but it would help the public and councillors themselves to have some kind of comparison of the rates that they are paying and of the funding level of the scheme and the implications that that might have for future funding, rather than to continue with the current range. I am told that councils such as Avon pay rates of between 15% and 40%, depending on the employer, into a scheme that, based on all conventional funding measures, does not require that money at this time.
Baroness Scott of Bybrook (Con)
My Lords, I declare my interest as a vice-president of the Local Government Association and of the National Association of Local Councils. I support my noble friend’s Amendment 20. I do not intend to relitigate the arguments that have already been so clearly set out, but I wish to underline how pressing this issue becomes in the context of local government reorganisation.
Local government reorganisation introduces a level of structural uncertainty that pension schemes are simply not designed to absorb without flexibility. In particular, the costs facing pension schemes will not be ring-fenced during the LGR. In those circumstances, it is not inevitable that administrating authorities will respond with increased prudence. If so, does that not risk higher contribution rates being locked in? This would not be because of deteriorating fundamentals, but because of the uncertainty created by this Government.
There is also a timing problem. We do not yet know when the LGR will take place. It may well fall outside the actuarial valuation window, which would make access to interim contribution reviews not merely helpful but essential. Without them, schemes and employers can be left operating on assumptions that no longer reflect the reality of the structures beneath them.
I would also be grateful if the Minister would clarify the position on valuation cycles. In 2025, we did not set contribution rates for a three-year period. We face the very real prospect that some councils, whose rates are now being set, may not even exist by the time the next triennial valuation takes place.
This leads me to funding strategy statements. In the Minister’s view, have councils been given sufficient guidance from the Government to prepare these statements appropriately in the context of the LGR? These documents underpin long-term funding assumptions, yet many authorities are being asked to draft them without clarity on their future form or boundaries.
Finally and critically, the treatment of assets and liabilities following reorganisation must be handled with absolute care. Ensuring that these are carved up fairly and accurately post-LGR is vital to maintaining confidence in the system. That process must be demonstratively independent, transparent and robust, not left to negotiation under pressure.
Amendment 20 seeks not to obstruct reform but to ensure that, during a period of structural upheaval, pension schemes are not forced into unnecessary rigidity, excessive prudence or long-term misallocation of risk. For these reasons, I strongly support the principle behind the amendment.
Lord Fuller (Con)
My Lords, I rise ahead of the noble Lord, Lord Davies—perhaps he can follow me and say how much he agrees with me this time. I support my noble friend’s Amendment 20 and will echo some of my noble friend Lady Scott’s points. Although promises made to members, once earned, are inviolate, the costs fall on the local taxpayer and employees, based on regular re-evaluations. These re-evaluations come thick and fast, rather like painting the Forth Bridge: once you have completed one, you start the next. I strongly support my friends in advancing the new clause, because it would place interim reviews on a statutory basis. However often and regularly they come, there will always be exceptional circumstances where a valuation is needed.
Like my noble friend Lady Scott, I think that structural change is an obvious circumstance where an interim review is not just needed but required. I will give an example. Local government workers can retire early on a full pension, having attained the age of 55, if they are made redundant on efficiency grounds. Local government reorganisation is nearly always, automatically, retirement on efficiency grounds. I estimate these strain costs, to be borne by the employer and local taxpayers, to be in excess of £1 billion, and we know that none of these figures have been taken into account in any of the financial analysis that the department has relied on to advance its plans for local government reorganisation.
That aside, the extreme turbulence caused by a comprehensive LGR—not just the odd county here or there but a comprehensive LGR by 2028—may require an interim review of employers’ rates, because of the different styles of councils being rammed together, as I explained earlier: operating versus outsourced. Without a reworking, schemes and employers could be operating not just on assumptions that no longer reflect the reality but on councils that do not even exist any more.
Administering authorities are being left in limbo as it is, so there must be at least the option to recalibrate the treatment of assets and liabilities following the reorganisation, representing a new landscape. This is important, as the noble Baroness, Lady Altmann, said, partly because of such a dramatic variation between the contribution rates of particular employers. But I do not agree with her reasoning because, as I tried to say on an earlier group, this is important because you cannot have one employer cross-subsidising another. I know it is not my role to debate the noble Baroness—that is for the Minister—but I seek to be helpful on this. The contribution rates have to bear in mind all the variabilities from one employer to another. There is a world of difference between a charity that is nearly bankrupt, for which the contributions are payable at that point, and a large tax-raising council with many thousands of employees to jam-spread the contributions over.
That is why it is proper that there are these variations; they are there for a good reason. Unfair as it may seem, that is the arithmetic. Otherwise, we end up with the moral hazard of the weakest employers, with the poorest covenant strength, going bust and everybody else having to pay for it. I realise that is not entirely encompassed by Amendment 20, but I wanted to respond to the noble Baroness because I have been in this situation in a fund of which I am a trustee, and that is what we had to do.
Baroness Altmann (Non-Afl)
I just wanted to say that I completely agree with my noble friend. All these amendments are asking for is a level of transparency that we do not currently have. Obviously, if an employer needs a different contribution rate from another one, we would not expect everybody to pay the same rate. But at the moment, I do not think the general public know what the rates are—and I am talking only about rates for local authorities, not for the charities and so on; it is up to them whether they produce that. If you look at Amendment 20A, it is talking about the local authorities specifically rather than the other employers in the scheme.
Lord Fuller (Con)
I was coming to a conclusion anyway, so I will not detain your Lordships any further. I have made the points that I wanted to make.
Lord Davies of Brixton (Lab)
At the risk of receiving a glare from my Whip, I feel I have something to contribute to this group as well.
I will first make a general point. If noble Lords and noble Baronesses are going to quote specific examples, we need chapter and verse in order to understand what is happening. If we are just given figures, we are meant to absorb and draw some conclusion from them, which is not possible; we need to know chapter and verse of any examples that noble Lords quote so we can analyse and see what is really going on in that particular case. I have to say that my assumption is that, with all the examples we have been given, there is a readily available, understandable situation, and somewhere along the line there has been a failure of understanding.
On Amendment 20, my question for the noble Baroness, which she sort of answered, was: why is this amendment required? I think we were told that it is all too difficult, but of course it is not all too difficult. There is a big example: the London Borough of Kensington and Chelsea, which has a Conservative-controlled council, earlier this year made an interim change in its contribution rate to zero because its investment policy had been so successful. It is worth noting that it has a very successful investment policy and it is one of the smallest local government funds—something to bear in mind during the other debates on the Bill.
There is a question: how often should you undertake a valuation? There is a strong argument for three years because that provides some level of stability to the council’s finances. You have to remember that, over the last year or two years, a council may be paying too much or it may be paying too little, but that is not money down the drain; it either goes into the fund or does not, and it will be available or not available at the end of the three-year period. The money does not disappear if contributions are up, and it will be reflected in the future contributions that that council will pay.
I am also concerned that of course an employer will seek a review when it thinks its contribution is going to go down. I bet it will not seek a review if it thinks its contribution is going to go up, which provides exactly the sort of ratchet effect that the noble Baroness said she wanted to avoid. So it would be perfectly practical to do a valuation every year with the strength of the computers we have available now. It a long time since the day when I had to sit at a large square sheet of paper and do all the figures by hand: you just run the computer and there are the figures. I am sure the consulting firms will be happy to get all the additional fee income, but does it actually produce the advantages that we are told will be achieved through this amendment?
I note the points made by the noble Baroness, Lady Scott of Bybrook. I think it is a very valid point. It is a shame that whatever the local government department is called nowadays has not been involved with the Bill; it could have brought some perspective to where we are.
On Amendment 20A and benchmarks, I draw the attention of the noble Baroness, Lady Altmann, to a regular report from a group whose name I shall not get right—but there is a national group of local government pension schemes. Following each valuation, it produces a detailed report providing all the information she asks for. Again, the information is available. She is asking for this information, when it is already easily available online. On my iPad, I can look up all the information which it is being suggested is being hidden away. The importance of the Local Government Pension Scheme is obvious, and obviously there should be transparency, but the idea being promoted that we do not know what is going on in these funds is gravely unfair to the pension schemes concerned.
Lord Katz (Lab)
My Lords, I shall now respond to Amendments 20 and 20A. I am grateful to the noble Viscount, Lord Younger of Leckie, and the noble Baronesses, Lady Stedman-Scott and Lady Altmann, for tabling them. Amendment 20 seeks to revise the existing LGPS regulations to make it easier for employers in the scheme to request interim reviews of contribution rates. I welcome the intention to increase flexibility in how surpluses in the LGPS are treated, but it is crucial for any flexibility to be underpinned by robust safeguards to protect the long-term funding position of those funds. It is important, equally, to make the distinction between how surpluses are treated in the LGPS scheme and in other defined benefit schemes. At the risk of repeating my words on the previous group, within other defined benefit schemes, trustees can choose to release surplus where scheme rules allow. Clauses 9 and 10, which we cannot wait to get to, will increase that flexibility.
In the LGPS, the triennial valuation process already ensures that contribution rates are reviewed every three years and enables withdrawal of surplus through reduced contribution rates where it is prudent to do so. The interim review process is available as an additional mechanism to allow scheme employers, particularly those at risk of exiting the scheme, to seek lower contribution rates between valuations. Interim reviews may take place if it appears likely to the administering authority that the liabilities have changed significantly since the last valuation, if there has been significant change in the ability of employers to meet their obligations or if the employer has requested a review.
I welcome the call from noble Lords opposite to make interim reviews easier to understand and more transparent. I agree that regulations on interim reviews require revision, including on these points. Indeed, the department has already stated this in a letter to administering authorities—that was in March 2025. I understand the point that the noble Baroness, Lady Stedman-Scott, was making about the vicissitudes of the market and other changes that occur. Without wishing to be overly sarcastic, we could posit having reviews on an almost continual basis to try to anticipate market movements, changes in demographics or other external shocks. I am not for a minute suggesting that that was the intention behind the amendment, but it proves the point that, if we are going to break up the cycle of valuation, when and how we do it is a question for further debate. That possibly addresses some of the points that the noble Baroness, Lady Scott of Bybrook, was making as well. It is important that any changes to regulations are properly considered and avoid unforeseen consequences.
Baroness Scott of Bybrook (Con)
The reorganisation is very different from the day-to-day running of the local authorities. Once they are reorganised, it will calm down and balance out again. But what worries me is whether the Government are working with local government pension schemes on the impact of these changes. If not, why not and will they do so?
Lord Katz (Lab)
Actually, the noble Baroness, Lady Scott, anticipates this, which is actually useful on the point that my noble friend made. I will come to that in a second. I was just about to say that of course we are aware. I am afraid that the noble Baroness was not in her place when we discussed local government reorganisation in the first group, earlier this afternoon in Committee.
Actuaries are aware of the local government review and the potential impact on contribution rates. In response to this, actuaries could have a number of options. They could calculate a harmonised contribution rate for the new unitary authorities proposed, set out a path to target harmonised contribution rates if desired or continue to treat them separately and do a contribution review when the local government reorganisation position is clearer.
This is probably as good a point as any to reassure my noble friend Lord Davies of Brixton, whose mastery of technology never fails to impress: my colleagues from the MHCLG very much support the DWP on this Bill and we are working collectively on elements that relate to the Local Government Pension Scheme; so do not worry about that.
It is important that any changes to regulations are properly considered and avoid unforeseen consequences. The views of employers, funds and others within the sector are a vital part of this process, and making amendments to this Bill would prevent the sector and scheme employers from having their say on whether the change will work for them. The department has already committed to launching a consultation this year, which will cover the full range of issues with the current rules.
Amendment 20A, tabled by the noble Baroness, Lady Altmann, seeks to benchmark Local Government Pension Scheme employer contributions on an annual basis. I recognise the noble Baroness’s desire to increase transparency on employer contributions and to set them in a wider context, including council tax. LGPS funds are already required to publish a valuation report and a rates adjustment certificate following each valuation. This certificate sets out the employer contribution rates as a percentage of pay to be paid by each employer in the fund in each of the three years of the valuation period. Employer contribution rates are set locally and vary widely across the scheme, depending on the funding level of the fund and the covenant of the individual employer. It is not appropriate to set a benchmark for employer contributions for funds as this would compromise local accountability.
I will come on to talk a little about council tax rates and contributions, because they have been mentioned by many noble Lords. Before that, I repeat the point I made in the previous group. I am afraid that the amendment seems to neglect the fact that 50% of LGPS employer contributions are paid by employers that are not local authorities, so we cannot focus on just council tax as the be-all and end-all.
However, those local authority employers do make up half that funding. Those local authority employers in the LGPS meet the cost of employer contributions from their total income, of which council tax is only a proportion. It varies considerably among different councils across the country, depending on their other sources of income, which are myriad. They include business rates, grants, Section 106 contributions and CIL. They can include any income gained from other charges and levies, whether parking or licensing. The list goes on. I defer always to the noble Lord, Lord Palmer, and his decades of experience on my next-door council, Barnet. He and noble Lords in the Room will understand the wide range of income sources that councils have.
Baroness Stedman-Scott (Con)
My Lords, I thank all noble Lords who have contributed to the debate on these amendments; I also thank the Minister for his response. I thank in particular my noble friend Lady Altmann for both her amendment and the way in which she explained it. Her expertise, track record and knowledge of this industry are second to none; I know that others in the Room are equally in that position.
My noble friend Lady Scott made a very important point about local government reorganisation, which is bound to have an impact on pension schemes. The question that she asked on financial statements was pertinent.
I have been intrigued to watch the relationship between my noble friend Lord Fuller and the noble Lord, Lord Davies of Brixton, develop. I am sure that it will become even more interesting as the Bill carries on. I can tell the noble Lord, Lord Davies of Brixton, that we have chapter and verse on the information to which we have referred today; where we are able to share it, we will do so.
The Minister made the important point that the markets change; the skill is in knowing at what point to intervene and review matters, but it is important that we have the right process and framework in place to do so.
In closing, I reiterate that this amendment is ultimately about making the system work as Parliament intended. Interim reviews exist on the statute book for a reason. They are meant to provide flexibility where circumstances change materially between formal valuations, and to prevent contribution rates becoming detached from economic reality. Yet where a safeguard exists in law but cannot be exercised in practice, it ceases to be a safeguard at all.
This amendment seeks not to weaken the Local Government Pension Scheme or to second-guess actuarial judgment but to ensure that prudence operates as a balanced discipline rather than an inflexible default. Where funding positions have strengthened significantly and where contribution rates place growing pressure on local services, it is reasonable that employers should be able to access a clear, transparent and intelligible process to seek reassessment. Clarity matters here. Councils are legally required to manage their finances prudently, deliver value for money and protect essential services for local taxpayers. They cannot discharge those duties effectively if contribution-setting processes are opaque, thresholds are unclear or review mechanisms are practically out of reach.
This amendment would simply align pension governance with those existing statutory responsibilities. It would make explicit how interim reviews may be requested, how they will be assessed and on what basis assumptions will be scrutinised. In doing so, it would strengthen confidence that decisions affecting billions of pounds of public expenditure are being taken proportionately, transparently and in full recognition of the real-world constraints under which councils operate. In short, it would turn a theoretical right into a usable one and restore the balance between member security, financial sustainability and the proper stewardship of public funds. That, I suggest, is not unreasonable but a modest and responsible objective. With that, I beg leave to withdraw my amendment.
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, before we move on, I say that we would like to finish the next group by 8.15 pm, which is when we need to wind up. I would hate to think that we broke mid group.
Clause 8: Interpretation of Chapter 1
Amendment 21
“(h) ensuring activities follow the relevant laws and regulatory rules;”Member’s explanatory statement
This is a probing amendment. It expands the definition of “management” of local government pension scheme funds and assets to test whether the Bill adequately reflects the full range of responsibilities involved in administering pension assets and seeks clarification from Ministers as to whether the Bill as drafted sufficiently captures these aspects.
Viscount Younger of Leckie (Con)
My Lords, in response to the noble Lord opposite, I can confirm that my opening remarks will be relatively short. Amendments 21 and 22, tabled in my name and that of my noble friend Lady Stedman-Scott, are largely probing amendments, directed not at altering the policy intent of the Bill but at testing the completeness of the framework that it sets out.
Clause 8 is an interpretation clause. It defines what is meant by the management of Local Government Pension Scheme funds and assets for the purposes of this chapter, and it does so by listing a number of illustrative activities. As drafted, those activities focus primarily, though not exclusively, on investment decision-making—that is, buying and selling assets, setting asset allocation, establishing pooled vehicles, selecting investments and so on. We fully accept that the clause makes it clear that this list is non-exhaustive. The phrase “include (among other things)” is well understood. None the less, what appears in a Bill still matters. It signals what Parliament understands to be central to the concept being defined and it shapes how subsequent powers are interpreted, exercised and defended. That is the purpose of these amendments.
Amendment 21 would make it explicit that “management” includes ensuring that activities comply with relevant laws and regulatory rules. Amendment 22 would similarly make it explicit that “management” includes handling risks, including how they are identified, assessed and kept under review. Neither amendment seeks to impose new duties or redefine existing obligations. Both simply ask whether the Government agree that compliance and risk governance are not peripheral but intrinsic to asset management.
Local Government Pension Scheme managers are fiduciaries; they operate within a dense web of statutory, regulatory and prudential requirements. Ensuring compliance with those requirements is not an administrative afterthought but a core managerial function. Likewise, risk management is not something that follows investment decisions; it informs them at every stage.
The reason why we raise this issue is not theoretical. Elsewhere in the Bill, powers are framed by reference to the management of scheme assets, and it therefore seems reasonable to ask the Minister to confirm on the record, if he could, that when the Government use that term it is intended to encompass the full spectrum of responsibilities that scheme managers already discharge, including legal compliance and risk oversight. In other words, is the Bill deliberately neutral as to those aspects because they are already assumed, or does the narrower emphasis of the illustrative list reflect a more constrained conception of management, one focused primarily on asset pooling and allocation? Our amendments invite that clarification.
In legislation of this kind, when significant powers are being taken and fiduciary duties are central, it is important that Parliament is clear about the assumptions that underpin the language being used. Therefore, I hope that the Minister can reassure the Committee that the Government agree that compliance with law and active management of risk are integral to the management of the LGPS assets, and that nothing in the Bill is intended to narrow or sideline those responsibilities. On that basis, I look forward to the Minister’s response and clarification, and I beg to move.
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.
Viscount Thurso (LD)
May I ask one point of clarification from the noble Viscount, Lord Younger, when he comes to wind up at the end of this debate, again on risk? I read this amendment as being about the risk register—the list of risks faced by the organisation and how they are dealt with—rather than the level of risk that is taken in investing assets, which will determine the return level. I wonder whether he could give us clarity on that.
Lord Katz (Lab)
My Lords, I am grateful to the noble Viscount, Lord Younger, for tabling these amendments and, as the noble Lord, Lord Fuller, said, for giving us this short but sweet opportunity to discuss the management of the schemes.
I join the noble Lord, Lord Fuller, in using this opportunity to pay tribute to all those who are involved in the work of running the LGPS. He is absolutely right that it is a thankless and hard task; this is an opportunity for me to put on record that I am in complete agreement with him on that matter, although I say gently, as we are on the last group for today, that his definition of “sexy” differs from mine somewhat—but each to their own.
I recognise that the intention behind these amendments is to ensure the robust management of funds and assets in the LGPS. The Government share this aim and are taking steps to ensure that the reforms are implemented soundly. I am happy to confirm to the noble Viscount, Lord Younger, that “management”, as established in Clause 8, is not a narrow administrative concept but a comprehensive responsibility encompassing governance, oversight and compliance. The Government are clear that administering authorities and asset pool companies must regard adherence to all applicable laws and regulatory requirements as a core, non-negotiable element of their management duties.
This expectation reflects the principle that robust compliance is fundamental to safeguarding assets, maintaining public confidence and ensuring accountability throughout the system. In particular, under the provisions of this Bill, all investment management activity beyond setting high-level investment strategy will be delegated to the asset pool company, which will be required to seek authorisation from the Financial Conduct Authority. FCA authorisation and supervision will provide vital assurance to members and employers that very large pools of capital will be managed properly, including ensuring that robust procedures for identifying and managing risk are in place. The Government have written to the asset pools to set out the new requirements in Clause 1 and are engaging closely with pool company leaders to monitor progress on meeting them in good time. In addition, subject to the passage of the Bill, the Secretary of State intends to make regulations and issue guidance on asset pooling and fund governance, which will set out the expectations on LGPS funds and pools.
On strengthening fund governance, administering authorities will continue to be responsible for holding pools to account on their performance, including on how risks are managed. To strengthen governance and accountability further, regulations will require administering authorities to appoint the new positions of “senior officer” and “independent person”, subject to the outcome of the consultation. Senior officers will take the leading role in representing their funds in the governance of the asset pool in which they participate, and independent persons will offer professional expertise to support pensions committees on investment strategy, governance and administration—including holding the pool to account.
Administering authorities will be better able to manage risk and ensure compliance as a result of the new powers relating to independent governance reviews set out in Clause 5. Independent governance reviews will ensure that administering authorities review their governance and their compliance with the legislation, supported by independent scrutiny, to provide assurance to members and employers. In response to the question from the noble Viscount, Lord Younger, on whether we are attempting to constrain the concept of management, the answer is that we are not. The list provided is an inclusive one, not an exhaustive one. As I have said, compliance with laws and regulations and effective risk management are assumed in the Bill, as they are in existing LGPS legislation, with the latter also provided in the requirement for asset pools to be regulated by the Financial Conduct Authority.
The provisions in this Bill are already adequate to ensure that asset pool companies and administering authorities are compliant with the law and have adequate controls in place with regard to the identification and management of risks. Given that, as well as my explanations, I hope that I have satisfied the noble Viscount, Lord Younger, and provided the assurances that he sought. I respectfully ask him to withdraw his amendment.
Viscount Younger of Leckie (Con)
I am grateful to the Minister for his response and for answering the questions that I posed—I think there were only one or two, but, again, I will check Hansard for my questions and his responses.
The Committee will be pleased to know that I have little to add to what I said earlier, but I would like to reiterate a broader point. The more clarity we can place in the Bill and the more we can place clearly on the record, the greater the certainty we will provide to trustees, funds and employers about changes to a landscape that profoundly shapes how they operate and discharge their responsibilities.
In this very short debate, I was particularly grateful for the points made by my noble friend Lord Fuller, backed up by my noble friend Lady Noakes. I appreciated my noble friend Lord Fuller’s focus, which it is important for the Committee to put, on what pension fund administrators actually have to do, and he was quite right to highlight the breadth and detail required in undertaking the role.
That leads me nicely on to answer a question raised by the noble Viscount, Lord Thurso, on Amendment 22. I will need to check, but my understanding is that when it comes to the role of a pension fund administrator, management includes handling risks. The question is how we define “handling”. My understanding is that it includes how risks are identified, assessed and kept under review, but it is quite possible that there is somebody above that level who takes full responsibility. Otherwise, my understanding is that it involves handling both the risk register and how risk is assessed and decided on in providing a return to investors, but I will investigate and come back to the noble Viscount.
In concluding, although today we might be debating definitions and interpretation, I have no doubt that those affected by this legislation are following our proceedings closely and are keen for as much clarity as possible from the Government on definitions, duties and responsibilities. For that reason, I would very much welcome any further clarification the Minister is able to give the Committee throughout our subsequent proceedings on the questions we raise on these matters. That would provide reassurance not only to this Committee but to those beyond it who are looking to these proceedings for guidance and certainty. I finish by saying that that really is true, in that we have been in touch with a number of third parties and those in the industry, and many of the comments made today and on Monday absolutely reflect their issues and concerns. With that, I beg leave to withdraw the amendment.
Lord Wilson of Sedgefield (Lab)
My Lords, I think that this is an appropriate moment to adjourn. It is 8.08 pm and we are supposed to finish by 8.15 pm, so I think it is too late to start another group.