(1 day, 7 hours ago)
Lords ChamberRead Hansard Text Read Debate Ministerial Extracts
16:33 - Division on Amendment 4 - Ayes: 276 / Noes: 165 - Amendment 4 agreed.
17:13 - Division on Amendment 9 - Ayes: 201 / Noes: 177 - Amendment 9 agreed.
17:43 - Division on Amendment 12 - Ayes: 198 / Noes: 171 - Amendment 12 agreed.
Lord Fuller
“(ca) the Government Actuary’s Department;(cb) the Pensions Regulator;”
Lord Fuller (Con)
My Lords, it is a pleasure to open Report on the Pension Schemes Bill. As we start, we should be clear that the Bill’s success will be measured on the extent to which it makes it easier for people to take personal responsibility and save for their future, and make their savings secure, while permitting appropriate risk-taking and capital to grow the economy.
I should declare some interests. I have been a trustee of the Norfolk pension scheme for well over 20 years and a member of the Local Government Pension Scheme advisory board since its inception—in fact, I will retire from that on Monday. During that period, I have served on the Firefighters’ Pension Scheme and been chair and vice-chair of the Local Government Pension Committee, which is the body representing the employers in the scheme.
Today is about the Local Government Pension Scheme. The LGPS is different from most of the other public schemes because members have put money aside for their retirement—and that is important. My Amendments 1, 2 and 5—to which the noble Baroness, Lady Altmann, has added her name—relate to the overarching structural organisation of the 87 schemes that feed into a number of pools.
Let us dispose of Amendment 1 first. In my personal experience, I have found that just limiting the list of consultees to the FCA would be insufficient. I think there has probably been a misunderstanding in the department about the fact that the Government Actuary’s Department and the Pensions Regulator really do get involved there. While I would not press the amendment to a vote, I think it is pretty straightforward. If we do not have the Pensions Regulator and GAD—which look after 50 or so other things, apart from investment—the Bill would be holey.
I have my reservations about government interference in the structure of pools. It damages the purity of the relationship and accountability of the trustees to act in the members’ best interests. Rachel Reeves will be a footnote in history by the time the cows come home with the consequences of some of the provisions in Clause 1. The approach of mandating pools has already damaged the scheme. For no good reason, the exemplar access scheme was told to disband; it had £40 billion-worth of assets under management, but that was not good enough. It had access to the best FCA global professionals in the City of London. Now it is being forced to join a provincial pool, which—for goodness’ sake—does not even have an FCA qualification.
Elsewhere in the Bill, there are restrictions that prevent a scheme from belonging to more than one pool. For reasons I will now explain, this incomprehensible restriction will mean that the Government thwart their own ambitions to bring the LGPS assets to bear to invest in other wise and appropriate investible infrastructure opportunities outside their home patch.
My amendment would allow any good opportunity that has been signed off, so to speak, by one LGPS fund to be available to all the others, whether the fund was in that pool or not. The LGPS is the closest we have to a national wealth fund. Two years ago, its total assets under management were valued at more than £390 billion—and it is much more than that now. These things change but, by some measures, it is the world’s fourth- or fifth-largest scheme. Some 6.68 million Britons belong to that scheme. It may be a large scheme, but the members are not fat cats: the typical member is a 47 year-old person earning £18,000 a year and who may, after a period of very long service, attain a pension of £5,000 a year. In the next group, I will refer to this number, but investment returns for 2024 on the LGPS were 8.9%, with a broad asset allocation of equities, bonds, property, and so forth. The investment and management costs grew by much less than inflation—2.9%.
The scheme that I am a member of in Norfolk has a cost per member of less than £20; it is half the cost of anywhere else. When I came to that scheme in 2007, there were £1.8 billion of assets. That is now nearly £6 billion. When I leave the trusteeship in May, I will look back with satisfaction. It is a British success story. The noble Lord, Lord Davies, trumpeted this in Committee. With all this interference and fettering of the ability of the trustees to put the members’ best interests first, what is the problem that the Government are trying to solve here?
I make no apology for rehearsing this as I open Report. The success story that is the LGPS should play an important part in investing in and renewing our nation. I am not against scale. I know there are some schemes at £500 million that need to bulk up, although I am bound to say that one of the smaller schemes in the Orkneys has the best performance of all the schemes in the whole scheme. There is something to be learned there.
Baroness Noakes (Con)
My Lords, I have Amendment 4 in this group. This concerns mandation, which we will debate more extensively later this week in connection with defined contribution schemes. Amendment 4 seeks to ensure that mandation cannot apply to the LGPS. This amendment should be easy for the Government to accept. This mandation amendment, unlike the ones we shall debate on Thursday, reflects what the Government have said is their policy.
Clause 1 gives the Government very extensive powers to tell local government pension funds what they may or may not do in relation to asset pool companies and scheme managers. Clause 2 says that any Clause 1 regulations must—not may—
“make provision about the management of the funds and other assets”.
As is usual with regulation-making powers, they are unconstrained. While Clause 2 lists some of the things that could be included in the regulations, it contains no restrictions on the use of the power.
I have tabled Amendment 4 seeking to ensure that the power cannot be used to tell local government schemes to invest in particular assets, asset classes or locations of investment. I firmly believe that fiduciary duties are paramount and should never be interfered with by the Government, whether in relation to public sector schemes such as the LGPS or private sector ones, which we will debate on Thursday. The noble Lord, Lord Katz, said in Grand Committee on 12 January:
“To be absolutely clear … we are not mandating asset pools to invest in certain ways in the LGPS. The power to direct pools is a backstop power. It does not allow government to mandate investment in specific assets or asset classes”.—[Official Report, 12/1/26; col. GC 244.]
The issue is not whether the power is a backstop power or whether the Government intend to use it but whether the Bill could be used—by this Government or some future Government—to mandate investments in the LGPS.
Clause 2 is clear that regulations under Clause 1
“must make provision about the management of the funds and other assets for which the scheme managers are responsible”.
Subsection (2) goes on to require an investment strategy, and subsections (3) and (4) allow the Secretary of State to specify what is in that strategy, including strategic asset allocation. On any ordinary interpretation, this adds up to very considerable power over LGPS investments.
In the other place, the Government removed from the original Bill a more explicit power of direction that would have allowed the Secretary of State to direct LGPS investment activities. It was pretty shocking, and the Government sensibly removed it before the Bill arrived in your Lordships’ House. That removal, however, does not mean that the Bill we now have before us could not be used to mandate investments using the powers that remain in Clauses 1 and 2. I hope the Government will agree that certainty is required in this area. My amendment would put matters beyond doubt. If the Government do not accept Amendment 4, I am currently minded to test the opinion of House when it is reached.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will speak to Amendments 2 and 5, which address the same underlying issue—whether pooling and expertise in the Local Government Pension Scheme is intended to support good investment decisions or to constrain them. I will speak in support of Amendment 4, to which I have added my name.
No one disputes that there can be value in scale, but scale does not require exclusivity. Nothing in the case for pooling requires funds to confine to a single pool, unable to access specialist expertise developed elsewhere. The LGPS is a federation of, I think, 89 funds with different demographics, liabilities and investment strategies. It is entirely foreseeable—indeed, it is already happening—that one pool will develop a particular strength in, say, infrastructure, and another in renewables or local investment opportunities, or, as has already been outlined, it may be that the investment opportunity is large and accessible only by more than one joining together. Why should a fund be prevented from accessing that expertise or that scale simply because it sits in a different pool? Looking at it from the non-scale end, I have personally spoken to fund managers who wanted to invest local to support infrastructure at local scale but who do not want all that exposure in their own area, for reasons of diversification. They have had their fingers burned with shopping centres. The current drafting would make that unnecessarily difficult.
In Committee, the Government were clear that they want to avoid forced or value-destructive transfers of assets between pools. Allowing funds to participate in more than one pool and allowing cross-pool investment is one of the simplest ways to avoid exactly that. If a fund can access a specialist vehicle without having to replicate it internally or move assets unnecessarily then that is a win for the scheme members. The purpose of pooling was to broaden access to expertise, not to narrow it; to create economies of scale, not to create silos; and to support better long-term investment decisions, not to restrict the routes through which those decisions could be implemented.
The noble Lord, Lord Fuller, has reminded us of many of these issues, as he did in Committee. The LGPS is a British success story, delivering strong returns, low costs and high efficiency for 6.7 million members. His warning was and is that the Bill risks fettering the independence of schemes to make the best long-term decisions for their members. These amendments go directly to that point, and it would be beneficial if the Government could recognise this—I really cannot see what they would take away.
I therefore suggest that the Government seriously consider adopting these amendments. They are modest but important. They would not weaken pooling but strengthen it, they would not undermine scale but enhance it, and they would not challenge the Government’s policy direction. They would simply ensure that the LGPS could operate as a coherent system, rather than a set of sealed compartments. I hope that the Minister will see them as constructive corrections to support fiduciary duty, improve efficiency and help deliver the very outcomes that the Government say they want.
I turn to Amendment 4. The noble Baroness, Lady Noakes, has already explained in detail why it is a good amendment, and we on these Benches support it. It would be a safeguard to make sure that the same kind of mandation that the Bill contains for default pension funds did not creep across through regulations into the LGPS. That may not be the intention now, but, as elsewhere in the Bill, there are no safeguards against the future intentions of we-do-not-know-who in a change of circumstances. It is a bad thing in legislation to continually have these open abilities to make regulations, billed as doing one thing but completely open sometimes to do almost the opposite. The precedent has been set elsewhere in the Bill by the drafting and, no matter how it ends up, we need to be certain that it cannot creep into local government. I therefore support Amendment 4, and we will support the noble Baroness, Lady Noakes, if she is minded to divide the House.
Baroness Altmann (Non-Afl)
My Lords, I have added my name to Amendments 2, 4 and 5, so I will speak to those. I support the noble Lord, Lord Fuller, in his Amendment 1. The addition of the Pensions Regulator, alongside the FCA, is very important. I must declare my interest as a non-executive director of a pensions administration company and as a board adviser to a pensions DC master trust.
Amendments 2 and 5 are really important in the context of the Local Government Pension Scheme. The LGPS is an unusual type of defined benefit scheme; it is not like any of the others which are funded, because it is underwritten by the Government. It does not pay a levy to the Pension Protection Fund and the Government completely underwrite all liabilities, so of course the trustees are able, perhaps, to feel that they can take more risks than a defined benefit scheme, which is supported only by an employer which may fail and the members end up in the PPF. Having said that, unless the Government wish to change the Local Government Pension Scheme into another unfunded public sector scheme and just take all the assets in—which they could do—surely it is important to ensure that the trustees can make investment decisions that they believe are best, rather than the Government suggesting they know better and telling them what to do.
Amendments 2 and 5 both address restrictions on the ways in which the Local Government Pension Scheme can invest, whereby it has to choose to belong to one asset pool and that is it—it could not participate in another pool, even if it felt that that other pool had attractive attributes. I understand the Government’s intent—they would like pension schemes to support both local and national projects, as would I—but it should not be that you can support only the local projects that happen to be part of the asset pool that you must belong to. That is bound to turn these into discrete pools, rather than diversified pools where the trustees have a much freer choice.
The Government may be muddling the idea of scale with the idea of diversification. Both are important and both can deliver better outcomes for members, but trustees have to be able to choose which managers they believe can do the best for them. Quite frankly, usually it is the case that any one pool cannot be the best at everything. There will always be the need, as the noble Lord, Lord Fuller, said, for specialist expertise to be offered to pension schemes.
Amendment 4 is in the name of the noble Baroness, Lady Noakes, and she excellently explained what she intends it to do. The idea is that the Government should not dictate specific assets that pension schemes can invest in.
Although I have no problem with the Government incentivising particular types of investment, whether by offering better returns or different tax reliefs for investing in the ways the Government might wish—they might encourage a local pension fund to invest in its local area—the idea of mandating it with no option but to follow seems a step too far. I hope the Minister will understand that there is support for the ideas the Government wish to achieve, and which lie behind the stipulations in the Bill. It is just that the powers extend so far that we have no idea what might come next on mandation.
We are not talking about incentivising. We are talking about forcing schemes to invest in ways that Ministers see fit, rather than supporting the economy in general in ways that the trustees and their managers decide would deliver the best outcomes for the scheme.
Lord Palmer of Childs Hill (LD)
My Lords, first, I have to declare an interest because after 28 years as a councillor in the London Borough of Barnet, I am in receipt of a modest local government pension. I sometimes forget to declare that and I do so now. We have been lucky to have incisive speeches from the noble Lord, Lord Fuller, the noble Baroness, Lady Noakes, my colleague and noble friend Lady Bowles and the noble Baroness, Lady Altmann. After them, I almost want to ask, “Is there anything else one should say?”, but as a politician, I will do so.
This has been a useful debate on the future governance of the Local Government Pension Scheme, and there is a common theme running through it: the need to protect fiduciary responsibility while ensuring that governance is modern, credible and transparent. The amendments in this group range from consultation requirements to the possibility of participation in more than one asset pool, and to the important question of whether Ministers should be able to steer investments towards particular assets and places. I hope that Amendment 4 will be moved at the end of this debate; I would certainly want to support that amendment, if the noble Baroness decides to move it.
We on these Benches recognise that pooling can bring efficiencies and expertise, and we generally welcome the provisions on the Local Government Pension Scheme in the Bill, but bigger is not always better simply because it is bigger. Flexibility matters: if one pool has genuine expertise in a special asset class, there is an argument for allowing schemes to benefit from that knowledge, rather than being locked into a single route for all purposes. Equally, if powers are to be used over asset pools, proper consultees matter. It is hard to object to hearing from bodies such as the Government Actuary’s Department and the Pensions Regulator before directions are given. These are basic disciplines of good administration; I only hope that the Local Government Pension Scheme uses those provisions.
Our wider concern remains the same one raised repeatedly in Committee: that the Bill is too ready to create broad powers first and to explain the practical boundaries later. On the Local Government Pension Scheme, that is particularly sensitive because we are dealing with very large sums, long-term liabilities and members who expect prudence—that was probably why they went into local government in the beginning—not improvisation. So our test is straightforward: does the provision strengthen scheme governance, preserve proper fiduciary decision-making and protect members from political or poorly evidenced intervention? Where it does, it deserves support; where it does not, Ministers still have work to do.
The amendments in this group are pretty modest. As we go through the Bill, we will come to other amendments that would go further. The Minister and her colleagues should think again about whether these amendments improve the Bill. They are not against the Bill or the Government; they are prudent. They would provide fiduciary powers and the power to use them. I invite Ministers to take a step back and consider giving their support to these early amendments and asking their colleagues in the other House to do so. These are reasonable amendments. As I say, later in this debate there will be other amendments that go further. I would like to hear that Ministers feel there is some credibility in the amendments in this group, particularly Amendment 4.
Viscount Younger of Leckie (Con)
My Lords, I want to start by thanking my noble friend Lord Fuller for commencing our discussions on this important Bill, which is now on Report. We on these Benches look forward to an effective and constructive Report and hope that we can work with noble Lords across the House to make the improvements to the Bill that, in our view and that of many in the pension sector, are desperately needed.
Towards the end of my remarks, I will speak to the important Amendment 4, in the name of my noble friend Lady Noakes, but first I will speak briefly in support of Amendment 1, in the name of my noble friend Lord Fuller, and Amendments 2 and 5, in the names of my noble friend Lord Fuller and the noble Baroness, Lady Altmann. Taken together, these amendments would make constructive improvements to the Bill.
Amendment 1 would ensure that both the Government Actuary’s Department and the Pensions Regulator are formally consulted before directions are given in relation to asset pool companies. This seems an eminently sensible and proportionate safeguard. The provisions in the Bill give the Government significant powers to direct changes relating to LGPS pooling arrangements—changes that, in practice, may reshape the investment structures of some of the largest pension funds in the country.
Decisions of that magnitude should not be taken without the benefit of the best available expertise. Requiring consultation with the Government Actuary’s Department and the Pensions Regulator would ensure precisely that: actuarial and regulatory oversight would be brought to bear before such directions are issued. This would help to ensure that decisions that could materially affect the funding, governance and investment strategy of the LGPS are taken with expert input. That seems an entirely reasonable expectation when we are dealing with funds that collectively safeguard the retirement incomes—we must not forget this—of millions of public servants.
Amendment 2 addresses another important point. As the Bill stands, regulations may prohibit a scheme manager from participating in more than one asset pool company at the same time. This amendment would remove that provision. Doing so would give scheme managers greater independence in determining how best to structure their investments. If, as was mentioned earlier, one asset pool develops particular expertise in, say, infrastructure, private markets or another specialist asset class—akin to a centre of excellence, perhaps—there may well be circumstances in which it is entirely sensible for multiple schemes to participate in that pool for that purpose.
The noble Baronesses, Lady Bowles and Lady Altmann, put it very eloquently. Preventing scheme managers accessing such expertise simply because they already participate in another pool risks imposing unnecessary rigidity on the system and is unnecessarily prescriptive and inflexible. By removing that restriction, this amendment would allow scheme managers greater freedom to act in the interests of their members—which, as the Government sometimes forget, must remain the central principle guiding all decisions in the management of pension assets.
Amendment 5 follows a similar logic. It would remove wording that restricts how asset pool companies can undertake investment management activities, thereby allowing investment opportunities created within one pool or by one scheme manager to be accessed more widely across the LGPS. In practical terms, this would facilitate cross-pool collaboration within the scheme. Rather than forcing each pool to operate in isolation, it would allow expertise and opportunities to be shared, broadening the menu of options open to scheme managers when determining how to allocate assets and pursue long-term returns. At a time when the Government are encouraging greater scale and collaboration within pension investment, it seems entirely sensible that the legislative framework should not inadvertently constrain that collaboration if that is the choice of the scheme manager, to the ultimate benefit of members of that scheme.
More broadly, these amendments recognise an important principle. As structural changes are made to the way that LGPS operates that could significantly reshape the pensions landscape as a “coherent system”—as the noble Baroness, Lady Bowles, well put it—it is essential that those responsible for managing pension funds retain the flexibility to exercise their judgment in the interests of their members. Pooling can bring benefits, but it should not come at the expense of professional discretion or fiduciary responsibility. These amendments strike a reasonable balance: they would strengthen oversight where central powers were exercised, while preserving the ability of scheme managers to make decisions that best served the members whose pensions they are entrusted to protect.
Lord in Waiting/Government Whip (Lord Katz) (Lab)
My Lords, I am grateful for our discussion on this first group. I am indebted to the noble Lord, Lord Palmer of Childs Hill, for reminding me too that I should declare my membership, as a former Camden councillor, of its members’ pension scheme—although I defer to him in terms of seniority in years of service: I did a paltry one term, as opposed to his gazillion, I think it was, in the neighbouring council in Barnet.
I share the interest raised in this discussion in fostering greater collaboration and sharing of expertise across the LGPS and ensuring that there are appropriate safeguards in the Bill. On Amendment 1, tabled by the noble Lord, Lord Fuller, it is right that we ensure that appropriate safeguards are in place on the use of direction powers. To reiterate, these are included in the Bill as backstops to ensure that the Government can fulfil their role as stewards of the scheme, but let me be clear that the direction powers in the Bill are not designed to allow the Government to direct investment into specific assets or asset classes, and the Government are satisfied that they cannot be used in this way.
The Bill already requires the Secretary of State to consult the asset pool company, its participating partner authorities, the FCA and any other body that the Secretary of State considers appropriate, prior to the exercise of the direction powers. I do not believe that the Pensions Regulator is an appropriate body for this list. Asset pool companies will be regulated by the FCA and do not fall under the remit of the Pensions Regulator.
In moving his amendment, the noble Lord, Lord Fuller, took issue with the closure of the access pool. To be clear, access went through the same process as all the pools. Outsourcing all its investing was not value for money. The pools that access funds are going to are all FCA regulated. I hope this provides reassurance not just for the noble Lord, Lord Fuller, but for your Lordships’ House.
The Ministry of Housing, Communities and Local Government will work closely with the Government Actuary’s Department to provide actuarial advice to the department on the LGPS. It can be expected that the department would seek advice from it prior to issuing a direction wherever it was relevant to do so. Furthermore, the Secretary of State has a duty to consult anyone whom they consider appropriate under Clause 1(5)(d), which could include the Government Actuary’s Department. This may not always be appropriate, however, depending on the type of direction being issued. Overly burdensome and formal consultation requirements can slow decision-making. It would therefore seem potentially onerous to have the Government Actuary as a compulsory consultee under these direction powers.
The noble Lord, Lord Fuller, also talked about the impact of local government reorganisation on pooling in the LGPS. Many administering authorities are forming new pool partnerships to deliver the standards of pooling which we have set. I know that authorities have taken the impact of local government reorganisation into account when deciding which pool to join. The Government stand ready to support authorities with any concerns that they may have about the impact of local government reorganisation on the administration of the LGPS in their area. For the avoidance of doubt, and to address the point made by the noble Baroness, Lady Bowles, there is nothing in the legislation that says that the Government underwrite the liabilities of the LGPS. These are locally managed schemes, which includes responsibility for liabilities.
Amendment 2 seeks to encourage collaboration and competition across the LGPS by permitting administering authorities to participate in more than one asset pool company. This Government strongly believe that pools should work together wherever this can improve outcomes for members, employers and taxpayers. Asset pools becoming centres of excellence in specialist asset classes would reduce duplication and enable investments at scale, both within pools and across the whole scheme. Joint ventures are already operating in the scheme—such as LPPI and Northern LGPS’s collaboration through the GLIL Infrastructure fund, which invests in assets ranging from upgraded rail rolling stock to green energy and water projects. These show how collective investment can unlock the scheme’s potential to invest in the UK.
To encourage further collaboration of this kind, Clause 4 removes procurement barriers so that pools can invest in one another’s vehicles without limitation. Nothing in this legislation prevents administering authorities benefiting from specialist expertise in other asset pools. It certainly does not impose an arbitrary north/south boundary or other such divisions, as the noble Lord, Lord Fuller, intimated. However, under the reformed system, this will appropriately be done via their own asset pool, because decisions to contract with, or invest alongside, another pool are a matter for the regulated pool company, not for individual authorities.
The Bill establishes a clear division of responsibilities. Administering authorities will set the investment strategy, while asset pools will implement that strategy. This places investment decisions with professional managers, enabling the scheme to achieve scale and deepen capability. This amendment would undermine those benefits by returning investment decisions to individual authorities, rather than the expertise developed at the pools. I therefore believe that the amendment is neither necessary nor an appropriate measure to enable collaboration across the scheme.
I should like to reassure the noble Baroness, Lady Altmann, on the points that she raised. First, pooling is not about limited choice. Pools will select managers on behalf of their funds under the fund’s direction. Secondly, the investment strategy will set funding objectives and an asset allocation. Thirdly, responsibility for setting the investment strategy will remain with funds. Nothing in the Bill allows the Government to tell funds what to invest in, nor will pools make that decision. It will be made by the LGPS funds for pools to deliver.
I turn to Amendment 5, also from the noble Lord, Lord Fuller, and the noble Baroness, Lady Altmann. I understand that the intention behind this amendment is to allow investment in opportunities created by other administering authorities and asset pools. As I have said, this is already possible under the legislation as drafted. What the amendment would actually do is to allow administering authorities to count as local any investment to the benefit of people living or working anywhere in England and Wales. This definition is relevant only when administering authorities are setting their approach to, and targets for, local investment in their investment strategy, and when reporting on the extent and impact of local investment.
Of course, the Government are all for UK investment. Indeed, as we have heard, the LGPS is the country’s largest UK pensions investor already. However, the purpose of requiring a specifically local, not national, investment objective in the investment strategy is to encourage investment into all regions of the UK, and directly into the communities in which scheme members have worked. Administering authorities can set any target they want for local investment, and asset pools are free to invest assets over and above this target in the UK or worldwide, as best fits the investment strategy. There is therefore nothing stopping administering authorities from benefiting from investments anywhere in the country, regardless of their geographic location.
I turn to Amendment 4 from the noble Baroness, Lady Noakes. Clause 2, specifically the provision in subsections (3)(b) and (4), allows the Government to make regulations specifying matters that administering authorities must or may cover in their investment strategy. It is not designed to permit government to dictate what that strategy says. The power that we removed from the Bill in the other place was equivalent to the powers that the Secretary of State has over funds, which the Government’s initial judgment was that it was appropriate to have over pools under the new system. We have heard feedback from stakeholders and feel that it is not necessary for the Secretary of State to have those powers.
This provision will be used to require that LGPS investment strategies include: an approach and target range for local investment; high-level funding objectives and an approach to responsible investment; and a strategic asset allocation completed to a standard template, to be included in guidance. In each case, it remains for LGPS administering authorities to determine what those objectives, approaches, asset allocations and target ranges will be. Some may be concerned about how a future Government might use this provision. I reassure them that the Government do not consider the clause to permit regulations compelling authorities to adopt any particular position in their investment strategy. I hope that the noble Baroness will therefore be reassured that the Bill does not enable what her amendment seeks to guard against.
The purpose of the government amendments to Clause 4, Amendments 6 to 8, is to ensure that changes made under the clause do not have any wider application than intended. Clause 4 amends the Procurement Act 2023 to create a new exemption for investment and fund management contracts between Local Government Pension Scheme managers and their LGPS asset pool companies. This is required because the existing exemption in the Procurement Act contains a turnover test that would cap the potential for LGPS asset pools to collaborate through joint ventures. Clause 4 addresses this by ensuring that LGPS pools are not subject to this turnover test where a pool is acting in the interests of Local Government Pension Scheme managers. However, it is appropriate that the effect of the clause does not go any wider than intended. The amendments therefore put it beyond doubt that these changes apply only when Local Government Pension Scheme managers are acting in their capacity as Local Government Pension Scheme managers, and not in any other scheme management capacity they might have.
I hope my response demonstrates that the Government have considered carefully the points raised through Amendments 1, 2, 4 and 5. To pick up on the comments made by the noble Lord, Lord Palmer, we understand the intentions behind the amendments—we just do not think that they are necessary. We understand the motivation behind them, and I hope that my explanation makes that clear. We are also responding to the wider point, which we discussed at some length in Committee. The nature of the Bill, called by some skeletal, is that this is how pensions and other financial management legislation is passed. A lot has to be done through regulation, because that is how one responds to changing marketplaces and sector demands. We make no apologies for that. However, the Government welcome collaboration across the scheme and, as I have explained, the provision in the Bill and our proposed regulations already allow for it. Amendments 2 and 5 would undermine the pooling and local investment reforms without promoting further collaboration.
This Government also recognise the desire to ensure that there are appropriate safeguards on the use of direction powers. I hope I have reassured your Lordships’ House that the consultation requirements in place are already sufficient and that it is not necessary to introduce additional references to the Government Actuary and the Pensions Regulator. Finally, I hope that I have reassured your Lordships’ House that the provisions in the Bill do not allow the Government to introduce mandation via regulation. I therefore ask the Lord, Lord Fuller, to withdraw Amendment 1.
Lord Gove (Con)
Before the Minister sits down, he said that Amendment 4 is unnecessary because the Bill does not do what the promoters of Amendment 4 argue that it does. He did not say that it would be malign, that it would frustrate the efforts of the Government, that it was wrong in any way; he merely said that the Bill already achieved what the promoters of the amendment want and therefore it would be superfluous. What damage would therefore be done if Amendment 4 were accepted? In what way would it damage the Government, damage pension fund trustees or damage pension fund members? It is not good enough to say simply that the noble Baronesses, Lady Altmann and Lady Bowles, and the noble Lord, Lord Palmer, are wrong, and for us to take it on trust. That is not what we should do.
Lord Katz (Lab)
I say simply that if we took that approach to all legislation, we would end up with Bills hundreds or thousands of pages long, because we might pile on more amendments simply because they are well-intentioned. It is important that we are clear about the legislation that we are drafting, so that people in the pensions sector, lawyers, et cetera, can properly interpret what we intend—by any legislation, not just this Bill. When we say that something is superfluous, we do not add it in: I think that is a perfectly decent criterion by which to legislate. The noble Lord, Lord Gove, shakes his head. I say to him gently that both this and the previous Government have had a lot of criticism for large Bills and there is always an onus on us to have slimmer legislation. We will not get slimmer legislation by accepting willy-nilly amendments that we think are superfluous.
Lord Gove (Con)
My Lords, I am afraid that that answer is completely inadequate.
Lord Fuller (Con)
My Lords, it has been an interesting debate. The LGPS is special. It is the closest thing, as a number of noble Lords have said, to having a sovereign wealth fund in our islands, and I am unconvinced by the points made by the noble Lord, Lord Katz. He has misunderstood what local investments are. I do not accept for a moment his reassurances around the creation of specialist pools. As my noble friend Lord Younger said from the Front Bench, this increases unnecessary rigidity, damages coherence and misunderstands the distinction between funding and financing.
I suppose noble Lords can be grateful for at least one thing: as the noble Lord, Lord Katz, was at the Dispatch Box, it saved the Minister, the noble Baroness, Lady Sherlock, repeating the old trope that the large Ontario and Canadian pension funds are the sorts of things against which the LGPS should be marked. Today, the Financial Times reported that the Ontario funds have fallen away by 5.3% over the last year, while the LGPS has grown by 9%. This is what happens. I am conscious that I am winding. I will not press Amendments 1, 2 and 5 to a vote, but I will support my noble friend Lady Noakes in the Lobby if she chooses to divide the House.
Baroness Noakes
“(4A) The provision made by virtue of subsection (1) may not include any provision about investment in specific assets or asset classes or about the location of investments.”
Member's explanatory statement
This is a drafting amendment to clarify that only contracts made by a local government pension scheme manager acting in its capacity as such can be exempt contracts under clause 4.
Member's explanatory statement
This is a drafting amendment to clarify that the “80% condition” refers only to investment management activities carried out for local government pension scheme managers acting in their capacity as such.
Member's explanatory statement
This is a drafting amendment to clarify that in the definition of “investment management activities” the reference is to funds or other assets for which a local government pension scheme manager is responsible.
Baroness Stedman-Scott
“Benchmarking of Local Government Pension Scheme liabilities(1) For each actuarial valuation relating to a scheme for local government workers which has pension funds, an administering authority must obtain and publish—(a) the primary valuation used for funding purposes, and(b) one or more benchmark valuations of scheme liabilities based on—(i) prevailing bulk annuity pricing, and(ii) a gilt-based discount rate.(2) The valuations published under subsection (1) must be published at the same time as the funding strategy statement, and alongside the employer contribution rates arising from the funding valuation.(3) Where the funding valuation is materially more prudent than the benchmark valuations, the administering authority must publish a statement explaining—(a) the risks being guarded against,(b) why those risks justify a higher degree of prudence than that reflected in insurer pricing, and(c) the impact on employer contribution rates.(4) The funding strategy statement must include appendices explaining the valuation assumptions, benchmarks, and their effect on contribution rates in a form that is reasonably accessible to a person who is not a qualified actuary.(5) The statement must be communicated to the relevant local authority and made publicly available.(6) The documents published under this section must be made available in a manner that enables meaningful consultation by scheme employers and scheme members.(7) In this section—“administering authority” has the same meaning as in Regulation 2 of the Local Government Pension Scheme Regulations 2013 (S.I. 2013/2356);“funding strategy statement” has the same meaning as in Regulation 58 of the Local Government Pension Scheme Regulations 2013 (S.I. 2013/2356).”Member's explanatory statement
This amendment requires Local Government Pension Scheme valuations to be benchmarked against insurer pricing and gilt-based discount rates, with explanations where significantly greater prudence is applied. It also requires those benchmarks, the funding strategy statement, and employer contribution rates to be published together, with accessible explanatory material to support meaningful consultation.
Baroness Stedman-Scott (Con)
My Lords, I move Amendment 9 standing in the names of my noble friend Lord Younger of Leckie and myself. During the passage of this Bill, we on these Benches have had a great many discussions not only in this Chamber but with industry experts, scheme managers, employers and others who will be directly affected by the provisions before us. Those conversations have been extremely valuable and have revealed something that many of us have found increasingly concerning. We have been made aware that, in a number of cases across the Local Government Pension Scheme, employers are being asked to contribute very substantial sums into pension funds; these levels of contribution appear to go well beyond what would be required for those funds to be fully funded, even on a very prudent basis.
Of course, prudence is essential in pension funding, and no one in this House would dispute that. Pension promises stretch decades into the future, and it is right that those responsible for safeguarding them take a cautious and responsible approach when assessing liabilities and setting contribution rates. What we are seeing in some cases, however, appears to move beyond prudence into excessive prudence. When contribution requirements are set significantly above what would be necessary even under extremely cautious valuation assumptions, the consequences are that employers, local authorities, academies, housing associations and others are required to divert even greater sums of money into pension funds.
The money does not come from nowhere; it comes from taxpayers and from public budgets, which might otherwise be used to fund and support local services, improve communities, invest in schools, support vulnerable people and deliver the many things we all want councils and public bodies to be able to do. If those employers are being asked to contribute significantly more than is necessary to secure the pensions of their members, we have to ask whether the balance between prudence and proportionality has shifted too far. That is precisely the issue this amendment seeks to address.
Amendment 9 would introduce an important requirement for transparency, requiring Local Government Pension Scheme valuations to be benchmarked against two widely recognised measures: insurer pricing—specifically, bulk annuity pricing—and evaluation based on gilt discount rates. Those benchmarks would then be published alongside the scheme’s official funding valuation.
Crucially, where the scheme’s official valuation is materially more prudent than those benchmarks, the administrating authority would be required to publish a clear statement explaining three things: first, what risk the scheme was seeking to guard against; secondly, why those risks justified the high level of prudence being applied; and, thirdly, what the impact of that additional prudence would be on employer contribution rates. In other words, the amendment would introduce transparency around the actuarial assumptions being used; it would allow employers, scheme members and the wider public to see how prudence affects contribution cost; and it would give those who are paying into the scheme the ability to understand—and where appropriate, question—the basis on which those cost are being set.
This intention should not be controversial. Indeed, one might reasonably argue that it should be a basic feature of the system. Where decisions are being taken which require significant contributions from public bodies, there should be transparency about how those decisions are reached, there should be honesty about the assumptions being applied and those affected should have the information necessary to exercise agency and scrutiny.
What this amendment seeks to achieve is not to undermine prudence—quite the opposite. Prudence remains vital in pension funding. But prudence must be accompanied by accountability, and when additional prudence is applied, particularly where it carries significant cost implications, it should be clearly explained and justified. The fact that our amendment would require those benchmarks, the funding strategy statement and employer contribution rates to be published together, is another key point. It would allow stakeholders to see the full chain from market comparison to actuarial judgment to the costs ultimately borne by employers.
This amendment therefore strikes a sensible balance. It would preserve the independence of actuaries and the integrity of the valuation process, while ensuring that the consequences of those decisions are visible and understood. For employers, it would provide clarity; for scheme members, it would provide reassurance; and for taxpayers, it would ensure that the significant sums being directed into pension funds are subject to appropriate transparency. For those reasons, this amendment represents a constructive and proportionate improvement to the Bill. It asks only that, where high levels of prudence are applied, they are accompanied by explanation and openness. That seems to me an entirely reasonable expectation, and I will test the opinion of the House when it is called.
Lord Fuller (Con)
My Lords, I support Amendment 9 in the names of my noble friends on the Front Bench and place on record that there are some very good behaviours among the Local Government Pension Scheme administering authorities that already follow the path laid out in the amendment, which would then be placed on a statutory basis.
I would not want people to think that none of that best practice happens, or that the numbers are just plucked out of the air—that is not the way it is at all. The purpose is that all schemes reach expectations and assess their liabilities in aggregate, not just for each of the councils—most people without this House would think the LGPS is a scheme for councils—but all the other admitted bodies as well. As I said in the previous group, when I first joined the Norfolk scheme about 20 years ago, there were about 70 admitted bodies; there are now 500, so it is extraordinarily complicated. Nationally, on a whole-of-LGPS basis, there are 6,160 scheduled bodies, 3,639 admitted bodies, 478 designated bodies—I do not know what they are, but I think they might be with the Environment Agency—and 15,049 employers with active members.
The key thing, in support of my noble friend Lady Stedman-Scott, is that when we look at all these contribution rates, it is not just taking the scheme in aggregate; we have to drill down to all the particular liabilities for each employer in the scheme. I am now drifting into the complication we often hear so much about, which is used to obfuscate the scheme. What I really like about this amendment is that it stops people who know about the Local Government Pension Scheme from hiding behind that complexity and obfuscation. It will require members to publish in plain language how the numbers are arrived at and what this amendment seeks to achieve.
Again, to repeat some of my history, when I first joined the Norfolk scheme, which is a good example, it was 79% funded. We shovelled in cash like it was going out of fashion. Now, 20 years later, it is 130% funded. In the last three years it has gone up 25%. These big swings militate against stability and sustainability. Over the years there has been a pessimism bias, which has meant that council tax, councils and admitted bodies have put much more money into the scheme. Partly, there was groupthink from the regulators, which forced us down this path.
However, I want to provide reassurance. When you look at the assumptions that I have been involved in, over five triennial revaluations now, there is a fan of opportunities and scenarios that the actuaries run on the membership of the scheme, sponsoring employers, even the life expectancy of members calibrated by postcode. There are about a thousand different scenarios in the scheme that I have seen. Of course, one of those scenarios is a wipeout. We should not confuse a scenario with a likelihood. With the benefit of hindsight, I think what has happened is that the extreme cases have been taken and split down the middle, whereas if there was more clustering around the middle then we would not have had to put in so much. That is why the amendment looks in a much more focused way at the funding strategy statement. That way, we can take the true costs into account.
On seeing the noble Lord, Lord Davies, again, who is an actuary, I am reminded of an old actuaries’ joke I told in Grand Committee. I am going to repeat it, because it was a small audience then: “We’re all living longer and it’s getting worse”. Some of the assumptions have possibly overcooked life expectancy and undercooked the effects of Covid, and so forth. There is a balance to be struck between overoptimism on one hand and excessive prudence on the other. It is a complicated scheme, but the amendment works out a method by which we can communicate that texture in language that the man in the street can understand, so that taxpayers can be reassured that they are not being overtaxed and members can be reassured that, over the life of the tail liabilities of the whole scheme, they will be paid in full at the right moment. As I said on the previous group, the LGPS is the closest thing we have to a sovereign wealth fund and it is important that we do not take an excessive pessimism bias, as the story of the last 20 years has shown.
Lord Davies of Brixton (Lab)
I do not mean to be unkind to the tablers of this amendment, but it is nonsense, in my view. As the noble Lord, Lord Fuller, explained, I can confirm that I am a fellow of the Institute and Faculty of Actuaries. To be honest, this amendment would mean more work for actuaries, on the face of it. Who will do these independent assessments? It is presumably people who know what the technical nature of a pension scheme is—to that extent, maybe I am not against the amendment. It suggests that it should be benchmarked against two things that are irrelevant. The Local Government Pension Scheme is not insured. It is not invested totally in gilt-edged securities. You could calculate those figures, but what do they tell you? Absolutely nothing.
The fundamental problem with this proposal is that it is the administering authority that decides on the contribution rate, not the actuary. It is not the actuary who decides how much prudence should be in the figures. The actuary provides advice and the administering authority decides. If, for whatever reason, the administering authorities feel that they do not have enough control over the situation then that is a matter for them to sort out. It does not require legislation to say that administering authorities should do their job—it is already their job, and they should get on and do it.
Finally, even if an appropriate level of prudence was applied when deciding the contribution rate, that money—which, for the sake of prudence, is paid into the fund—is not lost and has not disappeared. It is still available and will be available for the purposes of the scheme; it will be taken into account the next time there is a valuation. Valuations roll on one after the other. If perchance, because of incorrect advice, a bit too much money is put in initially then it will be there at the next valuation and will be taken into account. Presumably the administering authority, as long as it is doing its job, will adjust the contribution rate appropriately. What we have in the amendment is additional unnecessary bureaucracy and, as far as I can see, the only people who will gain will be the professional advisers.
Lord Palmer of Childs Hill (LD)
My Lords, this group asks for greater transparency around Local Government Pension Scheme valuations by requiring benchmarking against insurer pricing and gilt-based discount rates, with clearer explanations where more prudent assumptions are used. There is value in greater openness and comparability, but there is also a risk in appearing to imply that one benchmark can neatly settle what is, in practice, a complex actuarial judgment.
I was taken by the contribution from the noble Lord, Lord Davies. He really killed off the amendment by saying that it would give more work for actuaries. The tendency is for the actuary then to say, “On the one hand this and on the other hand that”. Very often, the advice is not even that definite anyway, which is why actuaries are there to confuse the issue altogether.
We should be honest about two things at once. First, employers and scheme participants need clearer information. If valuation choices materially affect contribution rates, local authority budgets and, ultimately, local services then those choices should be explained in language that non-specialists can understand. Secondly, the Local Government Pension Scheme is not simply an insurer in another form; it is a long-term, open, public sector scheme with characteristics that very much differ from closed private arrangements. Although comparison can illuminate, it must not mislead, as is the danger. A benchmark should be a tool for understanding, not a back-door instruction about how every valuation ought to be done.
That is why we on these Benches are cautious. We are sympathetic to calls for clearer publication, accessible material and meaningful consultation. Sadly, we are less persuaded by any suggestion that the right answer can be derived by mechanically comparing one prudence basis with another. The real issue is whether assumptions are evidence-based, proportionate and properly explained. If the Government believe that the present system already secures that then they should show it—I hope the Minister will do that when he responds. If not, there is merit in considering reforms that improve transparency without oversimplifying a technical process.
On that basis, we on these Benches do not oppose the spirit of scrutiny here, but we are not convinced that the amendment, as drafted, is the full answer. Therefore, we are not against what the amendment says, but we would not support it if it were moved to a vote.
Lord Katz (Lab)
I thank the noble Viscount, Lord Younger of Leckie, for the amendment, moved very ably by the noble Baroness, Lady Stedman-Scott. It seeks to improve the transparency of the assumptions and level of prudence applied in LGPS actuarial variations, including through the introduction of additional benchmarks.
The 2025 triennial valuation will conclude on 1 April, and at present we do not have a complete picture of its outcomes across the 87 different funds and more than 20,000 employers in the scheme. The amendment seeks to prescribe remedies before any diagnosis has been made or, indeed, any maladies have been fully understood.
Many of the matters raised will be covered by the Government Actuary’s Department report under Section 13 of the Public Service Pensions Act 2013. The report will assess whether employer contributions have been set at levels appropriate to ensure solvency and long-term cost efficiency, whether funds’ valuations comply with the regulations and the degree of consistency between them. Recommendations will then be taken forward by the Ministry of Housing, Communities and Local Government and the scheme advisory board.
Officials are already engaging with the Government Actuary’s Department, which is targeting a publication date of spring 2027 for its report and recommendations. Your Lordships’ House will be pleased to hear that this is earlier than previous valuations, which I hope demonstrates the seriousness with which we are taking the issues raised by noble Lords in Committee. The Government Actuary’s Department will engage widely with funds, actuaries and advisers to develop a comprehensive understanding of the 2025 valuation.
It is appropriate for different funds and their advisers to use different discount rates, reflecting variations in risk appetite, employer profile and investment mix. It is helpful to understand how these approaches compare across the sector. The Section 13 review uses benchmarks to place local valuations on a comparable footing and may, in the first instance, provide useful insight into funds’ decision-making. There is a delicate balance to be struck. Members’ benefits are guaranteed in statute, but funds must ensure that they hold sufficient resources to pay those benefits over the long term through investment income and contributions.
My noble friend Lord Davies is right in his assertion that actuaries advise and funds decide. I salute, in making these contributions, his forbearance in not arguing for the interests of the national union of actuaries, of which I am sure is a founder member—at least he ought to be, if it does not exist.
We heard a fair amount on prudence, as we did in Committee, from the noble Lord, Lord Fuller, using his experience. In a locally managed scheme, it is for funds to work with their actuarial advisers and employers to set a contribution rate that supports the long-term viability of employers and the fund. The Section 13 report prepared by the GAD will consider questions of prudence—that is, how the discount rate is set and how stability is applied to contribution rates. Were the Government to set correct valuation assumptions, they would risk undermining the principle that funds and expert actuarial advisers are responsible for ensuring the long-term sustainability.
A push for greater intervention at the valuation risks moving from a locally managed scheme to a centrally managed scheme. We heard much about that in the discussion on the previous group of amendments. The implications are real and far reaching, decreasing rather than increasing the role for locally elected representatives.
On transparency, the amendment would require additional detail on assumptions and benchmarks in the funding strategy statements and these to be communicated in a more user-friendly way. I believe we are broadly aligned on the value of valuation reports and supporting material, such as funding strategy statements, being easier to understand for the lay reader. There is already transparency in the process. Administering authorities should consult all employers in the fund on their funding strategy statement. This statement should outline how surpluses and deficits will be managed, outline the approach to contribution stability and summarise the main actuarial assumptions used at the valuation.
To respond to the noble Lord, Lord Fuller, the funding strategy statement is consulted on, and the SAB guidance already says that the purpose of the FSS is to establish a “clear and transparent” strategy that explains how liabilities will be met and
“how the fund balances the interests of different employers”.
We must not jump to conclusions about how the valuation has played out for every fund and employer. There are already examples of good practice, including meaningful employer consultation and capable pension committees with the confidence to interrogate their actuary’s advice to fully understand the proposed contribution rates.
In his evidence to the Committee on the Bill in the other place, Roger Phillips, chair of the LGPS advisory board, said about the treatment of surplus that
“we live in a very volatile situation, and circumstances can change. You have to be careful, because if you reduce contribution rates considerably, that is a great benefit at this moment in time, but if you then turn around and start to increase them again, that can be very difficult for all employers to deal with, including local government”.—[Official Report, Commons, Pension Schemes Bill Committee, 2/9/25; col. 41.]
Until the valuation has concluded, we cannot reach a definitive view on how the interpretation of regulations and guidance and the quality of employer consultation have shaped the results that will apply from 1 April. As part of their review, the Government will ask the Government Actuary’s Department to focus on methods for managing risk and reflecting the long-term funding objectives of the scheme including discount rates, application of stability mechanisms and buffers and the effectiveness of employer engagement. I have committed to additional work with the GAD on how discount rates and the application of stability mechanisms affect contribution rates and whether employer engagement processes are operating effectively.
Following the publication of the Section 13 report, the Ministry of Housing, Communities and Local Government will undertake a review of the regulations and guidance governing the triennial valuation ahead of the 2028 valuation. I appreciate that your Lordships’ House may wish for more immediate action, but we must ensure that we are in possession of the valuation results before we determine the right course of action. I therefore ask the noble Viscount, Lord Younger, or the noble Baroness, Lady Stedman-Scott, to withdraw the amendment.
Baroness Stedman-Scott (Con)
I did not say it for that to happen—just to clarify matters.
I am grateful to all noble Lords who have contributed to this debate and thank the Minister for his response. It has become clear in our discussion that the issue this amendment raises is not simply a technical question about actuarial methodology or valuation frameworks; it is about the very real pressure being felt by employers across the Local Government Pension Scheme and the consequences of those pressures for local services and for the taxpayers who ultimately fund them. We remain concerned that this is not yet something that appears to be firmly on the Government’s radar, yet the evidence we have heard from employers, advisers and those operating within the system suggests that it is an issue that requires attention.
This is not something that we have plucked out of the air, made up or brought to the Chamber today based on a whim. It is from interviews and meetings that we have had with experts in the system who say that this needs looking at. We were told about one local government pension scheme that is 189% provided for. While we have to be careful, balance things and rely on the experts, that is just a bit out of kilter. Across the country, councils and other employers are facing extremely difficult financial circumstances. Many are asking for emergency support simply to maintain the services on which their communities depend. In that context, it cannot be right that questions about whether pension contributions are being set at excessively prudent levels are simply left to drift until the next review cycle arrives.
For those reasons, we believe this amendment addresses an issue that is real, immediate and important. It introduces transparency where transparency is needed, and it does so in a way that is constructive and proportionate. I therefore seek to test the opinion of the House.
Viscount Younger of Leckie
“Interim reviews of employer contributions 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) (funding strategy statement), 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.(3) 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.(4) 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) specified 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.(5) 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.(6) 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).(7) Administering authorities must have regard to guidance issued under paragraph (6)(a).(8) The Secretary of State must publish the guidance within six months of the day on which the Pension Schemes Act 2026 is passed.””Member's explanatory statement
This new clause aims to strengthens regulation 64A of the Local Government Pension Scheme Regulations 2013 to make interim reviews of employer contribution rates more accessible and transparent.
Viscount Younger of Leckie (Con)
My Lords, I will address Amendment 12, which stands in my name and that of my noble friend Lady Stedman-Scott. This amendment addresses an issue that sits at the very centre of the concerns we have raised throughout the passage of the Bill: how contribution rates in the Local Government Pension Scheme are set, reviewed and scrutinised. This debate will take us further than the previous debate on a related issue.
Throughout the passage of the Bill, we have returned repeatedly to a central concern about the Local Government Pension Scheme: whether the system as it currently operates is truly striking the right balance between prudence and responsibility to members. We touched on that during the last debate. Prudence is essential; no one disputes that. Pension promises stretch across decades and it is entirely right that those responsible for safeguarding them adopt a careful and responsible approach—I feel sure that when or if he chooses to speak, the noble Lord, Lord Davies, will have something to say on this matter—because prudence must also be proportionate, transparent and sustainable.
A pension system must not only protect members’ benefits; it must also operate in a way that is affordable for those who are required to fund it. That balance is fundamental to the long-term health of the scheme and a key consideration for many admitted bodies considering if they should remain a member of it. The noble Lord, Lord Katz, alluded to this in a previous debate, but at present employer contribution rates are set through the actuarial valuation cycle which takes place, as he may have said, every three years—note: every three years. That process is well established and plays an important role in maintaining the long-term stability of the scheme. But it also means that once those rates are set, employers can find themselves locked into them for a considerable time, even if the financial circumstances of the scheme or of the employer itself change significantly during that interval. We believe that rigidity is increasingly difficult to justify.
We know that financial conditions can change quickly. Employer finances can change, liabilities can change and market conditions can shift. We know that from recent experience, yet, under the current framework, the mechanisms for reviewing contribution rates between valuation cycles are limited and, in practice, often opaque. Amendment 12 seeks to address that problem by creating a clearer and more transparent framework for reviewing employer contribution rates earlier when circumstances change.
Under this amendment, administering authorities would be able to carry out an interim review of contribution rates where there has been a significant change in scheme liabilities or in an employer’s financial position, or where an employer formally requests a review and agrees to cover the reasonable costs of undertaking it. We believe this is a very reasonable and sensible change. It makes the process more accessible to employers who believe that the contribution rates they are being asked to pay no longer reflect reality. It recognises that financial circumstances do not move neatly in three-year cycles—and nor do they—and allows the system to respond when material changes occur.
However, the amendment goes further than simply enabling reviews. It also strengthens transparency around the actuarial assumptions that underpin those decisions. That level of transparency is essential, as was again debated in the previous group. Contribution rates have few real consequences for employers participating in the scheme, whether local authorities, academies, housing associations or many others. Those organisations must plan budgets, allocate resources and deliver services on the basis of the costs they are required to meet. They should therefore be able to understand the assumptions and methodologies that determine those costs, so this amendment helps to ensure that contribution rates can respond to changing financial circumstances. It would ensure that employers are not locked into potentially outdated rates for three years at a time and that the actuarial assumptions underlying those decisions are transparent and, very importantly, open to scrutiny.
Ultimately, this is about responsibility. We all expect public bodies to act responsibly when they handle public money, and pension funds are no exception. As we have heard, they manage very substantial sums of money, and the decisions taken within those systems have consequences for not only scheme members but employers and taxpayers. With responsibility must come transparency and accountability, and where contribution requirements change or are reviewed, the assumptions behind those decisions should be visible and understandable.
However, crucially, this amendment would not undermine the role of actuaries; nor would it weaken the prudence that underpins pension funding. It would ensure that the system remains responsive and more flexible, transparent and accountable to those who are required to fund it. For those reasons, this amendment represents a constructive and necessary improvement to the framework governing the Local Government Pension Scheme, and I urge the Government to adopt it. I will, of course, listen very carefully to the upcoming debate, short or long, but I give notice that I am minded to test the opinion of the House. I beg to move.
Baroness Altmann (Non-Afl)
My Lords, I support this amendment. This is an important time to talk about the contribution rates to the Local Government Pension Scheme. When funding has changed so substantially in a very short period of time, having an interim review clearly makes sense, for not only the local authority but the council tax payer.
As we heard in a previous debate, we are seeing councils with significant surpluses continuing to spend council tax income on pension contributions to schemes that do not need them because they are in significant surplus. Further, fixing contribution rates in a three-year cycle underestimates the timeframe that has gone into the setting of those rates, because the valuations on which those rates are based were done more than three years before the third year of the cycle. It takes about a year for the scheme valuation to be done and the contribution rates to be set, so they could easily be four years behind. A lot can happen, and has happened, in that timeframe.
I hope the Government will accept that this principle of allowing councils to be more flexible with the revenue that they receive from council taxes could benefit local authorities and the country. We know that councils have been forced to increase council tax due to their inability to meet their basic spending commitments. If the amount that councils spend on pension contributions could instead be spent on social care, or other local authority needs, they would require less money from local residents—which would improve the local economy, as tax rates would not be so high—and central government. The pressure on public spending could therefore be ameliorated.
I know that there is a principle of trying to achieve what is referred to as stability in contribution rates, so that they do not change too much from one year to the next. However, when there are significant changed circumstances, forcing schemes to fiddle the assumptions on which the scheme funding is based so that local authorities can somehow justify maintaining contributions to a fund that, in the private sector, would not need the money and would normally be having a contribution holiday, strikes me as not serving the best interests of either the local or the national economy. A review of how pension contribution rates are set at local authority level is probably long overdue, given the big changes that we have seen, and could help the Government with some of the funding strains that they have been feeling, and their desire to improve growth.
If a local authority is spending, say, 20% or more of its council tax revenue on putting money into a pension scheme that does not need it, and if that pension scheme is underwritten by the Government anyway, so its members’ benefits are not at risk, you have a very different scenario from that a private sector employer’s trustees might be facing: if the contributions stop and the employer gets into trouble, there is nothing much that can be done to ameliorate the position for members. That risk does not really exist in a local authority pension scheme. As I say, there is no contribution to the Pension Protection Fund and no underwriting; this is guaranteed by taxpayers.
Therefore, if you are raising taxpayer revenue from council tax, why not simply use it where it is needed, rather than putting it where it is not needed for now? You can always come back later and impose contributions when or if the funding position changes, but the scheme is not going to run out of money in any short-term period; that is not how pension schemes work. I therefore hope that the Government will appreciate the logic of this amendment, which was so ably moved by my noble friend on the Front Bench.
Lord Katz (Lab)
I thank the noble Viscount, Lord Younger of Leckie, for his amendment, and I share the interest in ensuring that interim valuations are accessible and transparent for all employers in this scheme.
Amendment 12 proposes changes to Regulation 64A of the Local Government Pension Scheme Regulations 2013, which concerns valuations carried out outside of the triennial valuation cycle. In Committee, I committed that the Government will consult on changes to Regulation 64A this year, and we will consider the matters raised as part of that consultation.
I reiterate the point I made in Committee: any changes to regulations need to be properly considered to avoid unforeseen consequences. The views of employers, funds and other sector groups are vital to this process, and amending legislation now would prevent them contributing to the policy design and therefore ensuring our ability to get the best possible outcome. There is clearly value in having a mechanism that allows employers to review contribution rates, especially where employer covenants or liabilities change significantly, but this must remain consistent with the triennial valuation and be workable for all participants across the sector.
Amendment 12 aims for additional transparency, in a similar vein to the other amendments we have discussed this afternoon. The noble Viscount should note that the policy on interim valuation contribution reviews is set out in the funding strategy statement, on which employers are consulted.
The noble Baroness, Lady Altmann, spoke in detail about the time lag of valuations and the impact of events in the financial cycle. As everyone will be aware from geopolitical events, markets can vary from one day to another. Simply requesting a valuation on the basis of a change in the day’s markets would be excessive, and indeed many funding strategy statements state this. The current regulations provide for interim valuations on the basis of changes in liabilities or covenant. The risk of liabilities not being met is that the burden goes up not for the Government but for the council tax payer, as a council that may not be in a good financial position, as the noble Baroness says, needs to increase council tax to cover liabilities. The Government do not underwrite the scheme. Your Lordships’ House should remember that 50% of LGPS employer contributions are not from local authorities, so we are not talking about a situation where it is exclusively local authorities that would cope with the change.
I said in Committee—and I could have said this in response to the previous group as well—that it is marvellous to see the Benches opposite show concern now about the funding of local authorities. We are concerned about it, and we were concerned about it for the previous 14 years when the Benches opposite were in government and had a differing view of imposing austerity on local government. I will say no more, and I apologise to your Lordships’ House—I could not help myself, having been very good on the previous group.
I hope my response demonstrates that the Government have considered the points raised through this amendment carefully. I therefore ask the noble Viscount, Lord Younger of Leckie, to withdraw Amendment 12.
Viscount Younger of Leckie (Con)
I am grateful to the Minister and to my noble friend Lady Altmann for her supportive remarks. This amendment raises a simple but important question: how do we ensure that the Local Government Pension Scheme remains responsive, transparent and accountable when the financial circumstances surrounding it change? It sounds to me very reasonable.
I have taken note of the remarks made by my noble friend Lady Altmann, from her long experience. It was interesting that she pointed out that the timeframe of three years could easily be four years for the delays that necessarily have to be there, and she made further powerful points. By accepting this amendment, the Government could have a greater chance of achieving their growth targets with a domino effect—they might like to take that point on board.
Across the country, as my noble friend Lady Stedman-Scott said in the previous debate, many local authorities and other participating employers are operating under immense financial pressure. We know that councils are already struggling to balance their books, and some are being forced to seek emergency support simply to maintain basic services. In that context, the ability to review contribution rates where circumstances have materially changed is surely a matter of responsible governance.
The amendment is simple. It would establish a clearer framework through which contribution rates could be reviewed when there is a good reason to do so. For those reasons, I believe this amendment represents a sensible, reasonable and proportionate improvement to the current framework. It would reinforce the principles of transparency, accountability and responsible stewardship of public funds. I therefore stick to what I said at the beginning: when my amendment is called, I will wish to test the opinion of the House.
Finally, I do not think that the Minister is correct. He said the policy should “remain consistent”, which shows a great lack of understanding of what many in the industry are actually saying and a great inflexibility from this Government. I wish to test the opinion of the House.
Baroness Altmann
“(6A) Prior to making modifications to scheme rules in line with this section, trustees must commission and consider relevant formal actuarial advice regarding the impact of surplus distribution on scheme funding and future member or employer benefits and must consider alternative approaches for dealing with a surplus that include—(a) running the scheme on without new contributions,(b) transferring to a superfund, and(c) buying annuities.”Member’s explanatory statement
This amendment would require trustees to ensure they have had formal advice about surplus distribution before changing scheme rules, and the impact of alternative ways to deal with scheme funding.
Baroness Altmann (Non-Afl)
My Lords, Amendment 13 is in my name. I shall also speak to Amendment 15, which is very similar. I also support the aims of Amendments 14 and 16 to 19, which seek to make sure that members’ interests are taken into account when trustees distribute, or consider distributing, a surplus to employers.
Amendment 13 seeks to build on the important discussions we had in Committee. I thank the Minister for her thoughtful responses to those discussions. I appreciate the Government’s commitment to ensuring that defined benefit pension schemes can contribute to economic growth through the prudent and efficient use of their substantial surpluses. With around £1.2 trillion in private sector defined benefit assets—and that is on prudent measures—the potential for positive impact is huge, given the estimated £240 billion surplus from those 4,500 schemes.
Trustees who have stewardship over these assets on behalf of around 9 million scheme members are now being encouraged to make strategic decisions which could reshape some schemes for the future and deliver broader benefits, potentially both to members and to the economy. The Bill is correct in encouraging that to happen. Of course, trustees have significant responsibilities when they assess a scheme’s surplus and whether to it pay out or to preserve it. As the noble Lord, Lord Davies of Brixton, has so often reminded us, a surplus is merely a reserve—a buffer against future bad markets, perhaps. In some schemes, the extent of that surplus is so significant, with the employer having put in so much money during the past few years, because of the impact that quantitative easing had for so long on pension schemes’ liabilities, that it is perhaps appropriate for trustees to consider whether employers should be able to get some of that money back, especially if they could invest some of it into their business and help grow the strength of the employer behind the scheme.
As trustees have these greater responsibilities, my amendment seeks to ensure that the relevant comparisons are being made before any surplus is distributed, so that the trustees have considered the available options. The current Technical Actuarial Standard 300 would properly inform them. This would include not just paying out a surplus but running the scheme on for the benefit of the members. It could also include possibly finding a new employer sponsor who could manage the scheme with a greater strength behind it and take advantage of the surplus to some degree both to enhance member benefits and to return some money to the employer.
The noble Lord, Lord Davies, may well tell us that these technical actuarial standards and the reports, such as TAS 300, are already in place, so why do we need the amendment? I am informed by significant areas in the pension industry that advise many DB schemes that, although there is a requirement for these reports, trustees do not always take note of them. They are not even always presented to the trustees. This is under the aegis of the Financial Reporting Council, which does not have sufficient resource to enforce the standards that it would, perhaps, otherwise wish to do.
This amendment makes it clear to trustees that they must consider the broader actuarial advice—not just asking whether they should pay out the surplus and how much they should pay out but considering the other options that would be available. Many trustees will consider paying out a surplus alongside a scheme buyout, for example. This actuarial report would help to inform the trustees of the potential benefits and improvements to members that could be achieved by not buying out and by running the scheme on, for example.
At the moment, for each £1 billion of buyout funding that exists in a scheme, if they buy out, approximately £150 million to £250 million then goes to the insurance company in profit because it takes in the money but then rerisks it but invests in higher return assets—so it makes that profit. It is entirely feasible to imagine that a scheme that carries on could itself get that extra profit by running the investment policy in a kind of low-risk way, just as an insurance company would do, but that money could then go to the members or be shared between the members and the sponsor.
Viscount Thurso (LD)
My Lords, I shall speak to my Amendments 14, 16, 17 and 18, in my name and that of my noble friend Lord Palmer. It is always a pleasure to follow the noble Baroness, and I thank her for her support, which I am happy to reciprocate. As it is the first time that I have spoken on Report, I reiterate my interest as a trustee of the Parliamentary Contributory Pension Fund. I do not think that this Bill affects that fund, but for clarity I declare it. I also thank the Minister for the engagement that she has had with me and other colleagues—but particularly with me—on this subject. I came away feeling that I had had tea and sympathy, although possibly not with the greatest expectation for the future. But I thank her for engaging with me.
We debated this matter at some considerable length in Committee, and I shall not go over it. The key issue in this set of amendments is about permitting, when there is a surplus, that surplus to be fairly used, in part to give some inflationary uplift, if that would be the appropriate thing, to members of a scheme. There is nothing in any of the amendments that mandates that course of action; these are designed to permit it and also perhaps to draw attention to some of the historic injustices, as they might be called.
I cannot hear the word “surplus” in relation to pension funds without immediately putting quotation marks around it, as I said in Committee. I was grateful to the noble Lord, Lord Davies, for his suggestion that we really ought to talk about “assets” rather than a “surplus”, which is a best guess by some intelligent professionals. The starting point is a known—the actual market value of the fund on a given day—to which are added a series of known unknowns, in the form of what the guesstimated inflation rate might be, what the likely actuarial longevity of the members might be, and a variety of other things, to arrive at a best guesstimate of what the value of the assets might be at a time in future and what the liabilities might be. If you take one from the other, you come up with a surplus or a deficit. Like many who have spoken, I am extremely cautious about the notion of surplus, and I know from the funds that I have been involved in that, if you are at the top of the cycle, as I suspect we are getting close to now, a larger surplus is much needed to cushion you against the volatility of the shocks to come, whereas if you are at the bottom of the cycle, you are probably very near parallel and possibly slightly in deficit—and you have to have regard to that.
There is a general principle, which I shall speak to more on my next amendment later on tonight, that there is a contract between the employer and the employee that is, in the case of a direct benefit pension, that they are remunerated and, as part of their remuneration, there is a future remuneration, which is the pension. In the case of those schemes that have in their rules full indexation and there is a large surplus, the principle is that that surplus should, by whichever means are chosen, be returned to the employer. The schemes that I am concerned about are schemes which are in surplus and which, in their documentation, made clear that it was the intention at the time to uprate for inflation—but, for whatever reason, usually prudence, the designers of the scheme did not mandate that but allowed a degree of flexibility so that the employer or the scheme could choose not to uprate in whatever circumstances. In that circumstance, when a surplus arises and when indexation arises that had been indicated, if not absolutely promised, part of that surplus belongs to the pensioners, and it is only fair and just that they should have it. This set of amendments is designed to make that possible.
Lord Davies of Brixton (Lab)
I have worked in the pension sphere for far longer than I care to remember, and so-called surpluses have been a big issue throughout. They have come and gone. Sometimes they have been negative surpluses—deficits—but they are still central to the health or otherwise of a pension scheme. They have been totally embedded in my working life, so I hope the House will forgive me if I choose to make a longer contribution on this issue.
I support all the amendments in this group. The noble Baroness, Lady Altmann, suggested that I might not like her amendments, and maybe they are a bit unnecessary in principle, but in practice, the idea that trustees should consider all these issues when they make a decision about releasing surplus to the employer is a good one, so I support Amendments 13 and 15. I also support the amendments in the name of the noble Viscount, Lord Thurso. I particularly welcome his Amendment 17, which effectively points out that the existing legislation on the release of surpluses says explicitly that the trustees should do so only when it is in the interests of members. This legislation removes that guarantee.
We debated this issue in Committee and we have heard the Government’s argument, which, essentially, is, “We can leave it to the trustees to look after it”. My experience is that that is not a safe basis to rely upon. Some trustees are fine and they do a great job; others do not consider their role to be to help the members. They see their role as very restricted, so not having something in the Bill about members is a massive disadvantage.
In introducing this legislation, Ministers said extensively that members are going to benefit from the release of surpluses. Any bystander not deeply engaged in the issue, listening to what Ministers have said, would come to the conclusion that members are going to benefit. Indeed, I quoted about half a dozen ways in which different Ministers have given that impression, but for the purposes of this debate, I shall just quote the Minister for Pensions, my honourable friend Torsten Bell. He argued consistently and rightly that the release of assets is not just for employers but for members as well. The Government’s road map for pensions, to which he put his name, states under the heading, “Surplus Flexibilities”:
“We will allow well-funded … pension schemes to safely release some of the £160 billion surplus funds to be reinvested across the UK economy and to improve outcomes for members”.
The Government’s case is that this change in the legislation is required to benefit members, yet there is nothing at all in the Bill about benefit for members. This has been highlighted in the amendment from the noble Viscount, Lord Thurso. It is a big gap in the Bill, and it needs to be rectified.
My Amendment 19 goes together with Amendment 16 from the noble Viscount, Lord Thurso. His amendment adds the word “consulted”, saying that members should not only be notified of the trustees’ intention to release surplus to the employer, they should be consulted about that decision. Consultation is obviously a good thing. The structure for trustees to consult scheme members is not, to my mind, strong enough to provide a helpful way forward. The better way forward is the one suggested in my amendment. There is already provision in legislation for employers to consult members about changes in occupational pension schemes. There is a list of changes to or actions in relation to pension schemes, whereby the employer—if they are involved—has to consult with the independent recognised trade unions. I am very much a trade unionist here. The point of trade unions is to provide a viable means of consultation, and it applies here.
Baroness Stedman-Scott (Con)
My Lords, I will speak briefly to some of the amendments in this group. At the outset, I thank all noble Lords who have tabled amendments and contributed to the constructive discussions we have been able to have on these issues. While I will focus my remarks on some of the amendments, we understand the direction of travel intended across this group.
Taken together, these amendments largely seek to ensure that the process of releasing surplus funds from defined benefit schemes is carried out on the basis of sound professional advice, in close communication with scheme members and with their interests properly safeguarded. The group also includes a technical amendment from the Government, which tightens up the drafting of the Bill and which we are content to support.
Amendment 13 in the name of the noble Baroness, Lady Altmann, would introduce a formal decision-making safeguard before schemes even create the legal power to pay surpluses to employers. In practical terms, it would ensure that trustees have received and considered formal actuarial advice before making such a change to the rules of the scheme. That matters because altering the rules of a scheme to enable surplus extraction has potential implications for the long-term funding position of the scheme and for the security of members’ benefits.
Amendment 13 therefore performs two important functions. First, it seeks to ensure that trustees properly understand the impact that surplus distribution could have on scheme funding before rule changes are made. Secondly, it requires them to consider alternative approaches to dealing with surplus that may benefit members instead, such as running the scheme on, transferring to a superfund or securing benefits through annuities. In other words, it ensures that sound professional advice is formally incorporated into the process before it can be completed.
That process is then complemented by Amendment 15, which addresses the next stage of the decision. While Amendment 13 concerns the creation of the power, Amendment 15 would ensure that advice is taken when trustees decide whether to exercise that power and pay surpluses to the employer. Under this amendment, trustees would be required to obtain actuarial advice and to consider the risks and benefits of alternative approaches before distributing surplus. They would therefore need to evaluate options such as reducing or pausing contributions, running the scheme on, transferring to a superfund or buying out liabilities. Ensuring that these risks and alternatives are considered in sufficient depth is critical. It helps to make sure that trustees’ fiduciary duties remain at the centre of the process and that decisions about surplus are taken in a careful, balanced and professionally informed way.
Amendment 17 would retain the existing requirement that trustees must be satisfied that the exercise of the power to pay surplus is in the interest of scheme members. As noble Lords will know, that protection currently exists in the Pensions Act 1995, but the Bill as drafted would remove it. Retaining that test would represent a major governance safeguard. It ensures that trustees continue to place members’ interests at the heart of their decision-making when considering whether surplus should be returned to the employer. That seems to us both sensible and entirely legitimate. The Government should give serious consideration to adopting this change because members’ interests should always remain central to the operation of pension schemes.
The reforms proposed in the Bill potentially open a pathway for surplus to be released from defined benefit schemes. If that pathway is to command confidence, it must be underpinned by strong governance, professional advice and meaningful member engagement. The amendments in this group help to reinforce these principles. We welcome the opportunity we have had to debate and discuss these important issues.
The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, I am grateful to the noble Baroness, Lady Altmann, my noble friend Lord Davies and the noble Viscount, Lord Thurso, for introducing their amendments. During our various deliberations, many noble Lords have highlighted the fact that the level to which a DB scheme is funded is subject to volatility and to changes in the underpinning assumptions used to ensure that schemes remain able to meet the promised pensions. This is something we take seriously as we all want to ensure that the policy aim here can be achieved: for surplus funds to be used to benefit members and employers, but with the right protections so that every member’s pension can be paid.
As I have outlined previously, the DB funding code and the underpinning legislation require trustees to aim to maintain a strong funding position. Our changes preserve trustee discretion over surplus release. Crucially, trustees must receive actuarial certification that the scheme meets a prudent funding threshold, and members must be notified before surplus is released. Let us not forget that these changes are simply levelling the playing field, as some schemes can already release surplus.
Amendments 16 and 19 would both require a consultation to take place before surplus is released. I understand the wish of noble Lords for the voice of members to be heard when decisions are being taken about releasing surplus. We agree with that observation; that is precisely why the decision to release surplus remains in the hands of trustees, who are there to represent their members. Trustees will consider a range of scheme-specific circumstances, including the employer covenant and wider endgame planning, when discharging their duty to members. It is, however, entirely for trustees to decide whether they may seek broader views before taking a decision to release surplus. It is their decision, not that of the employer.
In our view, a legislative requirement to consult is not proportionate. The existing framework gives trustees scope to seek broader views as required, and the fact remains that, ultimately, trustees must act in the best interests of scheme beneficiaries when taking a decision to release surplus. Furthermore, under our changes, trustees will continue to be subject to a requirement to notify members in advance of any surplus release, maintaining this key protection for scheme members. I can assure my noble friend Lord Davies that we will be monitoring closely how schemes intend to use, and are using, these powers.
Amendment 17 seeks to retain the statutory requirement that trustees be satisfied that it is in the interests of members before agreeing to surplus release. We discussed this in some detail in Committee. Trustees already have a clear overarching duty to act in the interests of scheme beneficiaries. We have had clear feedback from industry-wide stakeholders, including trustees, who have welcomed the repeal of this statutory requirement. Existing legislation is perceived by trustees as a barrier to considering the release of surplus because they are not sure how this additional test is reconciled with their existing overarching duties. This could clearly lead to indecision on whether to release surplus, which may ultimately lead to members losing out. We are making this change to put it beyond doubt for trustees that they are not subject to any additional tests beyond their existing, clear duties of acting in the interests of scheme beneficiaries.
Amendments 14 and 18 cover the consideration of discretionary awards upon the release of surplus. I understand the concerns raised by scheme members whose pensions have not kept pace with inflation. But the Government do not think that these amendments would be helpful to trustees or members. These amendments address only a single element of the matters that trustees must consider when determining whether to release a surplus. In practice, trustees’ overarching duty to act in the interests of all beneficiaries requires them to weigh a broad range of criteria before deciding whether a surplus should be released and, if so, how members might appropriately benefit. This may include the award of discretionary increases but, by narrowing the scope of these considerations, the amendments would risk constraining trustees in the proper discharge of their responsibilities.
The noble Viscount highlighted some matters that we may return to when we discuss his Amendment 22. I will touch on them now—what happens in circumstances where there appears to be a decent surplus and trustees may be minded but employers are reluctant—but, if it is okay with the noble Viscount, I will come back to that in the debate on his Amendment 22 as it is probably more closely focused on that.
The Government therefore believe that it is important that trustees remain in the driving seat. They are best placed to understand the individual circumstance of their scheme, its characteristics and history, and to decide how members may benefit from the release of surplus. By extending the power to return surplus to more trustees, we are levelling that playing field, with strong safeguards in place to protect member benefits. Trustees will be in a better position to negotiate member improvements in return for agreeing to release surplus.
There is clearly an appetite out there for trustees to enable members to benefit from this. Recent industry research shows that over 40% of employers intend to share DB surplus with members. We are confident that there is an appetite. We need to be careful not to create so many new restrictions that the policy aim of allowing more trustees to share surplus is not achieved, because that would prevent surplus delivering real value not just to employers but to members and the wider economy.
I turn to Amendments 13 and 15 in the name of the noble Baroness, Lady Altmann. Amendment 15 would require regulations to include a condition that trustees receive and consider actuarial advice on scheme funding. Amendment 13 would create a legislative requirement for trustees to commission actuarial advice on future benefits and alternative approaches to surplus release before modifying a scheme to allow for payment of surplus to the employer. I am not going to revisit our discussion on TAS 300, which is a particularly delightful memory from Committee, but I understand the concerns raised by the noble Baroness about trustees having appropriate advice to be able to make an informed decision about their endgame choices and whether to release surplus. Trustees will be required to take into account the scheme’s long-term funding objective when making decisions on surplus. This will include the factors that are listed in these amendments. Under the funding code, trustees are already required to set out their funding and investment strategy, describing how they intend to meet members’ benefits over the long term—in other words, their long-term objective. They will already be seeking appropriate advice before determining the long-term objective for their scheme. That objective is reviewed in line with each triennial valuation at a minimum.
Putting in place additional legislative steps that require trustees to commission and receive actuarial advice before releasing surplus could result in additional unnecessary bureaucracy. Hardwiring specific legislative considerations that trustees must take into account will remove their flexibility to gather the most appropriate advice for individual schemes. The Pensions Regulator—TPR—has set out guidance for schemes considering their long-term objective and options, including buyout, superfunds and run-on, which sets out clear expectations of trustees. In particular, the guidance says that trustees
“should regularly review the best way to deliver members’ promised benefits”.
It is not the responsibility of the FRC; it is for TPR to set out the requirements on trustees and monitor them.
Baroness Altmann (Non-Afl)
My Lords, I thank the Minister for her thoughtful and considered response. I also thank all noble Lords who have supported my amendment, including the noble Lord, Lord Davies, and the noble Viscount, Lord Thurso. I had hoped that the noble Lords on the Opposition Front Bench might be willing to support me if I were to press this to a vote, but it sounds as if that is not the case. I hope that the Government will be successful in ensuring that when pension scheme surpluses are paid out, members are considered carefully. I know that the Minister considered this would be unnecessary bureaucracy. I have to say that it is a requirement, but one that is not always adhered to, and the mechanisms for overseeing it do not seem to have been working.
More particularly, what I had hoped this amendment could help achieve was not only helping the trustees meet member benefits but, in many circumstances, potentially improving member benefits beyond what is currently payable. Yes, they need appropriate advice but, given the state of pension schemes, there is a significant opportunity to improve the amount of money paid to members alongside the decisions to pay out surpluses. Therefore, if the noble Viscount, Lord Thurso, decides to move Amendment 14 and test the opinion of the House, I certainly would be minded to support him. However, I beg leave to withdraw Amendment 13.
Lord Katz (Lab)
My Lords, before we go any further, I am afraid we will need to adjourn during pleasure for a few minutes. There has been an incident which means we do not have full access to the areas of the House that are needed to get to the voting Lobbies. I suggest we adjourn during pleasure and keep an eye on the annunciator. It should be a few minutes, but I do not want to specify a time because we do not know quite how long it will take to clear up. Apologies for this inconvenience, but I think it is for the best.