Public Service Pensions Bill

Baroness Donaghy Excerpts

Wednesday 9th January 2013 Lords Chamber

[The Deputy Chairman of Committees (Lord Colwyn)]

My Lords, if this amendment were to be agreed I could not call Amendment 35 due to pre-emption.

[Baroness Donaghy]

My Lords, I identify with every word that the noble Lord, Lord Sharkey, said on that issue. In doing so, I shall speak to my amendment about the European directive, which is related to the structure and governance of schemes. In view of the time, I shall give the short version because it is a rather technical issue.

Of course the European directive was intended to have a minimum EU-wide standard for security of benefits, but that was not its sole objective. It was also aimed at improving standards of management and allowing pension fund schemes to play a full part in investment markets. All funded schemes should meet these objectives whether government guaranteed or not.

On the question of legal separation, at present the funds in England and Wales of the Local Government Pension Scheme are not legally separated. They are under the control of the councils that administer them. Most are run by a council committee under local authority legislation. On the issue of the Local Government Pension Scheme meeting the requirements of Article 18, the article states:

“Member States shall require institutions located in their territories to invest in accordance with the ‘prudent person’ rule and in particular in accordance with the following rules … The assets shall be invested in the best interests of members and beneficiaries. In the case of a potential conflict of interest, the institution, or the entity which manages its portfolio, shall ensure that the investment is made in the sole interest of members and beneficiaries”.

Therefore, the Local Government Pension Scheme has its own investment regulations. They do not contain any requirement to the effect of the prudent person rule or to invest in the best interests of scheme members and so are non-compliant with the directive in this respect.

Let me make clear that I am not making any outright criticism of the Local Government Pension Scheme. It has been well run and has the trust of its members. I am aware, of course, that the Minister has said that, in his view, the Government are already fully compliant with the directive. The previous Government, which implemented these articles, also believed that they were fully compliant. I simply make the point that I do not think that is entirely accurate.

The investment regulations of the Local Government Pension Scheme do not contain any requirement to the effect of the prudent person rule or to invest in the best interests of scheme members and so they are non-compliant. Even with the benefit of the directive’s existing legal framework, which is not present in the Local Government Pension Scheme, Parliament has seen the need to provide further protection for members’ interests in particular by requiring the appointment of member-nominated trustees or trustee directors, imposing obligations to provide information to members, requiring trustees to be informed and trained so that they understand their responsibilities, and requiring trustees to appoint professional advisers, whose duty it is to act only for them in situations where there may be a conflict of interest with the employer imposing restrictions on the amount of permissible investment in the employer.

The position under the Local Government Pension Scheme, as matters stand, is completely different. The equivalent of the trustee is the administering authority, which is likely to be a major employer in relation to the fund it manages. Not only that, all decisions taken about investing the fund are taken by councillors, officers and employees of the administering authority or representatives of other employer bodies. There is no provision in the legislation which replicates the duty that trustees owe to their beneficiaries. On the face of the legislation as it stands, therefore, there is nothing to stop the administering authority from taking decisions on investments which prefer its interests and the interests of other employers over the interests of members of the Local Government Pension Scheme. My amendment is therefore necessary to ensure that reform of the Local Government Pension Scheme should address the provisions of the IORP directive.