Pension Schemes Bill

Lord Katz Excerpts

Committee stage
Monday 12th January 2026 Grand Committee

[Lord Palmer of Childs Hill (LD)]

I simply ask the Minister to explain how local accountability will be preserved, how fiduciary duties will be protected in practice and why so much of this is not in the Bill.

[Lord in Waiting/Government Whip (Lord Katz) (Lab)]

My Lords, I am grateful to noble Lords for these amendments in the names of the noble Viscount, Lord Younger, and the noble Baronesses, Lady Stedman-Scott, Lady Bowles of Berkhamsted and Lady Altmann. Before I proceed, as we have had a bout of putting things on the record and making declarations, I should say that I served for a mercifully short time as a councillor in the London Borough of Camden from 2010 to 2014 and, as a consequence, am a member of that council’s pension scheme, but I think that has pretty scant bearing on our discussions this afternoon.

On Amendments 2 and 6, I recognise the intention to preserve the independence of the Local Government Pension Scheme administering authorities and to reduce the burden of regulation on their function. I will say now, so that I do not forget, that I appreciate that the noble Viscount, Lord Younger, asked a great deal of questions on amendments not just in this group but in groups to come. It was very helpful to have his explanation about degrouping; we are very happy to debate the Bill in the way the Committee sees best. I also put on record the welcome recognition by many Members who spoke on this group, particularly the noble Lords, Lord Davies and Lord Fuller—although in slightly different ways—of the importance and success of the LGPS. It is worth being clear that the Government are determined to make sure that success continues.

[The Deputy Chairman of Committees (Baroness Watkins of Tavistock) (CB)]

There is a Division in the House. The Committee will adjourn and resume after 10 minutes.

The Division has been cancelled. If noble Lords are content that everybody is back who needs to be, the Committee stands resumed.

[Lord Katz (Lab)]

My Lords, the Government share the noble Viscount’s aim of ensuring that administering authorities can continue to comply with their fiduciary duty to act in LGPS members’ best interests. I assure the Committee that the Government are not seeking to undermine the fiduciary duty of local pension funds in any way. The responsibility to set an investment strategy, which is the key driver of investment returns, will remain with funds.

As part of the reforms, we are consolidating all assets under the management of the LGPS asset pools; internal advisory capability is a key benefit of that scale. Integrated models in which strategic advice and investment management are both delivered by the same fiduciary manager are commonly used both in private sector schemes and internationally. These models can deliver greater value for money and economies of scale, and can reduce conflicts of interest. The Government recognise that there will be situations where administering authorities may feel that the advice of pools needs to be supplemented with or tested against advice from other sources. However, the Government are clear that such cases should be exceptional rather than routine.

This is probably a good point to address a couple of questions. The noble Viscount, Lord Younger, asked about cross-subsidising. It is fair to say that asset pooling does not lead to one administering authority subsidising the surplus of another. Administering authorities will remain responsible for the surplus or deficit of the fund that they manage, and each fund will continue to be valued separately.

The noble Lord, Lord Fuller, asked about the scale of the pools disincentivising investment in smaller British businesses and creating bubbles; he used the example of AI. Pools will be able to invest in small companies, including small and growing businesses that contribute to the economy. This could be achieved at scale by using actively managed funds, which aggregate opportunities. As set out in the Pensions Investment Review: Final Report, there is

“clear evidence that, in general, larger schemes are better able to invest in productive asset classes”.

This includes investment in private markets, which are key to financing fast-growing British companies. So I believe that the new pooling model will see more money invested in small British companies.

The Government are pleased that decisions about which of the six continuing asset pool companies LGPS funds wish to work with have been made on a voluntary basis and at a local level, and certainly do not intend to intervene in these decisions. However, the Bill provides for regulations to include powers to direct which asset pool a pension fund participates in, so as to be able to safeguard the scheme in future in the unlikely event that satisfactory arrangements cannot be agreed at the local level; this may include where relationships have broken down within a pool or where an administering authority finds itself without a pool willing to accept it.

The noble Viscount, Lord Younger, asked about consultation on the powers; basically, he asked why we are introducing a power to direct which asset pool an administering authority participates in. The Government’s strong preference is for decisions on pool membership to be made on a voluntary basis and at a local level. However, the Government need to be able to safeguard the scheme in the unlikely event that satisfactory arrangements cannot be agreed at a local level, such as if an administering authority were to find itself without a pool willing to accept it or, as I said, if relationships break down. Regulations are expected to require consultation; that is carried out prior to using the power, of course.

The noble Viscount, Lord Younger, also asked about the transition of assets that are held or managed. The guidance allows room for pools’ discretion where transfer of ownership is not reasonably practical, so there will not be any need for authorities to make such unnecessary losses in the process of pooling.

More generally, the noble Viscount and other noble Lords asked about the fiduciary duty and it being undermined. This provision is not a new power. It replicates a provision in the existing Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016, which will be repealed when the new Local Government Pension Scheme (Pooling, Management and Investment of Funds) Regulations come into force.

I do not want to single out anyone in particular, but the noble Lord, Lord Fuller, talked about meddling. To be clear, this power is a backstop power that would be used only as a last resort to safeguard the scheme, following, as I said, consultation with the relevant administering authority.

On Amendment 4, I recognise that the noble Viscount’s intention is to test why transitional arrangements for LGPS administering authorities are not set out in the Bill. There is more than 50 years’ precedent for the rules of the Local Government Pension Scheme being set out in secondary legislation, going back to the Superannuation Act 1972. We therefore consider that it is more appropriate to change what may and must be included in the rules of the Local Government Pension Scheme through the use of secondary legislation created using existing powers and, where necessary, new powers provided in the Bill, rather than using primary legislation to amend existing secondary legislation. Moreover, given the range of circumstances faced by administering authorities and asset pool companies, the Government will retain some flexibility by setting out transitional arrangements in regulations and can work with the sector to ensure that new requirements are workable and agreeable.

My noble friend Lord Davies of Brixton raised the spectre of this introducing uncertainty. We collectively have a duty to ensure that every penny of members’ hard-earned money is well invested and that the LGPS’s extraordinary scale is harnessed. That includes making the best use of some of the excellent capabilities that exist in the LGPS, rather than building from scratch, which is why we are moving to fewer pools. We recognise that implementing these reforms may cause significant upheaval and require resources, but the reward is enabling a bigger and better LGPS to fulfil its potential as an engine for growth. The Government are considering responses on the proposed transitional arrangements included in the recent technical consultation on the pooling, management and investment of funds regulations and will set out their response in due course.

Regarding Amendment 5 in the name of the noble Viscount, Lord Younger, I recognise the intention to examine the practicalities of co-operation between administering authorities and strategic authorities, especially in the light of the English Devolution and Community Empowerment Bill. The English Devolution White Paper published in December 2024 set out our plan to rewire England by devolving power and funding from central government to local leaders who know their area best. A key aspect of this is the development of ambitious local growth plans by mayoral strategic authorities, including local investment opportunities for institutional investors, including the LGPS.

Clause 2 includes a requirement for LGPS administering authorities to co-operate with strategic authorities, including corporate joint committees in Wales, in order to identify and develop appropriate investment opportunities. This will mean that the investment potential and requirements for pension investments are factored into thinking on local strategic projects from the beginning. It will be for the asset pools, not politicians, to conduct due diligence and take the final decisions on whether to invest. I hope that that addresses the questions posed by the noble Viscount, Lord Younger, around ensuring that schemes are acting in their members’ interests and the interplay between strategic authorities and other authorities.

This high-level requirement to co-operate allows strategic pools and administering authorities to design the most effective ways of working. To ensure a clear, firm trajectory to consolidation and benefits of scales for the scheme as a whole, along with the assurances that I have provided, I think that it is important to understand that the intention behind the LGPS clauses that we have been discussing is to get a balance between retaining flexibility and introducing scale.

There is one remaining question that I have yet to respond to, which was from the noble Baroness, Lady Bowles, about using the power to direct asset pools as to the manner of their investments. The Government are introducing the backstop power to be used, as I said, as a last resort to protect the scheme in the unlikely event that a pool’s decision-making puts it or the underlying pension funds at risk. This power is consistent with existing powers that the Government have to direct administering authorities in specified circumstances, which include powers to give directions about how they should exercise their investment functions. To safeguard the scheme, these powers will need to apply to asset pools instead of administering authorities in future. The Government’s intention is that scheme regulations will require all LGPS asset pool companies to be authorised by the Financial Conduct Authority. It would not make sense for government direction to contradict any requirements of such authorisation.

As I said when I began responding to this group of amendments, there were a lot of questions. I hope that I have answered most of them, but we will of course revisit Hansard after the debate, and I undertake to write to anyone whose questions I have missed. Given that, I respectfully ask the noble Viscount to withdraw his amendment.

[Lord Fuller (Con)]

May I gently invite the Minister to review the comment he made about the ACCESS pool voluntarily asking to disband itself and then, if necessary, write to me afterwards and make a correction on the record? My understanding is that the ACCESS pool did not wish to be disbanded and, in fact, the response to the fit-for-the-future consultation was that the ACCESS pool’s

“proposal does not meet the Government’s vision for the future of the LGPS”.

There was compulsion; it was not voluntary.

[Lord Katz (Lab)]

I had better write to the noble Lord. I am afraid I do not have the details of that particular case to hand, but it is our understanding that it was coming from a voluntary perspective. But rather than speculating—I do not have the details here—I am very happy to write to him with more detail.

[Baroness Noakes (Con)]

I listened carefully to the Minister’s response, but I am not sure that he answered the question about why the Government need to take power to specify the sources of advice that scheme managers must take and whether that would result in a closed list of scheme advisers that had to be used in any event. Not only is that undesirable from a competition standpoint; it also seems likely to work against producing better returns longer term, because you will just ossify the situation as you find it at the point that the Government decide to make that decision.

[Lord Katz (Lab)]

I thank the noble Baroness for that question. I do not know whether this will give her complete satisfaction, but I understand that requiring funds to take advice from their pool could potentially be a conflict of interest. I would say that, first, asset pool companies will be required to have robust conflict of interest policies and procedures for identifying and managing those areas of conflict. As I said fairly early on in my remarks, integrated models—

[Baroness Noakes (Con)]

It has nothing to do with conflicts of interest; it is about whether the Government can specify a limited number of sources of advice that can be given to scheme managers, what the purpose of that is and whether that does not in fact work against achieving the best returns for members over time.

[Lord Katz (Lab)]

I am sorry; I probably misunderstood the direction of the noble Baroness’s questions. I had better write to her to set that out. I think it is fair to say that—this might help a little—in contrast to external advisers, because asset pools are solely owned by old GPS administering authorities, they exist to provide services of their interests and they do not stand to gain financially, even from partner funds taking their advice or providing poor-quality advice. I am not entirely sure that that gets at her question, but the point is that we do not feel that there will be that impact from limiting sources of advice. I will write to her to provide more detail on that point.

[Baroness Bowles of Berkhamsted (LD)]

I got a bit lost in the explanation, because the Minister also mentioned internal advisers. In replying, will he lay out where he thinks the advice is and what that power is doing? If it is providing a sort of override, as the noble Baroness, Lady Noakes, suggested, to a particular type of adviser, as I was trying to suggest it might, then that is unacceptable. Perhaps if the Minister just lays out exactly what is there, that might clarify it. I hope that he will tell us that he will not override anything.

[Lord Katz (Lab)]

That is very helpful. When I write to the noble Baroness, I will certainly make sure that we address the point around independent advisers. I appreciate the noble Baroness, Lady Bowles, asking for that kind of clarification, so my written remarks will address that point.

[Viscount Younger of Leckie (Con)]

My Lords, I am grateful to the Minister for his responses; I am also grateful for the debate we have had on this group of amendments.

I am grateful to all noble Lords beyond me who have asked further questions, particularly in the latter stage of this short debate. It is fair to say—I am saying this against myself—that, with so many questions having been directed originally to the noble Baroness, Lady Sherlock, but applying to both Ministers, it would be extremely helpful to have a full letter with the answers. This has been an important debate; some clear issues have been spoken to, and answers are required.

I will start by picking up some points made by the noble Lord, Lord Davies. He gave the impression—indeed, he said this; I cannot remember his expression—that I was being negative about the Local Government Pension Scheme. I reiterate the point made by my noble friend Lord Fuller: the Local Government Pension Scheme is efficient and is very much a British success story. In addition to that, my noble friend Lord Fuller set out—very eloquently, I thought—the concerns around both the complexities in the Bill and the unintended consequences. There are two clear sides to this. I agree with the noble Lord, Lord Davies, on the success aspect; I want to be quite clear that he knows my position on this.

What unites the amendments in this group is not opposition to reform, nor hostility to pooling local investment or good governance. Rather, it is a concern about how far the Bill reaches into areas that have traditionally, and rightly, been the responsibility of trustees exercising fiduciary judgment. The noble Lord, Lord Katz, said that intervention by government is very much a last resort. I accept what he says but, as the noble Baroness, Lady Altmann, asked—very tellingly—are the Government best placed to direct? Further, she made an interesting point on whether the £400 billion should be part of a sovereign wealth fund. That just shows that it is worth having this sort of debate on this important area of the Bill.

Across these clauses, the Bill moves from setting a framework to conferring powers of direction, compulsion and prescription; direction over participation in asset pools; compulsion towards a particular end state without a clear transition; duties to co-operate with strategic authorities without defined boundaries; and regulation-making powers that reach into advisory pathways and the content of investment strategies themselves. I feel from the debate that each of these elements raises the same underlying question: how will these powers be exercised in a way that is genuinely compatible with fiduciary duty, rather than merely being stated to be so?

With that, I beg leave to withdraw the amendment, but I also acknowledge that there is much work to be done in this area.

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[Baroness Stedman-Scott (Con)]

My Lords, we come to another group of largely probing amendments, which I welcome. A good deal of the process on the Bill will be about unpacking what the Government intend, how these provisions will work in practice and what the industry can anticipate. Certainly, those are the questions that have been raised with me in my engagement with representatives.

I will speak briefly to the amendments in the names of other noble Lords, many of which are clearly probing in nature and raise important and legitimate questions about how Local Government Pension Scheme assets might be deployed to support wider economic and social objectives. We welcome that debate. It is right that Parliament explores how long-term patient capital can help support UK growth, infrastructure and social outcomes. I recognise the spirit in which these amendments have been brought forward.

However, from our side, we believe that it is important to be clear about a central principle: LGPS funds are, first and foremost, fiduciary vehicles. Scheme managers have a legal duty to act in the best financial interests of members and beneficiaries, and that duty must remain paramount. However, I note that the Local Government Pension Scheme’s advisory board has already warned that:

“New government regulations could ‘directly usurp’ the most fundamental duty of council pension funds”.


Could the Minister address that in his response?

Opportunities for investments in areas such as UK growth assets or social housing should therefore be presented, structured and made investable in a way that meets risk-adjusted return requirements and not mandated or directed through statute. There is a clear difference between creating a strong pipeline of investable opportunities and compelling capital allocation. Once we move from encouragement to prescription, we risk undermining trustee independence.

Many of the amendments in this group helpfully test where that boundary should sit, and I hope that the Minister can reassure the Committee that the Government’s approach is to enable, not to direct, in order to attract pension investment through quality and value, not through compulsion. If we keep fiduciary duty at the centre and focus on making UK opportunities genuinely competitive investments, growth and good pensions will go hand in hand. That is the balance that we are keen to see maintained.

I shall speak to my two amendments in this group, Amendments 9 and 11, which are intended to improve clarity, accountability and future-proofing in Clause 2, rather than to change the underlying investment powers of the scheme managers.

Amendment 9 would require scheme managers to publish an annual report on the local investments held within their asset pool companies, including both the extent of those investments and their financial performance. If local investment is to play an increasing role within LGPS portfolios, transparency is essential. Members, employers and taxpayers are entitled to understand not only where capital is being deployed but how it is performing. This amendment would not mandate local investment; nor would it direct decision-making. It simply asks that where such investments are made, they are visible, measurable and open to scrutiny. The question it poses to the Government is straightforward: is transparency, rather than compulsion, the right way to build confidence in local investment? We believe that it is.

I add at this point that a great many Bills are coming before your Lordships’ House in which the interaction with post-devolution structures is far from clear. The Government should be making more of an effort to provide clarity on the post-devolution picture when drafting legislation. I therefore ask the Minister—here come the exam questions—how do the Government intend to keep the definition of strategic authorities under review as devolution evolves? What assurances can be given that future legislation will align properly with the new devolved arrangements? Do the Government accept that there is a risk of confusion and overlap if these definitions are not regularly updated to reflect constitutional changes? More broadly, what steps are the Government taking to ensure a coherent and consistent approach to the interaction between the new powers and devolution settlements? Crucially, how will assets and liabilities be carved up post devolution, and can the Minister assure us that this will be done independently? I am very happy for the Minister to write, rather than bombarding him with a massive amount of work now—although maybe we should; I do not know.

Amendment 11 is probing in nature and concerns the definition of strategic authorities. Currently, the Bill hard-codes a specific list of bodies in primary legislation, yet the architecture of English devolution is changing rapidly, not least through the forthcoming English devolution Bill. This amendment therefore asks whether that definition is sufficiently agile and future-proofed or whether it risks becoming outdated almost as soon as it is enacted. It invites the Minister to explain how the Government intend to ensure that LGPS governance can adapt to evolving local and regional structures without requiring repeated primary legislation.

Taken together, these amendments seek to strengthen Clause 2 by reinforcing accountability on the one hand and flexibility on the other, while preserving the core principle that investment decisions must remain firmly rooted in fiduciary duty. I look forward to the Minister’s response to the questions the amendments raise and his reassurance that the Government’s approach is to enable good investment decisions through transparency and clarity rather than prescription.

[Lord Katz (Lab)]

My Lords, I am grateful to noble Lords for these amendments and for the probing and helpful debate that we have had on this group.

I turn first to Amendment 7 in the name of my noble friend Lord Davies of Brixton, which explores how LGPS assets might be used to provide social housing. The Government aim to ensure that LGPS investments support the prosperity and well-being of their local communities, just as members did throughout their working lives—an aim that is certainly reflected in my noble friend’s amendment. However, the Government do not wish to direct asset pools as to the manner of their investments—to be fair to my noble friend, he said that this was not about mandation. To respect the independence of LGPS funds, it remains the responsibility of administering authorities to set their investment strategy.

The reforms will require administering authorities to co-operate with strategic authorities to identify and develop appropriate investment opportunities, which may include social housing-related investments. While social housing is a high priority for local areas and may provide suitable opportunities for investment, it should be for strategic authorities to consider and set priorities appropriate for their areas.

My noble friend asked whether the revised regulations might act as a barrier to investing in social housing. We would say that that is not the case; there will not be a barrier. Administering authorities will continue to set the investment strategy for their fund, including local investment priorities. They must have regard to local growth priorities in setting their investment strategy and can recommend opportunities to their pool. Local investments are not restricted to any asset classes. The Government see housing as one of as the investment sectors with the greatest potential for local government impact.

My noble friend Lady Warwick of Undercliffe spoke cogently and with some passion on the importance of increasing social housing. That is something the Government would align with. She asked whether we were confident that, without reference to social housing in the Bill, the LGPS will invest in it. I say to her—to be fair there was some acknowledgement of this in her comments and in those of my noble friend Lord Davies—that there is a long history of local investment by the LGPS. Cornwall Pension Fund, for example, has committed more than £100 million to a local impact fund with a focus on solar farms and affordable housing. Greater Manchester Pension Fund has backed major housing and regeneration projects in the north-west, to which it commits 5% of its total assets. The LPP pool is a major investor in the Haweswater Aqueduct Resilience Programme. The London and LPP pools have established the £250 million London fund, to which my noble friend Lord Davies referred. It invests in opportunities in London, including in residential property and affordable housing, as well as community regeneration, digital infrastructure and clean energy.

My noble friend Lady Warwick asked whether the Government would ensure that all LGPS have the right tools to provide the best returns for members. The Government’s expectation is that the reforms will deliver the wider benefits of professionalised asset management, including long-term savings and efficiency. We are also aiming to strengthen LGPS fund governance. Better governance ensures decisions are more effective, with decision-makers able to be agile, better at managing risk and able to pick up opportunities.

Amendment 11 was mentioned by a number of noble Lords and was tabled by the noble Baroness, Lady Stedman-Scott. I agree that the definition of strategic authority should be consistent across all relevant legislation. This Bill and the draft regulations that the Government have prepared will ensure that the authorities that are treated as strategic authorities in England for the purpose of the English Devolution and Community Empowerment Bill are treated as such for the purpose of LGPS investments. If any new authorities become strategic authorities, the Government will use the regulation-making powers to ensure that their treatment remains the same. I hope that addresses some of the concerns raised by the noble Baroness, Lady Stedman-Scott. She talked about her concerns about potential confusion over a changing and emerging landscape. I am happy to write to her with more details, as she was so kind in setting so few exam questions compared with her Front Bench colleague on my earlier group. Her restraint is commendable.

Regarding Amendment 12, I understand the noble Lord’s intention is to encourage greater domestic investment across the whole of the UK and, indeed, growth is the number on mission of this Government. The LGPS already invests approximately 30% of its assets in the UK. Greater consolidation will build on this success story as the pools will have greater capacity and expertise to invest domestically, including in infrastructure and unlisted assets.

The noble Lord, Lord Fuller, asked about the duty to co-operate and whether it would make it difficult for schemes to invest outside their locality. I reassure him that the proposals do not prevent investment outside the area of the funds or the pool. Administering authorities are free to set whatever local investment target they consider appropriate. While investment across the UK is strongly encouraged, the purpose of this requirement is to promote investment that has tangible benefits to the fund or its pool. Expanding the definition to the whole of the UK would go too far and local benefits would be diluted.

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[Viscount Thurso (LD)]

Does the Minister agree that ESG and responsible investing is perhaps best summed up in the stewardship code, which most responsible investors use?

[Lord Katz (Lab)]

I could not have put it better myself. We have to be careful in regarding ESG as fashionable politics, inserting itself into a fashionable investment space. We have to be careful not to throw the baby out with the bathwater and to really appreciate that there are good reasons why certain investments are more popular and investments in other areas are being shunned. There are trends in industry and society as to what products and classes of investment are popular. Sometimes, we can overthink these things.

I am pleased that the noble Viscount, Lord Thurso, popped up because I was just about to address his question about the Bill preventing funds setting targets on local investment, on this theme. I hope this answers his question: they must set a target, but it can be any value that the fund considers appropriate. They retain that element of flexibility, which I hope is helpful.

Regarding Amendment 9, the Government will require some administering authorities to report on their local investments, including the total investment, and on the impact of investments, in their annual reports through guidance. We consider that Amendment 9 would be an unnecessary duplication of a requirement that was already set out in guidance and in regulations. We think that it would not add anything to the Bill, as that regulation is already good practice—it is already there.

Amendment 12, spoken to by noble Baronesses, Lady Bowles and Lady Altmann, seeks to expand the definition of local investments beyond stretching point: it could mean investments for the benefit of persons living or working in any of the administering authorities’ local areas. Our fear here is that the amendment would, in effect, break the definition of local investment, as it could mean any investment in England and Wales. We contend that local investment, as it stands, has a broad definition, as it can refer to investments that have measurable beneficial impact for people living or working in areas local to, or in the region of, the administering authority, or of its pool partner administering authorities. As a consequence, this is broad enough to capture an appropriately wide geographic range while ensuring that there are still benefits for the local area.

To ensure a clear and firm trajectory to consolidation and benefits at scale for the scheme as a whole, along with the assurance I hope I have provided to the noble Lords in discussing these amendments, I respectfully ask my noble friend Lord Davies to withdraw his amendment.

[Lord Davies of Brixton (Lab)]

I thank my noble friend the Minister for his reply. As I made clear, my amendment was not about mandation or compulsion but the ability for local authority funds to invest in ways which are seen as socially beneficial. There was general agreement about the synergy, as I put it, between investing in social housing and the investment needs of local authority funds. The Minister was clear that it should not be a barrier, but, as the regulations are still being discussed, and as the statutory guidance has not been agreed yet, this is a moving feast. I hope that, at some stage, we will be able to get a specific statement on the ability of funds to invest in housing, and in the other ways which have been suggested. I beg leave to withdraw the amendment.

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[Viscount Younger of Leckie (Con)]

My Lords, I thank the noble Baroness, Lady Altmann, for her two amendments in this group, for the remarkably brief discussion that has been prompted and for the opportunity that they provided for her and us to probe the Minister on these important issues. Noble Lords will be pleased to hear that I will not rehearse the arguments at length, as I touched on them in some detail earlier. However, I wish briefly to reiterate what I regard as a central and non-negotiable principle: the Local Government Pension Scheme exists first and foremost as a fiduciary vehicle. Scheme managers are under a clear legal duty to act in the best financial interests of members and beneficiaries, and that duty must remain paramount.

Against that background, Amendment 13 raises a particularly important question, one that has been put to us repeatedly by industry representatives from a wide range of backgrounds; namely, what type of assets do the Government have in mind in which funds should be directed to invest? I think this is the essential argument of the noble Baroness, Lady Altmann. Is the intention to focus on infrastructure, debt servicing or supporting new towns and similar developments? The noble Baroness also raised the point of what percentage should be invested in UK assets. As she pointed out, perhaps 25% should be invested in UK growth assets, and, therefore, what is the definition of growth? Lots of questions arise from the noble Baroness’s amendments.

I recognise, and I think the noble Baroness alluded to this, that we will return to this issue in greater detail when we come to consider the reserve power, but like the noble Baroness, I wish to flag this matter at this stage as it has been a theme this afternoon on this first day of Committee and a live and pressing question not only for us but, I reiterate, for the many third-party stakeholders with whom we have engaged.

[Lord Katz (Lab)]

My Lords, I, too, thank the noble Baroness, Lady Altmann, for tabling these amendments. I cannot speak on behalf of the whole Committee, but I would say that it is most people’s intention to encourage greater investment in UK assets. Growth is certainly the number one mission of this Government. If you did not realise that, you have probably been hiding under a rock these past few months and years.

These amendments would direct LGPS funds to make investments in certain UK asset classes. Supporting UK growth by making investments in such assets, in tandem with seeking appropriate returns, is a valuable function of the scheme and the noble Baroness is right to be interested in this important topic. As I have mentioned, the LGPS already invests around 30% of assets in the UK. Greater consolidation will build on this success story, as the pools will have greater capacity and expertise to invest domestically.

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[Baroness Altmann (Non-Afl)]

I stress that the amendment is a “may” or “must”; the group does not require a “must”. This was intended to help the Government understand that there are merits in considering the flow and the stock. If there is new contribution flow of a particular size going into an area—this can be part of regulations; it is not required—that could well have a less damaging impact on the market than mandating or aiming. For example, Clause 2(4)(c) talks about “target ranges” for strategic asset allocation to growth assets and income assets. With a fund of this size, when talking about a target range for growth assets or any other assets, we might be moving the markets, because so much money would need to be shifted around. That is much less of an issue with the new contribution flow, but it could still achieve some of the objectives that the Government are seeking to attain.

[Lord Katz (Lab)]

I thank the noble Baroness for that intervention and clarification. I do not want to comment specifically on whether the scale of that investment would be market moving; I do not have the expertise to say that. I want to underline that, ultimately, we think it is for administering authorities and the pools to decide where these investments are made. That is right, because it is the way they fulfil their fiduciary duties. I am happy to look at her contribution again and, if I can add to that explanation, I will happily write to her.

The noble Lord, Lord Palmer of Childs Hill, asked whether pension funds are investments of policy delivery. As I stated earlier, the responsibility for setting investment strategy remains with the funds. The Government are not taking powers to direct asset pools to make or not make investments in specific projects. To be clear, it goes back to the fact that it is for those administering authorities and pools to make those decisions.

[Baroness Altmann (Non-Afl)]

I am so sorry, but this is a really important point. In Clause 2(4), paragraphs (a), (b) and (c)—in particular paragraph (c), to which my amendment seeks to add something—state that we are talking about

“strategic asset allocation or target ranges for growth and income”.

That absolutely sounds as though the Government could—it is “may”, not “must”, so it may not happen—leave the door open to directing investments in the way the Minister says the Government do not wish to do. I would be grateful for some clarification; I do not need it now, as I am happy either for the Minister to write or for us to meet to discuss it.

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[Baroness Stedman-Scott (Con)]

I know how frustrating it is when Members keep getting up to ask questions, but I have to do this. The Minister referred to a backstop. For what purpose? In what circumstances would it be used? Can the Minister help us understand that?

[Lord Katz (Lab)]

The backstop power relates to our earlier discussion on previous amendments. It would be used in extremis. The problem is that the noble Baroness is asking me to conject on what are hypothetical situations. Some of these issues will be set out in some of the regulations that will follow.

I am happy to go back a couple of interventions and pick up the point made by the noble Baroness, Lady Altmann. I would be happy to write to try to clarify the distinction that we are making. Of course we want to see good levels of investment in a range of different asset classes, but we are absolutely not saying that this is a slippery slope to taking powers of direction or mandation. We are very clear on that. Ultimately, this is the nature of pensions legislation: some of the clarity comes down stream. We are clear that the Government’s intention in the Bill is purely to provide the framework to ensure that we can harness the potential of these asset pools to make some meaningful investments.

[Baroness Stedman-Scott (Con)]

This is in the Bill. I know that the Minister cannot do this now—I accept that he can write to me—but can he please help us? If it is in the Bill, we need to know what it means before regulations come.

[Lord Katz (Lab)]

I am not sure whether I can provide much more clarity than I have done so far, so I would be very happy to write to the noble Baroness to spell that out.

I realise that I have not given the levels of satisfaction and clarity that Members perhaps wanted but, as these are probing amendments, we contend that they would have a minimal impact. On that basis, I ask the noble Baroness to withdraw her amendment.

[Baroness Altmann (Non-Afl)]

I thank the Minister for his answers; I feel for him in his position. I am happy to withdraw the amendment; we can have further interaction at a later stage.

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

My Lords, I was due to give a very short speech. It is still short, but it has got slightly longer in terms of the content of this debate. I am particularly grateful to the noble Baronesses, Lady Bowles of Berkhamsted and Lady Altmann, for tabling Amendment 10, which we welcome and which I understand to be a sensible and proportionate safeguarding measure. I want to go a bit further because there were two particularly powerful speeches, in particular that from the noble Baroness, Lady Bowles.

As we read it, the amendment seeks to ensure that investment strategies cannot be used to favour particular investment vehicles over comparable or competing alternatives. In doing so, it would help to guard against strategies becoming a back-door means of directing capital, rather than serving their proper purpose as high-level statements of investment policy.

That distinction matters. Investment strategies should guide objectives, risk appetite and approach and not hardwire specific vehicles or delivery mechanisms into statute or regulation. Preventing the embedding of such preferences also reduces the risk of political or regulatory pressure or—I will use the word—interference, being reflected in investment strategy documents and helps to preserve trustee independence and proper decision-making. Although it is a serious subject, the noble Baroness, Lady Bowles, gave us a succinct, well-argued speech with her bucket wrapper analogy. She gave a hard-hitting speech with some important questions which I hope the Minister will be able to answer.

One issue that has been made clear today, which has arisen in a number of debates, and was encapsulated in this short debate, is the opaqueness of “government direction”. I was very taken by the equally hard-hitting speech from my noble friend Lord Fuller. The confusion—by the way, the C is for confusion, just to add that in—is over the responsibility with the grey areas, notably in respect to the understandings, or not, from the Mansion House Accord and those who were the signatories.

One question to ask is whether those signatories now realise what they have got themselves into, or what their understanding was then and what it is now. I ask that as an open question, particularly in relation to the inclusion or exclusion of different types of investment. The noble Baroness, Lady Altmann, focused particularly on open-ended or close-ended. There is a lot of emphasis here. Most unusually, I was in total agreement with the noble Lord, Lord Davies. I am not sure that that has happened with me in the past.

To conclude, we therefore welcome the intent of Amendment 10. It would be very helpful if the Minister could indicate whether—and if so, how—the Bill as currently drafted already guards against this risk. It is a crucial question and relates to all the questions that have been asked. What assurances can be given that investment strategies will not be used to prescribe or favour particular investment vehicles in practice?

[Lord Katz (Lab)]

My Lords, I am grateful to the noble Baronesses, Lady Bowles of Berkhamsted and Lady Altmann, for this amendment. I agree with them that funds in the LGPS should not be specifying preferences between similar investment vehicles in their investment strategies. I fear that the rest of my response may well disappoint the noble Baroness, Lady Bowles, and—though perhaps not to such a great extent—the noble Baroness, Lady Altmann. I say in passing to the Committee that it is always good to hear consensus breaking out, even if it rather gets to the horseshoe theory of politics when it is my noble friend Lord Davies and the noble Lord, Lord Fuller. But let us try to end today’s Committee session on a positive note.

I will now go into the detail. Under our reforms, decisions on implementation of strategies, including selection of appropriate vehicles and managers, will be made by the LGPS pools, which will have the capacity and expertise to deliver the benefits of scale that we have discussed. It is the Government’s view that the draft regulations are already clear in that respect. This will be supported by guidance, setting out that investment manager selection is solely the responsibility of the pool. LGPS pools will make the decision on whether to invest through external managers and which managers to use, and there is nothing whatever to prevent them using investment trusts should they consider it beneficial.

This is where the space for disappointment potentially arises. I am aware of the concerns expressed in relation to the treatment of listed investment funds, notably investment companies and trusts, under the reserve asset allocation powers, which are relevant to DC pension schemes. That was set out very powerfully by the noble Baroness, Lady Bowles. The Committee will have the chance to debate these concerns when we reach Clause 40 and discuss Chapter 3, which deals with asset allocation for DC schemes.

To get to the heart of it, the noble Baroness, Lady Altmann, asked about the impact on the LGPS. To give reassurance, we are not excluding closed-ended investment funds from the LGPS. I can be absolutely clear that that is the case. We are not excluding them, and neither will local authorities be directed to exclude them. I hope that provides clarity as we discuss the LGPS elements of the Bill.

Having said that, we have had comments around investment and asset types, particularly from my noble friend Lord Davies, as well as others, on this group of amendments. We will take what has been said and consider it in time for the debate on this issue when we get to it in greater detail. In anticipation of that day—which we are all looking forward to, particularly at two minutes to Committee rising—I ask the noble Baroness, Lady Bowles, to withdraw her amendment.

[Baroness Bowles of Berkhamsted (LD)]

I will be as brief as I can. I thank all those who have spoken in the debate, particularly for the support that I have received. The noble Lord, Lord Davies, is to some extent correct in that this is a proxy for what comes later, but I wanted to give the Committee that reflection time over competition law issues, because it is not necessary: exactly the same will happen without defaming listed investment companies and doing them down. The channels of how the investments are going to go will be the same. But the Minister has still not answered the question. Who asked for the exclusion? It is not in the accord. We have been told that it is in the accord but, as I have explained, the wording gives the opposite direction.

We have been told by Ministers that it is the pension funds, or anybody except the Government. It is somebody’s fault that it is there. I regret that I think it is deliberate rather than accidental but never mind that as long as it goes because it is not necessary to defend what the Government want to defend. That would be fine by me. It is relevant to local government funds because they invest so much that way. Therefore, it was a genuine concern that a reserved power could begin to replicate the reserved power in new Section 28C. It was not a totally bogus proxy, if I could put it that way. I have elaborated the point; as I have said I can do much more yet. With that, I beg leave to withdraw my amendment.