Local Government Pension Scheme

Debate between Marcus Jones and Ian Blackford

Monday 24th October 2016 Westminster Hall

[The Parliamentary Under-Secretary of State for Communities and Local Government (Mr Marcus Jones)]

It is a pleasure to serve under your chairmanship, Sir Edward.

I am grateful to the hon. Member for Ross, Skye and Lochaber (Ian Blackford) for introducing this debate about investments made under the local government pension scheme in England and Wales. It provides me with the opportunity to address the significant misconceptions about Government policy that have arisen as a result of briefing from trade unions and other bodies.

Judging from the debate today, before I go on to things that people might not agree with, I think everyone agrees that the scheme members of the pension funds are the most important group involved. I want to reassure those scheme members that their pensions are certainly not at risk and that we are giving local authorities more and not less control over investments.

Before I get into the detail of the policy, I should make it clear that the LGPS is a defined-benefit scheme, in which benefits are guaranteed by statute and are not directly affected by the investment performance of individual funds. Scheme members in different local funds, each with different asset allocations and funding strategies, receive the same level of benefits based on a salary and length of scheme membership.

Investment decisions in the LGPS are not, therefore, a “gamble” with scheme members’ pension rights. It is clearly the case, however, that local administering authorities should seek to maximise the returns on investments in order to limit the risk to the town hall that pensions or otherwise might pose to local council tax payers and local services. We have made it clear repeatedly that investment decisions must be taken in the best interests of scheme members and taxpayers.

The petition states that the Government might

“gamble away members’ money on infrastructure projects”,

but I make no apologies for the fact that we have been clear that authorities should be ambitious in developing their proposals on infrastructure investment. Investment in infrastructure is increasingly seen as a suitable option for larger pension funds with long-term liabilities.

Figures published by the LGPS advisory board in 2013 showed that only £550 million, or 0.3% of the scheme’s total assets of £180 billion, were invested at that time in infrastructure. That falls some way behind other large pension funds that have elected to invest 10% to 15% in the area. It is widely recognised that infrastructure investment is good not only for investors, but for the global economy. Indeed, investing in large-scale infrastructure projects can offer a useful match with the long-term liabilities held by pension funds.

Other countries are well ahead of us in progressive thinking and it is time for the UK to step up to the challenge. In the existing investment environment, there is also even greater pressure to reduce costs and maintain or improve performance. Our work with the LGPS funds to pool their investments will save up to £300 million a year over time, thus benefiting scheme members and taxpayers alike. The larger scale of the pools will also open up new investment opportunities, such as large infrastructure projects. I am grateful for the hard work put in by elected members and officers in making pooling begin to happen. I will meet each pool over the coming weeks to discuss their plans and set out our expectations.

Nevertheless, I have been absolutely clear throughout that investment decisions are for administering authorities and that that will remain the case. There is no question, nor has there ever been, of the Government directing funds to invest in a particular way—for example, in infrastructure projects. The point about directive 41/2003 is therefore not relevant.

[Ian Blackford]

I find myself in agreement with much of what the Minister is saying. There is a desire for greater infrastructure investment, but the issue is getting the architecture right. If he takes away the risk of Government interference with the LGPS, he might get to a position that we could all support, but he must listen to the legitimate voices of concern.

[Mr Jones]

I thank the hon. Gentleman for his intervention but, as I said at the outset, we are giving local authorities more and not less control over their investments.

--- Later in debate ---

[Mr Jones]

As I said earlier, the LGPS is a defined-benefit scheme, so the benefits to the pension fund participants are protected by statute. I do not think that is an issue for the people with investment in the funds. As I will explain, there is an extremely important point about how pension funds are able to invest and the additional freedom that we have provided in that respect.

I want to underline that I respect and understand the strength of feeling shown by many of the respondents to our consultation on the new LGPS investment regulations and the people who signed the petition. The proper conduct of pensions and pension investments is of deep concern to us all, as it should be. A key concern expressed by respondents to the consultation was about the power in those regulations under which the Secretary of State could, after proper consultation, intervene in the investment activities of an administering authority. It may be helpful and, I hope, reassuring if I set out the reasons that we have taken that power.

Historically, the LGPS investment regulations and the framework that they impose have sought to constrain investment decisions to minimise risk and protect the interests of scheme beneficiaries and taxpayers. More recently, however, those regulations have fallen below the standards in Europe and the private sector in the UK. Under the new investment regulations, administering authorities will be significantly more responsible and accountable for their investment decisions. Provided that authorities act reasonably within the framework provided by the regulations and guidance, they will no longer be constrained by prescription from the centre about how their assets are invested. For example, we have removed limits on the proportion of assets that may be invested in particular ways. The new regulations therefore provide authorities with much more freedom over how they invest LGPS funds and bring that scheme broadly into line with private sector schemes in that respect, and represent a landmark policy shift.

The power of intervention has been included in the new regulations as a backstop in the rare circumstances in which it may be necessary to protect the around £200 billion of assets and 5 million members of the local government pension scheme. The regulations include several safeguards to ensure that that power is used appropriately and proportionately, including full consultation with the relevant authority. The Government’s response to the consultation made it clear that that power would be used only on clear evidence that an authority was failing to act in accordance with the regulations or guidance.

[Ian Blackford]

I want to try to be helpful. There is awful lot of concern about the power that the Government have given themselves to intervene. We understand the statutory obligations under these local authority schemes, but as a way out of that, did the Government consider giving that power not to themselves but to the Pensions Regulator?

[Mr Jones]

A lot has been made of the fact that these measures are being made by statutory instrument. The Public Service Pensions Act 2013 gives Ministers broad powers over the running of pension funds. That Act was scrutinised at significant length in the House. Considering the suite of powers that Ministers are given by that Act and taking into account the views of organisations such as the local government pensions scheme advisory board, the new regulations do not go anywhere near as far as they could have. I know from meeting that board that several people from administering authorities and trade unions are represented on it, and I discussed this issue with them at some length.

To pick up a few other points, the new investment regulations and guidance allow authorities to take into account non-financial factors, such as social, environmental and corporate governance considerations, when making investment decisions. However, authorities must take proper advice, act lawfully and take decisions that are in the best interests of scheme members and taxpayers. They must also act in a way that is consistent with UK foreign and defence policy.

The guidance is clear that administering authorities should not use pension policies to pursue boycotts, divestments or sanctions, except where formal legal sanctions exist and embargoes or restrictions have been put in place by the UK Government, where policy responsibility for such matters lies. We have taken the same view in our guidance on boycotts in the context of public sector procurement, which in turn is based firmly on the position in international law.