Local Government Pension Scheme

Ian Blackford Excerpts

Monday 24th October 2016 Westminster Hall

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

I beg to move,

That this House has considered e-petition 125475 relating to the Local Government Pension Scheme.

It is a privilege to serve under your chairmanship, Sir Edward. I appreciate that, on the face of it, the motion is about the corporate governance of local authority pension funds in England and Wales, and the interaction with central Government in certain circumstances, but it is also about infrastructure investment in a broad sense. In introducing the debate, I am minded that it is about local authority schemes in England and Wales, but it forms part of a wider debate on corporate governance and infrastructure investment globally. Indeed, there are important initiatives in that regard in Scotland. The primary reason I am introducing the debate is in my capacity as a member of the Petitions Committee, but I should also note that I am the Scottish National party spokesperson on pensions.

On 23 September, new regulations affecting local government pension schemes were laid before the House and they come into force in just a few days’ time, on 1 November. To put that in context, we are talking about a very large market in the UK. According to the Local Government Pension Scheme Advisory Board, as of 2015 local authority schemes held £217 billion of assets, across 91 local authority pension funds that have 5 million members.

We should welcome the principle of infrastructure investment and pooled funds, but we also need to recognise the debate in the overall context of pension funds. Of course, across the pension fund landscape, there is a desire for growing diversification; and there is the issue of low returns from Government bonds, which affects many pension funds, and the questions of whether they go into deficit and how they meet their future liabilities. In that regard, the debate about infrastructure investment is important, and the costs and benefits, and the potential returns, of pooling local authority pension funds are worth considering.

Other countries, most notably Canada, have already embraced those challenges and have done so with what is perhaps a more effective corporate governance model than the one we have today in the United Kingdom.

[Nick Thomas-Symonds (Torfaen) (Lab)]

Previously, I served as my party’s shadow Pensions Minister and I was struck by the concern of people I met, particularly scheme members, about where and how their own funds were invested. Does the hon. Gentleman agree that it is the wishes of scheme members that should be paramount in any corporate governance model to which he is referring?

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[Ian Blackford]

Absolutely. I found myself agreeing with the hon. Gentleman many times when we were on our respective Front Benches and it is good to see him here for this debate today. I agree with him because the funds belong to the 5 million scheme members. They are their funds and it is about their future. We should remember what a pension is—a pension is deferred income.

When someone is making that contribution, of course they should have a say. That is why I referred to the corporate governance model in Canada. One of the things I will go on to talk about today is a carrot-and-stick approach from the Government, but there has to be a consensus and I am concerned about the Government’s ability to intervene in local authority pension schemes. Although I understand and support, in broad terms, what the Government are doing in promoting pooled funds and infrastructure investment, it has to be done in partnership with the local authority pension funds.

[Several hon. Members rose—]

[Ian Blackford]

I will give way first to the hon. Member for Cardiff South and Penarth (Stephen Doughty).

[Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op)]

I thank the hon. Gentleman for giving way and agree with much of what he has said and indeed with the comments of my hon. Friend the Member for Torfaen (Nick Thomas-Symonds).

I, too, have been contacted by many members of the local scheme and by representatives of Unison, the trade union, who have great concerns about the undemocratic way in which they see the process going forward, and indeed concerns about the process that the Government have used. Whatever their individual views might be on where investment should or should not go, and on whether that is for economic, financial or ethical reasons, the process seems to them to be fundamentally undemocratic.

[Ian Blackford]

Again, I find myself in agreement with that. The Government should reflect on the consultation that is taking place and, hopefully, on the voices that will be raised today, because they have to take on board that, in making the changes that they are talking about, they need that wide body of support.

[Several hon. Members rose—]

[Ian Blackford]

I will give way in a second but I want to make a point. We need to have a wider discussion about how we will get an attractive return on investment, not only in the local authority pension schemes but in defined-benefit schemes around the land. We know the situation we are in. Because of quantitative easing, or largely because of quantitative easing, yields on Government gilts are low and will not give us the kind of return that we have been used to, so there is a real issue about where we will get the investment returns in future.

[Several hon. Members rose—]

[Ian Blackford]

I will give way in a moment but I want to finish the point. It is important, therefore, that we have the debate about infrastructure investment. There is an important opportunity, but that opportunity must be seen by local pension schemes as being about investing in their local economy. The Government have to think very carefully about that inter-relationship.

[Mr Jim Cunningham (Coventry South) (Lab)]

I thank the hon. Gentleman for giving way and I agree with everything that he has said, and with the comments of one or two of my colleagues.

There is another issue to consider when we talk about the ability of local authorities to invest in various assets for pension schemes. We can have an ethical foreign policy but local authorities must be unethical in their investments, which is a contradiction. I am thinking particularly of cluster bombs and things like that. In the west midlands, a pension scheme might not want to invest in companies that manufacture cluster bombs but has to do so because the Government say so.

[Ian Blackford]

I thank the hon. Gentleman for his contribution and he makes an interesting point. We must have the wider debate about sustainability and ethical investment. There are certainly very attractive funds that exist in the area of sustainability, corporate social responsibility and so on, and it is very important that local authorities are allowed to have the debate about what is in their members’ best interests. They must be able to satisfy them that they are acting in their interests. It is entirely legitimate for pension schemes to have a debate about what they consider to be ethical investments, and they should be allowed to pursue them provided that they can demonstrate that they are acting in the best interests of their members.

[Mr Andrew Smith (Oxford East) (Lab)]

I am very grateful to the hon. Gentleman for giving way and I congratulate him on opening this debate. Further to an earlier intervention, we can all see some benefit from the proposed pooling arrangements, but we must also be cognisant that there can be risks, or a concentration of risks. Does the hon. Gentleman agree that there ought to be trade union representation on the governance structures for the pooling in order to stand up for members’ interests?

[Ian Blackford]

Very simply, yes, I agree. Stakeholders and trade unions are a very important part of the debate. We must also look at the training that is given to trustees in that regard, so that they can discharge their responsibilities fully, and indeed the important role that advisers play. In some senses, we have perhaps rushed these changes, rather than stood back and tried to get something on which I hope we can build consensus.

[Jack Dromey (Birmingham, Erdington) (Lab)]

I am grateful to the hon. Gentleman for giving way. As chairman of the local government unions, I led negotiations on the local government pension scheme; I campaigned to defend the local government pension scheme; and I worked with the scheme, at both national and local level, on investment strategy. It is absolutely right, commensurate with what we always sought to do through the scheme, that we have ethical investment, that we encourage infrastructure investment and that we look at sensible pooling arrangements. However, the first obligation of a pension scheme is to its members, to deliver to those loyal, long-serving public servants the best possible retirement. Does the hon. Gentleman therefore agree that it is not only illegitimate but potentially unlawful for the Government to seek to impose their will on 1 million workers and their pension scheme, and that the best thing to do would be to go back to the drawing board, sit down with the trade unions and negotiate a sensible way forward?

[Ian Blackford]

Again, I find myself in complete agreement. The hon. Gentleman is correct and there is an argument that what the UK Government have done is perhaps in contravention of European law. I will come to that point a little later.

[Sir Alan Meale (Mansfield) (Lab)]

First, I congratulate the hon. Gentleman on the fine way in which he has approached this important debate and got it going. This is an important question. In the 1960s, an ex-Prime Minister, Harold Wilson, forced through a report on the financial institutions, which revealed that over 70%—I think it was 74% at the time—of the FT share index was owned by pension funds. That shows how important this issue is.

To go back to the hon. Gentleman’s earlier point, there is a question about the value of gilts and bonds. I do not think it is just about that—it is also about the violation of the rights of individual pension-holders. The Government pay the money over in the first place, then take it back and say, “We’ll allow you to have this, but only if we decide how it’s spent”. That has got to be stopped.

[Sir Edward Leigh (in the Chair)]

Order. We are having a lot of interventions. This is a three-hour debate, so if people want to make long interventions, I would love to hear them give a speech instead. There is no need for long interventions, Sir Alan.

[Ian Blackford]

Thank you, Sir Edward. Again, I find myself in agreement with the hon. Member for Mansfield (Sir Alan Meale), because, as I mentioned, the funds belong to the scheme-owners—those who are working in local authorities that are engaged in that way. It rather ill behoves the Government to seek to interfere in the governance of the funds if they are acting in the best interests of their members—that is the test. That is why it is important for the Government listen to the debate, reflect and perhaps come back with some new thinking.

The whole infrastructure issue is important. I think we all recognise that we have to build capacity in our economies. We have all heard the debate about being left behind. It is absolutely necessary that local authority pension funds in the north of England, the midlands and my own country of Scotland play their part. Each local authority area must make its own determination as to what is right and invest in local schemes—social housing, perhaps—for the benefit of the community. At the same time, they should invest for the benefit of the pension schemes. It is about democratic accountability and investment opportunities. It should not be too complicated.

I urge the Government carefully to consider what has been done in Ontario and Quebec. They have been able to build consensus because they have not had the same compulsion and the Government in Canada cannot use the big stick against local authorities.

I commend the Library on a first-class briefing. On the legal framework, it states:

“Although the rules are set nationally by the Secretary of State,”

the scheme

“is administered at local level by ‘administering authorities’, which broadly correspond to county councils and London Boroughs. These administering authorities are responsible for managing scheme investments, within the statutory framework. The Local Government Association (LGA) explains that this means decisions are ‘taken by democratically elected local councillors working within the restraints of local authority budgets.’”

That local democratic accountability, which many right hon. and hon. Members have mentioned, is the nub of the matter.

The briefing continues:

“When making decisions on investment, the primary responsibilities of administering authorities are to deliver the returns needed to pay scheme members’ pensions, and to protect local taxpayers and employers from high pension costs. In this context, there have been questions about the extent to which investments can be made with other objectives in mind – for example, a desire to invest in infrastructure or avoid certain investments on ethical grounds. Legal advice published by the LGA in April 2014 said that the power of investment must be exercised for investment purposes and not for wider purposes. However, as long as this remained true, the precise choice of investment could be influenced by wider considerations.”

The briefing also states that the Department for Communities and Local Government has been considering how to “achieve economies of scale” and, as has been mentioned, pooling can lead to reduced costs and enhanced returns. The principle is fine and is to be lauded. However, it has become clear that the Government are going to use the stick approach as well as that of the carrot. If subtle inducement does not work, the Government could intervene by directing local authorities to invest in a certain way or by the Secretary of State exercising control. If we are to support local democracy throughout the United Kingdom, that cannot be right, and I can understand why local authorities might be alarmed.

[Mr Andrew Smith]

The hon. Gentleman is totally right about how undemocratic the measure is. Is there not a double jeopardy as well? Should the Government not be mindful of the fact that if they direct a fund to behave in a particular way and the investment goes wrong, they themselves will be liable? Do they not have to remember Equitable Life?

[Ian Blackford]

The right hon. Gentleman makes a valid point. I promised myself that I would not be too strident in the debate and not give the Government too much of a verbal kicking, but let us look at where we are on wider pensions policy and mark the Government’s report card because, frankly, it is not a good one. Let us take the issue of fairness for the women in the Women Against State Pension Inequality Campaign, and that of pensions freedom, on which just last week we saw a roll-back with the secondary annuity market being scrapped before it gets going. A systemic risk was identified by the previous Secretary of State for Work and Pensions, yet the Government have had nothing to say about their responsibilities. We can see the impact of the risk to pensioners, we all know what happened with Maxwell and recently we have had BHS—

[Sir Edward Leigh (in the Chair)]

Order. This is a very interesting debate on local government pensions and I know that Mr Blackford, who is a consummate parliamentary performer, will want to get straight back to the point, and away from Mr Maxwell, won’t he?

[Ian Blackford]

I am grateful for that advice, Sir Edward, and will move on. I was trying to put across the point that, regarding the Government interfering in local government pension schemes, their track record on pensions is not something I would see as commendable.

Unison has argued that investment decisions should be made by their funds and their members. I agree. Let us remember that the pension funds we are talking about are members’ funds. The Local Government Association has also said that there is even the risk of the regulations and the Secretary of State infringing European law on Government intervention in pension fund investment—a point that was made earlier. I find myself, not for the first time, on the side of European law and against the Government.

The Local Government Association has welcomed some of the changes, stating:

“Under the previous LGPS investment regulations there were express limits and thresholds on the assets that LGPS funds could invest in. The new framework moves the LPGS to a ‘prudent person’ approach as exists in the private sector. Under this approach outright limits and thresholds are replaced with a system that gives LGPS administrating authorities more flexibility and requires them to have their own policies on asset allocation, risk and diversification.”

I do not think anyone here would object to that but, having given local authorities that clear mandate, we need to see them investing under the conditions set for them and in the best interests of the members, without interference from Government.

On the Government reforms, the Pensions and Lifetime Savings Association states:

“We agree with the Governments proposals for pooling and the need to ensure that fund are committed to delivering these pools. However, there is a risk that such broad powers, combined with the lack of an explicit fiduciary duty, could ultimately be used by a future government to direct what funds invest in, with limited regard on the impact to the payment of members benefits and the costs to employers and members.”

[Nick Thomas-Symonds]

Is it not important that there is full transparency in respect of those costs so that everyone—scheme members and the public—can see precisely what is being charged to members?

[Ian Blackford]

Absolutely. The hon. Gentleman makes an important point that should be seen in the wider context of information that should be given to plan holders, including those in the state pension scheme. All potential pensioners should be given an A4 sheet detailing their entitlements, backed up by transparency about the charges for all the schemes invested in. There is more work to be done.

I ask a simple question: is it really the Government’s intention to be in a position in which they can be challenged regarding seeking to direct local authority pension schemes? The Pensions and Lifetime Savings Association states that the Government ought to pause and reflect on their obligations and on the importance of local democracy and accountability. In their consultation document, the Government state:

“However, given the very large sums of public money at stake, we believe that it is entirely appropriate for the Secretary of State to be able to intervene where concerns have raised, having taken account of all available evidence.”

That is illuminating. As a number of us have said, we are talking about plan holders’ money. Yes, there must be regulation and oversight, but the Government are hardly a neutral participant in the process and they must think again and learn from best practice elsewhere.

Earlier this year, new legislation came into force in Quebec, which has been framed as a measure that potentially ensures that costly defined-benefit plans are sustainable in the long run. We should consider having that here. Under the legislation, the province no longer requires defined-benefit plans to fund themselves based on short-term assumptions about their own finances and market volatility. Instead, they need to fund themselves based only on long-term, less conservative assumptions. The law, which aims to reduce contribution volatility for employers and thus make defined-benefit plans more sustainable, is the first of its kind in Canada. The changes will be particularly supportive when it comes to longer-term infrastructure investment. That is the kind of debate that we ought to have in this country.

The e-petition motion, and the changes to the governance of pension schemes, relate solely to England and Wales, but it is worth reflecting on the fact that there is active engagement on the topic of local authority investment in infrastructure in Scotland, where responsibility is devolved to the Scottish Parliament. The SNP-led Scottish Government are committed to changing pension scheme regulations to ensure that they are not a barrier to local government pension schemes investing in infrastructure, and they are working with the scheme advisory board to achieve that. We in Scotland realise that there needs to be more of a balance between encouraging that approach and paying due regard to the responsibility of scheme managers to invest pension fund moneys in accordance with the scheme managers’ fiduciary duty. The Scottish Government are committed to achieving that delicate balance.

The discussion of pension scheme investment takes place in a wider context, which includes activities centred on the cities and a major programme of infrastructure investment. Cities and their regions are key drivers of our economy and the Scottish Government are committed to working with all our cities to unlock investment, whether individually, collectively through a city deal, through one of the Scottish Government’s devolved initiatives to stimulate growth and deliver infrastructure investment, or through a combination of all those measures.

[Tristram Hunt (Stoke-on-Trent Central) (Lab)]

It seems to me that it is not only about the democratic right of local authorities to pursue their choices, but also, exactly as the hon. Gentleman is saying, about giving them the kind of fiscal skills that can only help in the furtherance of their city deals. For the Government to try to quash both those objectives seems wholly perverse.

[Ian Blackford]

I again find myself wholly in agreement with a Member. I am not trying to lecture the Chamber on the things we are getting right in Scotland, but the Government in London could benefit from the kind of collaborative thinking we have developed, which is very much in line with what the hon. Gentleman said.

The fiduciary duty placed on local government pension schemes to act in the interests of the beneficiaries of the funds has to be the underlying principle of investment strategies and has to govern investment decisions. The responsible investment of pension funds must always be prioritised over unstable and risky investment. It is up to local authorities to ensure that they invest the funds to achieve the best outcomes for employees, trustees and sustainable growth. I stress that it is for the local authorities to determine that, and not for central Government to determine for them.

There have been some excellent examples in Scotland of sustainable investment in local housing projects delivering much needed long-term infrastructure that benefits ordinary people. For example, the Falkirk local government pension scheme fund awarded fund manager Hearthstone Investments £30 million to invest in social and affordable housing in Scotland. More than 300 affordable homes are expected to be delivered, with the Scottish Government providing an initial investment of more than £6 million towards 126 social homes in Falkirk and Clackmannanshire. That is the kind of collaborative work that we need across the United Kingdom.

Rather than droning on, I will wind up at this point. On the basis of the consultation that the Government have seen and on the basis of what I expect the Minister will hear this afternoon, I ask that they go back and think again. They need to try to get back to a position of consensus and collaboration with local authority pension schemes in England and Wales.

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[Richard Burden (Birmingham, Northfield) (Lab)]

I am grateful for the opportunity to contribute to today’s debate. I join my right hon. Friend the Member for Knowsley (Mr Howarth) in congratulating the hon. Member for Ross, Skye and Lochaber (Ian Blackford) on the way he introduced the debate on behalf of the Petitions Committee. I will concentrate on three areas: local decision making; scrutiny of Government proposals; and how the regulations and the guidance attached to them relate to broader UK policy.

As other Members have said, local decision making comes down to whether pension fund scheme members and local authorities are allowed their say in how pensions are invested, rather than simply being overruled by Government. It is also about the ability of those responsible for public institutions to exercise the judgments they are appointed to exercise within the law. In the case of local authorities, that involves accountability not only to their electorates, but to scheme members. In their role as pension trustees, they have to be able to make judgments in line with their fiduciary duties. Funds must be invested in the best interest of their members, as European directives lay out, and I hope that will not change, although I find it difficult to understand how the regulations are compatible with those directives.

If Ministers are serious about being committed to more local decision-making and giving powers back to local areas, it follows that investment decisions should be made by local authorities, fund trustees and members, not by a Secretary of State with a broadened set of powers of intervention. That is where concerns arise, however, along with concerns about the degree of scrutiny Parliament is being allowed over the issue. That is pretty alarming given the negative responses received as part of the consultation. Indeed, today’s debate is only happening at all because of a public petition being acted upon and allowed to happen by Members of this House. It is not a result of Government initiative or Government action.

[Ian Blackford]

The hon. Gentleman is making some important points. Does he agree that it is rather shameful that the measure was introduced through a statutory instrument, rather than with a debate in the House of Commons in which all Members could properly participate?

[Richard Burden]

The hon. Gentleman makes an excellent point, and I hope it is not lost in the debate. The Minister will respond to the debate, and I hope he will address that point specifically when he winds up, although I am afraid that Ministers have form here. It seems that the changes—or at least some of them, and some of what is written in the regulations and the guidance attached—appear to be allied to new rules on public procurement that were announced in February without any parliamentary scrutiny up to that point.

The most we knew about either of those changes was a highly partisan press release issued at the Conservative party conference in October 2015. Indeed, the formal announcement from the Government on the local government procurement changes did not even happen in this country. Instead, it happened at a joint press conference by the right hon. Member for West Suffolk (Matt Hancock), who was then at the Cabinet Office, and the Prime Minister of Israel. It took successive applications for a Westminster Hall debate to enable us to find out what those regulations meant. The ministerial reply to that debate left a number of questions unanswered, and it took more correspondence back and forth before a Cabinet Office letter to me on 4 May finally clarified that some of the actual changes being proposed were a lot less dramatic than the rhetoric we had witnessed in the Conservative party press release and the Minister’s joint press conference.

On the changes in local authority pensions regulations, will the Minister clarify what is rhetoric and what is reality when it comes to guidance and consultation in relation to administering authorities preparing and maintaining investment strategy statements under regulation 7 of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016? I particularly want to ask about paragraphs 3.7 and 3.8 of the consultation. Paragraph 3.7 stated:

“The Secretary of State has made clear that using pensions and procurement policies to pursue boycotts, divestments and sanctions against foreign nations and the UK defence industry are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government.”

Paragraph 3.8 states that such guidance is intended to make it clear that the administering authority,

“should not pursue policies which run contrary to UK foreign policy.”

So will the Minister confirm that his reference to,

“boycotts, divestments and sanctions”

in no way overrides UK Government policy and guidance on illegal Israeli settlements in the Occupied Palestinian Territories, nor fetters administering authorities’ ability to follow that broader policy. I ask because the UK Government have a long-standing and clear foreign policy position that is bipartisan in recognising the illegality of Israeli settlements in the Occupied Palestinian Territories. The Government’s current guidance, issued to UK businesses, does not encourage trade or financial involvement with the settlements. A recent statement by all EU member states “unequivocally and explicitly” makes the distinction between Israel and all territories occupied by Israel since 1967.

Secondly, will the Minister confirm that neither the regulations he has introduced nor the guidance that accompanies them in any way override UK Government policy and guidance on illegal Israeli settlements in the Occupied Palestinian Territories? Will he confirm that they do not fetter administering authorities’ ability to follow such guidance in relation to local authorities’ overarching commitment not only in regard to the Palestinian territories, but in implementing the United Nations guiding principles on business and human rights? I want to be clear that when paragraph 3.8 of the guidance attached to the regulations says that administering authorities should not pursue investment policies that

“run contrary to UK foreign policy”

it in no way undermines or overrides the overarching commitment in the UK’s own 2013 action plan for implementing the UN guiding principles on human rights and business, which state that the UK Government,

“are committed to ensuring that in UK Government procurement human rights related matters are reflected appropriately when purchasing goods, works and services. Under the public procurement rules public bodies may exclude tenderers from bidding for a contract opportunity in certain circumstances, including where there is information showing grave misconduct by a company in the course of its business or profession. Such misconduct might arise...where there are breaches of human rights.”

In his reply to me of 4 May this year, the right hon. Member for West Suffolk, on behalf of the Cabinet Office, made it clear that public procurement policies were in no way intended to undermine the long-standing UK policy that Israeli settlements in the Occupied Palestinian Territories are illegal under international law. He also said,

“There are flexibilities to enable individual authorities to exclude suppliers that are corrupt, guilty of misconduct, in breach of various international laws and so on”.

Will the Minister confirm that the various international laws referred to would include the Geneva conventions?

The implications go beyond any question about Palestine or Israel or even the middle east as a whole. There are implications for the whole gamut of ethical investment policies and for the ability of a local authority pension fund to decide not to invest in tobacco or in the activities of companies that are felt to be environmentally unsustainable. The implications go wide indeed. In this context I want to draw the House’s attention to the Government’s response to the consultation on today’s regulations, which states:

“Provided that the guidance to be published under draft Regulation 7(1) is complied with, there is nothing in draft regulation 7(2)(e) to prevent an administering authority from taking any non-financial consideration into account provided that it is made in the best long term interests of scheme beneficiaries, and does not represent any significant risk to the health of the fund.”

When the right hon. Member for West Suffolk replied to me in relation to the procurement issue, he said that all such decisions have to be made on a case by case basis, which has of course always been the situation; there is nothing new there. However, will the Minister today clarify that all the assurances I was given in relation to local government procurement, extracted from the Government in the letter of 4 May sent by the right hon. Gentleman, also apply in respect of the 2016 local government pension scheme regulations and guidance notes that we are debating today?

When I wrote to the right hon. Member for West Suffolk during his time at the Cabinet Office, even though the pensions aspect of the announcement was a Department for Communities and Local Government responsibility, I tempted him to comment on the new management and investment regulations for local authorities’ pension funds, as well as the public procurement matters that were within his area of responsibility, and I am pleased to say that he did so. In his letter to me of 4 May, he said that the changes we are debating today,

“Increase rather than decrease the potential for local discretion in decision-making”.

I am pleased to hear that. I have difficulty relating it to what is in the guidance notes and regulations, but I hope he is right about that, and I hope that any interpretations of the regulations will reflect that statement that was made on the record by a Cabinet Minister. I hope the Minister today will confirm that statement in relation to the concerns that I and others have raised today and will no doubt raise during the debate.

I have asked the Minister specific questions about specific parts of the regulations and guidance notes and about the correspondence that I have had with the Government on this matter. I am sure he has been fully briefed and will be able to give full answers to all the questions. If there are areas where he cannot give clear answers, I hope he will respond to all Members in writing.

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[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.

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[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.

--- Later in debate ---

[Ian Blackford]

Thank you, Sir Edward; that is very kind of you. I thank those who signed the petition and brought us here today. I think we all agree that the debate is important. There are a couple of important underlying factors, the most important of which is that there has to be local democracy and accountability.

The Opposition have spoken enthusiastically about the benefits of pooling and of local authority pension schemes investing in infrastructure on a global basis and locally within our economies, so we support the direction of travel. However, the Minister still has not really addressed—I would go as far as to say he has ignored it—what is written in the regulations, and he and the Government must reflect on that power of interference. I have tried to give them a way out, because there is a logical question: why do the Government want the powers of interference over local authority pension schemes? There is no logic for that situation.

Perhaps the Government need to go back and think, in the days that remain until those regulations come into force on 1 November, about the role that the Pensions Regulator may play. The Government need to get out of the situation and get around the table with the local authorities and the LGPS to agree that there is a fantastic opportunity for pension schemes to invest in infrastructure. They have to do that by taking away the threat of interference.

[Jack Dromey]

The hon. Gentleman is making a powerful case for the Government to think again. Does he agree that it would be absolutely extraordinary, having had a consultative process in which 98% of respondents objected to the Government’s proposals, for the Government to say, “We know it’s your pension and we know that 98% have said no, but we intend to go ahead regardless.”?

--- Later in debate ---

[Ian Blackford]

Indeed. The hon. Gentleman makes a valid point. He spoke about Leninism; it is Big Brother knows best. I hope, at this late stage, that the Government reflect, so that we can get to a situation where we all support, in broad terms, what they are doing, but we can only do so with a proper governance model.

Question put and agreed to.

Resolved,

That this House has considered e-petition 125475 relating to the Local Government Pension Scheme.