Pension Schemes Bill

Lord Katz Excerpts

2nd reading
Thursday 18th December 2025 Lords Chamber

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

My Lords, I beg to move that the House do now adjourn and, in doing so, wish everyone in the House, and all those working in the House, chag sameach, a very happy Christmas, a restful break and a happy new year.

House adjourned at 5.34 pm.

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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

Pension Schemes Bill

Lord Katz Excerpts

Committee stage
Wednesday 14th January 2026 Grand Committee

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

My Lords, it is a pleasure to be opening for the Government on the second day of Committee on the Pensions Schemes Bill. Once again, for the sake of the record, I am not sure whether it is otiose but I repeat that I am a former councillor in Camden and, as such, a member of its councillors’ pension scheme—but for four years, so I am not going to retire rich on it.

I am grateful to all noble Lords who spoke in the debate on this probing stand part question on Clause 6. I recognise the intention to scrutinise the process to be followed if compulsory mergers of LGPS funds are undertaken.

As noble Lords are no doubt aware—and I hope this answers the question that the noble Baroness, Lady Noakes, raised about the history and rationale for including the clause—Schedule 3 to the Public Service Pensions Act 2013 confers powers on the Secretary of State to make regulations about the administration, management and winding up of any pension funds. Clause 6 amends the 2013 Act to clarify that, in the case of the LGPS, the Secretary of State’s existing powers include the power to make regulations about the merger of two or more LGPS pension funds, and this includes compulsory merger. At this point, I reassure the Committee that the Government do not currently have any plans to require the merger of LGPS funds and that their strong preference is that mergers take place by agreement between administering authorities. However, it is essential that the Government have sufficient powers in place to be able to fulfil their stewardship role towards the scheme.

The purpose of the clause is to ensure that sufficient powers are in place to facilitate the merger of pension funds if needed—for example, as a consequence of local government reorganisation, something that the noble Lord, Lord Fuller, spoke about. He referred to this in slightly less positive terms, but the Committee will be aware of the Government’s ambition to simplify local government by ending the two-tier system. A consequence of this is that in some areas a new administering authority, as he said, will need to be designated to administer Local Government Pension Scheme funds, because the existing administering authority will no longer exist. One potential solution to this may be the merger of two or more pension funds. These decisions are local ones, but any such change will require agreement from the Secretary of State to make legislation for transferring the pension assets and liabilities of the previous administering authority and other councils involved in unitarisation to the new administering authority. MHCLG will write to affected local authorities with guidance on what they should consider when deciding on their preferred approach to designating a new administering authority for their pension fund.

The power may also be used in the unlikely event that an independent governance review finds particularly grave issues with an administering authority’s governance of their pension fund. This intervention will be considered by the Secretary of State only in exceptional cases, as an option of last resort after discussions about governance and compliance with the administering authority, and where there is no credible action plan for improvement.

--- Later in debate ---

[Lord Willetts (Con)]

I have one question following the Minister’s very helpful explanation. I was involved in the internal government discussion leading up to the 2013 legislation, and at the back of our minds was the whole issue of merging local government pension schemes for economic and investment reasons. The model that emerged of seven or eight umbrella bodies shaping their investment strategy was seen as the best way to deliver that. The Minister’s list of reasons why there might be compulsory mergers excluded any investment or economic argument, so is he assuring the Committee that the Government do not envisage using these powers to secure specific economic or investment objectives?

[Lord Katz (Lab)]

I am seeking help from my noble friend Lady Sherlock in a helpful conference on the side. The investment assets are in pools, so that is not necessary. The backstop powers are very clear: if there is a need for a merger or we are worried about a failing scheme, there is that backstop power and this is why. It would not be used to direct particular investment strategies.

[Baroness Stedman-Scott (Con)]

My Lords, I thank all noble Lords who have taken part in this debate, and I also thank the Minister for his full and detailed response to the questions that were asked. The Minister talked about perhaps using these powers when there are local government reorganisations; that is highly likely in the current climate, I would think.

The purpose of this stand part notice is not to resist sensible reform but to underline the importance of clarity, certainty and proper accountability where Parliament is being asked to confer powers on this scale. Clause 6 is framed at a very high level, yet it opens the door to decisions that could permanently reshape local government pension arrangements, where powers are capable of compelling structural change. It is vital that those affected understand not only that the power exists but the principles that will govern its use. Clarity matters for scheme managers, employers and, above all, scheme members, whose long-term interests depend on confidence in the stability and predictability of the system. Certainty matters because pension funds operate on long horizons, and opaque or open-ended powers can create risk.

Most of all, the responsible exercise of delegated powers depends on transparency. When Parliament is asked to delegate authority in a highly technical and sensitive area, it is entirely reasonable to expect a clear account of how that authority will be exercised and what safeguards will guide it. However, in view of the response given by the Minister—I am sure that all noble Lords who have taken part in this debate will look at Hansard; if there are any issues, we will go back to the Minister—I beg leave to withdraw the stand part notice.

--- Later in debate ---

[Lord Palmer of Childs Hill (LD)]

My Lords, I must first remind myself to declare that I am a member of the Local Government Pension Scheme: I could not fail to be, having been 28 years on the London Borough of Barnet Council, but I tend to forget about it because it is quite a while ago. A payment does come monthly into my bank account, so I must declare that I am a recipient. I also served on the pensions committee of the London Borough of Barnet, so I have some knowledge of the things that the noble Lord, Lord Davies, has been very eloquent about.

These amendments propose reviews of the Local Government Pension Scheme, and I think we have to get back to exactly what these amendments are asking for, which is sustainability and actuarial practice. We on my Benches support both, in principle. The Local Government Pension Scheme is a long-term, open scheme with unique characteristics, and pressures on admitted bodies, including housing associations, merit careful examination.

The noble Lord, Lord Davies, spoke eloquently about the profession of actuaries. I have always found that actuaries do not have a unified view. There are different actuaries and different views, and as a chartered accountant I have always thought they were impressively prudent with what they said the funds needed to be protected against.

Similarly, actuarial practices such as desirability, stability and solvency are not always applied consistently, despite our applause for actuaries as a profession. Greater clarity would help employers plan and would reduce disputes. Reviews, which is what these amendments ask for, are not admissions of failure; they are tools of good governance. We on these Benches therefore see these amendments as constructive and not critical.

The noble Lord, Lord Fuller, spoke very eloquently about stabilisation and the noble Baroness, Lady Altmann, talked about cost and stabilisation review. Excess prudence, or super-prudence, is not sensible, and it is so easy to be prudent as the easy way out. There is an argument for temporary respite. All these come into the question of review, which is what these two amendments ask for. Our question is whether the Government can accept the value of structured, evidence-based review in strengthening confidence in the Local Government Pension Scheme. Review is not a question of failure; it is a question of prudence, which I would have thought actuaries would be in favour of.

[Lord Katz (Lab)]

My Lords, this has been another interesting and wide-ranging debate, and I am sorry to see that the accord that we had on Monday— the horseshoe accord, I am going to call it—between my noble friend Lord Davies and the noble Lord, Lord Fuller, has broken down. Sadly, in my experience these things do not last that long.

--- Later in debate ---

[Lord Katz (Lab)]

Where was I? I was simply going to say that I of course defer to the noble Lord, Lord Palmer of Childs Hill, who was very much my senior partner in local government service. For the Committee’s information, I did not represent a neighbouring ward, but we are in neighbouring wards, although in different local authorities. It is good to know that north-west London—NW6 or NW2—is well represented in Committee this afternoon.

Before we look at the amendments relating to the triennial valuation of funds, it might be helpful to explain some of the basic principles relating to the valuation. The central principle and pride of the Local Government Pension Scheme is that it is a locally managed scheme. Administering authorities are responsible and accountable for meeting pension promises to members over their lifetimes. Striking the right balance between the cost to employers, risk management, intergenerational fairness and the needs of an open scheme is a matter for authorities.

This takes place through the fund valuation process, which is robust and well established, with strong safeguards. Administering authorities can work with their actuaries to develop assumptions and then carry out a valuation of the fund. Contribution rates are set for each employer, and administering authorities consult their employers as part of the rate-setting process. It is right that employers understand and are able to challenge their contribution rates and factor them into their medium-term financial planning. Valuations and rates are published and made available to all employers.

The valuations are reviewed by the Government Actuary’s Department, under Section 13 of the Public Service Pensions Act, which assesses whether compliance, consistency, solvency and long-term cost efficiency in the scheme have been achieved. Each fund and each employer is different. Valuations and rates will vary, depending on both the performance of investments and the make-up of each employer.

As we have heard from many noble Lords—including very forcibly from my noble friend Lord Davies—the 2025 valuation will conclude in a few weeks, setting rates for 2026-27 onwards. We should acknowledge the importance of that timing in our consideration of these amendments.

If I may, I will respond to Amendments 14 and 15 together. I am grateful to the noble Baroness, Lady Stedman-Scott, and the noble Viscount, Lord Younger of Leckie, for tabling them. Amendment 14 would require a review into the affordability of the scheme. I recognise the concern that we have heard to ensure that the scheme remains affordable for employers, including local authorities and admitted bodies such as housing associations. But, to everyone’s credit—I will perhaps single out my noble friend Lord Davies but, to be fair, I include the noble Lord, Lord Fuller, and the noble Baroness, Lady Altmann—the LGPS is a success story. It has gone from deficit to surplus and currently has returns of 7% to 9%. It is in a strong financial position, with the majority of funds expected to show a surplus following the latest valuation. As a result, employer contributions are expected to reduce from April. Some reductions will be bigger than others, and that is part of the nature of the process that is in train. We should not pre-empt the result of that valuation.

The statutory cost control mechanism, which applies to all public sector schemes including the LGPS—which my noble friend Lord Davies referred to—ensures that the cost of benefits remains sustainable for employers. This mechanism operates on a four-year cycle, following the scheme-level valuation conducted by the Government Actuary’s Department. As we have heard, the most recent valuation was in 2024. An additional cost management process for the LGPS is operated by the scheme advisory board, with the aim of controlling the contributions paid by employers, which are set locally.

In addition, the Government Actuary’s Department, under Section 13 of the Public Service Pensions Act 2013, will undertake a review of all fund valuations for the Secretary of State and on whether compliance, consistency, solvency and long-term cost efficiency have been achieved across the scheme. An additional review into the affordability of the scheme would therefore simply replicate the existing processes built into the scheme. The Section 13 report will be based on the 2025 local valuations, which will conclude in a few weeks, and will deliver recommendations on the long-term cost effectiveness of the scheme, which the Government will consider carefully. We are very much not sweeping this issue under the carpet.

--- Later in debate ---

[Lord Palmer of Childs Hill (LD)]

My Lords, I support these amendments because I believe that transparency is good. I will need to address some of the things that the noble Lord, Lord Davies, said. He is right from an actuarial point of view, obviously. He said the decision is made by the council; in fact, it is made by the management committee of that council. The management committee of most councils will consist of councillors who are neither actuaries nor particularly great financial wizards. What happens in practice is that those people on the council’s management committee that is deciding take the advice of its pensions advisers, stockbrokers and actuaries. It happens on that basis. Do they understand it? My general view is that they are swayed by the people who make the arguments to that committee.

So this group of amendments addresses transparency, benchmarking and surplus. To most people, these are technical matters and ones on which the noble Lord, Lord Davies, speaks with great expertise from an actuarial point of view. But the impact on employer contributions and public services is real. Where valuations are materially more prudent than market benchmarks, we need to understand why.

My noble friend Lord Thurso talked about risk appetite. Most local authority pension committees will not have a great deal of appetite for risk. Their idea is that they are custodians of their employees’ pensions and they will naturally fall on the opposite side of taking risk. That is probably quite right. These amendments are a step in the right direction: they are a clearer explanation of assumptions and benchmarks, which strengthens the local government pension schemes by improving accountability and understanding.

Our question is whether the Government and the Minister agree that transparency is a safeguard and not a threat. This is what the amendments talk about—transparency. We need to make it as transparent to the management committees of these pension funds as it can be. That is what these amendments try to do: they would bring this on to a more generalised basis, not just picking the ones that do well in the Orkneys or wherever, but ones that maybe need guidance. Therefore, these Benches support these amendments, and I hope that they see some light at the end of the tunnel.

[Lord Katz (Lab)]

My Lords, this has been another interesting and wide-ranging debate. I am pleased to see that the horseshoe accord has, to some small measure, broken out again. I must say that I am not as pleased to see the conversion—maybe I am being unfair in characterising it as a Damascene conversion—of the noble Lord, Lord Fuller, and other Members opposite into the prudence of having well-funded local government to provide local services, after the underfunding of local authorities for a fair amount of time. Would that that sentiment had been shown by the Benches opposite when they were on our side of the Committee, but we are where we are.

These amendments show a clear desire to provide greater transparency in the triennial valuation and contributions rate-setting process. I agree it is important that all scheme employers understand how their contribution rates have been set, and members need to have confidence in the long-term sustainability of the fund.

These amendments also show a keen interest in the funding level of the Local Government Pension Scheme and the balance that administering authorities must strike between the long-term sustainability of the fund and affordability to its employers. As a public sector scheme, it is right that we are mindful of the costs to the taxpayer of funding the scheme.

I will address up front why the surplus extraction measures in Clauses 9 and 10 do not apply to the LGPS, to avoid confusion. The LGPS already has a triennial valuation process where contribution rates for employers are set. This is effectively a point where surplus extraction can take place, as this is where contribution rates can be reduced in response to an improvement in the funding level. As we will come on to later, there is also an interim contribution review process for employers who find themselves in difficulty. Therefore, an additional surplus extraction process is not required.

Furthermore, I urge caution in viewing surpluses in the LGPS as a potential windfall or as a means of managing broader revenue pressures for scheme employers. As in all defined benefit schemes, surpluses are maintained to absorb future shocks, manage demographic risk and ensure that promises made to members are kept. Poor decision-making can now lead to higher costs for future generations of taxpayers.

For context, the 2025 valuation will conclude in a few weeks, as we have discussed, with employer contribution rates set for April 2026 onwards. Following this, the Government Actuary’s Department, under Section 13 of the Public Service Pensions Act 2013, will undertake a review for the Secretary of State of all fund valuations, on whether compliance, consistency, solvency and long-term cost efficiency in the scheme has been achieved. Under usual timeframes, the report will be published in mid-2027.

Although I appreciate that the Committee is concerned about rising surpluses in the scheme, it surely cannot be right that we make amendments that would have a material impact on future valuations without having a full review of the outcomes of the 2025 valuation. It is anticipated that there will be reductions in contribution rates for many employers from April, and we need to take account of how the current system has coped with the significant changes in market conditions since that 2022 valuation—we discussed that on both this and the previous group—before making changes to the valuation process.

The LGPS is a locally administered and managed scheme. It is administering authorities that are responsible for managing their surpluses through employer contribution rate changes, and for working with their actuaries to set appropriate assumptions as part of the valuation. Authorities are required under government regulations to provide valuation reports to employers to support them in their longer-term financial planning. So we must consider whether it is right for the Government to exert a more significant level of influence over the setting of contribution rates through these amendments, and whether this is compatible with local accountability.

It is right, in a locally managed scheme, that funds are able to set their own approaches to stability and prudence, reflecting both the needs of employers in understanding their medium-term financial obligations and the different risk profiles of their investments. The balance of these is key to delivering the intergenerational fairness mentioned by noble Lords opposite, particularly the noble Viscount, Lord Younger—and indeed we all want to see that.

On transparency, revised statutory guidance on the funding strategy statement, which all LGPS funds must publish, was issued by the scheme advisory board on behalf of MHCLG in January 2025. Under this guidance, administering authorities should consult all employers in the fund on their funding strategy statement, which should outline how administering authorities will manage surpluses and deficits, outline the approach to contribution rate stability, and summarise the main actuarial assumptions used at the valuation.

Amendment 16 would require the Secretary of State to set a statutory funding objective for LGPS funds, including considerations for administering authorities, setting their funding strategy and contribution rates. There is already detailed guidance on how funds should manage surpluses and deficits in their funding strategy, but, as locally managed schemes, it should be for administering authorities to consider how to strike the right balance in setting the contribution rates, with appropriate considerations of prudence and the long-term sustainability of the scheme and contributions. Furthermore, a funding objective would still require a degree of interpretation and so would not provide the clarity that the noble Lord seeks to achieve with his amendment.

In 2020, the Supreme Court found that LGPS money is not, in fact, public money, but that it belongs to its members, which further justifies why a statutory funding objective is not appropriate for the scheme.

Amendment 17 would require fund valuations to be benchmarked against insurer and gilt-based pricing, with a report laid before the relevant local authority. The triennial valuation and contribution rates-setting process is already a robust and collaborative process between administering authorities, actuaries and employers. Many authorities already follow best practice in consulting scheme employers alongside the contribution rate-setting process. This gives employers the opportunity to challenge contribution rates and consider whether they are sufficiently stable, or whether excessive prudence is built in.

Statutory guidance already sets out that funds should publish the actuarial assumptions used as part of the funding strategy statement. The noble Baroness, Lady Altmann, referenced the role of the Financial Reporting Council in the valuation. The valuation reports, which are publicly available, will include Financial Reporting Council compliance statements that technical actuarial standards have been complied with. In addition, I have already raised the Section 13 report by the GAD, which reviews the fund-level actuarial valuations. As part of the review into the 2022 valuation report, for example, when assessing consistency, there was a review of assumptions, including the discount rate.

Finally, this amendment points to a perceived excessive risk aversion undertaken by the LGPS. This is not an accurate characterisation. In fact, around three-quarters of LGPS assets are invested in return-seeking assets, vastly outweighing the equivalent figures in private schemes, which are heavily geared towards matching assets.

Amendment 18 would require administering authorities to publish and justify their approach to the treatment of surpluses over 120%. First, we must consider if this is the level that we would wish to set in the context of the LGPS. Elsewhere in defined benefit schemes, the Government are considering the funding threshold for surplus release, and there has already been consideration of what this would be. But we must remember that the valuation process already provides a route to return surplus to employers, which allows for changes every three years, whether or not a threshold—whatever it is—has been met.

Furthermore, each valuation is prepared on a local basis, meaning that the funding level will depend on the discount rate set. The discount rate converts the value of future benefits to a current value so it can be compared to the current value of assets; it is used to determine the employer contribution rate required to pay future benefits. It is based on the assumed future returns of the individual fund’s investments, taking into account the portfolio of assets held by the fund, the demographic profile of its members and its attitudes to risk. That means that a funding level of 120% in one fund will simply not be comparable to that of another if the discount rates applied are significantly different.

I think that the Committee will surely agree that the purpose of a buffer is to provide a surplus in well-funded times and guard against a fall into deficit in more challenging times. As a locally managed scheme, it is for the funds, not for the Government, to decide what the right level of surplus is. Introducing these additional reviews and requirements would risk undermining the valuation process and the locally managed nature of the scheme.

On Amendment 19, we had an interesting discussion on transparency—certainly transparency and accessibility is something that we should all seek. I appreciated the discussion between my noble friend Lord Davies and the noble Baronesses, Lady Altmann and Lady Noakes, on the accessibility of the actuarial statements. Maybe I would say this, but I thought that my noble friend put up a good defence of the professional standards that actuarial firms set themselves with regard to matters of accessibility.

I appreciate that the intent of Amendment 19 is to increase the transparency of actuarial valuations for all scheme employers and for members of the public. In addition to the requirements that I have already mentioned, regulations also require the administering authority to publish and send copies of any valuation, report or certificate made under Regulation 62, or Regulation 64, to all employers. I do not recognise that as limited transparency, but I concede that there is scope for greater visibility—and that is something that we should always seek to pursue. While there is scope to look at whether these publications could be made easier to understand for employers, that should be considered in the round—I suggest following the conclusion of the 2025 valuation.

The noble Viscount, Lord Younger, asked me to comment on his example of valuations increasing despite surpluses, and I would say that there is a robust valuation process in place into which employers feed. We must wait for completion of the scheme valuation and its formal result—but if this is the case as set out by the noble Viscount, the Government Actuary’s Department will review the results in the valuation under regulations in Section 13.

The noble Lord, Lord Fuller, asked about funds not using a discount rate that is more prudent than a gilt basis. I have already talked about the wider inaccurate characterisation of excessive risk aversion, but at this point I add that the LGPS is a funded scheme with diversified assets and its discount rates are set by fund actuaries on a scheme-specific, prudent basis that reflects long-term expected returns. The valuations are reviewed nationally by the GAD on compliance, solvency and long-term cost efficiency. Without the results of the 2025 valuation or the Section 13 review, we cannot say for certain what the current approach is, taken across all funds.

--- Later in debate ---

[Lord Davies of Brixton (Lab)]

At the risk of receiving a glare from my Whip, I feel I have something to contribute to this group as well.

I will first make a general point. If noble Lords and noble Baronesses are going to quote specific examples, we need chapter and verse in order to understand what is happening. If we are just given figures, we are meant to absorb and draw some conclusion from them, which is not possible; we need to know chapter and verse of any examples that noble Lords quote so we can analyse and see what is really going on in that particular case. I have to say that my assumption is that, with all the examples we have been given, there is a readily available, understandable situation, and somewhere along the line there has been a failure of understanding.

On Amendment 20, my question for the noble Baroness, which she sort of answered, was: why is this amendment required? I think we were told that it is all too difficult, but of course it is not all too difficult. There is a big example: the London Borough of Kensington and Chelsea, which has a Conservative-controlled council, earlier this year made an interim change in its contribution rate to zero because its investment policy had been so successful. It is worth noting that it has a very successful investment policy and it is one of the smallest local government funds—something to bear in mind during the other debates on the Bill.

There is a question: how often should you undertake a valuation? There is a strong argument for three years because that provides some level of stability to the council’s finances. You have to remember that, over the last year or two years, a council may be paying too much or it may be paying too little, but that is not money down the drain; it either goes into the fund or does not, and it will be available or not available at the end of the three-year period. The money does not disappear if contributions are up, and it will be reflected in the future contributions that that council will pay.

I am also concerned that of course an employer will seek a review when it thinks its contribution is going to go down. I bet it will not seek a review if it thinks its contribution is going to go up, which provides exactly the sort of ratchet effect that the noble Baroness said she wanted to avoid. So it would be perfectly practical to do a valuation every year with the strength of the computers we have available now. It a long time since the day when I had to sit at a large square sheet of paper and do all the figures by hand: you just run the computer and there are the figures. I am sure the consulting firms will be happy to get all the additional fee income, but does it actually produce the advantages that we are told will be achieved through this amendment?

I note the points made by the noble Baroness, Lady Scott of Bybrook. I think it is a very valid point. It is a shame that whatever the local government department is called nowadays has not been involved with the Bill; it could have brought some perspective to where we are.

On Amendment 20A and benchmarks, I draw the attention of the noble Baroness, Lady Altmann, to a regular report from a group whose name I shall not get right—but there is a national group of local government pension schemes. Following each valuation, it produces a detailed report providing all the information she asks for. Again, the information is available. She is asking for this information, when it is already easily available online. On my iPad, I can look up all the information which it is being suggested is being hidden away. The importance of the Local Government Pension Scheme is obvious, and obviously there should be transparency, but the idea being promoted that we do not know what is going on in these funds is gravely unfair to the pension schemes concerned.

[Lord Katz (Lab)]

My Lords, I shall now respond to Amendments 20 and 20A. I am grateful to the noble Viscount, Lord Younger of Leckie, and the noble Baronesses, Lady Stedman-Scott and Lady Altmann, for tabling them. Amendment 20 seeks to revise the existing LGPS regulations to make it easier for employers in the scheme to request interim reviews of contribution rates. I welcome the intention to increase flexibility in how surpluses in the LGPS are treated, but it is crucial for any flexibility to be underpinned by robust safeguards to protect the long-term funding position of those funds. It is important, equally, to make the distinction between how surpluses are treated in the LGPS scheme and in other defined benefit schemes. At the risk of repeating my words on the previous group, within other defined benefit schemes, trustees can choose to release surplus where scheme rules allow. Clauses 9 and 10, which we cannot wait to get to, will increase that flexibility.

In the LGPS, the triennial valuation process already ensures that contribution rates are reviewed every three years and enables withdrawal of surplus through reduced contribution rates where it is prudent to do so. The interim review process is available as an additional mechanism to allow scheme employers, particularly those at risk of exiting the scheme, to seek lower contribution rates between valuations. Interim reviews may take place if it appears likely to the administering authority that the liabilities have changed significantly since the last valuation, if there has been significant change in the ability of employers to meet their obligations or if the employer has requested a review.

I welcome the call from noble Lords opposite to make interim reviews easier to understand and more transparent. I agree that regulations on interim reviews require revision, including on these points. Indeed, the department has already stated this in a letter to administering authorities—that was in March 2025. I understand the point that the noble Baroness, Lady Stedman-Scott, was making about the vicissitudes of the market and other changes that occur. Without wishing to be overly sarcastic, we could posit having reviews on an almost continual basis to try to anticipate market movements, changes in demographics or other external shocks. I am not for a minute suggesting that that was the intention behind the amendment, but it proves the point that, if we are going to break up the cycle of valuation, when and how we do it is a question for further debate. That possibly addresses some of the points that the noble Baroness, Lady Scott of Bybrook, was making as well. It is important that any changes to regulations are properly considered and avoid unforeseen consequences.

[Baroness Scott of Bybrook (Con)]

The reorganisation is very different from the day-to-day running of the local authorities. Once they are reorganised, it will calm down and balance out again. But what worries me is whether the Government are working with local government pension schemes on the impact of these changes. If not, why not and will they do so?

[Lord Katz (Lab)]

Actually, the noble Baroness, Lady Scott, anticipates this, which is actually useful on the point that my noble friend made. I will come to that in a second. I was just about to say that of course we are aware. I am afraid that the noble Baroness was not in her place when we discussed local government reorganisation in the first group, earlier this afternoon in Committee.

Actuaries are aware of the local government review and the potential impact on contribution rates. In response to this, actuaries could have a number of options. They could calculate a harmonised contribution rate for the new unitary authorities proposed, set out a path to target harmonised contribution rates if desired or continue to treat them separately and do a contribution review when the local government reorganisation position is clearer.

This is probably as good a point as any to reassure my noble friend Lord Davies of Brixton, whose mastery of technology never fails to impress: my colleagues from the MHCLG very much support the DWP on this Bill and we are working collectively on elements that relate to the Local Government Pension Scheme; so do not worry about that.

It is important that any changes to regulations are properly considered and avoid unforeseen consequences. The views of employers, funds and others within the sector are a vital part of this process, and making amendments to this Bill would prevent the sector and scheme employers from having their say on whether the change will work for them. The department has already committed to launching a consultation this year, which will cover the full range of issues with the current rules.

Amendment 20A, tabled by the noble Baroness, Lady Altmann, seeks to benchmark Local Government Pension Scheme employer contributions on an annual basis. I recognise the noble Baroness’s desire to increase transparency on employer contributions and to set them in a wider context, including council tax. LGPS funds are already required to publish a valuation report and a rates adjustment certificate following each valuation. This certificate sets out the employer contribution rates as a percentage of pay to be paid by each employer in the fund in each of the three years of the valuation period. Employer contribution rates are set locally and vary widely across the scheme, depending on the funding level of the fund and the covenant of the individual employer. It is not appropriate to set a benchmark for employer contributions for funds as this would compromise local accountability.

I will come on to talk a little about council tax rates and contributions, because they have been mentioned by many noble Lords. Before that, I repeat the point I made in the previous group. I am afraid that the amendment seems to neglect the fact that 50% of LGPS employer contributions are paid by employers that are not local authorities, so we cannot focus on just council tax as the be-all and end-all.

However, those local authority employers do make up half that funding. Those local authority employers in the LGPS meet the cost of employer contributions from their total income, of which council tax is only a proportion. It varies considerably among different councils across the country, depending on their other sources of income, which are myriad. They include business rates, grants, Section 106 contributions and CIL. They can include any income gained from other charges and levies, whether parking or licensing. The list goes on. I defer always to the noble Lord, Lord Palmer, and his decades of experience on my next-door council, Barnet. He and noble Lords in the Room will understand the wide range of income sources that councils have.

--- Later in debate ---

[Viscount Thurso (LD)]

May I ask one point of clarification from the noble Viscount, Lord Younger, when he comes to wind up at the end of this debate, again on risk? I read this amendment as being about the risk register—the list of risks faced by the organisation and how they are dealt with—rather than the level of risk that is taken in investing assets, which will determine the return level. I wonder whether he could give us clarity on that.

[Lord Katz (Lab)]

My Lords, I am grateful to the noble Viscount, Lord Younger, for tabling these amendments and, as the noble Lord, Lord Fuller, said, for giving us this short but sweet opportunity to discuss the management of the schemes.

I join the noble Lord, Lord Fuller, in using this opportunity to pay tribute to all those who are involved in the work of running the LGPS. He is absolutely right that it is a thankless and hard task; this is an opportunity for me to put on record that I am in complete agreement with him on that matter, although I say gently, as we are on the last group for today, that his definition of “sexy” differs from mine somewhat—but each to their own.

I recognise that the intention behind these amendments is to ensure the robust management of funds and assets in the LGPS. The Government share this aim and are taking steps to ensure that the reforms are implemented soundly. I am happy to confirm to the noble Viscount, Lord Younger, that “management”, as established in Clause 8, is not a narrow administrative concept but a comprehensive responsibility encompassing governance, oversight and compliance. The Government are clear that administering authorities and asset pool companies must regard adherence to all applicable laws and regulatory requirements as a core, non-negotiable element of their management duties.

This expectation reflects the principle that robust compliance is fundamental to safeguarding assets, maintaining public confidence and ensuring accountability throughout the system. In particular, under the provisions of this Bill, all investment management activity beyond setting high-level investment strategy will be delegated to the asset pool company, which will be required to seek authorisation from the Financial Conduct Authority. FCA authorisation and supervision will provide vital assurance to members and employers that very large pools of capital will be managed properly, including ensuring that robust procedures for identifying and managing risk are in place. The Government have written to the asset pools to set out the new requirements in Clause 1 and are engaging closely with pool company leaders to monitor progress on meeting them in good time. In addition, subject to the passage of the Bill, the Secretary of State intends to make regulations and issue guidance on asset pooling and fund governance, which will set out the expectations on LGPS funds and pools.

On strengthening fund governance, administering authorities will continue to be responsible for holding pools to account on their performance, including on how risks are managed. To strengthen governance and accountability further, regulations will require administering authorities to appoint the new positions of “senior officer” and “independent person”, subject to the outcome of the consultation. Senior officers will take the leading role in representing their funds in the governance of the asset pool in which they participate, and independent persons will offer professional expertise to support pensions committees on investment strategy, governance and administration—including holding the pool to account.

Administering authorities will be better able to manage risk and ensure compliance as a result of the new powers relating to independent governance reviews set out in Clause 5. Independent governance reviews will ensure that administering authorities review their governance and their compliance with the legislation, supported by independent scrutiny, to provide assurance to members and employers. In response to the question from the noble Viscount, Lord Younger, on whether we are attempting to constrain the concept of management, the answer is that we are not. The list provided is an inclusive one, not an exhaustive one. As I have said, compliance with laws and regulations and effective risk management are assumed in the Bill, as they are in existing LGPS legislation, with the latter also provided in the requirement for asset pools to be regulated by the Financial Conduct Authority.

The provisions in this Bill are already adequate to ensure that asset pool companies and administering authorities are compliant with the law and have adequate controls in place with regard to the identification and management of risks. Given that, as well as my explanations, I hope that I have satisfied the noble Viscount, Lord Younger, and provided the assurances that he sought. I respectfully ask him to withdraw his amendment.

[Viscount Younger of Leckie (Con)]

I am grateful to the Minister for his response and for answering the questions that I posed—I think there were only one or two, but, again, I will check Hansard for my questions and his responses.

The Committee will be pleased to know that I have little to add to what I said earlier, but I would like to reiterate a broader point. The more clarity we can place in the Bill and the more we can place clearly on the record, the greater the certainty we will provide to trustees, funds and employers about changes to a landscape that profoundly shapes how they operate and discharge their responsibilities.

In this very short debate, I was particularly grateful for the points made by my noble friend Lord Fuller, backed up by my noble friend Lady Noakes. I appreciated my noble friend Lord Fuller’s focus, which it is important for the Committee to put, on what pension fund administrators actually have to do, and he was quite right to highlight the breadth and detail required in undertaking the role.

That leads me nicely on to answer a question raised by the noble Viscount, Lord Thurso, on Amendment 22. I will need to check, but my understanding is that when it comes to the role of a pension fund administrator, management includes handling risks. The question is how we define “handling”. My understanding is that it includes how risks are identified, assessed and kept under review, but it is quite possible that there is somebody above that level who takes full responsibility. Otherwise, my understanding is that it involves handling both the risk register and how risk is assessed and decided on in providing a return to investors, but I will investigate and come back to the noble Viscount.

In concluding, although today we might be debating definitions and interpretation, I have no doubt that those affected by this legislation are following our proceedings closely and are keen for as much clarity as possible from the Government on definitions, duties and responsibilities. For that reason, I would very much welcome any further clarification the Minister is able to give the Committee throughout our subsequent proceedings on the questions we raise on these matters. That would provide reassurance not only to this Committee but to those beyond it who are looking to these proceedings for guidance and certainty. I finish by saying that that really is true, in that we have been in touch with a number of third parties and those in the industry, and many of the comments made today and on Monday absolutely reflect their issues and concerns. With that, I beg leave to withdraw the amendment.