Pension Schemes Bill

Lord Katz Excerpts

Monday 16th March 2026 Lords Chamber

The amendment would insert a clear restriction stating that regulations made under Clause 2 may not include provisions requiring investment in specific assets, asset classes or geographical locations. Pension assets exist to secure the retirement income of members, not to serve as instruments of industrial policy. Those responsible for managing these funds are bound by fiduciary duties to act in the best interests of their members, and Governments are not. For that reason, this amendment is extremely important, and we will support my noble friend Lady Noakes if she decides to test the opinion of the House—she said in her opening remarks that she was minded to do so.

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

My Lords, I am grateful for our discussion on this first group. I am indebted to the noble Lord, Lord Palmer of Childs Hill, for reminding me too that I should declare my membership, as a former Camden councillor, of its members’ pension scheme—although I defer to him in terms of seniority in years of service: I did a paltry one term, as opposed to his gazillion, I think it was, in the neighbouring council in Barnet.

I share the interest raised in this discussion in fostering greater collaboration and sharing of expertise across the LGPS and ensuring that there are appropriate safeguards in the Bill. On Amendment 1, tabled by the noble Lord, Lord Fuller, it is right that we ensure that appropriate safeguards are in place on the use of direction powers. To reiterate, these are included in the Bill as backstops to ensure that the Government can fulfil their role as stewards of the scheme, but let me be clear that the direction powers in the Bill are not designed to allow the Government to direct investment into specific assets or asset classes, and the Government are satisfied that they cannot be used in this way.

The Bill already requires the Secretary of State to consult the asset pool company, its participating partner authorities, the FCA and any other body that the Secretary of State considers appropriate, prior to the exercise of the direction powers. I do not believe that the Pensions Regulator is an appropriate body for this list. Asset pool companies will be regulated by the FCA and do not fall under the remit of the Pensions Regulator.

In moving his amendment, the noble Lord, Lord Fuller, took issue with the closure of the access pool. To be clear, access went through the same process as all the pools. Outsourcing all its investing was not value for money. The pools that access funds are going to are all FCA regulated. I hope this provides reassurance not just for the noble Lord, Lord Fuller, but for your Lordships’ House.

The Ministry of Housing, Communities and Local Government will work closely with the Government Actuary’s Department to provide actuarial advice to the department on the LGPS. It can be expected that the department would seek advice from it prior to issuing a direction wherever it was relevant to do so. Furthermore, the Secretary of State has a duty to consult anyone whom they consider appropriate under Clause 1(5)(d), which could include the Government Actuary’s Department. This may not always be appropriate, however, depending on the type of direction being issued. Overly burdensome and formal consultation requirements can slow decision-making. It would therefore seem potentially onerous to have the Government Actuary as a compulsory consultee under these direction powers.

The noble Lord, Lord Fuller, also talked about the impact of local government reorganisation on pooling in the LGPS. Many administering authorities are forming new pool partnerships to deliver the standards of pooling which we have set. I know that authorities have taken the impact of local government reorganisation into account when deciding which pool to join. The Government stand ready to support authorities with any concerns that they may have about the impact of local government reorganisation on the administration of the LGPS in their area. For the avoidance of doubt, and to address the point made by the noble Baroness, Lady Bowles, there is nothing in the legislation that says that the Government underwrite the liabilities of the LGPS. These are locally managed schemes, which includes responsibility for liabilities.

Amendment 2 seeks to encourage collaboration and competition across the LGPS by permitting administering authorities to participate in more than one asset pool company. This Government strongly believe that pools should work together wherever this can improve outcomes for members, employers and taxpayers. Asset pools becoming centres of excellence in specialist asset classes would reduce duplication and enable investments at scale, both within pools and across the whole scheme. Joint ventures are already operating in the scheme—such as LPPI and Northern LGPS’s collaboration through the GLIL Infrastructure fund, which invests in assets ranging from upgraded rail rolling stock to green energy and water projects. These show how collective investment can unlock the scheme’s potential to invest in the UK.

To encourage further collaboration of this kind, Clause 4 removes procurement barriers so that pools can invest in one another’s vehicles without limitation. Nothing in this legislation prevents administering authorities benefiting from specialist expertise in other asset pools. It certainly does not impose an arbitrary north/south boundary or other such divisions, as the noble Lord, Lord Fuller, intimated. However, under the reformed system, this will appropriately be done via their own asset pool, because decisions to contract with, or invest alongside, another pool are a matter for the regulated pool company, not for individual authorities.

The Bill establishes a clear division of responsibilities. Administering authorities will set the investment strategy, while asset pools will implement that strategy. This places investment decisions with professional managers, enabling the scheme to achieve scale and deepen capability. This amendment would undermine those benefits by returning investment decisions to individual authorities, rather than the expertise developed at the pools. I therefore believe that the amendment is neither necessary nor an appropriate measure to enable collaboration across the scheme.

I should like to reassure the noble Baroness, Lady Altmann, on the points that she raised. First, pooling is not about limited choice. Pools will select managers on behalf of their funds under the fund’s direction. Secondly, the investment strategy will set funding objectives and an asset allocation. Thirdly, responsibility for setting the investment strategy will remain with funds. Nothing in the Bill allows the Government to tell funds what to invest in, nor will pools make that decision. It will be made by the LGPS funds for pools to deliver.

I turn to Amendment 5, also from the noble Lord, Lord Fuller, and the noble Baroness, Lady Altmann. I understand that the intention behind this amendment is to allow investment in opportunities created by other administering authorities and asset pools. As I have said, this is already possible under the legislation as drafted. What the amendment would actually do is to allow administering authorities to count as local any investment to the benefit of people living or working anywhere in England and Wales. This definition is relevant only when administering authorities are setting their approach to, and targets for, local investment in their investment strategy, and when reporting on the extent and impact of local investment.

Of course, the Government are all for UK investment. Indeed, as we have heard, the LGPS is the country’s largest UK pensions investor already. However, the purpose of requiring a specifically local, not national, investment objective in the investment strategy is to encourage investment into all regions of the UK, and directly into the communities in which scheme members have worked. Administering authorities can set any target they want for local investment, and asset pools are free to invest assets over and above this target in the UK or worldwide, as best fits the investment strategy. There is therefore nothing stopping administering authorities from benefiting from investments anywhere in the country, regardless of their geographic location.

I turn to Amendment 4 from the noble Baroness, Lady Noakes. Clause 2, specifically the provision in subsections (3)(b) and (4), allows the Government to make regulations specifying matters that administering authorities must or may cover in their investment strategy. It is not designed to permit government to dictate what that strategy says. The power that we removed from the Bill in the other place was equivalent to the powers that the Secretary of State has over funds, which the Government’s initial judgment was that it was appropriate to have over pools under the new system. We have heard feedback from stakeholders and feel that it is not necessary for the Secretary of State to have those powers.

This provision will be used to require that LGPS investment strategies include: an approach and target range for local investment; high-level funding objectives and an approach to responsible investment; and a strategic asset allocation completed to a standard template, to be included in guidance. In each case, it remains for LGPS administering authorities to determine what those objectives, approaches, asset allocations and target ranges will be. Some may be concerned about how a future Government might use this provision. I reassure them that the Government do not consider the clause to permit regulations compelling authorities to adopt any particular position in their investment strategy. I hope that the noble Baroness will therefore be reassured that the Bill does not enable what her amendment seeks to guard against.

The purpose of the government amendments to Clause 4, Amendments 6 to 8, is to ensure that changes made under the clause do not have any wider application than intended. Clause 4 amends the Procurement Act 2023 to create a new exemption for investment and fund management contracts between Local Government Pension Scheme managers and their LGPS asset pool companies. This is required because the existing exemption in the Procurement Act contains a turnover test that would cap the potential for LGPS asset pools to collaborate through joint ventures. Clause 4 addresses this by ensuring that LGPS pools are not subject to this turnover test where a pool is acting in the interests of Local Government Pension Scheme managers. However, it is appropriate that the effect of the clause does not go any wider than intended. The amendments therefore put it beyond doubt that these changes apply only when Local Government Pension Scheme managers are acting in their capacity as Local Government Pension Scheme managers, and not in any other scheme management capacity they might have.

I hope my response demonstrates that the Government have considered carefully the points raised through Amendments 1, 2, 4 and 5. To pick up on the comments made by the noble Lord, Lord Palmer, we understand the intentions behind the amendments—we just do not think that they are necessary. We understand the motivation behind them, and I hope that my explanation makes that clear. We are also responding to the wider point, which we discussed at some length in Committee. The nature of the Bill, called by some skeletal, is that this is how pensions and other financial management legislation is passed. A lot has to be done through regulation, because that is how one responds to changing marketplaces and sector demands. We make no apologies for that. However, the Government welcome collaboration across the scheme and, as I have explained, the provision in the Bill and our proposed regulations already allow for it. Amendments 2 and 5 would undermine the pooling and local investment reforms without promoting further collaboration.

This Government also recognise the desire to ensure that there are appropriate safeguards on the use of direction powers. I hope I have reassured your Lordships’ House that the consultation requirements in place are already sufficient and that it is not necessary to introduce additional references to the Government Actuary and the Pensions Regulator. Finally, I hope that I have reassured your Lordships’ House that the provisions in the Bill do not allow the Government to introduce mandation via regulation. I therefore ask the Lord, Lord Fuller, to withdraw Amendment 1.

[Lord Gove (Con)]

Before the Minister sits down, he said that Amendment 4 is unnecessary because the Bill does not do what the promoters of Amendment 4 argue that it does. He did not say that it would be malign, that it would frustrate the efforts of the Government, that it was wrong in any way; he merely said that the Bill already achieved what the promoters of the amendment want and therefore it would be superfluous. What damage would therefore be done if Amendment 4 were accepted? In what way would it damage the Government, damage pension fund trustees or damage pension fund members? It is not good enough to say simply that the noble Baronesses, Lady Altmann and Lady Bowles, and the noble Lord, Lord Palmer, are wrong, and for us to take it on trust. That is not what we should do.

[Lord Katz (Lab)]

I say simply that if we took that approach to all legislation, we would end up with Bills hundreds or thousands of pages long, because we might pile on more amendments simply because they are well-intentioned. It is important that we are clear about the legislation that we are drafting, so that people in the pensions sector, lawyers, et cetera, can properly interpret what we intend—by any legislation, not just this Bill. When we say that something is superfluous, we do not add it in: I think that is a perfectly decent criterion by which to legislate. The noble Lord, Lord Gove, shakes his head. I say to him gently that both this and the previous Government have had a lot of criticism for large Bills and there is always an onus on us to have slimmer legislation. We will not get slimmer legislation by accepting willy-nilly amendments that we think are superfluous.

[Lord Gove (Con)]

My Lords, I am afraid that that answer is completely inadequate.

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Moved by

[Lord Katz]

6: Clause 4, page 6, line 4, at end insert “acting in its capacity as a local government pension scheme manager”
Member's explanatory statement
This is a drafting amendment to clarify that only contracts made by a local government pension scheme manager acting in its capacity as such can be exempt contracts under clause 4.

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[Lord Palmer of Childs Hill (LD)]

My Lords, this group asks for greater transparency around Local Government Pension Scheme valuations by requiring benchmarking against insurer pricing and gilt-based discount rates, with clearer explanations where more prudent assumptions are used. There is value in greater openness and comparability, but there is also a risk in appearing to imply that one benchmark can neatly settle what is, in practice, a complex actuarial judgment.

I was taken by the contribution from the noble Lord, Lord Davies. He really killed off the amendment by saying that it would give more work for actuaries. The tendency is for the actuary then to say, “On the one hand this and on the other hand that”. Very often, the advice is not even that definite anyway, which is why actuaries are there to confuse the issue altogether.

We should be honest about two things at once. First, employers and scheme participants need clearer information. If valuation choices materially affect contribution rates, local authority budgets and, ultimately, local services then those choices should be explained in language that non-specialists can understand. Secondly, the Local Government Pension Scheme is not simply an insurer in another form; it is a long-term, open, public sector scheme with characteristics that very much differ from closed private arrangements. Although comparison can illuminate, it must not mislead, as is the danger. A benchmark should be a tool for understanding, not a back-door instruction about how every valuation ought to be done.

That is why we on these Benches are cautious. We are sympathetic to calls for clearer publication, accessible material and meaningful consultation. Sadly, we are less persuaded by any suggestion that the right answer can be derived by mechanically comparing one prudence basis with another. The real issue is whether assumptions are evidence-based, proportionate and properly explained. If the Government believe that the present system already secures that then they should show it—I hope the Minister will do that when he responds. If not, there is merit in considering reforms that improve transparency without oversimplifying a technical process.

On that basis, we on these Benches do not oppose the spirit of scrutiny here, but we are not convinced that the amendment, as drafted, is the full answer. Therefore, we are not against what the amendment says, but we would not support it if it were moved to a vote.

[Lord Katz (Lab)]

I thank the noble Viscount, Lord Younger of Leckie, for the amendment, moved very ably by the noble Baroness, Lady Stedman-Scott. It seeks to improve the transparency of the assumptions and level of prudence applied in LGPS actuarial variations, including through the introduction of additional benchmarks.

The 2025 triennial valuation will conclude on 1 April, and at present we do not have a complete picture of its outcomes across the 87 different funds and more than 20,000 employers in the scheme. The amendment seeks to prescribe remedies before any diagnosis has been made or, indeed, any maladies have been fully understood.

Many of the matters raised will be covered by the Government Actuary’s Department report under Section 13 of the Public Service Pensions Act 2013. The report will assess whether employer contributions have been set at levels appropriate to ensure solvency and long-term cost efficiency, whether funds’ valuations comply with the regulations and the degree of consistency between them. Recommendations will then be taken forward by the Ministry of Housing, Communities and Local Government and the scheme advisory board.

Officials are already engaging with the Government Actuary’s Department, which is targeting a publication date of spring 2027 for its report and recommendations. Your Lordships’ House will be pleased to hear that this is earlier than previous valuations, which I hope demonstrates the seriousness with which we are taking the issues raised by noble Lords in Committee. The Government Actuary’s Department will engage widely with funds, actuaries and advisers to develop a comprehensive understanding of the 2025 valuation.

It is appropriate for different funds and their advisers to use different discount rates, reflecting variations in risk appetite, employer profile and investment mix. It is helpful to understand how these approaches compare across the sector. The Section 13 review uses benchmarks to place local valuations on a comparable footing and may, in the first instance, provide useful insight into funds’ decision-making. There is a delicate balance to be struck. Members’ benefits are guaranteed in statute, but funds must ensure that they hold sufficient resources to pay those benefits over the long term through investment income and contributions.

My noble friend Lord Davies is right in his assertion that actuaries advise and funds decide. I salute, in making these contributions, his forbearance in not arguing for the interests of the national union of actuaries, of which I am sure is a founder member—at least he ought to be, if it does not exist.

We heard a fair amount on prudence, as we did in Committee, from the noble Lord, Lord Fuller, using his experience. In a locally managed scheme, it is for funds to work with their actuarial advisers and employers to set a contribution rate that supports the long-term viability of employers and the fund. The Section 13 report prepared by the GAD will consider questions of prudence—that is, how the discount rate is set and how stability is applied to contribution rates. Were the Government to set correct valuation assumptions, they would risk undermining the principle that funds and expert actuarial advisers are responsible for ensuring the long-term sustainability.

A push for greater intervention at the valuation risks moving from a locally managed scheme to a centrally managed scheme. We heard much about that in the discussion on the previous group of amendments. The implications are real and far reaching, decreasing rather than increasing the role for locally elected representatives.

On transparency, the amendment would require additional detail on assumptions and benchmarks in the funding strategy statements and these to be communicated in a more user-friendly way. I believe we are broadly aligned on the value of valuation reports and supporting material, such as funding strategy statements, being easier to understand for the lay reader. There is already transparency in the process. Administering authorities should consult all employers in the fund on their funding strategy statement. This statement should outline how surpluses and deficits will be managed, outline the approach to contribution stability and summarise the main actuarial assumptions used at the valuation.

To respond to the noble Lord, Lord Fuller, the funding strategy statement is consulted on, and the SAB guidance already says that the purpose of the FSS is to establish a “clear and transparent” strategy that explains how liabilities will be met and

“how the fund balances the interests of different employers”.

We must not jump to conclusions about how the valuation has played out for every fund and employer. There are already examples of good practice, including meaningful employer consultation and capable pension committees with the confidence to interrogate their actuary’s advice to fully understand the proposed contribution rates.

In his evidence to the Committee on the Bill in the other place, Roger Phillips, chair of the LGPS advisory board, said about the treatment of surplus that

“we live in a very volatile situation, and circumstances can change. You have to be careful, because if you reduce contribution rates considerably, that is a great benefit at this moment in time, but if you then turn around and start to increase them again, that can be very difficult for all employers to deal with, including local government”.—[Official Report, Commons, Pension Schemes Bill Committee, 2/9/25; col. 41.]

Until the valuation has concluded, we cannot reach a definitive view on how the interpretation of regulations and guidance and the quality of employer consultation have shaped the results that will apply from 1 April. As part of their review, the Government will ask the Government Actuary’s Department to focus on methods for managing risk and reflecting the long-term funding objectives of the scheme including discount rates, application of stability mechanisms and buffers and the effectiveness of employer engagement. I have committed to additional work with the GAD on how discount rates and the application of stability mechanisms affect contribution rates and whether employer engagement processes are operating effectively.

Following the publication of the Section 13 report, the Ministry of Housing, Communities and Local Government will undertake a review of the regulations and guidance governing the triennial valuation ahead of the 2028 valuation. I appreciate that your Lordships’ House may wish for more immediate action, but we must ensure that we are in possession of the valuation results before we determine the right course of action. I therefore ask the noble Viscount, Lord Younger, or the noble Baroness, Lady Stedman-Scott, to withdraw the amendment.

[Baroness Stedman-Scott (Con)]

Your Lordships have got me.

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[Baroness Altmann (Non-Afl)]

My Lords, I support this amendment. This is an important time to talk about the contribution rates to the Local Government Pension Scheme. When funding has changed so substantially in a very short period of time, having an interim review clearly makes sense, for not only the local authority but the council tax payer.

As we heard in a previous debate, we are seeing councils with significant surpluses continuing to spend council tax income on pension contributions to schemes that do not need them because they are in significant surplus. Further, fixing contribution rates in a three-year cycle underestimates the timeframe that has gone into the setting of those rates, because the valuations on which those rates are based were done more than three years before the third year of the cycle. It takes about a year for the scheme valuation to be done and the contribution rates to be set, so they could easily be four years behind. A lot can happen, and has happened, in that timeframe.

I hope the Government will accept that this principle of allowing councils to be more flexible with the revenue that they receive from council taxes could benefit local authorities and the country. We know that councils have been forced to increase council tax due to their inability to meet their basic spending commitments. If the amount that councils spend on pension contributions could instead be spent on social care, or other local authority needs, they would require less money from local residents—which would improve the local economy, as tax rates would not be so high—and central government. The pressure on public spending could therefore be ameliorated.

I know that there is a principle of trying to achieve what is referred to as stability in contribution rates, so that they do not change too much from one year to the next. However, when there are significant changed circumstances, forcing schemes to fiddle the assumptions on which the scheme funding is based so that local authorities can somehow justify maintaining contributions to a fund that, in the private sector, would not need the money and would normally be having a contribution holiday, strikes me as not serving the best interests of either the local or the national economy. A review of how pension contribution rates are set at local authority level is probably long overdue, given the big changes that we have seen, and could help the Government with some of the funding strains that they have been feeling, and their desire to improve growth.

If a local authority is spending, say, 20% or more of its council tax revenue on putting money into a pension scheme that does not need it, and if that pension scheme is underwritten by the Government anyway, so its members’ benefits are not at risk, you have a very different scenario from that a private sector employer’s trustees might be facing: if the contributions stop and the employer gets into trouble, there is nothing much that can be done to ameliorate the position for members. That risk does not really exist in a local authority pension scheme. As I say, there is no contribution to the Pension Protection Fund and no underwriting; this is guaranteed by taxpayers.

Therefore, if you are raising taxpayer revenue from council tax, why not simply use it where it is needed, rather than putting it where it is not needed for now? You can always come back later and impose contributions when or if the funding position changes, but the scheme is not going to run out of money in any short-term period; that is not how pension schemes work. I therefore hope that the Government will appreciate the logic of this amendment, which was so ably moved by my noble friend on the Front Bench.

[Lord Katz (Lab)]

I thank the noble Viscount, Lord Younger of Leckie, for his amendment, and I share the interest in ensuring that interim valuations are accessible and transparent for all employers in this scheme.

Amendment 12 proposes changes to Regulation 64A of the Local Government Pension Scheme Regulations 2013, which concerns valuations carried out outside of the triennial valuation cycle. In Committee, I committed that the Government will consult on changes to Regulation 64A this year, and we will consider the matters raised as part of that consultation.

I reiterate the point I made in Committee: any changes to regulations need to be properly considered to avoid unforeseen consequences. The views of employers, funds and other sector groups are vital to this process, and amending legislation now would prevent them contributing to the policy design and therefore ensuring our ability to get the best possible outcome. There is clearly value in having a mechanism that allows employers to review contribution rates, especially where employer covenants or liabilities change significantly, but this must remain consistent with the triennial valuation and be workable for all participants across the sector.

Amendment 12 aims for additional transparency, in a similar vein to the other amendments we have discussed this afternoon. The noble Viscount should note that the policy on interim valuation contribution reviews is set out in the funding strategy statement, on which employers are consulted.

The noble Baroness, Lady Altmann, spoke in detail about the time lag of valuations and the impact of events in the financial cycle. As everyone will be aware from geopolitical events, markets can vary from one day to another. Simply requesting a valuation on the basis of a change in the day’s markets would be excessive, and indeed many funding strategy statements state this. The current regulations provide for interim valuations on the basis of changes in liabilities or covenant. The risk of liabilities not being met is that the burden goes up not for the Government but for the council tax payer, as a council that may not be in a good financial position, as the noble Baroness says, needs to increase council tax to cover liabilities. The Government do not underwrite the scheme. Your Lordships’ House should remember that 50% of LGPS employer contributions are not from local authorities, so we are not talking about a situation where it is exclusively local authorities that would cope with the change.

I said in Committee—and I could have said this in response to the previous group as well—that it is marvellous to see the Benches opposite show concern now about the funding of local authorities. We are concerned about it, and we were concerned about it for the previous 14 years when the Benches opposite were in government and had a differing view of imposing austerity on local government. I will say no more, and I apologise to your Lordships’ House—I could not help myself, having been very good on the previous group.

I hope my response demonstrates that the Government have considered the points raised through this amendment carefully. I therefore ask the noble Viscount, Lord Younger of Leckie, to withdraw Amendment 12.

[Viscount Younger of Leckie (Con)]

I am grateful to the Minister and to my noble friend Lady Altmann for her supportive remarks. This amendment raises a simple but important question: how do we ensure that the Local Government Pension Scheme remains responsive, transparent and accountable when the financial circumstances surrounding it change? It sounds to me very reasonable.

I have taken note of the remarks made by my noble friend Lady Altmann, from her long experience. It was interesting that she pointed out that the timeframe of three years could easily be four years for the delays that necessarily have to be there, and she made further powerful points. By accepting this amendment, the Government could have a greater chance of achieving their growth targets with a domino effect—they might like to take that point on board.

Across the country, as my noble friend Lady Stedman-Scott said in the previous debate, many local authorities and other participating employers are operating under immense financial pressure. We know that councils are already struggling to balance their books, and some are being forced to seek emergency support simply to maintain basic services. In that context, the ability to review contribution rates where circumstances have materially changed is surely a matter of responsible governance.

The amendment is simple. It would establish a clearer framework through which contribution rates could be reviewed when there is a good reason to do so. For those reasons, I believe this amendment represents a sensible, reasonable and proportionate improvement to the current framework. It would reinforce the principles of transparency, accountability and responsible stewardship of public funds. I therefore stick to what I said at the beginning: when my amendment is called, I will wish to test the opinion of the House.

Finally, I do not think that the Minister is correct. He said the policy should “remain consistent”, which shows a great lack of understanding of what many in the industry are actually saying and a great inflexibility from this Government. I wish to test the opinion of the House.

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Amendment 13 withdrawn.

[Lord Katz (Lab)]

My Lords, before we go any further, I am afraid we will need to adjourn during pleasure for a few minutes. There has been an incident which means we do not have full access to the areas of the House that are needed to get to the voting Lobbies. I suggest we adjourn during pleasure and keep an eye on the annunciator. It should be a few minutes, but I do not want to specify a time because we do not know quite how long it will take to clear up. Apologies for this inconvenience, but I think it is for the best.