Pension Schemes Bill Debate
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Lord Katz
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Lord in Waiting/Government Whip (Lord Katz) (Lab)
My Lords, in moving Motion A, I will also speak to Motions B, B1 and C. The Commons have disagreed with Amendment 1 on the grounds that it could introduce, rather than mitigate, risks that the provision in Clause 2 could be used in unintended ways. Amendment 1 would place an explicit prohibition on regulations made under Clause 2, including any provision requiring investment in particular assets or asset classes, or in particular locations.
I acknowledge the concern that lies behind this amendment, and I wish to reiterate the Government’s position clearly for the benefit of the House. The Government have no intention of using the powers in Clause 2 to require asset pool companies to invest in specific assets, asset classes or locations. The Bill, as drafted, does not provide a legal basis for the Government to tell asset pool companies what investments should be made or where those investments should be located. Indeed, by expressly setting out particular matters that regulations may not address, the amendment risks introducing ambiguity about the scope of the regulatory making power. It could invite the inference that matters not explicitly excluded are in fact permissible; such an approach could therefore weaken the clarity of the legislative framework and increase the risk of misinterpretation or challenge.
I note that, in 2020, the Supreme Court ruled that the powers to make LGPS regulations had to be interpreted in line with Parliament’s intention, which was that LGPS investment decisions should be made in a way consistent with funds’ fiduciary duties. Although the Bill provides for asset pool companies to take investment decisions rather than funds, there is nothing in the Bill that overrides this broader intention, meaning there is nothing in the Bill that allows Government to tell asset pool companies to invest in specific assets, asset classes or locations. For these reasons, the Commons were of the view that Amendment 1 is both unnecessary and potentially counterproductive. The Government agree with that assessment.
Motion B sets out that this House do not insist on its Amendment 5 because the Commons consider that it is not appropriate to impose the publication requirements mentioned in the amendment, and that any additional requirements should be considered after the next report under Section 13 of the Public Service Pensions Act 2013 has been prepared. I thank the noble Viscount, Lord Younger, for his amendment in lieu in Motion B1, the intent of which, I believe, is already substantively met by the Government Actuary’s statutory Section 13 review of the LGPS valuations and the consultation on Regulation 64A, which relates to interim valuations, that MHCLG has already committed to running later this year.
The 2025 LGPS valuation has recently concluded. I am pleased to note that, taken across the whole scheme, the average employer contribution rate reported at the 2025 valuations of the LGPS in England and Wales has reduced by slightly less than 5% of pensionable pay, relative to the equivalent amount quoted for the 2022 valuations. This figure has been confirmed by the GAD’s analysis of the published valuation reports. There is of course variation to this across the country, and I understand the concern with ensuring that valuations are balancing stability for the scheme with value for money for the taxpayer.
As I have referred to both in Committee and on Report, under Section 13 of the Public Service Pension Schemes Act 2013, MHCLG appoints the Government Actuary to undertake a review of the valuation. As part of this review, I have already committed that the department will ask the Government Actuary for a consideration of the issue of prudence. Specifically, the Government Actuary’s Department will look at the levels of prudence inherent in the contribution rates set by funds, to ensure that a balanced view of liabilities is being taken in the context of an open scheme. This will include any prudence margins used within the discount rates, as well as other sources of prudence, such as the stability buffers and stabilisation mechanisms used by funds. While the Government Actuary’s Department does not believe that any of the actuarial firms would characterise their valuation methods as being gilts-based, they recognise that some of the rates used by funds in the 2025 valuation are similar to prevailing gilt yields at the valuation date. Discount rates have therefore been set by reference to the long-term investment horizon and characteristics of the actual assets backing funds’ liabilities, but are then reduced by some funds to gilt-rate levels by the inclusion of prudence and stability margins.
I further commit that the department will ask the Government Actuary to consider the methods being adopted by fund actuaries for managing risk and reflecting the long-term funding objectives of the scheme. It will ask whether there would be benefit to including additional illustrative valuations in valuation reports, and, if so, what they should be based on. It will also ask whether pension funds and their actuaries are engaging effectively with employers on the setting of contribution rates, including whether the information is being provided in a way that is comprehensible to the lay reader. The Government Actuary has already committed to publishing its Section 13 report next spring, an acceleration of previous timetables.
In addition, the department committed to consulting on interim contribution rates later this year. This consultation will consider how and when it might be appropriate for an employer to use this review mechanism, including significant shifts in financial pressures on local authorities and other employers. It will also consider whether there should be a link to the Section 13 review of the valuation.
I trust these points give reassurance that the Government take noble Lords’ concerns seriously and that the Section 13 review will address them. I respectfully ask that the noble Viscount does not press his amendment.
Finally, I turn to Motion C. Amendment 6 seeks to update the current regulation that allows employers to seek an interim review of contributions within the three-yearly cycle of valuations. As I said previously, on the question of access to interim reviews of contribution rates, the department has already committed to consulting on interim contribution rate reviews later this year. This consultation will consider how and when it might be appropriate for an employer to use this review mechanism, including whether there should be a link to the Section 13 review of the valuation, and the relative balance of responsibility between the fund actuary and the administering authority. Any such changes would then be brought forward by the Government in regulations, having followed the proper process and met the statutory requirement to consult.
Noble Lords will be pleased to hear that departmental officials have already made clear to administering authorities that, should they receive requests for an interim review of their valuations, they need to engage with their substance, communicating clearly and transparently the process, and that any review must be in line with the policies set out in the funding strategy statement.
I urge all noble Lords to support Motions A, B and C, and that the amendment in lieu in Motion B1 is not pressed. I beg to move.
Lord Palmer of Childs Hill (LD)
My Lords, I thank the Minister for explaining things in great detail from the Government’s perspective.
I will speak to Motion B1, which the Minister said has already been met. The Local Government Pension Scheme already has mechanisms to review and amend employer pension contributions and funding practices; for instance, under Regulation 64A of the Local Government Pension Scheme Regulations 2013. There is even an existing GAD reporting mechanism under the Public Service Pensions Act 2013, which reports on compliance, consistency, solvency and long-term cost efficiency, with such reports having been carried out in 2018, 2019 and 2024. Therefore, we on these Benches think that the Government’s efforts should be focused—as they are, I think—more on implementing the recommendations of those reports, rather than duplicating efforts. We will probably abstain on Motion B1; we recognise its importance but think it is already being met.
Motion C is a government Motion, so I come to Motion D. Amendment 13 would extend the period before a pension pot is classified as dormant, increasing the threshold from one year to three years. We supported this increase earlier in the passage of the Bill, as it would provide greater flexibility for savers such as mothers, those on sabbatical or mature students. Motion D1, from the noble Baroness, Lady Altmann—
Lord Katz (Lab)
Motions D and D1 are the opening Motions of the next group.
Lord Palmer of Childs Hill (LD)
I see. I am sorry. Forgive me, I was going on to the next group.
On Motion B1, we will abstain rather than vote against it, because we think that these things are already in process, if dealt with properly.
Lord Katz (Lab)
I am glad that, for once, our debate on the LGPS has been short and sweet. I thank both opposition Front Benches for their engagement on this issue. I am glad that the noble Viscount, Lord Younger, recognised that there has been movement. We understand the importance attached to the nature of the reviews. I hope that what I said has met his need for us to demonstrate that we are taking it seriously, which, of course, we are.
In response to the noble Lord, Lord Palmer, I hope that he will be in a position where his abstinence will not be needed because the noble Viscount will not be testing the opinion of the House, but we shall see. I beg to move.