Local Government Pension Scheme

Marcus Jones Excerpts

Monday 24th October 2016 Westminster Hall

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

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

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

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

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

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

The petition states that the Government might

“gamble away members’ money on infrastructure projects”,

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

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

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

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

[Ian Blackford]

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

[Mr Jones]

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

[Melanie Onn (Great Grimsby) (Lab)]

Will the Minister explain what happens if an LGPS fund cannot pay its pensions?

--- Later in debate ---

[Mr Jones]

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

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

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

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

[Ian Blackford]

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

[Mr Jones]

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

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

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

[Richard Burden]

The Minister ran together three things: boycotts, divestments and sanctions. Boycotts tend to be a consumer thing. Sanctions tend to be a Government thing. The issue relevant to this debate is divestment. Paragraph 3.7 of the consultation document says that

“boycotts, divestments and sanctions against foreign nations and the UK defence industry are inappropriate”.

Will he clarify that action to divest pension funds from a company involved with Israeli settlements in the Palestinian territories would not fall foul of that so long as it was done on a case-by-case basis?

[Mr Jones]

I will address more of the hon. Gentleman’s points later in my comments, but I can clarify that any such divestment must be in line with the policy of the UK Government.

The hon. Member for Ross, Skye and Lochaber mentioned on a number of occasions the situation in Canada. We are aware that public service pension schemes in Canada have been merged, based on the fact that they are now important global investors. The Ontario teachers’ pension scheme seems to be regularly wheeled out as an example. There are several Members here from the west midlands who will know Birmingham airport well, and I am aware that the Ontario teachers’ pension fund has a significant investment in that airport. We see in the situation in Canada one of our drivers for pooling the LGPS funds, along with the wider need to save costs, not in terms of a direct cost saving to the Government but one that will be put back into those pension funds for the benefit of members.

I agree entirely that transparency of pension investments is important, so that all concerned can see where pension fund cash is being spent on fees and why. My Department is working closely with the scheme advisory board and others to ensure that information is clear in relation to fees charged to pension funds.

I assure hon. Members that there is an opportunity for trade union representation on pools. That is a matter for the individual pools themselves and depends on their governance arrangements, but the individual local authority members that support each scheme will have the right to be part of setting up those pooling governance arrangements, and it will therefore be their decision on whether union representatives are on the pools.

There have been extremely good examples of investment in local housing in England, as well as in Scotland, which the hon. Member for Ross, Skye and Lochaber mentioned. There is a good example in Greater Manchester, where funds have been used from the Greater Manchester pension scheme. As I said, a relatively small amount of funding has gone into that type of investment hitherto, and we want to encourage pension funds and pools to increase such investment.

The hon. Member for Birmingham, Northfield (Richard Burden) mentioned the significant correspondence he had had with my right hon. Friend the Member for West Suffolk (Matt Hancock). Without seeing that correspondence, it is difficult for me to answer some of his questions directly, but I will undertake to look at that correspondence and come back to him with a written response.

The hon. Gentleman mentioned overseas business risk guidance issued by the Foreign and Commonwealth Office. That guidance does apply to local government pension funds, but it is important to be clear that the Government are committed to promoting trade links and business ties with Israel and therefore the guidance strongly opposes boycotts.

[Richard Burden]

Just for clarity, I mentioned nothing about trade with Israel. I mentioned overseas business risk and the FCO guidance relating to Israeli settlements in the Occupied Palestinian Territories. If the Minister wishes, I can quote from that guidance, but I am sure he knows what I am referring to. It is nothing to do with Israel; it is to do with illegal Israeli settlements in the occupied territories.

[Mr Jones]

As the hon. Gentleman knows, that is covered in the guidance, and I will write to him at further length on that point.

The hon. Gentleman asked for clarification on whether local government procurement guidance applies to the LGPS. Our guidance on pension scheme investments is entirely of the same framework as the guidance issued by the Cabinet Office on public procurement. Both operate within the wider framework of national and international law.

The hon. Gentleman also mentioned tobacco. It is our position, as is clear from our response to the consultation on investment, that decisions on matters such as whether to invest in tobacco are for individual pension funds provided that they comply with the broad principles in our guidance.

The hon. Member for Birmingham, Erdington (Jack Dromey) mentioned localism. Our reforms are entirely consistent with localism. We have removed the petty, arbitrary caps on different types of investments put in place by the Opposition some years ago and given local authorities real freedom to decide how they invest their pension funds.

In summary, I reassure the House that investment decisions will remain for administering authorities. The Government are challenging local authorities to be independent and ambitious, subject to local democratic control and appropriate safeguards. We have no intention whatever of gambling with money that has been set aside to pay pensions.

[Melanie Onn]

I am a former trustee of a pensions scheme, and it was made clear to me on repeated occasions that the legal duties and responsibilities fell to those people around the table who were privy to all the investment information as well as the contributors to the scheme. My overriding question about the regulations and the Government’s involvement in the LGPS scheme, as opposed to private schemes over which they have no direct responsibility or involvement and do not interfere, is whether LGPS trustees’ rights and responsibilities are being eroded or undermined in any way. Does that set a precedent? That would concern me.

[Mr Jones]

I would like to reassure the hon. Lady that the changes are in no way intended to diminish the role of individual pension funds or the people who represent members. [Interruption.] She is commenting from a sedentary position, but we will have to agree to disagree on that point, bearing in mind what I have said previously.

[Sir Edward Leigh (in the Chair)]

Apparently, you can wind up, Mr Blackford. We would not want to miss your dulcet tones.