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.