Lord Fuller (Con)

Your Lordships will be pleased to know that peace has broken out again: I agreed with much of what the noble Lord, Lord Davies, said, and I do not accept the characterisations that the noble Baroness, Lady Altmann, laid out in full. I have sat on five triennial actuarial revaluations of the Norfolk scheme over 20 years, and I can tell noble Lords that we are not unique. We agonise over how we deal with the valuation over months. We look at the assumptions, the different types of employer and the different scenarios that we might realistically use. There is a fan of opportunities that the actuaries run; I would say a thousand or a very substantial number—many hundreds—of different potential scenarios based on membership of the scheme, the sponsoring employers and even the life expectancy per member calibrated by postcode, using the Club Vita methodology. Of course, we think primarily about governance as well. To a certain extent, if that is going on, one might ask why we need these amendments at all. We do because, as those of us who are involved in the LGPS know, brighter days ought to be ahead after some pretty tricky periods over the last 20 years. But just because the sun is coming over the horizon today, it does not mean it might not set in the future. A Bill like this will have longevity, so we need to get it right rather than be overly optimistic. Overoptimism is the counter to excessive prudence. I support many of the amendments in this group, but I will start with Amendment 18. I have seen schemes with valuations in the low 70s, when interest rates were low, but some schemes are now funded well into the 130s or 140s. We have heard today about a scheme that is funded 150%. Without excessive prudence, more of them might have been in that bucket. The sums of money for these fluctuations are enormous. For a mid-sized county scheme with £5 billion under management, 10% could still be £0.5 million—a large sum that can go a long way. So there is a temptation to trim employer contributions when times are good, safe in the knowledge that there is still a substantial cushion to fall back on. I have no problem with that as a principle: after all, when times were bad, employers had to chip in a lot more, so it is only fair that there is a two-way street and hoarding is no good to the member, employer or taxpayer when there is a bypass to pay for. The problem is how you apportion that rebate or discount to the members if there is a surplus. When times were bad and more contributions were needed, the contribution rate was calculated differently for each employer depending on the maturity of that scheme, the number of members of the employer, the covenant strength of the employer and their individual deficit and funding position. Clearly, a tax-raising council, which does most things itself and can jam-spread those changes over many employees, will have a lower contribution rate for the deficit than a largely contracted-out services authority with much fewer staff. That is why one authority that used to employ a lot of people, but had to let them go by outsourcing most of their services to private contractors, has a contribution rate of 50% on salaries. That is a huge sum of money. However, a well-run council like my own—we do most things ourselves—was in the 20s. That is not unfair; it is just the arithmetic. As an aside, I would say that outsourcing is all very well but, as the litany of failed outsourcers has shown—Carillion, Connaught, Mears, Steria and many more—when they go bust, those pension liabilities come boomeranging back to the host council that thought it was being smart but was not. One city not far from where I live has had to learn that painful lesson on more than one occasion. At least those councils that are tax-raising bodies, with ratings typically one notch below sovereign, can stand those shocks. Let us consider one class of admitted body: the academies, which are admitted to the scheme of local government workers for their classroom assistants. There are maybe only a few per school, but they benefit from a Department for Education underwriting. That is a pretty good state-backed guarantee there. They may not be able to raise taxes, but their liabilities are gilt edged. However, when you then think of the small youth work charity which could go bust tomorrow if its local authority cuts its funding, there is a risk there. My point is that all the employers play a different contribution rate within each scheme that relates to their circumstances. That is for one scheme, but there are 89 such schemes, each with their own circumstances. Yes, it is untidy, but matching assets and liabilities to the exact and precise needs of those cohorts provides the best value to the taxpayer and accuracy in computation. So, when you add or take away those contributions, if you are in surplus, the value of the rebate can be calculated accurately. I am not just trying to be difficult; I am just providing the reality of the situation. To focus on Amendment 18 for a moment, which requires the repayment of surpluses, it is a good proposal, but we need to allow for a much greater degree of complexity there. I hear what my noble friend has said, and there is a specimen number of 120% there. My instinct is that it is significantly more complicated than that, and there should be some sort of covenant-strength weighting—a hard-coded number is not right. Different schemes need different numbers. The underlying principle that, when the surplus gets to a certain amount, there should be a rebate is sound, but I am just really concerned that we overly simplify it and miss the target there. We certainly need to be aware, as the noble Lord, Lord Davies, mentioned in an earlier group, about the cost cap, and be aware of the situation, which is mainly in the statutory unfunded schemes, where valuations are split between the employer and employees. I was a member of the fire services scheme, an unfunded scheme, and we nearly got into the situation in 2018-19 where there was an excess and we had to take money away from the employees; then in 2023, I think it was, or possibly four years later, it was going the other way. Mercifully, it was so complicated that nothing was done, so we ended up where we were. Just the cost cap in and of itself is a blunt tool. But I am getting ahead of myself. Each scheme needs its own methodology for its own circumstances, and, of course, there are four separate actuarial companies in competition, so there is innovation which we must welcome—it is invidious to mention their names; some of us know who they are. They get their fees by constantly becoming more and more accurate and refined, and that is a good thing, not just for them but for the taxpayer, the members and employers. So, we need to have that combination of flexibility, but I can see the virtue of standardisation, or at least a standard method of expressing those particular schemes on a common basis so they can be consistently compared, so that my good friend Roger Phillips—who is newly OBE-ed, for the record—can publish his scheme advisory board census annually. I have explained why each scheme needs its own bespoke valuation, but that does not help Roger. And, in the non-LGPS schemes, the GAD—the Government Actuary’s Department—provides figures because they are a provision for risk sharing between government and members, and so forth. Amendment 19, and to a certain extent Amendment 17, on benchmarking, are important, but they cannot be the substitute nor override for bespoke measures in each scheme. In the case of benchmarking, the amendment would have been strengthened had we been able to look at cost per member, and there are other metrics too which can help people develop confidence in the schemes. It is in the public interest that the amendments are accepted. Just because brighter years are ahead—we hope—does not mean that there is no value to these amendments. We need to allow for circumstances when those silver linings may have clouds again, to mix metaphors. I do not want to dilute the thrust and importance of the statutory funding objectives for the LGPS, because it ultimately provides a method by which we can balance appropriate risk with reward for each of the scheme members and the taxpayer who underwrites it all in the end—and that is a good way of doing it. To a certain extent, the thrust of these amendments would put on a statutory footing the work that the LGPS advisory board does on a voluntary basis. That would be a very good thing for transparency and confidence, demonstrating further the success that is the local government scheme in this country. It is the closest thing that we have to a sovereign wealth fund, and anything that improves its standing has to be a good thing, so I commend this set of amendments.