Lord Katz (Lab)

My Lords, this has been another interesting and wide-ranging debate. I am pleased to see that the horseshoe accord has, to some small measure, broken out again. I must say that I am not as pleased to see the conversion—maybe I am being unfair in characterising it as a Damascene conversion—of the noble Lord, Lord Fuller, and other Members opposite into the prudence of having well-funded local government to provide local services, after the underfunding of local authorities for a fair amount of time. Would that that sentiment had been shown by the Benches opposite when they were on our side of the Committee, but we are where we are. These amendments show a clear desire to provide greater transparency in the triennial valuation and contributions rate-setting process. I agree it is important that all scheme employers understand how their contribution rates have been set, and members need to have confidence in the long-term sustainability of the fund. These amendments also show a keen interest in the funding level of the Local Government Pension Scheme and the balance that administering authorities must strike between the long-term sustainability of the fund and affordability to its employers. As a public sector scheme, it is right that we are mindful of the costs to the taxpayer of funding the scheme. I will address up front why the surplus extraction measures in Clauses 9 and 10 do not apply to the LGPS, to avoid confusion. The LGPS already has a triennial valuation process where contribution rates for employers are set. This is effectively a point where surplus extraction can take place, as this is where contribution rates can be reduced in response to an improvement in the funding level. As we will come on to later, there is also an interim contribution review process for employers who find themselves in difficulty. Therefore, an additional surplus extraction process is not required. Furthermore, I urge caution in viewing surpluses in the LGPS as a potential windfall or as a means of managing broader revenue pressures for scheme employers. As in all defined benefit schemes, surpluses are maintained to absorb future shocks, manage demographic risk and ensure that promises made to members are kept. Poor decision-making can now lead to higher costs for future generations of taxpayers. For context, the 2025 valuation will conclude in a few weeks, as we have discussed, with employer contribution rates set for April 2026 onwards. Following this, the Government Actuary’s Department, under Section 13 of the Public Service Pensions Act 2013, will undertake a review for the Secretary of State of all fund valuations, on whether compliance, consistency, solvency and long-term cost efficiency in the scheme has been achieved. Under usual timeframes, the report will be published in mid-2027. Although I appreciate that the Committee is concerned about rising surpluses in the scheme, it surely cannot be right that we make amendments that would have a material impact on future valuations without having a full review of the outcomes of the 2025 valuation. It is anticipated that there will be reductions in contribution rates for many employers from April, and we need to take account of how the current system has coped with the significant changes in market conditions since that 2022 valuation—we discussed that on both this and the previous group—before making changes to the valuation process. The LGPS is a locally administered and managed scheme. It is administering authorities that are responsible for managing their surpluses through employer contribution rate changes, and for working with their actuaries to set appropriate assumptions as part of the valuation. Authorities are required under government regulations to provide valuation reports to employers to support them in their longer-term financial planning. So we must consider whether it is right for the Government to exert a more significant level of influence over the setting of contribution rates through these amendments, and whether this is compatible with local accountability. It is right, in a locally managed scheme, that funds are able to set their own approaches to stability and prudence, reflecting both the needs of employers in understanding their medium-term financial obligations and the different risk profiles of their investments. The balance of these is key to delivering the intergenerational fairness mentioned by noble Lords opposite, particularly the noble Viscount, Lord Younger—and indeed we all want to see that. On transparency, revised statutory guidance on the funding strategy statement, which all LGPS funds must publish, was issued by the scheme advisory board on behalf of MHCLG in January 2025. Under this guidance, administering authorities should consult all employers in the fund on their funding strategy statement, which should outline how administering authorities will manage surpluses and deficits, outline the approach to contribution rate stability, and summarise the main actuarial assumptions used at the valuation. Amendment 16 would require the Secretary of State to set a statutory funding objective for LGPS funds, including considerations for administering authorities, setting their funding strategy and contribution rates. There is already detailed guidance on how funds should manage surpluses and deficits in their funding strategy, but, as locally managed schemes, it should be for administering authorities to consider how to strike the right balance in setting the contribution rates, with appropriate considerations of prudence and the long-term sustainability of the scheme and contributions. Furthermore, a funding objective would still require a degree of interpretation and so would not provide the clarity that the noble Lord seeks to achieve with his amendment. In 2020, the Supreme Court found that LGPS money is not, in fact, public money, but that it belongs to its members, which further justifies why a statutory funding objective is not appropriate for the scheme. Amendment 17 would require fund valuations to be benchmarked against insurer and gilt-based pricing, with a report laid before the relevant local authority. The triennial valuation and contribution rates-setting process is already a robust and collaborative process between administering authorities, actuaries and employers. Many authorities already follow best practice in consulting scheme employers alongside the contribution rate-setting process. This gives employers the opportunity to challenge contribution rates and consider whether they are sufficiently stable, or whether excessive prudence is built in. Statutory guidance already sets out that funds should publish the actuarial assumptions used as part of the funding strategy statement. The noble Baroness, Lady Altmann, referenced the role of the Financial Reporting Council in the valuation. The valuation reports, which are publicly available, will include Financial Reporting Council compliance statements that technical actuarial standards have been complied with. In addition, I have already raised the Section 13 report by the GAD, which reviews the fund-level actuarial valuations. As part of the review into the 2022 valuation report, for example, when assessing consistency, there was a review of assumptions, including the discount rate. Finally, this amendment points to a perceived excessive risk aversion undertaken by the LGPS. This is not an accurate characterisation. In fact, around three-quarters of LGPS assets are invested in return-seeking assets, vastly outweighing the equivalent figures in private schemes, which are heavily geared towards matching assets. Amendment 18 would require administering authorities to publish and justify their approach to the treatment of surpluses over 120%. First, we must consider if this is the level that we would wish to set in the context of the LGPS. Elsewhere in defined benefit schemes, the Government are considering the funding threshold for surplus release, and there has already been consideration of what this would be. But we must remember that the valuation process already provides a route to return surplus to employers, which allows for changes every three years, whether or not a threshold—whatever it is—has been met. Furthermore, each valuation is prepared on a local basis, meaning that the funding level will depend on the discount rate set. The discount rate converts the value of future benefits to a current value so it can be compared to the current value of assets; it is used to determine the employer contribution rate required to pay future benefits. It is based on the assumed future returns of the individual fund’s investments, taking into account the portfolio of assets held by the fund, the demographic profile of its members and its attitudes to risk. That means that a funding level of 120% in one fund will simply not be comparable to that of another if the discount rates applied are significantly different. I think that the Committee will surely agree that the purpose of a buffer is to provide a surplus in well-funded times and guard against a fall into deficit in more challenging times. As a locally managed scheme, it is for the funds, not for the Government, to decide what the right level of surplus is. Introducing these additional reviews and requirements would risk undermining the valuation process and the locally managed nature of the scheme. On Amendment 19, we had an interesting discussion on transparency—certainly transparency and accessibility is something that we should all seek. I appreciated the discussion between my noble friend Lord Davies and the noble Baronesses, Lady Altmann and Lady Noakes, on the accessibility of the actuarial statements. Maybe I would say this, but I thought that my noble friend put up a good defence of the professional standards that actuarial firms set themselves with regard to matters of accessibility. I appreciate that the intent of Amendment 19 is to increase the transparency of actuarial valuations for all scheme employers and for members of the public. In addition to the requirements that I have already mentioned, regulations also require the administering authority to publish and send copies of any valuation, report or certificate made under Regulation 62, or Regulation 64, to all employers. I do not recognise that as limited transparency, but I concede that there is scope for greater visibility—and that is something that we should always seek to pursue. While there is scope to look at whether these publications could be made easier to understand for employers, that should be considered in the round—I suggest following the conclusion of the 2025 valuation. The noble Viscount, Lord Younger, asked me to comment on his example of valuations increasing despite surpluses, and I would say that there is a robust valuation process in place into which employers feed. We must wait for completion of the scheme valuation and its formal result—but if this is the case as set out by the noble Viscount, the Government Actuary’s Department will review the results in the valuation under regulations in Section 13. The noble Lord, Lord Fuller, asked about funds not using a discount rate that is more prudent than a gilt basis. I have already talked about the wider inaccurate characterisation of excessive risk aversion, but at this point I add that the LGPS is a funded scheme with diversified assets and its discount rates are set by fund actuaries on a scheme-specific, prudent basis that reflects long-term expected returns. The valuations are reviewed nationally by the GAD on compliance, solvency and long-term cost efficiency. Without the results of the 2025 valuation or the Section 13 review, we cannot say for certain what the current approach is, taken across all funds.