Viscount Younger of Leckie (Con)

My Lords, the amendments in this group begin a series of groups related to the Local Government Pension Scheme. We start with amendments that seek to improve what is already in the Bill. However, as later groups will demonstrate, the Bill remains light on the LGPS. I am sure that the Minister and other noble Lords will have noticed that we have de-grouped a number of our amendments ahead of today, where they are most relevant to this group. I shall briefly explain our reasoning at the outset. We have no intention of frustrating the passage of the Bill. Rather, we have de-grouped those amendments where we felt it would facilitate a clearer and more focused discussion, enabling noble Lords to put more targeted questions to the Minister without requiring her, or indeed other noble Lords in Committee, to traverse an undue amount of technical detail in a single debate. I hope that our intentions on this point have been made clear. I do not accept the characterisation that this is simply a private pensions Bill—the Local Government Pension Scheme is clearly included within its scope—nor do I accept the argument that addressing the problems of the LGPS is either too complicated or not a priority. If we are legislating on pensions, we must be prepared to deal properly with the LGPS. I will refrain at this stage from going into the specifics, but later we will bring forward six additional proposed new clauses about the LGPS aimed at making the scheme operate in a more coherent, transparent and practical way. We very much hope that the Minister will engage seriously with these proposals. They go to the root causes of the problems facing the LGPS: how contribution rates are set; how these rates can be challenged; why transparency matters; how opacity undermines confidence in the system; why valuations and methodologies are so important; and, crucially, why many employers are currently getting a bad deal. However, let us begin with what is already before us in the Bill and why it must be properly probed. These amendments give rise to specific and important questions that we wish to put to the Minister. They concern not only the intent of the provisions but how they will operate in practice, how they will interact with existing LGPS governance and funding arrangements, and whether they genuinely address the problems that they are purported to solve. Clarity on these points is essential if we are to ensure that the Bill strengthens, rather than inadvertently weakens, confidence in the Local Government Pension Scheme. The first amendment in this group, Amendment 2, would remove subsections (2) to (8) of Clause 1 in order to probe the breadth and necessity of the powers being taken by the Secretary of State. As drafted, Clause 1 goes far beyond enabling regulation. It gives the Secretary of State the power to direct individual scheme managers to participate in or withdraw from specific asset pool companies and to issue binding directions not only to those scheme managers but to the asset pool companies themselves. Trustees have clear and well-established fiduciary duties to act in the best interests of their members and beneficiaries. Decisions about investment structure, risk, performance and value for money are central to those duties. The question this amendment seeks to pose is therefore simple: why does the Secretary of State require the power to override those fiduciary judgments by direction? The Government have already made clear their policy objective of encouraging greater pooling. What is not yet clear is why compulsion, backed by direction-making powers of this breadth, is considered necessary. I am also concerned about the precedent this sets. Once Ministers have the power to dictate where pension assets must be pooled, it is not difficult to imagine future pressure, real or perceived, for an overinvestment strategy, asset allocation or wider policy objectives, even where these may conflict with members’ best interests. The amendment therefore invites the Minister to explain, first, what safeguards will exist to ensure that any direction does not conflict with the fiduciary duty of scheme managers to their members. Secondly, over what timeframe will a scheme manager be expected to comply with a direction to enter or leave an asset pool? How will this align with long-term investment strategies? Thirdly, have the Government consulted the Border To Coast Pensions Partnership and other LGPS pools about the potential impact of this power? Fourthly, does the Minister recognise that forced entry or exit from asset pools could disrupt investment strategy, reduce stability and deter private sector partnerships? Have the Government considered this risk? I am afraid there are a lot of questions, but they are worth putting. How do the Government propose to deal with the risks of cross-subsidisation of employers with very different funding positions that are merged into the same asset pool by direction of the Secretary of State? What safeguards will be put in place to ensure that deficit management remains fair and proportionate across employers after such a merger? Will administering authorities be given the ability to ring-fence liabilities or negotiate separate funding arrangements if they are compelled to merge? Have the Government undertaken any modelling of the financial consequences of merging employers with very different funding positions? If so, will this analysis be published? Can the Minister set out what these prescribed circumstances might be? I appreciate the letter the Minister sent to noble Lords last week, in which she set out the Government’s recognition of the importance of fiduciary duty. I recognise that and I am sure the whole Committee would therefore welcome some clarity on this question and how these powers can operate while satisfying that duty. I appreciate that I have asked a lot of questions of the Minister. I do not expect a reply to them all now, but will she write to me to address any points she is unable to speak to today, copying in those who are in Committee today? As she will be aware, these questions are being asked by the industry as well as by noble Lords in Committee, and it is important that we get proper responses to them. This is a probing amendment, intended to elicit reassurance and clarity. Asset pooling can and should be done well, but it must be done in a way that respects trustee independence and preserves confidence in the governance of the Local Government Pension Scheme. The second amendment in this group, Amendment 4, would remove Clause 2(2)(b), not because we are necessarily opposed to asset pooling but to probe why the Bill places a clear and binding destination in primary legislation while saying almost nothing about the journey required to get there. As drafted, Clause 2 requires the vast majority of Local Government Pension Scheme assets to be held and managed by asset pool companies, with the only acknowledgment of the practical complexities of that transition being a brief reference to “transitional arrangements permitted by the regulations”. We are talking about the transfer of very substantial sums across multiple funds with differing asset mixes, contractual arrangements and liquidity profiles. The question that this amendment poses is straightforward: why are transitional arrangements not set out in the Bill, even at a high level? Parliament is being asked to approve a mandatory structure without being shown how legacy assets, illiquid investments, existing mandates and contractual obligations will be unwound or migrated, and over what timescale. That is a significant delegation of policy detail to secondary legislation, particularly given the scale of assets involved. I would be grateful if the Minister could explain how the Government envisage this transition being managed in practice, what safeguards will be in place to prevent forced or value-destructive transfers and how scheme managers can be confident that they will not be required to move assets in a way that conflicts with their fiduciary duties. The approach set out in our amendment would avoid ambiguity, provide greater clarity for scheme members and reassure taxpayers that pension funds are being managed in a consistent and accountable manner. Local government pension schemes vary significantly in size, resources and operational approach and without clear statutory provision, there is a risk that practice could diverge across schemes. Given that pension funds involve very substantial sums of public money, it is appropriate that the most fundamental rules governing their management are set out in primary legislation rather than left solely to regulations. Doing so would ensure a higher level of parliamentary scrutiny and durability and help guard against the risk of standards being diluted in future through ministerial discretion. This is also a probing amendment intended to elicit reassurance. We are clear, and I know the Minister appreciates, that confidence in the system depends on clarity about the transition, not simply an end state written into primary legislation. I hope she will take this opportunity to address that point today. My Amendment 5 would remove Clause 2(2)(c). To be clear, this is not because we are opposed to local or place-based investment. Rather, it is a probing amendment designed to explore how the Government envisage the relationship between scheme managers and so-called strategic authorities operating in practice. Clause 2 introduces a new statutory duty requiring scheme managers to co-operate with strategic authorities to identify and develop appropriate investment opportunities. However, the Bill does not define what is meant by “appropriate” or set out the process by which this co-operation is to occur, the weight to be given to the priorities of strategic authorities or how disagreements are to be resolved. This vagueness will create a degree of ambiguity which could prove problematic in practice, particularly where different actors may have very different interpretations of what constitutes an appropriate investment. One obvious question, therefore, is whether such opportunities are intended to be those defined by a fund’s investment strategy statement. As the Minister will know, the investment strategy statement sets out the fund’s objectives, asset allocation, risk management framework, ESG considerations and approach to pooling. If “appropriate” is not clearly anchored to that framework, there is a risk that scheme managers, strategic authorities and Ministers could each apply the term in rather different ways. This matters because scheme managers are trustees, bound by fiduciary duties to act in the best financial interests of scheme members. Strategic authorities, by contrast, have mandates to pursue local growth, regeneration and wider place-based objectives. Those aims may often align, but they will not always do so. Without clarity, there is a risk of politicisation, however unintended, whereby investments that are politically attractive or locally popular, such as particular infrastructure projects, are promoted despite not meeting the risk and return criteria appropriate for pension funds. This amendment therefore seeks to probe how the Government will ensure that the statutory duty to co-operate does not place scheme managers under implicit pressure to prioritise wider government or regional objectives over their core fiduciary obligations. Is this duty intended to be advisory or directive? Will scheme managers be expected to justify decisions not to invest in opportunities advanced by strategic authorities? What safeguards will exist to ensure that pension investment strategies remain firmly anchored in members’ best financial interests?