The government has reiterated its view that the pension schemes bill does not interfere with the fiduciary duty of administering authorities in the Local Government Pension Scheme, after peers had queried this in committee. While the debate continues around how much power ministers should wield over LGPS investments, Reform UK has said it would close the scheme and launch a sovereign wealth fund instead.

A clause in the pension schemes bill still gives the secretary of state the power to direct an asset pool about the “manner in which it carries out investment management activities”, while the government gave in on another whereby it could have also told pools which assets to invest in. 

In January, peers examining the bill in committee stage tabled amendments to probe why the secretary of state requires powers to override administering authorities’ fiduciary duties, including on how to invest and which pool to join. 

Conservative peer Viscount Younger of Leckie said during the 12 January committee: “Investment decisions should remain with those charged with fiduciary responsibility and not be directed by ministers, however well intentioned. Those safeguards cannot simply be assumed; in a framework bill, they must be explicit.” 

Among others, he asked Department for Work and Pensions minister Baroness Sherlock to explain what safeguards will exist to ensure that any direction does not conflict with the fiduciary duty of scheme managers to their members. 

“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,” he added. 

In a letter sent on 9 February, the minister replied jointly with government whip Lord Katz that the direction powers “are intended as a backstop” with “no intention to undermine the fiduciary duty of administering authorities”. 

The powers would be used “in extreme circumstances”, the pair wrote, for example where the behaviour of a pool or one or more partner funds puts administering authorities “at risk”. 

They pointed to requirements that had been added which mean the secretary of state must consult with stakeholders before making use of the powers. They also denied that the power to direct an asset pool regarding the “manner” in which it carries out investment management activities could be used to allow the government to mandate investment into specific assets or asset classes. “That is not the case,” they claimed. 

Instead, this power is there to “address situations where a pool’s approach to decision making puts employers participating in its partner funds at risk, or where a pool is failing to achieve the benefits of scale, including by utilising more investment vehicles than are required to effectively implement the investment strategies of its partner funds, or using segregated mandates where collective investment vehicles would achieve greater benefits”. 

The minister and whip added that regulations would only allow this power to be used where the secretary of state is satisfied that the asset pool company is managing assets “in a manner that is detrimental” to one or more partner funds, their members or employers, or the LGPS “as a whole”. It is unclear what is meant by a pool causing detriment to the LGPS as a whole. 

The letter notes that “this is to ensure that the power cannot be used for political purposes, but only in the secretary of state’s role as steward of the scheme”. 

The current political landscape is what is perhaps making some in parliament as well as industry anxious to ensure fiduciary duty is further enshrined and clarified in law.

Reform UK has singled out the LGPS as one of the areas on which its focus is on, following in the footsteps of governments that have tended to view the public sector scheme as a source of funding for their policies.

On Tuesday, deputy leader Richard Tice said his party would close the LGPS to new joiners and turn the scheme backing the pensions of council workers into a £500bn sovereign wealth fund, “patriotically backing British companies” and helping to build “hundreds of thousands” of affordable homes. Tice added the fund would invest “primarily in listed but some unlisted companies”. This differs slightly from what he said last September, when he argued the LGPS should move to passive equity and bond funds.

The LGPS is devolved in Scotland and Northern Ireland. In England and Wales, the scheme manages on aggregate roughly £400bn and was 107% funded at the 2022 valuation. This is expected to have increased since.

Pensions UK, the pension fund association, has responded with concern to Reform UK’s proposals.

“We simply do not recognise the picture of the Local Government Pension Scheme that Reform UK has painted,” said Zoe Alexander, executive director of policy and advocacy, calling the LGPS one of the “most successful pension schemes in the world” pointing out its allocation of around 17% to the UK and performance of about 7% a year over the past decade.

“The LGPS exists solely to fund the retirements of close to 7m local government workers, many of whom are low earners. It does not exist to manage a pool of assets to fund government projects,” she said. “Any policy proposing changes to the structure or approach of one of the largest pension funds in the world should be supported by evidence, and detailed plans. We stand ready to engage with Reform to ensure they have a full picture of the operation and strategic direction of the LGPS.”