Economic Activity of Public Bodies (Overseas Matters) Bill – in a Public Bill Committee at 9:27 am on 5 September 2023.
We are now sitting in public again and the proceedings are being broadcast. Before we hear from the witnesses, do any Members wish to make a declaration of interest in connection with the Bill?
I have been to Israel on a trip paid for by the Conservative Friends of Israel, and I have a personal friendship with James Gurd, who will give evidence.
I declare my membership of Unison. I understand that an individual from Unison will give evidence at this session.
As per my entry in the Register of Members’ Financial Interests, I recently visited the occupied territories. The visit was paid for by Amnesty, who will join us later this week.
I have been on a Conservative Friends of Israel trip, and James Gurd is a personal friend of mine.
I have also been on a Conservative Friends of Israel trip, James Gurd is a friend of mine, and I used to work at the Jewish Leadership Council.
I am the parliamentary chair of Labour Friends of Israel. It is a non-pecuniary position, but I have also been to Israel with Labour Friends of Israel.
As per my entry in the Register of Members’ Financial Interests, I have been on a trip to Israel funded by Conservative Friends of Israel, and James Gurd is personally known to me.
As per my entry in the Register of Members’ Financial Interests, I have been on a trip to Israel funded by Conservative Friends of Israel, and James Gurd is personally known to me.
I have been to Israel on a visit funded by Labour Friends of Israel, but that was many years ago.
I suppose, for the sake of completeness, that I should say I too have been on a trip to Israel with Labour Friends of Israel. However, as with Wayne David, that was many years ago.
I have also been on a trip funded by Conservative Friends of Israel, and I am also a friend of James Gurd.
I have been on a trip funded by Caabu, who are not giving evidence this morning, but I believe they are later on.
Are there any more? I do not think there are any more Members!
We will first hear oral evidence from Jo Donnelly, who is the head of pensions at the Local Government Association, and Jon Richards, who is vice-chair of the Local Government Pension Scheme Advisory Board. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill, and we must stick to the timings in the programme order the Committee has agreed. For this panel, we have until 9.55 am. To begin with, could the witnesses please introduce themselves for the record?
Jo Donnelly:
I am Jo Donnelly, head of pensions at the Local Government Association.
I would like to call the first Member to ask a question—Minister.
Q Thank you, Chair. It is a pleasure to serve under your chairmanship. I would like to thank our witnesses for their time and expertise.
There have been instances where local government pension schemes have come under pressure from civil society groups to divest from a particular country or territory. Is that something you are aware of? What kind of pressure have you faced? Do you think that the Bill will allow pension schemes to focus on delivering value for their members, rather than being distracted by political campaigns?
Perhaps I can start. Thank you very much for the question and for inviting us here. There have been limited incidents where there have been local attempts to push forward BDS at local levels. As a pension scheme, we are clear that this is a scheme about delivering pensions. Its fiduciary duty is on members to deliver what members want and expect. If, at any time, there are questions raised, we remind people of the fiduciary duty, which is the most important thing that drives matters.
Unfortunately, in recent years, we have seen a number of attempts by Governments and even suggestions by both the main parties that we should invest in various things—private equity and all the rest. That interferes with our duty to deliver pensions, and that is what drives us. So there have been a few small attempts, but they have not taken place. We have also seen some global investment managers making separate decisions, which our pension funds do not have any control over. Those are outwith our ability—we cannot do anything about it if they make those decisions, because it is a global investment association.
What we are fundamentally saying is that our primary duty is our fiduciary duty. Unfortunately, this Bill will interfere in that, and that is what our concern is. It has the potential to increase our administrative costs, as we have to monitor whatever we are asked to do, but also potential legal challenges, which we expect, because we know this is a very difficult minefield. So we have real concerns about the administrative governance and financial costs that this will put on us.
Q But do you agree that it is not for pension funds to run your own foreign policy?
Q Absolutely. Jo, do you want to come in on those questions?
Q Great. Some may argue that the existing legislation is confusing and not comprehensive enough, as it does not deal with divestments—it deals with investment procurement decisions. In your opinion, does the Bill do enough to improve on existing legislation and prevent divestment campaigns?
Jo Donnelly:
I think there are concerns around the clarity of a number of the provisions in the Bill and around how that will be dealt with in practice by pension committees, who are primarily making the decisions in the LGPS around investments and around strategy.
On the procurement side of things, I have taken some advice from my procurement colleagues in the LGA—obviously, I am not a procurement expert—and they have told me that, on the procurement side of things, there is nothing here that would cause any problems. The thing that is asked for is some more clarity around how the provisions on procurement in this Bill would interact with the Procurement Bill, which is currently going through Parliament as well. I think there is the potential for some confusion about how the provisions of each Bill interact with each other. So there is a request for some clarity and for clear communications to local authorities, and the LGA is happy to assist with that clarity on the procurement side of things.
Q But you are happy that, given clear guidance on the harmony between the Procurement Bill and this Bill, this is very operable.
Before the Minister proceeds, could I just remind her that we have a fairly tight timetable? Perhaps she could take that into account in future questioning.
Q Indeed. I just have one final question on the regulator. We have the Pensions Regulator in the Bill as the appropriate body for enforcing the ban, and they are clearly accustomed to similar roles. Do you think that that is the right regulator?
Jo Donnelly:
There are not that many options in the pensions space for the LGPS. The Pensions Regulator already has a role in relation to the administration and governance of the LGPS, but it does not have a role in the investment side of the LGPS—it does with other, private sector pension schemes, but not the LGPS. So the provisions in the Bill would expand TPR’s powers over some investment-type decisions in the LGPS. Our main concern around the regulator’s role is that they ensure that they limit their oversight of investment decisions to the provisions of the Bill and that they are properly resourced and trained to do that role, because it is quite different to what they are used to doing already.
Thank you to our witnesses for their time. In opening, you were very clear, Jon Richards, about what your job is and what your job is not, and I think the Committee will have taken some comfort from that. Do you feel you need extra tools or controls do that jobQ ?
I do not think we do. I think we think that the level of regulation of the LGPS is also already very high. You will have seen that the Government have just introduced a whole series of additional pension consultations, which we have to do—which poor Jo has to deal with and spend a long time on. Again, we think there is significant regulation. We have a regulator and we have a clear fiduciary duty. Trustees have clear responsibilities, including training responsibilities. They have a clear understanding of what should be done. There is a need for improving governance, and we have been doing a lot of work on that, including training. We have also tried to issue guidance on the need to be clear that, if there are challenges, or attempts to move people away from the fiduciary duty, we need to drag people back to that, and they should not be diverted by some of the political games that are potentially out there.
Q You mentioned legal challenges. Could you say what your anxieties are there?
There is some wording in some bits of the Bill. For instance, it talks about being substantially “influenced”, a “reasonable observer” and “moral disapproval”. There is a series of phrases. These are very open, vague phrases. It is a lawyers’ charter. It really makes it difficult for us. We have already seen an increase in the number of legal challenges around this issue. You can see the pressures around a whole series of environmental issues. We face a whole series of pressures. Every new regulation, particularly if it is as openly worded as this, potentially makes it more difficult for us to deliver our fiduciary duty.
Jo Donnelly:
Could I add something to that? The concerns about the judicial review and the court processes, in particular, are quite key for us, because it does appear that there could be dual running, effectively—enforcement action from the regulator alongside an interested party potentially bringing a judicial review or a High Court claim. The definition of an interested party is something that we would like to be clearer—for example, whether they need to be a scheme member or a local taxpayer. Some kind of clarity around the definition of who that could be would be helpful.
There is a real concern about the possibility of a local authority having to deal with a regulator investigation as well as a High Court claim. If a High Court claim was brought, that would be the first point of action. Normally, a High Court claim would be the end point; it would be the last resort. In this case, it could potentially be the first part of action, so the courts would be undertaking an investigation that we do not think would be helpful for them or the local authorities that are the subject of the action. That is a key concern for us as well.
Can I add one thing, please, Chair? There is another issue about statements being made by particular people. If someone makes a statement, say, during a pensions committee meeting, and it is minuted, it is not clear whether the challenge is against the pensions committee, or the individual or whatever. There is some wording about the dangers of someone expressing themselves in a pensions committee meeting, and the potential impact of someone taking a challenge against the whole committee. Again, there is very loose and worrying wording for us.
Q Before I bring in Chris Stephens, can I ask something? Of the various options for dealing with that problem that you mentioned, which do you think is likely to be the most effective?
Jo Donnelly:
What we would like to see is a change in the Bill that would lead to the judicial review option or the High Court claim being possible only against the decision of the enforcement authority. Effectively, the decision that the regulator makes is what can be then challenged in court, rather than the decision—the alleged breach of the law—by the authority in the first place. Ideally, it would proceed as relatively normal, which is that a decision of an enforcement authority is what is challenged in law, rather than the original decision.
Thank you. Chris Stephens.
Q Let me confirm my membership of Unison; that has been declared. I should also declare that I am a member of the Scottish local government pension scheme from my time working for Glasgow City Council.
Talking about green pensions, Lloyds Banking Group says:
“UK adults believe the biggest benefit of investing in a ‘green’ or ‘sustainable’ pension is the improvement that it would make to the lives of future generations...followed by the fact it could help save the planet”.
Are there any parallels between ethical investments in the environment and ethical investments in international human rights?
It is a very tricky area. It is a difficult tightrope that we walk as pensions trustees and pensions administrators. Let us just say that there are no pensioners on a dead planet, so you can see a clear long-term approach to understanding how you need to deal with potential investments, knowing the potential issues. I should admit that many years ago, I trained as a geologist and I was somewhat sceptical of climate change. I see humanity as a very small part of the overall 4.5 billion years that the Earth has been going. I looked at the different overall increases in temperature, and I think it is now quite difficult to argue against the scientific evidence in that context. That is my view; I understand others have not, but I have changed my view over the years.
Clearly, there is a logic behind environmental and a wish on the part of members to do that. I go back to what we said before: we are there to deliver on behalf of the members. That is our fundamental requirement. Clearly, we can see a desire among the membership to do something about ESG, so there is an understanding and a need to deal with that, because it deals with the wider investment and member issue. This is not the same type of political issue, and we wish to avoid, as much as possible as a pension scheme, getting tied into political issues. Unfortunately, this Bill does that to us.
Q Jon, you mentioned challenges that you have had. Are they coming from members of the scheme or people outwith the scheme? Can you maybe also talk about how members would raise a concern they had about an investment?
Again, I do not want to get too dragged into this, because whenever you get involved in these, you always end up arguing about the extremes, as opposed to the thing. As I have said, there have been a very small number of attempts where this has happened. We are aware of one attempt where an external councillor sought to intervene. As I have said, there are some areas where investment managers have made decisions that have had an impact on the problem. Members have sought to do so, and some Unison branches and members have also made some attempts, but whenever they get through to the fiduciary duty, that is fundamentally where the decision is taken, and they have not been anywhere near meeting those requests at this time. They may do; people and members may change their minds. At the moment, we have not reached that threshold of decision making.
Thank you. I have registered two other Members as signalling that they would like to ask questions. Have I missed anybody? No. In which case, I call Steve McCabe.
Q It has been suggested that there may be some confusion or a discrepancy between the schedule in the Bill that is designed to exclude pension schemes and clause 12, which deals specifically with the local government pension scheme. Do you regard that as a discrepancy, and what implications do you think it might have?
Jo Donnelly:
I think it is just a feature of how the law has to be drafted in order to exclude all pension schemes except the local government pension scheme, because the law applies to bodies under section 6 of the Human Rights Act, which includes education institutions such as universities, and obviously there is a pension scheme associated with universities. The law needs to exclude those pension schemes but specifically include the LGPS. I just read this as the best way that the drafters have found to make that clear, so I do not see it as a problem; it is just that the way in which the drafting has to work is sometimes a little clunky.
Q Is it a legitimate course of action to treat pension schemes differently?
I think this will be the last question.
Q Thank you, Chair, and thank you to the witnesses for joining us this morning. You have said that you are there to deliver on behalf of the members of your schemes. Many of my constituents will have pension funds and some may well have a view on how those funds are invested, which is surely right. How will this legislation affect the ability of fund managers to respond to those concerns of members?
Jo Donnelly:
It depends on the terminology. I would interpret “fund managers” as the asset managers: the investment professionals who manage the money in the pension scheme. They are tasked and given a mandate by the administering authority, by the pensions committee, which makes the decision as a collective. There is no individual decision making in the LGPS; it is all done as a collective by committee, which is one reason why there is some confusion for us about who the decision maker is, because that is never an individual in the LGPS.
In terms of fund managers as investment managers, they will continue to operate in line with the mandate that they are given by their client, which is the local authority or, in some cases, the investment pool, if it is one of the eight LGPS pools that exist in England and Wales. As long as those mandates do not breach the law, they will continue to operate as they do now. They make day-to-day commercial decisions about investments, taking into account all the relevant risk factors. If asset managers feel that there needs to be a change in an investment profile because of risk factors, they will make those decisions, normally without having to check that with the client—the authority that has invested the money.
Can I just add that we have a series of oversight bodies that take those decisions? Obviously there is a pension fund committee in the council, which has the administerial authority. We also have separate pension boards which have half representatives of employers and half of employees, which again matches what we have at national level, where our board is six councillors and six member representatives. The chair is a Conservative councillor, the chair of the employers’ side is a Conservative councillor and I am a trade union official.
We have never had to vote at the national level. We have voting powers, but we have never used them because we have never needed to: we understand that we have a fiduciary duty. That is where we agree with Conservative councillors. We disagree very heavily on politics and all sorts of things, but when it comes to the committee we are pretty clear about what it is we need to do, and also about the need to improve governance to ensure that members’ representatives and members’ views are taken into account when people make those investment decisions.
Q You do not think this legislation will have a negative impact on that process?
I do not think so. I think there are wider problems with this legislation. There are ways of dealing with governance and how members can feed in and put their views forward at local and national level. The Bill has a series of other difficulties that will cause us significant administrative, governance and legal problems.
Jo Donnelly:
I think there are some concerns about the exceptions and how they work. In the schedule, there are exceptions to permit considerations around environmental, social and governance factors, which are obviously now standard practice to consider when looking at investments. But there are some concerns about the wording of those provisions, whether they will allow things to continue to operate, and whether committees will be able to consider specific concerns brought by scheme members.
I am afraid we have reached the end of the time allotted to the Committee to ask questions. On behalf of the Committee, I thank the witnesses, who have been very clear and helpful in drawing our attention to some of the dilemmas and difficulties faced. I am sure when we come to deliberate on amendments and alterations to the Bill we will take very seriously the advice that has been given.