Planned changes to the Local Government Pension Scheme (LGPS) investment regulations are akin to dictatorship, a Labour shadow minister has said.
The proposed rules, which are due to take effect on 1 November, will require LGPS funds to have policies on environmental, social and governance (ESG) issues.
However, the government would be able to intervene in decisions on investments if they are deemed to go against foreign or defence policy.
Concerns have since been raised that LGPS funds will be used as an arm of the UK foreign office, with the funds unable to pursue some ethical policies requested by scheme members.
Speaking at a Westminster Hall debate on 24 October, shadow communities and local government minister Kate Hollern criticised the proposals, arguing "the government has no right to interfere in people's pensions".
"This is an appalling misuse of power, and contrary to the best interests of scheme members, who want to ensure that their pensions are invested in the way they want, not the way the government wants," she said.
"As usual, the government are using sledgehammer to crack a nut, and we have spoken about the back-door policy of avoiding councils that have, for ethical reasons, concerns about investments in some areas.
"This is the reverse of localism; it is dictatorship."
The debate came after a Unison e-petition which challenged the proposals and described them as allowing the government to "gamble away members' money on infrastructure projects".
However, the government could fall foul of European Union (EU) legislation if it directs LGPS funds to invest in a particular way. The Institutions for Occupational Retirement Provision (IORP) directive forbids EU member states from subjecting investment decisions to prior approval or system notification.
Undersecretary of state for communities and local government Marcus Jones rebuked the concerns and argued the LGPS investment strategy had no effect on the benefits guaranteed to members.
He said: "Investment decisions in the LGPS are not, therefore, a ‘gamble' with scheme members' pension rights. We have made it clear repeatedly that investment decisions must be taken in the best interests of scheme members and taxpayers.
"I make no apologies for the fact that we have been clear that authorities should be ambitious in developing their proposals on infrastructure investment."
"Nevertheless, I have been absolutely clear throughout that investment decisions are for administering authorities and that that will remain the case. There is no question, nor has there ever been, of the Government directing funds to invest in a particular way-for example, in infrastructure projects"
Jones went on to add the minister for communities and local government's power to intervene is a "backstop in the rare circumstances" where it deems it necessary to act to protect the LGPS' £200bn of assets and five million members.
SNP pensions spokesperson Ian Blackford added MPs recognise local authorities need to invest more heavily in infrastructure, but LGPS members deserve to have their concerns heeded.
He said: "The whole infrastructure issue is important. I think we all recognise that we have to build capacity in our economies.
"Each local authority area must make its own determination as to what is right and invest in local schemes-social housing, perhaps-for the benefit of the community. At the same time, they should invest for the benefit of the pension schemes. It is about democratic accountability and investment opportunities. It should not be too complicated.
"However, it has become clear that the government are going to use the stick approach as well as that of the carrot.
"If subtle inducement does not work, the government could intervene by directing local authorities to invest in a certain way or by the secretary of state exercising control. If we are to support local democracy throughout the United Kingdom, that cannot be right, and I can understand why local authorities might be alarmed."
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