LGPS: consultation on pooling investments

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The Department for Communities and Local Government (DCLG) has today put out a consultation paper on the proposed reforms to the investment regulations governing the LGPS.

The current regulations governing LGPS investment are quite prescriptive and restrict the diversification of funds by reference to percentage holdings in investment vehicles or in types of investment.

Funds, investment professionals and professional bodies have, for some time now, been lobbying for the investment requirements for the LGPS to be liberalised and brought more in line with the investment criteria which are applied to trust based pension schemes without the onerous restrictions currently imposed.

The consultation issued by DCLG seeks to address these concerns as well as to allow LGPS funds to pool assets giving them access to a more diversified pool of assets and economies of scale which may derive from larger investment funds.

The proposed changes to the investment regulations mean an abolition of the more prescriptive elements of the current regulations (categories of holdings and certain prescribed categories of investment) and a move towards more of a “prudent man” test aligning the LGPS more with other major funded pension schemes. The new regulations will also make it clear that, in appropriate circumstances, certain asset classes traditionally avoided by local authorities and the LGPS (for example, derivatives) may be used where the fund thinks such investments are appropriate.

The second limb of the proposed new regulations is to allow the Secretary of State a power of intervention where he or she is concerned that the administering authority is not exercising its investment function in an appropriate way.

Comment

The freeing up of administering authorities to pool funds and to have a more “trustee-like” approach to investment strategy and investment management is to be welcomed.

Some of the restrictions – imposed by the courts when the pension fund investment opportunities and asset allocation strategies were very different to those that exist now – did not make sense in relation to the running of a modern funded pension scheme.

However, there does seem to be a certain tension between allowing the administering authorities to invest in the manner they think most appropriate for their fund and giving the Secretary of State a power to intervene if central government does not think the administering authority is investing appropriately.

As ever, the devil will be in the detail of the regulations, and safeguards and constraints will be necessary to make sure that the interests of government in accessing the “British Wealth Funds”, which it is intended will comprise the LGPS, are not overriding the prudent investment strategies of local administering authorities.