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Framework for investment decisions

Although the rules of the Local Government Pension Scheme (LGPS) are set nationally, it is administered at local level by adminstering authorities, whos responsibilities include managing fund investments within the statutory framework. When making decisions on investment, the primary responsibilities of administering authorities are to deliver the returns needed to pay scheme members’ pensions, and to protect local taxpayers and employers from high pension costs (CLG consultation, November 2012, para 1.1). 

CLG consultations

In recent years, CLG has been looking at ways of achieving economies of scale in LGPS funds – with the primary aim of improving returns and reducing deficits but also to enable greater capacity to be developed for investment in infrastructure. This included consulting on ways to improve collaboration between funds (CLG, Call for evidence on the future structure of the Local Government Pension Scheme, June 2013 and CLG, Local Government Pension Scheme: Opportunities for collaboration, cost savings and efficiencies, May 2014).

In the summer 2015 Budget the Government said it would invite local authorities to come forward to proposals to pool investments in order to reduce costs. It would consult on detailed criteria and on backstop legislation to ensure that authorities that did not come forward with “sufficiently ambitious proposals” were required to pool investments (para 2.19).

In October 2015, C:G published a consultation on proposals to revoke and replace the LGPS Investment Regulations for England and Wales. The consultation laid out three main areas of reform:

  • Removing some of the existing prescribed means of securing a diversified investment strategy and instead placing the onus on authorities to determine the balance of their investments and take account of risk.
  • The introduction of safeguards to ensure that the more flexible legislation proposed is used appropriately and that the guidance on pooling of assets is adhered to. This includes a suggested power to intervene in the investment function of an administering authority when necessary.
  • The introduction of statutory guidance to assist administering authorities prepare for the new Investment Strategy Statements, including specific guidance on the extent to which non-financial factors should be taken into account when making investment decisions and how these should reflect UK foreign policy

Criteria published alongside the consultation, made clear the Government’s expectation for ambitious proposals for pooling. In addition, it proposed issuing guidance to authorities to the effect that investment policies should not “be used to give effect to municipal foreign or munitions policies that run contrary to Government policy.” The Government proposed giving the Secretary of State power to intervene where authorities did not take advantage of benefits of scale or adhere to guidance. Intervention could include: directing an authority to develop some or all of its assets in a particular way or requiring the investment functions to be exercised by the Secretary of State (November 2015 consultation, para 4.7)

In Budget 2016, the Government said it had received “ambitious proposals” from LGPS authorities to establish a “small number of British Wealth Funds” by combining assets into larger investment pools. It would work with them to establish a new LGPS infrastructure investment platform (para 1.284).

New investment regulations and guidance

The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (SI 2016/946) were laid before the House on 23 September, to come into force on 1 November 2016. They apply to England and Wales only. They do not apply to Scotland or Northern Ireland, where investments will continue to be managed as they are now (LGPS advisory board Q&A, 2016)

The Explanatory Memorandum explains the purpose:

  1. The regulations make provision in relation to the management and investment of pension funds held by administering authorities required to maintain such funds by the Local Government Pension Scheme Regulations 2013. They revoke and replace the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009.
  2. Specific provision is made for administering authorities to publish an investment strategy in accordance with guidance issued by the Secretary of State and for the Secretary of State to issue a direction to any authority which fails to act in accordance with its statutory obligations or guidance issued under Regulation 7.

The guidance on preparing and maintaining an investment strategy statement was published on 15 September 2016. This states that administering authorities “must commit to a suitable pool to achieve benefits of scale”.On taking social, environmental and corporate governance considerations into account, its states:

The law is generally clear that schemes should consider any factors that are financially material to the performance of their investments, including social, environmental and corporate governance factors, and over the long term, dependent on the time horizon over which their liabilities arise. However, the Government has made clear that using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government.

The Explanatory Memorandum to the regulations states that “separate guidance from the Secretary of State will clarify how the Government’s announcement on boycotts, sanctions and divestments should be taken into account when investment decisions are made” (para 7.9).

E-petition

A petition calling for a debate on the Local Government Pension Scheme (Investment) Regulations got 105,771 signatures. It said:

5 million people rely on the LGPS to pay their pensions. Government wants powers over LGPS investment funds, but they could gamble away members’ money on infrastructure projects. This is not allowed in any other UK scheme, including the MPs’. The LGPS must be invested in members’ best interests. Parliament must debate this issue and make the government accountable for these powers of intervention as any such direction may breach the law. Specifically Article 18 paragraph 3 of the EU Directive 41/2003 Institutions for Occupational Retire Provision: “Member States shall not require institutions located in their territory to invest in particular categories of assets.”

The Government responded that:

LGPS investment decisions will remain matters for local authorities, but councils should compare their investments in infrastructure against the example set by leading global pension fund investors.

Councils must invest local government pension scheme funds in the best interests of scheme members. The Government has no intention of setting targets for infrastructure investment or removing the right of individual pension fund authorities to make their own decisions about strategic asset allocation.

However, the pooling scheme assets announced at the July 2015 Budget will improve their capacity to invest in infrastructure, as well as achieving significant cost savings, while maintaining returns.

We have recently consulted on proposals to grant the Secretary of State a power of intervention which would further protect members’ and taxpayers’ interests. We expect that the power to intervene would be used exceptionally when there was clear evidence that a pension fund authority was not acting reasonably and lawfully, The Government is currently considering the responses to the consultation (Ibid).

The Petitions Committee agreed that there should be a debate on this petition, which has been scheduled for Monday 24 October 2016.

House of Lords Secondary Legislation Scrutiny Committee

In a report published on 20 October, the Committee drew the attention of the House to the regulations, on the ground that it gave rise to public policy issues of interest, in particular because the CLG consultation had shown “high levels of opposition to the proposed power of intervention”. It noted that:

While DCLG describes the power to intervent as a fall-back to protect public funds, likely to be used only rarely, significant numbers of consultation respondents consider that such a power is incompatible with the independence of the funds.


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