John Hanratty, Head of Pensions North at Nabarro LLP discusses the Local Government Pension Scheme (LGPS) and how the new regulations might impact
With the introduction of the Local Government Pension Scheme (LGPS) asset pools and an increased focus on the investment of LGPS assets into the infrastructure asset class, the investment of LGPS assets is under the spotlight like never before.
Coming into force this month are the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2012 (the Investment Regulations).
The removal of many of the restrictions on how administering authorities invest funds under the LGPS has largely been welcomed; it allows the LGPS to use investment vehicles and strategies more in line with other modern, large pension funds.
There have been concerns expressed, however, that the changes have politicised investment in the LGPS.
Further, the government’s position that there are “…large sums of public money at stake…” (Quoting from the Department for Communities and Local Government (DCLG) consultation response referred to below) has been questioned by those who believe that the “large sums of money” are held beneficially for the members of the LGPS rather than to do the work of government.
The government took the unusual step of releasing statutory guidance (the guidance) relating to how administering authorities under the LGPS should formulate, publish and maintain their Investment Strategy Statement (ISS). An ISS is required under the Investment Regulations and replaces the previous requirement to prepare and maintain a Statement of Investment Principles.
Much of the guidance is straightforward covering issues such as diversification and suitability of investments and setting out the authorities’ attitudes to risk and social, environmental and governance issues. But, the guidance is controversial in 2 ways:
- First, it provides for the Secretary of State to issue a direction and to effectively step in if an administering authority is not following the guidance in respect of how it invests; and
- Secondly, it restricts the social, environmental and governance policies which may be adopted by an administering authority by requiring those policies not to be contrary to the UK government’s foreign and defence policies.
According to the DCLG’s response to the consultation on the Investment Regulations, which was issued during the week beginning 26 September 2016, the DCLG received more than 23,500 responses to the consultation.
More than 23,000 of those responses were from members of the general public objecting to the Secretary of State having the power to intervene in administering authorities’ investment decisions.
The key objections were broadly grouped into three categories:
- That the intervention powers undermined the independence of administering authorities to act in LGPS members’ best interests;
- That the guidance, in requiring administering authorities not to pursue investment policies that are contrary to UK foreign or defence policies, prevented administering authorities from practising ethical investment management; and
- That the intervention power undermined the government’s commitment to devolution and the transfer of powers to local government.
The government’s position could be summarised as being:
- Regulation 8 of the Investment Regulations contains appropriate safeguards before any intervention and the locally elected members retain the duty and the power to set investment risk, strategy and allocation. It is only where elected members fail to do this in accordance with the regulations and the guidance will an intervention happen;
- That the funds in the LGPS are constituted largely of public money (including liability for deficits) and, as such, public money should be used in compliance with UK government policy including foreign and defence policies; and
- That the freeing up of the investment criteria does promote local democracy and an intervention will only take place once the safeguards have been exhausted.
The first major concern is that whilst the Investment Regulations are comprised in secondary legislation, changes to which would have to be laid before parliament for proper scrutiny, the guidance is precisely that – guidance issued by a Secretary of State.
This gives rise to questions about who scrutinises such guidance and whether there are any constraints on a new Secretary of State amending or revising the guidance for his or her party’s own political ends.
Another major concern is whether the Secretary of State is the appropriate person to intervene in the investment matters of the LGPS.
Regulation 8 deals with the issue of a direction by the Secretary of State and the intervention powers he or she has. The powers range from a direction to require the administering authority to make such changes to its investment strategy or invests assets as the Secretary of State considers appropriate or directs, through to full intervention where the investment powers of an administering authority fall to be exercised by or under the direction of the Secretary of State or his or her nominee.
Head of Pensions North