Guidance on new investment regulations for UK local government pension schemes (LPGS) has been welcomed for changing the course of asset pooling “for the better”, although concerns remain about the government’s power to influence investments.
The Department for Communities and Local Government (DCLG) put the regulations before parliament on 23 September, having published the guidance the week before.
The regulations revoke those from 2009 and usher in significant change by removing statutory limits on investments, shifting to a more flexible prudent-person approach.
LPGS had been eagerly awaiting the final regulations (a draft version of which had been released in 2015), not least because of their efforts to meet pooling deadlines.
Jeff Houston, board secretary for the Local Government Pension Scheme Advisory Board, tells IPE the release of guidance before the associated regulations themselves had been published was an unusual step, and that it came amid “a frustration, both within the board and across all the funds, that these investment regulations are taking so long to come out”.
For the Local Authority Pension Fund Forum (LAPFF), the guidance published by the DCLG shows the government is in “listening mode”. Kieran Quinn, chair of the LAPFF and the £17.3bn (€22bn) Greater Manchester Pension Fund, says: “The real value of this new guidance is that it reflects many of the views submitted to the government by funds about the challenges facing their plans for pooling and the new investment frontiers for local authority pension funds.”
The LAPFF praises the guidance on pension fund governance in a pooling context, particularly the renewed emphasis on the autonomous role of pension funds and the need for pools to be accountable to their member funds.
It also welcomes added emphasis on the role of the Scheme Advisory Board (SAB) and its new responsibilities, saying a stronger SAB would “support member-direction over the pace and nature of change being undertaken through pooling”.
Quinn says: “[We are] pleased to note the guidance reflects several of the key concerns exercising LAPFF member funds over the last few months about the direction of travel that pooling was taking. This new guidance alters that course for the better.”
The LAPFF says the guidance also makes two “very important” new points with respect to ESG, namely the requirement for LGPS to commit to the Financial Reporting Council’s Stewardship Code, and to have a policy on corporate governance and voting.
But the DCLG guidance also revives concerns about the government’s power to influence investment. Simon Howard, chief executive of the UK Sustainable Investment and Finance Association, says the association is “very concerned” with the power of direction by the secretary of state. “Once again, we call on the secretary of state to clarify that this power will only ever be used where an authority has breached its fiduciary duty,” he says.
The UK’s Pensions and Lifetime Savings Association raises similar concerns, agreeing with the government’s pooling proposals and the need to ensure funds are committed to delivering on these, but argues that more checks and balances should be included in the regulations. Fiduciary duty should be made explicit, it says. However, the final regulations do not appear to do so.
In late September, the government set out its response to the consultation on the draft regulations. In this, the DCLG writes: “The Secretary of State’s power of intervention does not interfere with the duty of elected members under general public law principles to make investment decisions in the best long-term interest of scheme beneficiaries and taxpayers.” The regulations come into force on 1 November.