A Welsh local authority fund has called for more time to draft and implement an investment strategy statement (ISS), as the sector deals with the upheaval of pooling assets.
The £1.4bn (€1.7bn) Clwyd Pension Fund also urged the Department for Communities and Local Government (DCLG) to allow derivatives for investment strategies other than those designed solely to manage risk.
In its response to the DCLG consultation on new investment guidelines for the sector, which concluded in February, Clwyd asked for a doubling of the time – to a year – granted local government pension schemes (LGPS) to draft the new ISS, as the funds shifted away from strict investment limits to a prudent person approach.
“From a practitioner viewpoint,” the response said, “a 12-month transition period, which may both assist with incorporating the new pooling arrangements within our ISS and linking the completion of the ISS with the Funding Strategy Statement, would be helpful.”
The abolition of investment restrictions and a shift to the prudent person principle has largely been welcomed, despite concerns about the “unprecedented” nature of powers granted to the UK government to intervene in the investment process.
The consultation was launched at the same time the DCLG outlined its criteria for creating LGPS asset pools, which has since led to proposals for eight pools.
Reacting to the DCLG’s suggestion that administering authorities “would only use derivatives as a means of risk management”, Clwyd also cautioned the government against taking such a view.
Citing advice sought from its investment consultant, JLT, Clwyd said restricting the use of derivatives to areas of risk management risked increasing costs where derivatives were less costly than physical securities.
JLT’s advice to the fund also noted that derivatives were “prevalent” across many asset classes, citing managed futures as an example.
The consultancy said: “The inclusion of such asset classes can form an effective tool in portfolio construction and therefore would support the ability for LGPS funds to potentially invest in them, albeit via a third party such as an asset/investment manager (and not on a direct basis).”
Clywd concluded that, based on the advice, the DCLG should amend the proposed regulation to allow for derivatives to be used for “efficient and effective” portfolio management.
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