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CIPFA outlines changes to LGPS investments

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UK - The Chartered Institute of Public Finance and Accountancy (CIPFA) has recommended investment regulations for Local Government Pension Schemes (LGPS) should be "clarified and simplified", by replacing investment limits with a series of "requirements".

In a report entitled 'LGPS investment regulations: Options for Change', a working party established by the CIPFA Pensions Panel outlined three potential options for the future: a move to a prudential regime; clarified and simplified regulation, or maintaining the status quo.

The working party, led by former London Pension Fund Authority chief executive Peter Scales, favoured the move to a prudential regime where the detailed investment regulations would be replaced by a requirement for funds to observe "proper practices" set out in a non-statutory code of practice.
 
It acknowledged this "would represent a major departure from the current approach but believes that this should be the preferred direction of travel." However it suggested a "more practicable" interim step would be to clarify and simplify the existing regulations.

The recommendations follow the results of the CIPFA pension panel survey of all 100 LGPS funds in England, Scotland and Wales - to which 67 responded - to gather views on the use of the investment regulations. (See earlier IPE article: LGPS Investment regs need to be 'simplified')

In particular, it found there recurrent areas of concern raised by respondents including confusion about the definition of investment, what investments were permitted, and the use of short-term borrowing.

The report noted "a significant minority" of pension funds are willing to work within the existing regulations, but while they did not find the rules limiting they admitted greater clarity would be welcome.

"It is because the majority view is pressing for change that the option to do nothing is the least favourable to the long-term interests of LGPS investment," said the committee.

The report, which has been submitted to the government's Communities and Local Government (CLG) department, instead outlined six recommendations to "help strengthen and modernise the existing investment framework":

Definition of investments - Replace existing regulations with the requirement stating schemes "must be invested in such a way as to ensure the security, quality, liquidity and profitability of the portfolio as a whole and, in doing so, take appropriate market, risk and investment advice"; Limits on investments - Replace existing rules with nine 'requirements' which also require assets be diversified; predominantly invested and traded in regulated markets; and allowing the use of derivatives for risk reduction and efficient portfolio management; Definition of investment manager - to be expanded to include managers authorised by an overseas regulator; Power to borrow - clarify when funds are allowed to borrow to provide temporary liquidity; Separation of bank accounts - pension fund assets should be administered in a separate account from other assets managed by the administering authority, and Other consequential amendments - use the consolidation of the regulations to address any minor changes relevant to the review findings.

Bob Summers, chair of the CIPFA Pension Panel, said: "Our survey has found that whilst many funds have begun to explore alternative markets and to develop ever more sophisticated risk management strategies, many more feel constrained in doing so by the current investment regulations.

"In bringing forward our recommendations for changes to the regulations, we seek to address some of these issues which we believe will help to both clarify and simplify the current regulations, and in so doing help to create a framework within which funds will feel able to pursue appropriate diversification and risk management within their investment strategies. I look forward to working with CLG in taking forward these recommendations and supporting their implementation," he added.

Have Your Say: A spokesman for the CLG said: "We welcome the publication of the CIPFA Pensions Panel report. We  will wish to consider its recommendations carefully and explore the evidence base of the proposals in some detail with the authors.

"At a time of significant stock market turbulence, stability and certainty in the form of a prudential and effective regulatory framework is essential for the Scheme's pension funds, given their scale and their importance to the underlying viability and affordability of the Local Government Scheme itself."

Have Your Say: Andrew Bradshaw, partner at Sacker & Partners LLP, commented: "The proposed changes are long overdue. For too long my LGPS clients have been straight jacketed by regulations which restrict their ability to take advantage of certain investment opportunities and it's high time they are given the opportunity to operate on the same playing field as private sector schemes."

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If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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