The UK is set to replace binding investment guidelines for local authority funds with a statement of investment policy, granting schemes greater freedom as they pool assets.
Bob Holloway, who heads the Department for Communities and Local Government (DCLG) pensions unit, said he hoped a consultation on investment regulations and pooling among the 89 local government pension schemes (LGPS) in England and Wales would be published in November, allowing the department to draft new regulation by April.
In a speech at the Local Government Pension Investment Conference in London, Holloway said the consultation was likely to consider issues raised by the 2012 Kay Review, including the impact of non-financial matters on investment, as well as remove the requirement to review the performance of external investment managers every three months.
He told delegates that elements of the current Local Government Pension Scheme Regulations 2009 would be amended as part of the consultation, and singled out the regulation’s schedule 1 – which imposes strict investment limits on the LGPS – as likely to be scrapped, if ministers approved.
“There will be no schedule 1,” he said, “and there will be a general provision that allows you to publish yet another statement that will be explaining your investment strategy. It’s your own version of schedule 1.”
This, he said, was “localism at work”.
The shift comes after years of calls from local authorities for changes to investment regulations.
The Greater Manchester Pension Fund – the largest LGPS, with £17.6bn (€23.9bn) in assets – told IPE in April it would like to see the rules amended to mirror those for private sector funds, with similar views previously expressed by the London Pensions Fund Authority and the London Borough of Camden.
The consultation would also set out terms of a regulatory backstop for the pooling of LGPS assets, which chancellor of the Exchequer George Osborne recently said would see the creation of “British wealth funds” that could invest in local infrastructure projects.
Holloway assured the audience there was no plan to force infrastructure investment.
“It is a hope, it is an aspiration you will be far-thinking enough in these sub-funds worth £30bn that you will then have the capacity and the will to invest in infrastructure,” he said.
He also praised the recent initiative by funds in the South West to create an asset pool worth around £19bn, and said industry should not get “hung up” on the £30bn pooling target mentioned in recent months by the government.
Discussing potential changes to corporate governance regulation, he said the current regulations only required funds to disclose a corporate governance policy if they had one.
“We may take that a little bit further and almost have that as a default position – i.e. you should have proactive corporate governance, but, if you don’t, then you explain [why not].
“It’s a major comply-or-explain provision rather than ‘What’s your policy?’”
He said the Local Authority Pension Fund Forum was “very strongly” backing a shift towards ‘comply or explain’, adding that the department wished to see schemes engaging with corporate governance “to protect their investments”.
The civil servant also touched on an announcement made during the ruling Conservative party’s annual conference, where it was suggested new regulation could prevent politically motivated divestment, such as the sale of holdings in Israeli companies.
Holloway said the department was “wrestling” with the matter at the moment, as there was “a great deal of complexity” associated with the wording of the regulation.
“I don’t know what the outcome will be, and I’m not sure the government [does] either,” he said.