Local Government Pension Schemes (LGPS) in the UK are considering legal action against the government should it force through a mandatory shift to passive listed investments via collective vehicles.

The proposals, first seen last year, have yet to be finalised, with no formal decision expected until after May’s general election due to friction within government departments.

As LGPS funds await a formal decision from the government, schemes with in-house investment management teams have been weighing their options, including legal action.

Original proposals from the Department for Communities and Local Government (DCLG) recommended the creation of two collective investment vehicles (CIVs) for the 89 LGPS in England and Wales, one for all listed equities and bonds and one for alternatives.

However, John Hattersley, director at the £5.9bn (€8.2bn) South Yorkshire Pension Fund, said in a meeting late last year that, if pressed, LGPS funds with internal investment capabilities would launch a judicial review were they forced into passive strategies.

He told IPE that, while the South Yorkshire fund has not formally raised it internally, he has heard it casually mentioned by a number of LGPS.

The South Yorkshire scheme, alongside other Northern English funds such as West Yorkshire, Derbyshire, Greater Manchester, Lancashire and Tyne and Wear, have a long history of internal asset management.

Hattersley suggested the South Yorkshire fund would also examine the possibility of becoming a CIV should government legislation go against its wishes.

Like many of its peers, the scheme, responding to the government consultation, argued that a mandatory shift to passive would lower standards within the LGPS rather than improve under-performing funds with high costs.

Many of the 33 LGPS in London are currently setting up a CIV to pool investments outside of government legislation.

Hattersley said funds with internal capabilities should be considered to manage CIVs in order to share experience and protect these capabilities.

This could also be utilised if the UK government does force through listed assets and alternatives CIVs.

“We are aware some of our peer group are thinking along similar lines, and, if it were an option, it would be one we would want to explore,” Hattersley said.

He added that the central government’s delay in making a decision had forced the fund to put its expansion plans to one side.

“There is a blight across all LGPS funds,” he said.

“In our instance, we have put certain developments on hold, as we want to make sure we know and can see our future, as, like everybody, we are under financial constraints.

“We don’t want to do something we would have to unwind fairly quickly if political decisions were taken causing us to do that.”

South Yorkshire’s internal team orchestrated an 8.3% investment return over 2014 after strong returns in index-linked Gilts, private equity, property and North American equities.

The fund’s £79m absolute return strategy returned 7.9% and made new investments into healthcare, distressed debt and illiquid credit.