The UK’s financial regulator is expected to take into account public pension funds’ concerns when finalising the implementation of the Markets in Financial Instruments Directive (MiFID II), according to the chair of the local government pension scheme’s (LGPS) advisory board.

LGPS officials were concerned that the wording of the original directive would have meant the pensions funds would be reclassified as retail investors, leading to a potential fire sale of assets they were no longer permitted to hold.

Roger Phillips, who is also a member of the committee overseeing the Worcestershire County Council Pension Fund, said he was confident that the Financial Conduct Authority (FCA) would provide a positive conclusion to the long-running debate about the status of LGPS funds.

The Europe-wide rule was designed to protect local authorities’ treasury investments, which are largely held in cash or other highly liquid, low-risk assets. However, UK local authorities also have direct responsibility for the management of pension fund assets – MiFID II rules did not account for this.

The LGPS has been lobbying the FCA for exemptions from the rule, while the Pensions and Lifetime Savings Association in January rejected the regulator’s initial proposal for a workaround, describing it as “costly, complex, and difficult to apply”.

However, Phillips said the advisory board was now “very confident” that the FCA would address the concerns in a satisfactory way.

“I think what we thought was going to be a huge issue will actually be far less of one,” he said.

In February last year, the European Commission delayed the implementation of MiFID II until 2018.

Investment return collapses to just 0.1%

The overall investment return of the 89 LGPS funds in England and Wales was just 0.1% in 2016, according to its latest annual report, published yesterday. This compared to 12.1% in 2015.

The scheme’s advisory board said the decline in performance was “reflective of the difficult market conditions”. It highlighted the FTSE All Share Total Return index’s loss of 3.9% over the period.

Despite this, the scheme’s funding position improved over the course of 2016. Assets stood at £217bn (€253bn) at the end of the year, unchanged compared to 12 months earlier, but liabilities fell to leave a deficit of £37bn, £10bn less than in 2015.