New rules allowing the UK government to control investments made by local authority funds are “unprecedented”, going beyond the influence The Pensions Regulator exerts over private sector schemes.
Unveiled as part of the Department for Communities and Local Government’s (DCLG) legislative backstop to ensure local government pension schemes (LGPS) pool assets into up to six vehicles no smaller than £25bn (€35.5bn), the regulation also removed the current statutory investment rules, instead requiring an investment strategy statement be drafted that allows investments as long as they are prudent.
Joanne Segars, chief executive of the Pensions and Lifetime Savings Association, welcomed aspects of the new regulation and praised the shift to the prudent person model, saying the association had long backed such a change.
However, Gary Delderfield, a partner at law firm Eversheds, said the new regulation seemed “pretty unique”, as it allowed the secretary of state for communities – currently Greg Clark – to amend a fund’s investment strategy statement and direct investment in specific assets.
He added that the new rules seemed to be “giving with one hand and taking with the other”, and that it was “pretty unprecedented” the government would have the power over investments.
Clifford Sims, a partner at Squire Patton Boggs, said the new powers should be regarded as a way of granting the DCLG a carrot and stick with which to ensure the pooling of assets.
He praised the way in which the new regulations were drafted and said he expected the ability of the government to intervene was likely to be reserved for funds unwilling to pool assets.
Pointing to the consultation document that said the government would be able to intervene where an administering authority was “carrying out another pension-related function poorly”, Sims speculated that intervention would not be limited to investment decisions.
“I think it is not just pooling, I think it is poor performance,” he said. “If they think someone is a sickly child, they will intervene.”
Delderfield noted that The Pensions Regulator did not currently have the powers to direct investment.
Instead, with schemes where it has concerns over aspects of management, it is able to replace one or all of the trustees.
However, Jae Fassam, a senior associate at Pinsent Masons, said the change was in line with the rules governing private sector schemes, with a move towards a principles-based regulatory framework.
“There has never been a power for the secretary of state to intervene in this way before, but, with the [previous] 2009 regulations, he already had intervened – he had just done so prior to publishing them,” he said.
The only one of the English pooling proposals to so far meet the £25bn threshold is the London collective investment vehicle, which earlier this week announced the names of four managers in charge of £6bn in mandates.