The UK pension fund association has raised concerns that new regulations and guidance for local government pension schemes (LGPS) will allow the central government to interfere with pension fund investment decisions.

Partly to protect against this, it called for fiduciary duty to be made explicit in the country’s investment regulation for LGPS.

Responding to the government’s consultation on new investment regulations for the UK LGPS, the Pensions and Lifetime Savings Association (PLSA) said it welcomed the move to a prudent person approach by removing arbitrary limits on the amount that local authority funds can invest in certain types of legal structures.

However, Joanne Segars, chief executive of the association, said “there is a danger government may have gone too far in a number of areas”.

It called on the government to make explicit in the investment regulations that LGPS must apply fiduciary duty – i.e. that the ultimate purpose of LGPS investments is to pay members’ benefits.

The PLSA is also concerned about the scope for the government to interfere in LGPS’s investments, referring to the “broad powers” being taken in connection with proposals for pooling and the need to ensure funds are committed to delivering these pools.

“Whilst we agree with the government’s proposals for pooling,” said Segars, “there is a risk such broad powers, combined with the lack of an explicit fiduciary duty, could be used by future governments to direct what and where funds invest.

“It would be more reassuring for employers and scheme members if there were greater checks and balances included in the regulations before using any power to direct.”

The rules proposed by the government have been described as “unprecedented”, giving the secretary of state for communities the power to amend a fund’s investment strategy statement and direct investment in specific assets.

UK trade union Unison previously raised concerns about the government hijacking new LGPS asset pools’ investments, while BNY Mellon warned that LGPS “shouldn’t be seen an easy way to plug the nation’s funding gap” when it comes to infrastructure.

The PLSA criticised government efforts to stipulate that policies on non-financial factors – environmental, social and governance (ESG) issues, for example – should reflect (UK government) foreign policy as “meddling with flexibility”.

The association said there were valid reasons why pension funds might apply a particular screening of divestment strategy in line with the long-term interest and values of members.

“It seems unhelpful and unnecessary for the government to hinder the flexibility of pension fund governors in this respect, and undemocratic to prevent fund members from placing certain stipulations over how their own savings are invested,” it said.

The association also raised concerns about the envisaged time frame for implementation of the new regulations, saying the six months “could prove incredibly challenging for funds”.

It called on the government to consider extending to pensions committees the knowledge and understanding requirements that currently fall on local pensions boards (under the Public Services Pensions Act 2013).

This would help ensure funds are in a position to apply the prudent-person principle and invest in line with their fiduciary duty, it said.

“A prudent-person requirement,” it added, “ultimately only works if those making investment strategy decisions, collectively, have the capacity and capability to do so.”