Autumn Statement 2015: Transforming the LGPS into Six British Wealth Funds to invest in infrastructure and drive local growth

The government used Wednesday’s Autumn Statement to further its plans to transform the LGPS by pooling their investments together into six British Wealth Funds, with the aim of driving investment into infrastructure and local growth. This follows on from the Chancellor’s previous announcement
in the Summer Budget that the 89 LGPS funds in England and Wales will be required to develop these ambitious pooling proposals.

Criteria and guidance have now been published that the government expects LGPS funds to take into account when formulating their proposals. The Secretary of State is also to be given new powers to intervene in order to ensure that those criteria and guidance are followed. What is clear is that the Chancellor intends to deliver on these ambitious plans.

Six British Wealth Funds: LGPS to facilitate infrastructure investment and drive
local growth

The Chancellor’s policy objective is that the pools should take the form of up to six British Wealth Funds, each with assets of at least £25bn, which are able to invest in infrastructure and drive local growth. Unlocking the LGPS in this way was part of the Chancellor’s four-point plan, announced at the Conservative party October 2015 conference, to change the way vital infrastructure projects are planned, determined and funded.

LGPS funds invited to submit pooling proposals

As indicated in the Summer Budget, the government yesterday published LGPS Investment Reform Criteria and Guidance which
it expects all LGPS funds to take into account when formulating their investment pooling proposals. The guidance invites all LGPS funds to submit initial
pooling proposals to the government by 19 February 2016. Following this, the government then expects LGPS funds to have submitted refined and completed pooling submissions which fully address the published criteria by 15 July 2016.

Four Criteria

LGPS funds will need to observe the following 4 criteria when formulating their pooling proposals:

• Asset pools to achieve benefits of scale;
• Strong governance and decision making;
• Reduced costs and excellent value for money; and
• An improved capacity and capability to invest in infrastructure.

New investment regulations

Complementing the guidance, a consultation has been issued on replacing and revoking the LGPS (Management and Investment of Funds) Regulations 2009. The aim of the new regulations is to lift existing restrictions on LGPS fund investment powers in order to make it easier for them to pool investments and access benefits of scale. The consultation on the new regulations ends on 19 February 2016. Osborne Clarke is aiming to respond formally to this and we propose to comment on the draft regulations at a later stage.

Secretary of State’s intervention power

Draft regulation 8(2) introduces a new power to allow the Secretary of State to intervene.  This is intended to ensure that LGPS funds take advantage of the benefits of scale offered by pooling and deliver investment strategies that adhere to regulation and guidance. The new power would enable the Secretary of State to issue Directions to individual funds. These may require the authority to develop a new investment strategy statement, or invest all or a portion of its assets in a particular way more closely adhering to the criteria and guidance.  Alternatively, it is suggested that the Secretary of State may personally intervene by executing a fund’s investment functions, or by directing a third party to implement a fund’s investment strategy.

Comment

Yesterday’s announcements are the culmination of work on the reform of LGPS investments which began in early 2013. While the Chancellor’s wishes for the LGPS to form the basis for six British Wealth Funds investing in infrastructure and driving local growth are certainly ambitious, they are also not without controversy: they potentially herald a new era where local government employees’ pension benefits are readily invested in local infrastructure projects.

A number of LGPS funds are already at an advanced stage in their pooling proposals, most notably the collective investment vehicle which many London authorities are pursuing. Time is now short for authorities which have not yet investigated initial proposals, which must be submitted by 19 February 2016. The Secretary of State’s interventionist powers to ensure compliance from LGPS funds which do not submit sufficiently ambitious proposals mean that the Chancellor’s wishes look set to come true.