Turning Local Government Pension Schemes into British Wealth Funds – regulations and guidance published

Later than originally envisaged, the Government has produced its response to its consultation on replacing and revoking the Local Government Pension
Scheme (LGPS) (Management and Investment of Funds) Regulations 2009. At the same time it has also published the new LGPS (Management and Investment of Funds) Regulations 2016, which are due to come into force on 1 November 2016.

Separately, the Government has published accompanying guidance on preparing and maintaining an investment management strategy.

It was hoped that the regulations would be produced earlier in the year, as they will need to be taken into account by the LGPS asset pools in their proposals for pooling.

However, the Regulations are largely the same as when we reported on them in their draft form in our update in November 2015.

Investment strategy statement

Regulation 7 of the new LGPS (Management and Investment of Funds) Regulations 2016 requires administering authorities to produce an investment strategy statement, which must include, among other things:

• the authorities’ approach to pooling investments;
• an assessment of the suitability of investments; and
• the authorities’ approach to risk.

This statement is required to be published no later than 1 April 2017, subject to transitional arrangements which we discuss later in this update.

Guidance

Regulation 7(1) states that the Secretary of State will produce guidance regarding the investment regulations.

The guidance focuses on the different components of the investment strategy statement required to be included under regulation 7(2). In this respect the guidance is helpful as it provides more detail on what should be included in administering authorities’ investment strategy statements.

Secretary of State intervention

Despite many responses to the consultation questioning the breadth of the Government’s proposed intervention power, this power has been introduced in regulation 8(2).

The intervention power allows the Secretary of State broadly to make directions to individual funds regarding their investment strategy, require a third party to exercise the investment functions of an individual fund or for the Secretary of State to exercise the investment functions of an individual fund.

The Government’s response to the consultation suggested that guidance would be provided on the evidence the Secretary of State may draw onto establish whether an intervention is required. The guidance mentioned above does not cover this, and it remains to be seen whether further guidance will be produced.

Transitional arrangements

One of the key changes that Government confirmed in its response to the consultation was an extension of the transitional arrangements, which in the draft regulations were only to remain in place for six months.

In its response, the Government acknowledged that administering authorities should be afforded more time to prepare and publish their investment strategy statement under regulation 7.

Therefore, regulation 12 states that the transitional arrangements remain in place until 31 March 2017, whereas in the draft regulations they remained in place only until 30 September 2016.

Although this is in practical terms an extension of the transitional arrangements, as the regulations were only laid before Parliament on 23 September, in real terms this gives administering authorities only just over 6 months to prepare and produce the investment strategy statement.

Comment

The publication of the new investment regulations and the associated guidance are certainly welcome news, as LGPS administeringauthorities continue to progress asset pooling. However, the shortness of the transitional arrangements will be of concern to administering authorities, considering the large amount of work that is required to implement asset pooling. It is not clear that the Government has taken this into account.

There remain serious concerns about the breadth of the Secretary of State’s interventionist power, which have not been addressed as of yet. Hopefully further information on what the Secretary of State will take into account before deciding to exercise this power will be forthcoming.