House of Commons Library

Local Government Pension Scheme investments

Published Friday, December 2, 2016

Looks at current debates around whether Local Government Pension Scheme (LGPS) funds should pool their investments and whether more can be done to encourage their investment in infrastructure

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Framework for LGPS investment decisions

Although the rules of the Local Government Pension Scheme (LGPS) are set nationally, it is administered at local level by administering authorities, whose responsibilities include managing fund investments within the statutory framework. When making decisions on investment, the primary responsibilities of administering authorities are to deliver the returns needed to pay scheme members’ pensions, and to protect local taxpayers and employers from high pension costs (CLG consultation, November 2012, para 1.1). 

CLG consultations

There are 90 LGPS funds in England and Wales. In recent years, CLG has been looking at ways to achieve economies of scale in LGPS funds – with the primary aim of improving returns and reducing deficits but also to enable greater capacity for investment in infrastructure. (CLG, Call for evidence on the future structure of the Local Government Pension Scheme, June 2013 and CLG, Local Government Pension Scheme: Opportunities for collaboration, cost savings and efficiencies, May 2014).

In the summer 2015 Budget the Government said it would invite local authorities to come forward with proposals to pool investments to reduce costs. It would consult on detailed criteria and backstop legislation to ensure that authorities that did not come forward with “sufficiently ambitious proposals” could be required to pool investments (para 2.19).

In October 2015, CLG published a consultation on proposals to revoke and replace the LGPS Investment Regulations for England and Wales. This set out three main areas of reform:

  • Removing some of the existing prescribed means of securing a diversified investment strategy and instead placing the onus on authorities to determine the balance of their investments and take account of risk.
  • The introduction of safeguards to ensure that the more flexible legislation proposed is used appropriately and that the guidance on pooling of assets is adhered to. This includes a suggested power to intervene in the investment function of an administering authority when necessary.
  • The introduction of statutory guidance to assist administering authorities prepare for the new Investment Strategy Statements, including specific guidance on the extent to which non-financial factors should be taken into account when making investment decisions and how these should reflect UK foreign policy

Criteria published alongside the consultation, made clear the Government’s expectation for ambitious proposals for pooling. In addition, it proposed issuing guidance to authorities to the effect that investment policies should not “be used to give effect to municipal foreign or munitions policies that run contrary to Government policy.” The Government proposed giving the Secretary of State power to intervene where authorities did not take advantage of benefits of scale or adhere to guidance. Intervention could include: directing an authority to develop some or all of its assets in a particular way or requiring the investment functions to be exercised by the Secretary of State (November 2015 consultation, para 4.7).

In Budget 2016, the Government said it had received “ambitious proposals” from LGPS authorities to establish a “small number of British Wealth Funds” by combining assets into larger investment pools. It would work with them to establish a new LGPS infrastructure investment platform (para 1.284).

New investment regulations and guidance

New guidance on preparing and maintaining an investment strategy statement was published on 15 September 2016. It says that administering authorities “must commit to a suitable pool to achieve benefits of scale.” On taking social, environmental and corporate governance considerations into account, it says:

The law is generally clear that schemes should consider any factors that are financially material to the performance of their investments, including social, environmental and corporate governance factors, and over the long term, dependent on the time horizon over which their liabilities arise. However, the Government has made clear that using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government.

The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (SI 2016/946) were laid before the House on 23 September and came into force on 1 November 2016. They included specific provision for administering authorities to publish an investment strategy in accordance with guidance issued by the Secretary of State and for the Secretary of State to be able to issue a direction to any authority which fails to act in accordance with statutory obligations or guidance. They apply to England and Wales only. In Scotland and Northern Ireland, investments will continue to be managed in the same way (LGPS advisory board Q&A, 2016). The Explanatory Memorandum said:

In a report published on 20 October, the Secondary Legislation Scrutiny Committee noted "high levels of opposition to the proposed power of intervention" in consultation responses and that:

While DCLG describes the power to intervene as a fall-back to protect public funds, likely to be used only rarely, significant numbers of consultation respondents consider that such a power is incompatible with the independence of the funds.

Debates on the regulations

A petition called for a debate on the regulations and for the Government to be made accountable for the powers of intervention. In its response, the Government said LGPS investment decisions would remain matters for local authorities and that it expected the power of intervention to be used “exceptionally when there was clear evidence that a pension fund authority was not acting reasonably and lawfully.” The petition having received over 100,000 signatures, the regulations were debated on 24 October 2016 (HC Deb 24 October 2016 c1-22WH). 

Early Day Motion 586 in the name of the Leader of the Opposition, praying against the regulations, led them to be debated by a Delegated Legislation Committee on 22 November 2016. The Committee voted by nine votes to four to accept the motion that the regulations had been considered (DLC Deb 22 November 2016 c4-10).

Other Library Briefing Papers of possible interest include SN06594 Infrastructure Policy (December 2015) and CBP-07507 Local authority boycotts (March 2016).

 

Commons Briefing papers CBP-7309

Author: Djuna Thurley

Topic: Pensions

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