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Local Government Pension Scheme investments

Published Friday, May 17, 2019

Looks at the framework within with Local Government Pension Scheme funds are invested - including issues such as investment pooling and taking account of ESG issues in investment decisions

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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. As for the trustees of pension funds in the private sector, their primary responsibility is 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).

Pooling investments

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 June 2013 and CLG, May 2014).

In the summer 2015 Budget, it 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 launched consultation on proposals to revoke and replace the LGPS Investment Regulations for England and Wales. Proposals included the introduction of:

  • Safeguards to ensure that guidance on pooling of assets is adhered to;
  • Statutory guidance to assist administering authorities prepare for the new Investment Strategy Statements, including 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).

On 22 January 2018, the Government said it had received proposals from LGPS administering authorities in England and Wales to “consolidate their assets into a small number of pools to take advantage of their scale.” It would work with administering authorities to establish a new LGPS infrastructure investment platform to “boost their capacity and capability to invest in infrastructure” (PQ 123038, 22 January 2018).

Guidance on preparing and maintaining an investment strategy statement published in September 2016 said that administering authorities “must commit to a suitable pool to achieve benefits of scale.” The LGPS Advisory Board issued an updated statement on pool governance in November 2018.

Regulations and guidance for LGPS administering authorities 

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 would continue to be managed in the same way (LGPS advisory board Q&A, 2016).

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 (House of Lords Secondary Legislation Scrutiny Committee, LGPS (Management and Investment of Funds) Regulations 2016, HL Paper 53, 20 October 2016).

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). Following an Early Day Motion 586, in the name of the Leader of the Opposition praying against them, the regulations were debated in Delegated Legislation Committee on 22 November 2016. The committee voted by 9 votes to 4 that the regulations had been considered (DLC Deb 22 November 2016 c4-10).

On 22 June 2017, the High Court ruled that part of CLG guidance on investments was unlawful because it was issued for non-pensions purposes ([2017] EWHC 1502 (Admin)]  

CLG received permission to appeal the judgement (PQ 243 HL 28 June 2017). Pending the outcome, the reference to boycotts, divestment and sanctions against foreign nations has been removed from the revised guidance (July 2017, p9). The Court of Appeal allowed the Secretary of State’s Appeal in June. However, the Palestine Solidarity Campaign has been given permission to appeal to the Supreme Court.

 

Commons Briefing papers CBP-7309

Author: Djuna Thurley

Topic: Pensions

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