Comeback tours in the music industry are all the rage at the moment with bands like Oasis announcing a reunion. In the world of pensions (no less glamorous) there are certain parallels. I say this because back in 2015 George Osborne was telling the Conservative Party that the Government would work with Councils to pool Local Government Pension Scheme (LGPS) investments so that Councils could "invest billions in the infrastructure of their regions…" The Government of the day believed that scaling up local government pension funds would mean they were potentially better placed (and at a lower cost) to invest in a wider range of assets including infrastructure projects.
Don’t look back in anger
Fast forward nine years and Rachel Reeves, the new Labour chancellor, has announced in her Mansion House speech an action plan "to tackle the fragmented pensions landscape, deliver investment and drive economic growth".
Her reforms will be implemented next year through the introduction a new Pension Schemes Bill. The scale of the proposed reform agenda has been set out in the Pension Investment Review. Drawing on the Canadian model, the Government has put forward proposals for legislating to require the current LGPS administering authorities to consolidate their assets into larger pools, building upon the existing eight asset pooling arrangements already in place. Part of the Government's intention is to create consistency in the investment approach under current LGPS pooling as well as extending the pooling of assets held by the administering authorities of the LGPS funds. Key to this proposal will be standardising the approach of administering authorities to delegating the management of investment implementation whilst maintaining the overarching strategic input for administering authorities. Through reformed LGPS asset pools, the Government hopes to unlock economies of scale and help deliver much needed local investment.
To help inform the proposed reforms, the Government has issued a consultation. As we see it, this could offer administering authorities the chance to influence the direction of travel and shape the future structure of arrangements in a way that opens up opportunities for them to manage their affairs more efficiently and productively.
Broadly, the Government is seeking views on its proposal:
1. to reform the LGPS asset pools by requiring minimum standards including:
1.1 a requirement for administering authorities to fully delegate the implementation of their investment strategy to the pool and take their principal advice from the pool. These pools would be FCA regulated with the requisite level of investment strategy expertise;
1.2 administering authorities would be obliged to transfer legacy assets to the management of the pool;
2. requiring administering authorities incorporate their approach to local investment in their investment strategy and include a 'target range' for the allocation of local investment. It is proposed that pools carry out due diligence on those potential local investments, with the final decision resting with the pool on whether to invest;
3. improving the governance of administering authorities and LGPS pools by requiring committee members to be 'upskilled'.Administering authorities would be required to publish their governance and training strategy as well as undertaking independent biennial reviews to evaluate how well they are fulfilling those responsibilities.
Some commentators are concerned that the proposals will go too far in shifting in the balance of decision-making with the result being that it will effectively deprive administering authorities of the influence that they currently have to determine how those LGPS funds are invested. However, the Pension Investment Review is clear that setting high-level investment objectives remains the responsibility of the administering authority even if there should be full delegation to pools to implement that strategy, including flexibility to set particular asset allocation.
The consultation seeks views on how to facilitate those changes and intends to introduce new legislation requiring administering authorities to set out their strategy on 'local investment' and a target range for local investment as a proportion of the fund. The Government's intention is also for statutory guidance to be issued to shape the preparation of administering authorities' investment strategy statements.
These are bold proposals to drive investment growth, but it must be kept in mind that when the Government has tried before to steer LGPS investment strategy for the wider public good, it hasn't always been a happy hunting ground. Legal challenges have inevitably followed from interested stakeholders. That pessimism may be misplaced here, but the balancing act will be allowing those pools the flexibility to invest without returning to an over prescriptive (and potentially restrictive) set of investment allocation. No simple task then, but there is potentially some 'low hanging fruit' to help achieve the Government's objective for pools to invest locally.
At present, an LGPS fund cannot invest more than 5% of its assets in entities controlled by that council. Removing this restriction would free up opportunities for LGPS funds to invest in say wholly owned companies to buy residential property and then let/manage that property. Overcoming such restrictions would boost investment in residential property and, importantly, secure benefits for the local economy. Such a relatively straightforward change to the current regulations would sit squarely in the camp of local investment.
Indeed, one of the more illuminating aspects in the Pension Investment Review is how the term 'local investment' has been scoped. As pools, by their very nature, can span different regional locations, the concept of a 'local investment' will be loosely interpreted, particularly given the Government's intention for administering authorities to work with different authorities to develop those growth plans.
Roll with it
Questions will then inevitably remain as to how on the Government's new strategy will be implemented. It will be for the consultation to flesh out those matters, but the Government will have to consider points such as, what happens if pools do not achieve a target allocation, what sanctions would be imposed and how would they be enforced? Equally, regardless of how consolidation is implemented, the Government will be wary of potential challenge, whether from those administering authorities who may disagree with a pool's decision not to invest in a particular local opportunity or from other stakeholder parties seeking to bring challenges stemming from the outcome of that consolidation process.
Where, it appears, that the extent of the obligation on administering authorities will be for them to merely to 'target' a specific asset allocation, then would this create tension when the administering authority's fiduciary duties are taken into account? The Courts have acknowledged the fiduciary role that administering authorities have and the forthcoming legislation and statutory guidance would need to be robust enough to address this, especially if, as the consultation sets out, the intention is that the administering authority is required to take advice on their investment strategy from their pool.
Some might say
Much of the press attention prior to the publication of the review has been on the establishment of pools and the wider political and economic imperative to increase investment, but other crucial elements are set to feature in the new legislative framework.
Improved governance is the third limb of the Pension Investment Review. The Government recognises that due to the increased size of LGPS assets and growing scheme membership, there is an added responsibility for good governance of the scheme. Raising standards of knowledge and understanding is a logical step to achieving improved standards and is aligned with changes already introduced in private sector occupational pension schemes. In some respects, this part of the review is pushing at a more open door, That said, in addition to those less contentious measures, we expect administering authorities to scrutinise with vigour, the Government's proposals for a biennial independent review of their governance requirements. This is likely to focus on the circumstances where the Secretary of State could utilise its powers to wind up a fund, and practically what such an outcome would mean for employers under the relevant fund.
Lord(s) don’t slow me down
The Government's proposal for pooling is a genuinely attention-grabbing point in time to discuss the LGPS more widely. In a "while I'm on the subject" moment, are we in danger of overlooking some of the opportunities to release direct savings (rather than those released from investment reforms) which could benefit the local economy and employers under the LGPS in the interim?
Seeking direct savings and investment growth are not mutually exclusive objectives and they could arguably be targeted in tandem. Such direct savings would not necessarily require the systematic overhaul that is being proposed under the Pension Investment Review.
There may be possibilities to explore statutory guidance to 'guardrail' the range of actuarial assumptions and prudent forecasting applied to LGPS funds which could result in the outcome of lower employer contribution rates for cash-strapped local authorities and not for profit employers. Given that the LGPS currently holds a combined funding surplus in excess of £100 billion, such an approach would encourage administering authorities to assist employers in the LGPS by allowing them to divert valuable resources from meeting heightened employer contributions towards other projects. Such direct savings could be utilised to drive substantial investment in its own right, without the same degree of reworking required to the structure of the LGPS.
Some might say, what do I know as I thought a Mansion House was just a very big house in the country.
