LGPS to abolish investment restrictions as details of pooling announced

Local authority funds in the UK will see most investment restrictions lifted and a shift towards a prudent person approach, as the government reforms the 90 schemes in England and Wales.

Releasing its long-awaited consultation on the structural reform of the local government pension schemes (LGPS), the Department for Communities and Local Government (DCLG) outlined a number of criteria on which pooling vehicles would be assessed.

Local funds will be expected to form “up to” six asset pools of no less than £25bn (€35.5bn), and each proposal should outline the level of savings each vehicle should hope to achieve over the next 15 years.

The only one of the English pooling proposals to so far meet the £25bn threshold is the London collective investment vehicle, which earlier this week announced the names of four managers in charge of £6bn in mandates. 

As part of the changes, the DCLG also confirmed it would look to replace the current regulation governing investments, which sets out upper limits on certain types of investments, including infrastructure.

Instead, funds would be asked to publish an investment strategy statement, allowing them to pursue a prudential approach in line with private sector funds in the UK.

The DCLG hinted at the potential for deregulation in late October.

The deregulation proposed by the department would require the new statement, effectively taking the place of the current Statement of Investment Principles, to set out a diversified investment strategy and the fund’s approach to risk management.

It would also need to mention any potential collaborative investment approaches, and the fund’s environmental, social and governance policy, as well as its approach to shareholder engagement.

The funds will have up to six months after the new regulation is in place to publish the new statement, at which point it will replace the investment regulations from 2009.

As part of the separate consultation on structural reform, the DCLG urged local authority funds to “explain” how infrastructure would feature within the new pooling arrangements, as well as how pooling could improve the ability to invest in the asset class.

Without directing the funds to invest in infrastructure, the consultation highlighted the “wide range” of assets pooled vehicles could seek exposure to – including railways, roads and housing projects, making both greenfield and brownfield investments.

The government also acknowledged that, should the LGPS opt for a single, illiquid asset-pooling vehicle – such as the infrastructure joint venture set up by the London Pensions Fund Authority and the Greater Manchester Pension Fund – such a vehicle would be exempt from the £25bn target imposed on the multi-asset pools.

The consultation offered other concessions in the area of pooling, recognising that certain investments – such as local holdings or direct property investments – would be impractical for the asset pool to oversee.

“In light of the arguments brought forward by authorities and the fund management industry, the government is prepared to accept that some existing property assets might be more effectively managed directly and not through a pool at present,” the consultation adds. 

“However, pools should be used if new allocations are made to property, taking advantage of the opportunity to share the costs associated with the identification and management of suitable investments.”

Both consultations are set to close by 19 February.