David Spreckley, head of Pensions and Treasury at Barnet Council, argues that the government’s LGPS Investment Consultation should consider the distinct nature of fiduciary duty for the LGPS.
The ongoing LGPS Consultation on investments underscores the UK government’s desire for Local Government Pension Scheme (LGPS) funds to increase their investments in levelling up and infrastructure projects.
While the consultation acknowledges the fiduciary duty of pension fund committees in making investment decisions, we believe that without clarity on our primary fiduciary responsibility, caution may hinder decision-making, limiting opportunities for local investments with broader community benefits.
Understanding fiduciary duty
The term “fiduciary duty” originates from the Latin word “fiduciarius,” signifying trust or entrustment. In the context of traditional (non-LGPS) pension funds, which are typically legally held in trust, the fiduciary duty is unequivocally toward the beneficiaries of that pension fund. Failing to maximize returns for a given level of risk could ultimately affect these beneficiaries.
Trustees of pension funds are acutely aware of this, and the legal framework is well-established, including a priority order for payments if the trust faces insufficient assets to meet beneficiaries in full. In such cases, some individuals may not receive their full entitlements.
However, this situation differs within the LGPS. LGPS assets are not held in a “trust fund” but are reserved to meet future promised benefits. Under an LGPS pension fund, members’ outcomes are not tied to the fund’s performance, and LGPS regulations do not specify a legal “priority order.” In the most extreme scenario, LGPS pension benefits would need to be met from local council revenue.
In practice, the primary stakeholder that stands to gain or lose the most from a well or underperforming LGPS are employers. In cases where the employer is a council, this directly impacts the local residents who rely on the council’s services and funding. We argue that, given the legal framework of the LGPS, our primary (though not sole) fiduciary duty should be to residents and service users, not just members. Clarity on this could open intriguing possibilities for how we approach decision-making regarding infrastructure investments with wider community benefits – explained below.
Redefining ‘return’ in infrastructure investment
In typical infrastructure investments, there are conventional measures of return, such as yields (e.g., toll income from a bridge) and capital appreciation (e.g., the increased value of a physical structure). However, when considering investments in regeneration and infrastructure, there is an additional benefit—the positive impact on local and surrounding areas due to the existence of these assets.
Take, for instance, the Dartford Tunnel and QE2 bridge, which connects Essex to Kent via the M25. This “asset” directly generates approximately £200 million in annual toll income. Yet, the economic benefits accrued to the surrounding areas (including major shopping malls, business parks, and a fast rail link) are likely worth many times that income. These broader benefits can be viewed as a “dividend” to the area stemming from infrastructure investments – we’ll refer to this as a “levelling-up” dividend for the remainder of this post.
Under traditional investment decision-making within a pension fund primarily owing its fiduciary duty to members, considering this wider levelling-up dividend when making investment decisions would be unorthodox. The focus would primarily be on the £200 million of annual income and whether it justifies the significant initial cost of building the infrastructure. However, in the LGPS context, where members’ benefits are not legally dependent on the Fund’s performance, but local residents benefit directly from economic regeneration facilitated by good infrastructure investment, would it be appropriate, from a fiduciary perspective, to explore whether Pension Fund Committees could explicitly recognize the dividend that may flow to residents, especially for the “up to 5% of assets” recommended in the consultation.
Currently, neither regulation nor guidance explicitly grants this recognition. Indeed, a recent Supreme Court case considering divestment touched on this subject and suggested LGPS funds have a primary fiduciary duty to members. This case might be too narrow in scope to have wider application, but the idea that LGPS funds owe their primary fiduciary duty to members will cause uncertainty for LGPS funds and, may, as a consequence, narrow the field of investable options towards local investments.
At Barnet, we believe that allowing pension fund committees to account for a levelling up dividend (for the target allocation of up to 5% of levelling up investments as a control) within their decision-making processes will encourage more investments in levelling up initiatives. However, fuzzy thinking on fiduciary duty may encumber our ability to do this in practice.
Of course, we are not naïve to the fact that allowing for a levelling-up dividend may bring governance challenges. A robust framework for decision-making (and the 5% limit) would need to be established to accommodate this change. But without this clarity, we might miss out on the full universe of opportunities that can benefit both our pension funds and the communities we serve.
David Spreckley will speak at Room 151’s annual Investment Forum on 8 November. To find out more, click here.
—————
FREE weekly newsletters
Subscribe to Room151 Newsletters
Follow us on LinkedIn
Follow us here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
