Michael Hayles, partner, and Ellie Alveyn of Burges Salmon examine the recent concerns some pools have raised about MHCLG’s draft guidance to LGPS administering authorities.
In January 2019, the Ministry of Housing, Communities and Local Government (MHCLG) issued a consultation and draft guidance on asset pooling in the Local Government Pension Scheme (LGPS).
The guidance includes substantive changes to the asset pooling framework that was introduced in 2016.
Key changes include an obligation on pool members to establish an additional vehicle, authorised by the FCA, to carry out investment strategies; and also to establish and maintain a ‘pool governance body’ to set the direction for the pool and hold the new pool company to account.
The guidance also set a deadline of 2020 after which pool members should make almost all new investments solely within the pool.
The concerns:
Several pools have expressed concerns about both the form and content of this guidance.
The Northern LGPS (“Northern”) sent a detailed letter to Rishi Sunak, the minister responsible, explaining its concerns that the guidance put onerous financial obligations on pools.
In particular, establishing a company authorised by the FCA to conduct investment strategy would cost Northern an estimated £10m to £15m.
It stated that this cost directly contradicted one of the original aims of pooling assets, which was to save money through economies of scale.
The draft guidance is also expressed to replace previous LGPS guidance, which included a criterion of providing ‘value for money’ for schemes, members and taxpayers.
Northern also felt that the changes were so substantive that they did not constitute guidance, but rather significant reform and submitted to Mr Sunak that these proposals ought to have been introduced by way of draft legislation that would be subject to parliamentary scrutiny.
Another major pool, Access, supported this view and expressed in its response to the consultation that MHCLG had breached Cabinet Office principles with its consultation document, and requested that it be withdrawn.
Government guidance issued to the LGPS has recently been the subject of judicial review, in a challenge brought by the Palestine Solidarity Campaign (PSC)[1] and therefore MHCLG might have been expected to take a more cautious approach to this new draft guidance.
Whilst the PSC challenged a restriction in the guidance, rather than an obligation, it is nonetheless important that in order to mandate LGPS practice, the Secretary of State must have a legal basis to do so.
The draft guidance is made under regulation 7(1) which provides “An authority must, after taking proper advice, formulate an investment strategy which must be in accordance with guidance issued … by the Secretary of State”.
Where this guidance takes a one size fits all approach – it is difficult to reconcile this with regulation 7(2) where the investment strategy must include (amongst other matters): “a requirement to invest … in a wide variety of investments”; “assessment of the suitability of particular investments”; the authority’s approach to pooling investments, including the use of collective investment vehicles”.
Our view is that, especially given that administering authorities each have their own fiduciary duties to invest their individual funds appropriately, the draft guidance takes an unhelpful approach that appears mandatory.
Next steps:
The consultation process closed on 28 March 2019.
Given the level of concern the consultation has received so far, it appears highly unlikely that the draft guidance will be implemented without alteration. Should this occur, it could be susceptible to judicial review.
[1] The Queen on the application of Palestine Solidarity Campaign & ors v Secretary of State for Communities and Local Government [2018]
