Local Government Pension Scheme administering authorities are set to be given a deadline of 2020 after which they should not normally make investments outside their LGPS pool, Room 151 has learnt.
Room 151 has seen a copy of a draft document issued by the Ministry of Communities and Local Government which would put guidance for the pooling process on a statutory basis for the first time.
The guidance, which could be adopted as early as April, also lays down wording that will make it harder for funds to drag their feet on the pooling process by limiting the types of investment they are allowed to retain.
The document says: “Following the 2019 valuation, pool members will review their investment strategies and put revised strategies in place from 2020.
“From 2020, when new investment strategies are in place, pool members should make new investments outside the pool only in very limited circumstances.”
It added that some existing investments may be retained by pool members – but only “on a temporary basis”.
“If the cost of moving the existing investment to a pool vehicle exceeds the benefits of doing so, it may be appropriate to continue to hold and manage the existing investment to maturity before reinvesting the funds through a pool vehicle,” it said.
Funds will be allowed to retain a small proportion of investments in “local initiatives within the geographical area of the pool member”, but these would not normally exceed five per cent of assets, the draft guidance says.
LGPS investment consultant John Raisin told Room151: “The effect of this statutory guidance will be to encourage those LGPS funds who may have been reluctant to pool assets to reconsider their positions.”
David Walker, head of LGPS investments at pension consultant Hymans Robertson said the 2020 target date and process by which retained assets should be assessed “is likely to speed up the transition process to pooling.”
In a briefing note prepared on the draft statutory guidance, Raisin voiced worries that there is no mention of the type of advice that pools should be allowed to give to their member funds.
He said that at least one asset pool is already understood to be providing advice on investment strategy to its constituent funds and this approach may be embraced by other pools.
“Such an approach would appear to be not merely inappropriate but contrary to the overall intention of asset pooling within the LGPS which is to realise the benefits of scale in the implementation of individual LGPS Funds investment strategies,” the briefing said.
He said that pools should be stopped from having a major influence over the strategic asset allocations of the organisations.
“This would in effect be “the tail wagging the dog,” he said.
“Therefore, it would appear both logical and highly desirable that a statement be included in the final version of the statutory guidance that asset pools ‘must not’ provide ‘proper advice’ to any LGPS fund in relation to decisions made by an LGPS fund…”
The consultation will close at the end of March, and it is possible that the final version could be adopted shortly after.
The consultation is not open to the public and has only been sent to administering authorities, chairs of council pension committees and other interested parties.
