The government has decided to introduce a statutory override to accounting changes to their pooled investments – and extend its period of operation for two years more than originally proposed.
In July, the government launched a consultation on an override to measures required by the IFRS9 accounting standard, proposing a grace period of three years.
Today, the government announced that following 107 responses to the consultation, it will implement a five-year override, and keep the situation under review.
Despite 90% of respondents calling for a permanent override, the Ministry for Housing, Communities and Local Government said: “The government does not see the case for issuing an initial statutory override that has no time limit.
“This is because it would result in a permanent deviation from normal accounting practices which would add another level of complexity to local government accounts.”
But due to the strength of feeling, the government said it would “will keep use of the override and the impact of allowing it to lapse on balanced budget calculations under review”.
The government said it would apply the override to all pooled investments due to concerns of the potential impact of limiting it just to pooled property investments, which it said could “have an unintentional impact of incentivising this type of pooled investment over others”.
Reacting to the announcement, David Green, strategic director at treasury adviser Arlingclose, said: “We are delighted that the government has listened to the representations made by us and our clients.
“Investing in pooled funds has allowed many of our clients to earn inflation-beating returns on their treasury balances without resorting to riskier direct investments in commercial property and equities.
“Today’s announcement that the status quo will be maintained for at least five years will therefore be very welcome by local authorities.”
John Kelly, client investments director at fund manager CCLA, said: “This is an excellent example of the sector giving the government a clear message and of MHCLG responding positively and prudently to those needs.
“The result gives necessary clarity and establishes a workable environment for councils in what continues to be an immensely difficult operating environment.”
In September, a survey by Room151 found that 80.4% of council treasurers backed a statutory override, with 69.2% saying it should not be time-limited.
Announcing the new guidance, the government said it had noted the views expressed in the Room151 survey.
The government said it will require local authorities to disclose profits and losses from pooled investments to as a separate line item in reserves.
“The government believes that this will enhance transparency. It will also make it easier for the government to keep use of the override under review without requesting additional information from local authorities,” it added.
The updated regulations and override take effect within the 2018/19 financial year to avoid any impact on councils’ revenue accounts.
Joseph Holmes, strategic director of resources at Winchester City Council, said he did not expect the prospect of a possible lifting of the override in five years time to have a large impact on councils’ treasury investment strategies.
He said: ““That is likely to alter from authority to authority. It depends on how much of their portfolio is weighted towards this type of instrument. If they are heavily weighted then there is a larger risk. If pooled investments are part of a larger overall diversification of treasury instruments and it is not a massive chunk then there is less risk. I think most authorities would just be likely to ride this one out.”
