Dear Colleagues,
New Local Government Pensions Scheme Investment Regulations and Asset Pooling
I write to appraise you of significant developments in respect of our LGPS Funds arising from recent Regulations, which I have set out below and ask if you will inform your Branch memberships of these developments. .
Introduction
In the summer budget the Chancellor of the Exchequer announced that LGPS funds would be asked to bring forward proposals for pooling LGPS investment assets. In the Autumn statement the Chancellor expanded on the proposals and announced the creation of up to six ‘British Wealth Funds’.
For these to be created the LGPS investment regulations needed to be up dated. The Department for Communities and Local Government (DCLG), which is the government department responsible for the LGPS, has now issued draft regulations, a consultation and other documents that support the proposals
Summary of the key issues and UNISON position
The government has instructed the 89 LGPS administering authorities to come up with proposals to create ‘pools’ of assets of no less than £25bn in size. Initial plans must be drawn up by the end of February 2016 and finalised by July 2016
UNISON supports the pooling process but with qualifications, there should trade union nominated scheme member representatives appointed to the pool governance structures
These pools of assets, known as British Wealth funds (or Collective Investment Vehicles) will be expected to be cost transparent, reduce the costs of investing and invest more in infrastructure
The requirement for a full cost analysis of all of the LGPS funds is an endorsement of UNISON’s consistent demands over the last five years for transparency of costs
The government is consulting on a new set of investment regulations to support this pooling initiative – the consultation finishes on the 19th of February 2016
UNISON has serious concerns with some of the proposals such as the proposition to give government unprecedented powers of intervention over funds’ investment policies if it believes such policies contravene UK government policy
UNISON is clear that funds’ investment policies should be guided by what is the ‘best interests’ of scheme members, not by government which is required under law.
The Scheme Advisory Board, the Law Commission and UNISON have requested that the government apply the Investment Regulations applicable to all other pension funds in the UK and the European Union – our counsel opinion believes that the government is in breach of the EU Directive 41/2003 Institutions for Occupational Retirement Provision (IORP)
The UK government is denying the scheme members of the LGPS their statutory right to have their pension funds invested in their best interests.
UNISON actions taken
Regional LGPS forums have been established
Regions have been encouraged to engage with branches to ensure they are aware of our position and they respond to the consultation
The issues of pooling and new investment regulations have already been referred to the Legal Department
Press and parliamentary briefings have been produced
An article for UNISON Focus has been produced
Consultation response for branches and regions has been produced
Background to LGPS asset pooling
Since the Independent Public Services Pension Scheme Commission asked the question what evidence was there for fund merger there has been a debate about the costs and efficiency of the LGPS funds.
In May 2014 the Government published a consultation which set out how savings of up to £660m a year might be achieved through greater use of passive management and pooled investment (available at https://www.gov.uk/government/consultations/local-government-pension-scheme-opportunities-for-collaboration-cost-savings-and-efficiencies).
Investing collectively can help authorities to drive down costs and access the benefits of scale, and also enables them to develop the capacity and capability to invest more cost effectively in asset classes such as infrastructure.
UNISON is in full support of the cost transparency process, no pension fund in the UK is in full knowledge of its true costs across the investment chain. We have been instrumental in persuading the government to move forward with a cost transparency agenda.
Proposed pooling criteria and process
The Government has invited authorities to develop proposals for pooling assets that meet published criteria. Draft proposals are to be submitted by the end of February and final proposals to be submitted in July 2016.
It will be for authorities to suggest how their pooling arrangements will be constituted and how they will operate. In developing proposals, they are asked take into account of four criteria, which are designed to be read in conjunction with the supporting guidance. These are:
A. Asset pool(s) that achieve the benefits of scale: The 90 administering authorities in England and Wales should collaborate to establish, and invest through asset pools, each with at least £25bn of Scheme assets.
B. Strong governance and decision making: The proposed governance structure for the pools should:
i. At the local level, provide authorities with assurance that their investments are being managed appropriately by the pool, in line with their stated investment strategy and in the long-term interests of their members;
ii. At the pool level, ensure that risk is adequately assessed and managed, investment implementation decisions are made with a long-term view, and a culture of continuous improvement is adopted.
C. Reduced costs and excellent value for money: In addition to the fees paid for investment, there are further hidden costs that are difficult to ascertain and so are rarely reported in most pension fund accounts. To identify savings, authorities are expected to take the lead in this area and report the costs they incur more transparently. Proposals should explain how the pool(s) will deliver substantial savings in investment fees, both in the near term and over the next 15 years, while at least maintaining overall investment performance.
D. An improved capacity to invest in infrastructure: Only a very small proportion of Local Government Pension Scheme assets are currently invested in infrastructure; pooling of assets may facilitate greater investment in this area. Proposals should explain how infrastructure will feature in authorities’ investment strategies and how the pooling arrangements can improve the capacity and capability to invest in this asset class.”
Key concerns for UNISON on the pooling consultation
In principle, proposals to improve the investment process by gaining scale should be supported. In particular, requirements to establish a cost basis for existing funds and achieve improvements in investment performance are in the interests of scheme members. Reductions in the cost of investing and a greater rate of return, puts more money into the pension fund to pay pensions.
UNISON’s view is that any anticipated ‘savings’ should go to the pension funds and not taken by the Treasury. We consider the requirement to ensure cost transparency for each fund and for the Common Investment Vehicles to be a considerable endorsement of our consistent call for this to happen.
UNISON is concerned that the new a governance structure will need to be added on top of the current structures. This adds in further potential for conflict, inconsistency and confusion between the different governance layers. We are also concerned that there are no proposals to include trade union/scheme members in the governance of the ‘common investment vehicles’.
We believe that trade union representatives should have seats at the governance table to ensure oversight of the process, in line with member involvement in LGPS fund boards, which have equal employer and member representation. Making it a requirement for pools to invest in infrastructure is a direct intervention into the investment process.
No other government in the European Union has such a condition on its pension funds. A pension fund’s duty is to pay pensions in the most efficient and effective manner, the duty is to the scheme member, not the government. Most of the current infrastructure investments of the LGPS have been made with Private Equity Partnerships and primarily into PFI projects.
The consultation is also silent on how any particular LGPS Fund will be able to access its share of a pooled fund if it needs to do so for example to sell the assets to improve its cash flow. The ability to access investments is crucial if funds start to have cash flow issues, for example if a number of employers continue to try and block new staff from joining the LGPS. Continuing Government in action to stop employers setting up arms length companies to limit future membership is a direct threat to the viability of the proposals to set up pooled funds.
LGPS Investment regulations and reform criteria
Investment regulations are the instructions to those who manage and invest the assets of the LGPS, they set out how to invest and what can be bought on behalf of scheme members. In England and Wales these are the 89 administration authorities who manage the pension funds.
The consultation document includes key proposals for the reform of the LGPS investment regulations, which place potentially unprecedented controls by the government on scheme member interests.
We have a number of concerns:
The consultation document states that the government will be issuing guidance proposing to allow for the intervention of the Secretary of State if a fund develops an investment policy contrary to UK ‘foreign policy’
“The Secretary of State has made clear that using pensions and procurement policies to pursue boycotts, divestments and sanctions against foreign nations and the UK defence industry are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government. The Secretary of State has said, “Divisive policies undermine good community relations, and harm the economic security of families by pushing up council tax. We need to challenge and prevent the politics of division.”
The government is also seeking to control the potential investment preferences of scheme members by placing an arbitrary requirement to follow UK government ‘foreign policy’. At present the Law Commission’s guidance is that ‘non-financial’ investment decisions should not be made without consultation with scheme members.
For example if a pension fund wishes to ‘disinvest’ from arms manufacturing companies then it would be obliged to consult scheme members on their views. If the scheme members agree then the administrators of the fund could do so. Under the proposed investment regulations the government is clearly stating that the views of the government would over ride any scheme member consultation within the LGPS.
There are proposals to remove some of the existing prescribed means of securing a diversified investment strategy and instead place the onus on authorities to determine the balance of their investments and take account of risk. This is known as the ‘prudential approach’ (simply put - not putting your eggs in one basket).
The consultation states:
“3.4 Key to this will be the investment strategy statement, which authorities will be required to prepare, having taken proper advice, and publish. The statement must cover:
• A requirement to use a wide variety of investments.
• The authority’s assessment of the suitability of particular investments and types of investments.
• The authority’s approach to risk, including how it will be measured and managed.
• The authority’s approach to collaborative investment, including the use of collective investment vehicles and shared services.
• The authority’s environmental, social and corporate governance policy.
• The authority’s policy on the exercise of rights, including voting rights, attached to its investments.”
Some stakeholders and in particular the fund administrators have complained that the current investment regulations are too prescriptive in the amounts of different assets that can be purchased. Other stakeholders within the LGPS, including UNISON, have for sometime been requesting changes to the investment regulations.
UNISON has argued that the regulations must comply with the European Directive 41/2003 Institutions for Occupational Retirement Provision (IORP). Both the England/Wales Scheme Advisory Board and the Law Commission have written to the government advising them that the investment regulations should be amended to meet the demands of the above Directive.
This requires in summary the investment regulations state:
Invest on a ‘prudent person’ basis (spread your investment risk across asset classes)
Invest ‘in the best interests of scheme members’
Resolve any potential conflicts of interest in scheme member’s favour
The current investment regulations as well as the proposed draft ones are silent on whose interests the funds invest member’s money in. This is a key area of concern as the pension funds are the institutions that pay out pensions.
Pension funds are therefore for the scheme members and no one else. It is why all pension funds must be run in the interests of those expecting pensions or are being paid pensions.
There some real concerns at the unprecedented powers of intervention being proposed by the government over investment policy of the LGPS funds. Investment policy should be a matter for the scheme members and their decision makers, not for a government to intervene.
There is no inclusion of the requirements of the IORP Directive, specifically no stated requirement to invest in the best interests of scheme members or resolve any potential conflicts of interest in their favour. This places, once again, the LGPS and the government outside of its treaty obligations with the European Union.
England/Wales Asset Pooling Update 8/1/16
The pooling process is picking up however many funds have yet to make up their minds over which way to go. There are now 7 pools in the process of establishment.
The following is a provisional list of the seven emerging LGPS pools and their potential values. Details are subject to change. It remains unclear whether one of the seven pools – the existing £10bn tie-up between Lancashire Pension Fund and the London Pension Funds Authority, will form the basis of a new pool or join one of the others.
Northern Powerhouse: £40billion: West Yorkshire, Greater Manchester, Merseyside (plus unnamed smaller funds)
Midlands – £35bn: Cheshire, Derbyshire County Council, Nottinghamshire County Council, Shropshire, Staffordshire, West Midlands ITA, West Midlands Pension Fund and Worcestershire.
ACCESS – £25bn+: Central Eastern and Southern Shires including Northamptonshire, Cambridgeshire, Essex, Norfolk, Isle of Wight.
London CIV £25bn: All London Funds
South West – £20bn: Avon, Cornwall, Devon, Dorset, The Environment Agency, Gloucester, Somerset and Wiltshire, plus Oxfordshire
Border to coast £13bn-£32bn: Cumbria, East Riding, Surrey, Warwickshire, Lincolnshire plus others in discussion
Welsh funds £13bn: Carmarthenshire, Cardiff, Flintshire, Gwynedd, Powys, Rhonda Cynon Taff, Swansea, Torfaen.
LPFA/Lancashire £10bn
Government documents issued
LGPS asset pooling
Local government pension scheme: investment reform criteria and guidance
Design of the structure and governance of efficient and effective collective investment vehicles for LGPS Funds
These can be found at: https://www.gov.uk/government/publications/local-government-pension-scheme-investment-reform-criteria-and-guidance
Investment regulations
LGPS: Revoking and replacing the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009: Consultation
The draft Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016
These can be found at: https://www.gov.uk/government/consultations/revoking-and-replacing-the-local-government-pension-scheme
For any clarification or further information please contact: Michael Booth Regional Organiser
Michael Booth
North West Unison
Regional Lead Officer LGPS Governance