UNISON press briefing

New Local Government Pensions Scheme(LGPS) investment regulations and asset pooling

  1. Introduction

In the summer Budget George Osborne announced that LGPS funds would be asked to bring forward proposals for pooling their 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), the government department responsible for the LGPS, has now issued draft regulations, a consultation and other documents that support the proposals.

  1. 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 no less than £25bn in size. Initial plans must be drawn up by the end of February and finalised by July.UNISON supports the pooling process but with qualifications, union nominated scheme member representatives should be 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.UNISON supports the cost reductions and income improvements but the law requires pension funds to invest in the best interests of scheme members, therefore infrastructure investment must be in scheme members’ interests, not the government’s.The requirement for a full cost analysis of all of the LGPS funds is an endorsement of UNISON’s consistent demands for transparency of costs.
  • The government is consulting on a new set of investment regulations to support this pooling initiative – that finishes on the 19 February 2016. These include unprecedented powers of the Secretary of State into the investment policies of the scheme’s funds. 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 LGPS 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.Legal opinion sought by UNISON believes that the government is in breach of the EU Directive 41/2003 Institutions for Occupational Retirement Provision (IORP). The UK government is denying scheme members of the LGPS their statutory right to have their pension funds invested in their best interests.
  • What is the remedy to prevent the government forcing the LGPS funds to invest in the interests of the UK government and not scheme members? The LGPS must become complaint with the EU IORP Directive – this requires a judicial review or a complaint to the Commission so that it can take infringement proceedings against the UK government.
  1. Background to LGPS asset pooling

Since the Independent Public Services Pension Scheme Commission asked what evidence there was 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

Investing collectively can help authorities 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.

  1. 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.

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 89 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 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 LGPS 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.

  1. Key concerns for UNISON on the pooling consultation

In principle, proposals to improve the investment process by gaining scale shouldbe 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 savingsshould go to the pension funds and not be 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 arrangement will need to be added on top of current structures. This adds in further potential for conflict, inconsistency and confusion between the different governance layers.We arealso concerned that there are no proposals to include trade union scheme members in the governance of the common investment vehicles.

We believe that union representatives should have seats at the governance table to ensure oversight of the process, in line with member involvement on 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 employers continue to try and block new staff from joining the LGPS. Continuing government inaction 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.

  1. 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 placepotentially 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. 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 all your eggs in one basket).

The consultation states:

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 investment regulations.

  1. What are the legal remedies?

The LGPS must become compliant with the EU IORP Directive – this requires a judicial review or a complaint to the Commission so that it can take infringement proceedings against the UK government. If the infringement proceedings led to the government losing it faces a considerable financial penalty for failing to comply with the Directive.

UNISON has argued that the regulations must comply with the IORP Directive.Both the England/Wales SchemeAdvisory 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 that 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 members’ favour

The current investment regulations as well as the proposed draft ones are silent on whose interests the funds invest members’ 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 being paid pensions.

There are 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 government ministers.

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 its treaty obligations with the European Union.

For any clarification or further information please contact: Colin Meech, National Officer

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:

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: