The government’s long-awaited statutory guidance on the Local Government Pension Scheme has clarified the definition of local investment and said pools should decide whether to use passive or active investment styles.
The Ministry of Housing, Communities, & Local Government’s guidance was released on Tuesday, the day before new regulations outlining how the scheme will operate under the new pooling reforms came into effect.
Three separate documents on pooling, governance and strategic investment strategies were published earlier this week.
Local investment
The pooling guidance clarifies the definition of local investment in the Pension Schemes Act. The legislation says the phrase refers to “investments in, or for the benefit of persons living or working in the scheme manager’s area, or the areas of the other scheme managers participating in the same asset pool company as the scheme manages”.
The guidance says “for the benefit of persons living or working in” an area includes the surrounding areas as well as the administering authority’s area itself.
It says local investments could include private equity, private debt, property and infrastructure, “although generally any investment made through public markets would not be considered a local investment unless a clear local benefit can be established”. It says that typically housing, regeneration, infrastructure, clean energy, small and medium enterprise finance, and natural capital, are the areas with greatest potential for local investment.
Active vs passive
The guidance reiterates that “all investment management decisions below those in the investment strategy must be made by the pool”.
It adds that while it is “reasonable” for pools to discuss a pension fund’s preferences over investment style with them, the choice about whether to use active or passive management rests the pool, not the fund.
Advice
Pension funds are now required to principle advice on their investment strategy from their pool, including local investment and responsible investment. The guidance says the pools could deliver this in-house, or procure it, and consider “utilising advisory expertise in other pools rather than developing specialist expertise in-house or procuring advisory services from private sector providers”.
It adds: “Pools must ensure that the advice that is given to administering authorities on their investment strategies and asset allocations is not influenced by the requirements of other authorities in a pool or of what can be delivered by the pool in house.”
The guidance defines the “exception circumstances” under which a fund can take additional advice from outside their pool as where the pool advises “a very substantial shift in strategic asset allocation to that which it has recommended previously, or entry into a substantially new investment approach,” or where a pool says it is not possible to implement the fund’s investment strategy.
The guidance says this should not typically be more than once in a valuation cycle.
Responsible investment
LGPS funds are responsible for setting their approach to responsible investment. The guidance says they should take account of the views of their employers and members but warns they “should exercise caution against undue influence from campaign groups whose positions may not reflect the views of members or align with the fund’s fiduciary responsibilities”.
The guidance adds: “The responsible investment approach should not set exclusions for investments in individual countries, investment styles or companies.”
The guidance says funds within a pool and the pool itself should “aim to agree on common priorities and use the collective scale of the pool to influence companies and sectors”.
However, it adds: “Where the responsible investment strategies of all partner funds cannot be aligned, pools and administering authorities should work together to form a limited number of groups of partner funds which each have an aligned approach.”
Roger Phillips (Con), chair of the LGPS Advisory Board (SAB) and Clair Alcock, board secretary, said: “The board has worked extensively throughout the development of the regulations and guidance to ensure that MHCLG officials understood the opportunities and practical challenges these reforms present,” they said.
They added: “We are pleased that officials have remained open to engagement and feedback from the sector and believe this collaborative approach has contributed to improvements in the guidance.”