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.
2.
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.
3.
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 https://www.gov.uk/government/consultations/local-governmentpension-scheme-opportunities-for-collaboration-cost-savings-and-efficiencies).
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.
4.
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.
5.
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 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 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 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.
6.
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. 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 some time
been requesting changes to investment regulations.
7.
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 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 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
c.meech@unison.co.uk
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-governmentpension-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-andreplacing-the-local-government-pension-scheme