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Is your Local Government Pension Scheme (LGPS) fund invested in accordance with the new investment regulations?

The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (the 2016 Regulations) came into force on 1 November 2016. 

This update describes the main changes introduced by the 2016 Regulations and what administering authorities need to do now to ensure their fund investments comply.

What's the idea behind the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016?

One of the main aims behind the 2016 Regulations is to give administering authorities more say over investment decisions and more autonomy when it comes to setting investment strategies.

The quid pro quo for passing more responsibility over to administering authorities is that the Secretary of State (SoS) has the power to issue Directions under the 2016 Regulations, if administering authorities fail to comply. 

This power was the subject of much scrutiny and controversy during the Government's consultation on the 2016 Regulations. The government has, however, decided to stick by its decision of allowing the SoS to step in, albeit only where the power is used appropriately and proportionately and only after consulting with the authority directly (Regulation 8).

Publishing an Investment Strategy Statement

The most significant new requirement is for administering authorities to publish their first Investment Strategy Statement (ISS) by no later than 1 April 2017. After that, the authority must review the ISS from time to time and at least every three years and publish a statement of any revisions. 

The content of the ISS is prescribed by the 2016 Regulations, which are supplemented by Guidance on Preparing and Maintaining an Investment Strategy Statement prepared by the Department for Communities and Local Government (the Guidance). 

Administering authorities should review their obligations under the 2016 Regulations alongside the Guidance, in order to understand what is expected in their ISS. 

Broadly speaking, the ISS must address and include the following:

  • variety of investments: a requirement to invest the fund money in a wide variety of investments;
  • suitability: the authority's assessment of the suitability of particular investments and types of investments; 
  • risk: the authority's approach to risk, including ways in which risks are to be assessed and managed; 
  • pooling investments: the authority's approach to pooling investments, including the use of collective investment vehicles and shared services; 
  • responsible investment: the authority's policy on how social, environmental and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments; and
  • rights: the authority's policy on the exercise of the rights (including voting rights) attaching to investments. 

Proper advice

For most of the above, the authority will need to take "proper advice" in order to comply, which is defined in the 2016 Regulations as advice from a person whom the authority reasonably considers to be qualified by their ability in and have practical experience of financial matters. 

Next steps

Administering authorities should begin preparing the ISS without delay, as they will need to gather information internally and from third parties and also obtain external advice. 

Administering authorities should also review the 2016 Regulations to ensure that they are compliant in all respects. Please get in touch if you would like us to advise you on how the 2016 Regulations apply to you, or if you need help with preparing your ISS.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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