The Local Government Pension Scheme (LGPS) (Management and Investment of Funds) Regulations 2016 were published on 23 September 2016, following the issue, on 15 September 2016, of the Guidance from the Department for Communities and Local Government (DCLG) on Preparing and Maintaining an Investment Strategy Statement required by those regulations (the Guidance).

The Government also published its response to submissions to the consultation "Revoking and Replacing the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009" on 27 September 2016.

The 2016 Regulations come into force on 1 November 2016. Administering authorities must publish their Investment Strategy Statements in accordance with the Guidance by 1 April 2017 at the latest.

Background to the Regulations

Last November, DCLG issued a consultation on proposed new regulations to replace the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 (the 2009 Regulations).

For some involved in the LGPS, the 2009 Regulations were already in need of reform because, in their view, the regulations did not address the needs of a "modern" investment strategy and, in particular, did not cater for the wider variety of investments often considered necessary to reflect the profile of the LGPS, its members and the benefits which need to be paid out. In addition to these perceived deficiencies were DCLG's requirements for funds to pool investments, to seek economies of scale and to consider investments in infrastructure.

See our alert of 18 December 2015 for further detail on the background to the new Regulations.

The 2016 Regulations are fundamentally different in approach, style and feel from the 2009 Regulations. In particular, they contain fewer restrictions on what an LGPS fund can invest in, subject to complying with official guidance published by the Secretary of State, and noting that the Secretary of State has the power to intervene in the investment functions of an administering authority.

The investment strategy statement

At the heart of the new regime is each LGPS fund's Investment Strategy Statement which must include the specific matters set out in the 2016 Regulations, be in accordance with the Guidance, allows for consultation prior to publication, and must then be periodically reviewed.

The 2016 Regulations require LGPS funds to invest in a variety of investments, bearing in mind the fund's approach to risk and to pooling and policies on social, environmental and corporate governance.

An authority must take "proper advice" when formulating the Investment Strategy Statement, meaning the advice of the person who the authority reasonably considers to be qualified by their ability in, and practical experience of, financial matters. The Strategy Statement must address the following requirements:

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

Comment on the 2016 Regulations

The 2016 Regulations are largely unchanged from the draft regulations on which the Government consulted earlier in the year. Many commentators raised concerns during that consultation, particularly as the 2016 Regulations do not require an Act of Parliament to bring them into force and the nature of the new requirements are so significant (see below).

Secretary of State's intervention power

Concerns raised during consultation regarding the wide power under Regulation 8 for the Secretary of State to issue directions if it is satisfied that the authority is failing to act in accordance with the guidance on preparing and maintaining an Investment Strategy Statement are largely unaddressed by the final Regulations.

There were over 23,000 members of the public who objected to the proposal that the Secretary of State could intervene in investment decisions. It was seen as undermining the rights and choices of pension fund members and the independence of financial decision making to act in members' interests.

The Government's response to such comments in the consultation largely focuses on the fact that the 2016 Regulations significantly de-regulate administrative authorities' investment functions. Many respondents considered that the proposed intervention power is too broad. In response, the Government pointed out that the very large sums of public money involved in the Local Government Pension Scheme requires appropriate checks and balances to be included in the framework. Administering authorities will continue to be responsible for setting their policy on asset allocation, risk and diversity.

The Government has also pointed out that the 2016 Regulations require the Secretary of State to consult the authority concerned before deciding whether to issue a direction and there is a non-exhaustive list of the sort of evidence that the Secretary of State must have regard to in reaching a decision to intervene.

In its response to the consultation, the Local Government Association suggested that the Regulations should include a minimum time period for considering and examining evidence prior to any decision to intervene and that the Secretary of State should be "satisfied beyond reasonable doubt" of the authority's failure to have regard to the guidance. The Government responded that the period allowed for consultation before the Secretary of State makes a decision to intervene will depend on the complexity and extent of the intervention in any particular case. It would not therefore be appropriate to prescribe a set period.

The LGA also pointed out that Regulation 8 and intervention by the Secretary of State could place it in the position of directing strategic investment decisions which could breach EU restrictions on government intervention in pension fund investment. Those concerns were echoed by Unison, which wants the law changed so that it is clear that it is the authority, not the Government, who decides where LGPS funds are invested in the best interests of scheme members.

The Government remains of the view that authorities will continue to be responsible for setting policy on asset allocation, risk and diversity but that, given the amounts involved, it is right that the Secretary of State should have intervention powers.

Clearly, this issue of intervention by the Secretary of State remains a contentious issue and a petition requiring Parliament to debate the issue of LGPS investment has received the requisite number of signatures. In response to the petition, the Government has stated that the power of intervention for the Secretary of State would "further protect members' and tax payers' interests". They expect that the power to intervene would be used exceptionally when there was clear evidence that the pension fund authority was not acting reasonably and lawfully.


While at first sight the Secretary of State's intervention power is broad and potentially onerous, the Government remains of the view that it is important given the large sums of public money involved in the LGPS. In the world of occupational pension schemes, the Pensions Regulator also has potentially onerous powers such as contribution notices and financial support directions which it rarely uses. But the threat of the use of such powers together with its guidance on best practice helps to drive behaviours and raise governance standards.

The first Investment Strategy Statement must be in place by 1 April 2017, so administering authorities need to be focusing on its production. This is quite a short window within which the authorities must respond to the new guidance and put in place the appropriate documentation.

Things to do now

We suggest authorities schedule an agenda item at the next available opportunity to discuss the formulation of the Investment Strategy Statement and open the dialogue with their local pension boards if they have not already done so. Proper advice from investment advisers will need to be obtained and work undertaken to document the process and secure the timely publication of the Statement.