Administering authority's use of "LGPS fund money" - prohibited from 1 April 2010
Under the previous Local Government Pension Scheme (LGPS) Investment Regulations the definition of "investment" included an administering authority's "use of LGPS fund money" for any purpose for which the administering authority had the statutory right to borrow money.
Historically, it has therefore been possible for an administering authority, in its wider capacity as a local authority, to borrow and use certain of its LGPS fund monies. For example, an administering may pool an amount of fund monies with certain of its "local authority monies" and make a combined cash investment.
The LGPS Investment Regulations provide that as from 1 April 2010, use of LGPS fund monies in this manner will not constitute an "investment" (as defined in the Regulations) and will therefore no longer be permitted.
During the consultation process in respect of the Regulations, many administering authorities expressed their opposition to this proposed change. Representations were made that the prohibition was unnecessary, would increase administration costs with no additional increase in asset security and would hinder administering authorities obtaining competitive terms for their cash investments.
Nevertheless, the new approach is much more akin to that adopted in the private sector where a pension scheme's investment in, and loans to, a sponsoring employer are subject to significant statutory restrictions. (It is also consistent with the new requirement for a separate fund bank account outlined below).
Administering authorities will need to ensure that any relevant LGPS fund monies are repaid no later than the end of March 2010.
Separate bank accounts for LGPS funds - 1 April 2011
By 1 April 2011 each administering authority must set up a "pension fund bank account" that is entirely separate from any bank account the administering authority may operate in connection with its wider functions as a local authority.
Prohibiting the co-mingling of "LGPS fund monies" and "local authority monies" is intended to improve transparency and provide a clearer more robust audit trail in respect of a pension fund's cash transactions. As many administering authorities already operate a separate bank account, the new requirement will result in greater consistency in the operational practices of LGPS funds in England and Wales.
During the consultation process, a number of administering authorities requested that an appropriate lead-in period be offered to enable them to take steps to comply with this new requirement. In response to this feedback the change is to be deferred until 1 April 2011.
To support the operation of separate bank accounts for LGPS fund money, the Regulations specifically prohibit "set off". This means that any positive balance in the LGPS fund bank account cannot be set-off against any negative balance in any other bank account operated by the administering authority. Administering authorities may wish to obtain specific confirmation from their bank (or "deposit taker") that no inappropriate set-offs will be made.
Power to borrow - 1 January 2010
The starting point for administering authorities is that they must not borrow money where such borrowing is to be repaid out of its LGPS fund monies.
However, the LGPS Investment Regulations contain several exceptions to this general principle. Administering authorities are permitted to borrow by way of temporary loan or overdraft any money required to:
- pay scheme benefits that have fallen due; or
- meet investment commitments arising from the implementation of a decision to change the balance between different types of investment.
The Regulations provide that an administering authority may benefit from either of the two exceptions detailed above where an administering authority "reasonably believes" that the sum borrowed (and any interest charged on it) can be repaid out of LGPS fund monies within 90 days of the date of the borrowing.
The LGPS Investment Regulations' clarification of an administering authority's borrowing powers, albeit restricted powers, is welcome as there has been some considerable uncertainty on this issue in recent years.
The Department for Communities and Local Government (CLG) has stated that it anticipates the circumstances in which an administering authority will have to borrow will be "exceptional". Further, responses during the consultation process indicated that only a minority of administering authorities expected to use any power to borrow.
Nevertheless, the Regulations do provide administering authorities with the flexibility to respond to certain short-term cash flow management issues that may arise from time to time.
Revised statement of investment principles (SIP) - 1 July 2010
The LGPS Investment Regulations introduce several changes to the requirements relating to SIPs. By no later than 1 July 2010, administering authorities must revise their SIPs to include details of their policy on:
- stock lending
- the ways in which risks are to be measured and managed.
An administering authority's SIP must also state the extent to which it complies with guidance given by CLG and, to the extent there is any non compliance, provide reasons.
CLG issued the relevant guidance in mid-December 2009. In summary, administering authorities should refer to the six principles set out in the Chartered Institute of Public Finance and Accountancy's (CIPFA's) guidance published in 11 December 2009 entitled "Investment Decision-Making and Disclosure in the Local Government Pension Scheme: A Guide to the Application of the Myners Principles".
The LGPS Investment Regulations have introduced few significant changes to the statutory regime that governs the investment of LGPS assets. Nevertheless, the updating of the Regulations and the additional clarifications the Regulations bring are to be welcomed.
All administering authorities in England and Wales must now revisit their SIP to ensure compliance with the new requirements. Certain administering authorities will be required to cease their use of "fund monies" and/or establish separate bank accounts. However, those calling for a less prescriptive statutory framework and an easing of the "Limits on Investments" will be disappointed.
Given the current economic climate, the strain on public finances and the ever increasing questions around the ongoing affordability of the LGPS, it is imperative that administering authorities can continue to clearly and readily demonstrate that fund assets are being appropriately invested, and carefully and regularly monitored.
The introduction of the LGPS Investment Regulations will hopefully provide impetus to those administering authorities who may require it to review and as necessary update their existing investment arrangements and procedures.
The number, variety and complexity of investment opportunities available to administering authorities has increased significantly in recent years. The availability, and recent take-up by LGPS funds, of longevity swaps is one obvious example of the changing investment landscape. Administering authorities must continue to recognise and respond to these expanding opportunities.
Administering authorities should also be mindful of the additional investment requirements contained in other overriding legislative provisions which may influence the investment of fund money, for example, the regulations relating to certain employer-related investments.
Pension committees and/or investment sub-committees must continue to take steps to ensure that their investment strategies are the product of robust well documented decision-making processes, are compliant with all relevant legislation and statutory guidance and are appropriate for their particular fund.
While the new LGPS Investment Regulations do not introduce wholesale changes, 2010 will nevertheless be another interesting and challenging year for those involved in the investment of LGPS assets.