UK Sets Out Public Pension Backstop Rules

The UK’s Department for Communities and Local Government (DCLG) could take over investment decision making for individual state-backed pension funds under proposed new investment rules.

The option forms part of a ‘backstop’ to the government’s requirement for the UK’s 89 local authority pension funds to pool their assets, laid out in a consultation paper published today. It has targeted six pooled investment vehicles of roughly £25 billion to £30 billion ($38 billion to $45 billion) each.

“Authorities will be expected to take a prudential approach, demonstrating that they have given consideration to the suitability of different types of investment.”If a pension fund is deemed to have breached investment rules or failed to participate in a pooled vehicle, the secretary of state for the DCLG—currently Greg Clark—may intervene to force the pension into a collaborative arrangement, or to demand a revised investment strategy.

Alternatively, the intervention could include “requiring that the investment functions of the administering authority are exercised by the secretary of state or his nominee”. The DCLG can also delegate investment decisions to “another body”.

“The power [to intervene] has been left intentionally broad to ensure that a tailored and measured course of action is applied, based on the circumstances of each case,” the consultation stated. In some cases, it may only be necessary to intervene in “certain parts of an investment strategy”.

The consultation also proposed “deregulation” of investment rules for Local Government Pension Scheme (LGPS) funds, granting more autonomy over decision making. It set out a plan to revoke current rules and replace them with a requirement to invest according “prudent person” principles in a “wide variety of investments.”

“Authorities will be expected to take a prudential approach, demonstrating that they have given consideration to the suitability of different types of investment, have ensured an appropriately diverse portfolio of assets, and have ensured an appropriate approach to managing risk,” the paper said.

The consultation was issued by Chancellor George Osborne alongside the UK’s Autumn Statement and Spending ReviewLGPS funds will be required to publish an “investment strategy statement”, detailing their approach to risk, asset allocation, pooling investments, exercising voting rights, and environmental, social, and governance matters. This will replace current statements of investment principles.

The relaxation of rules will allow LGPS funds to invest in derivatives, hedge funds, and forward currency contracts. While these assets are not explicitly outlawed currently, some funds had expressed uncertainty as to whether they were permitted.

“The government expects that having considered the appropriateness of an investment in their investment strategy statement, authorities would only use derivatives as a means of managing risk,” the consultation paper said, “and so has not explicitly stated that this should be the case.”

The new rules would also ease restrictions on the maximum amount permitted to be invested in individual vehicles.

The Pensions and Lifetime Savings Association (PLSA)—the representative body for pension funds in the UK—welcomed the move to a “prudent person” approach. “The PLSA has long fought for LGPS investment rules to mirror those of trust-based pension schemes in the private sector and we are pleased to see the government has listened,” added Chief Executive Joanne Segars.

The DCLG has invited responses to the consultation, which will remain open until February 19, 2016.

Related: Questions Raised Over UK Public Pension Reform; £3B in Passive Mandates Up for Grabs as Wales Joins Pooling Push; London United