05.01.17
FCA proposals a ‘counterintuitive’ threat to LGPS infrastructure spend
Local Government Pension Scheme (LGPS) funds could be prevented from investing in infrastructure under new regulations, the Pensions and Lifetime Savings Association (PLSA) has warned.
The PLSA has published its response to a Financial Conduct Authority (FCA) consultation, Markets in Financial Instruments Directive II, on new regulations which would see local authority pension funds reclassified as retail investors.
Since most infrastructure investment firms are structured to explicitly exclude retail investors, PLSA claims that across the whole LGPS this could put around £2.7bn of investment at risk.
Graham Vidler, director of external affairs at the PLSA, said: “The PLSA is a strong advocate of investment governance and we understand the need to ensure those making investment decisions have appropriate knowledge and understanding.
“However, the FCA needs to consider that local government pension funds have significant levels of investment expertise, a robust track record of effective risk management in investments, and considerable experience across a wide range of asset classes, including infrastructure.”
Vidler added that reclassifying local authority pension funds as retail investors will prevent them from investing in certain asset classes such as infrastructure.
“With LGPS funds investing billions in infrastructure right now, and at a time when the government is calling for greater infrastructure investment by pension funds, these proposals are counterintuitive,” he stated.
Earlier this year, the PLSA criticised a separate set of new LGPS regulations proposed by the government, saying they could lead to funds being paid into state infrastructure projects instead of for the benefit of members.
The latest move does seem counterintuitive as the government has set out plans for LGPS funds to create multi-billion pound asset pools, with a specific remit being to invest in infrastructure. Cllr Roger Phillips, chair of the Local Government Pension Scheme Advisory Board, recently analysed the opportunities and challenges facing the LGPS in the short to medium term for PSE, and the plans to create the wealth funds.
Neil Sellstrom, treasury and pensions advisor at the Chartered Institute of Public Finance and Accountancy (CIPFA), also told PSE that there needs to be firm governance structures in LGPS investment pooling arrangements. While Cllr Kieran Quinn, leader of Tameside Borough Council and chair of the Local Authority Pension Fund Forum (LAPFF), wrote for us on the social value benefits and commercial returns that can be achieved by LGPS funds investing in infrastructure.
The latest FCA rules include an option for local government pension funds to apply for elected official status, but the PLSA said that the process involved was time consuming, with no guarantee that future investment strategies would be effectively executed with existing managers or on existing terms.
It also pointed out that under the Management and Investment of Funds Regulations 2016, local authority pension funds are already subject to strict regulations, including a requirement to take advice when appointing investment managers.
Vidler called on the FCA to distinguish between the investment activity of local authorities and local authority pension funds, “so the latter may retain its professional client status to continue its effective investment strategies”.
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