The pensions minister has removed a paragraph from the pension schemes bill which would have given the government powers to direct how Local Government Pension Scheme Pools should invest.

The change has been interpreted by some as the government wanting to avoid confrontation in the House of Lords.  

The deleted part would have made it possible for scheme regulations to give the secretary of state powers “in prescribed circumstances” over an LGPS pool’s investments by “requiring it to take, or not to take, a specified decision in carrying out any specified investment management activities”.  

Pensions minister Torsten Bell on Monday tabled an amendment to remove this, with the relevant explanation stating that the power is now “not considered necessary”.  

Jeff Houston, a senior pensions consultant at Barnett Waddingham, suggested the change is a significant development and thinks the government may be looking to avoid confrontation over the issue in the House of Lords.   

The friction that a separate clause for a temporary reserve power to direct defined contribution investments has already caused with industry – with some parliamentarians also being critical – could conceivably have played a role in convincing the government that further confrontation might end up damaging the bill.  

“By removing the power to direct specific investment decisions, ministers have signalled they are listening to concerns and seeking to avoid an unnecessary clash in the Lords,” said Houston, adding that this “was probably one of the most contentious parts of the bill”.  

During the Public Bills Committee hearing on Tuesday, cllr Roger Phillips, who chairs the Scheme Advisory Board of the LGPS, highlighted mandation as potentially problematic in the context of local investment. Bell contested this saying the LGPS was not affected by investment mandation – but did not mention that this had been present in the bill before he removed it.  

A further change to the bill means that before telling an asset pool company to comply with guidance, or how it must carry out any specified investment management activities, the government would need to consult the asset pool company, the participating funds, the Financial Conduct Authority and potentially other parties. Similarly, before telling a fund to participate in or leave a specific asset pool, the government will need to consult with the fund, pool and participating funds and potentially other stakeholders.  

The LGPS Advisory Board has welcomed the proposals to remove government powers to mandate investments and require it to consult with stakeholders before directing the manner of investment or pool participation.  

 

Board secretary Clair Alcock said: “They appear to go a good way towards providing the guardrails the SAB has called for to avoid future ministers to achieving other aims which could be to the detriment of the fiduciary duty, as it is understood to apply to the LGPS.”  

 

While the government may want to avoid further confrontation or give the LGPS confidence over its fiduciary duty, there could be more profane reasons for the change, such as the fact LGPS pools will all be companies authorised and regulated by the FCA, a fact that is being alluded to with the need to consult the FCA.

 

Partner at law firm Squire Patton Boggs, Kirsty McLean, questioned how a power to effectively step into the pool’s shoes on a particular investment decision would fit with the pool company’s obligations under the FCA regime.

 

“As a broad principle, it must be right to say that where investment managers are FCA-regulated, they are subject to all sorts of duties, rules and codes of conduct, and it’s not immediately clear how those would fit with being told by a government minister to do something different to what they had decided,” she said.  

 

This principle could also be at play with reserve powers in relation to mandating investments for defined contribution schemes, as the benefit structure of the underlying scheme is unlikely to make a difference in this respect.  

 

In a further development, Scotland has now been included in the LGPS provisions of the bill. The Scottish LGPS is under the jurisdiction of the Scottish government. Its funds, dominated in asset size by Strathclyde and Lothian, do not currently pool their assets. 

 

McLean expressed surprise at the extension of the bill to Scottish funds, saying: “It will be interesting to see if the intention is just to future-proof, or if the Scottish government looks to move forward with amending the LGPS regulations in Scotland in a similar way to the regulations we are waiting for in England and Wales.” 

 

The inclusion of Scotland ensures parity of powers between Scottish and UK ministers in relation to their respective LGPS. Without this, further primary legislation would be needed should Scotland ever want to go ahead with LGPS pooling.  

 

A Scottish government spokesperson said: “The Scottish government has no immediate plans to mandate the pooling of Scottish Local Government Pension Scheme assets. Any future changes would be considered in consultation with the schemes and interested parties.”