​The legal case for investing council pension funds

Council pension schemes planning to invest in local projects must tread carefully or risk falling foul of the law, as Andrew Uprichard explains

In current times, when funding can be hard to come by and the public sector is asked to do more for less, local authorities are looking to maximise the use of their assets. One interesting question is whether a local authority can invest its pension fund in regeneration schemes which might be for the good of the local area? This is an option that is being considered more and more, but local government pension schemes need to be mindful of the legal framework governing what and how they can invest.

LEGAL FRAMEWORK
The main set of rules governing local government pension fund investments is contained in the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 (the regulations).
The regulations require the administering authority to:
•    formulate a policy for the investment of its fund money that must take into account the advisability of investing in a wide variety of investments and suitability of particular investments and types of investments
•    publish a written statement of investment principles (SIP).

The SIP must take into account, among other things, the types of investment to be held, the balance between different types of investments, risk, the expected return on investment and the extent to which social, environmental or ethical considerations are taken into account. It must also state to what extent the administering authority has complied with the secretary of state’s guidance in this area.

This guidance, Investment Decision-Making and Disclosure in the Local Government Pension Scheme; A Guide to the Application of the Myners Principles, is available to buy from Cipfa. The SIP must be reviewed and can be amended from time to time.

The regulations set limits on the percentage of the fund which can be invested in different types of investment. Certain investments can be increased from an initial limit to a higher limit, provided the administering authority has taken proper advice, acted in accordance with its investment policy and set out the detail of its decision in accordance with regulation 15.

So, for example, investments in unlisted company securities can be increased from 10% to 15% of the fund.

Regulation 13 does allow authorities to invest, without any restriction as to quantity, in any investment made in accordance with a scheme under section 11(1) of the Trustee Investments Act 1961 (a collective investment scheme which has Treasury approval). It appears that such investments are without the limits set by schedule 1.

PRACTICAL IMPLICATIONS
Any investment in regeneration projects must comply with the regulations. The SIP needs to be wide enough to allow the investment, and the risk profile of the proposed investment must not offend the SIP and/or the secretary of state’s guidelines as set out by Cipfa.

There are likely to be interesting questions in formulating investment policies and principles to allow a direct investment in local projects. At present there will be many pension funds which will invest indirectly in regeneration and other infrastructure projects through exposure to investment vehicles such as investment trusts, where this may be considered to have an appropriate level of risk and return to the particular fund.

However, a decision to directly support local projects would have to be carefully considered and only implemented following independent advice to ensure that the administering authority was not motivated by its inherent conflict of interest in wishing to secure funding for a particular project and that such funding fitted within the principles in relation to risk and return in the SIP.

Even if the investment complies with the SIP, thought needs to be given as to what form it would take, as the administering authority will need to comply with the schedule 1 limits on the percentage of funds that can be invested in loans, securities and so on. Over the last year or so, various local government pension funds have been investing an increasing percentage of the fund in infrastructure projects and the government is encouraging this.

If the administering authority wished to join with other administering authorities to invest in projects over a wide region this would be possible within regulation 13 (Treasury-approved collective investments).

Pension funds are also beginning to pool their investments, such as the 33 London authorities who are looking at creating a fund with more than £20bn of assets under management, of which they envisage 10% (£2bn) should be invested in London’s infrastructure.

FINAL THOUGHTS
In the post-PFI era there is a need for more institutional investment to get projects off the ground, and local government pension schemes will have a key part to play in regeneration, infrastructure and ‘green’ investments both in their own areas and elsewhere in the UK.