Regulate to accommodate

20 Feb 09
NIGEL KEOGH | The government this month launched a consultation on consolidating regulations for local government pension funds.

The government this month launched a consultation on consolidating regulations for local government pension funds. This includes CIPFA recommendations for borrowing powers and separate bank accounts

Earlier this month, the CIPFA Pensions Panel called for changes to the Local Government Pension Scheme investment regulations, following the recommendations from a 2007 survey of LGPS practitioners.

The survey was the latest example of the CIPFA Pensions Panel working with the Department for Communities and Local Government to help develop the way LGPS funds manage their investments.

For many years now, there have been meetings between representatives of the investment industry, LGPS practitioners — including the CIPFA Pensions Panel — and the government to review the investment regulations and consider changes.

The last major change resulting from those discussions was the introduction in 2005 of revised investment headroom limits in schedule one of the regulations.

However, the panel is aware of the need to keep under review the framework within which LGPS funds can operate as the landscape continues to change, with new investment vehicles, markets and methods introduced.

There have also been significant market events that have exposed systemic risks that need to be properly managed, and these have raised yet more issues in the context of the investment regulations.

One need look only at the effect of the credit crunch on global financial markets as an example of the type of challenge faced by LGPS investment practitioners today.

It was against this backdrop that the panel assembled a working party, chaired by former London Pensions Authority chief executive Peter Scales, to investigate whether there was a case for approaching the DCLG to revisit the investment regulations.

The working party asked 67 LGPS funds across England, Scotland and Wales about their experience in operating the regulations and used the responses to draw up its recommendations.

On February 6, the DCLG launched a consultation on consolidating the investment regulations. As part of this exercise, the department is consulting on amending the regulations in two of the areas highlighted in the panel’s report.

First, our survey found that there was some confusion over whether LGPS administering authorities have the power to borrow specifically for pension fund purposes.

Almost 50% of survey respondents said that an express permission to borrow in such circumstances would be welcome.

The main reasons cited for requiring such flexibility was to enable funds to better manage

short-term cash flows to meet shortfalls between contributions and pension payments; to meet investment commitments where the timings are uncertain; and during transitional periods.

The power to borrow would enable funds to meet these commitments without having to liquidate investments (potentially at less than optimal prices) to meet unpredictable cash calls or to hold excessive amounts of cash (achieving less than optimal returns) to cover potential timing gaps.

The proposal in the current consultation to introduce a limited power for administering authorities to borrow for the purposes of their pension funds is therefore a welcome clarification to the investment regulations.

Secondly, the working party considered whether pension fund assets should be administered through a separate bank account.

While many authorities use separate bank accounts, consolidating this good practice into regulations would add considerably to the transparency of pension fund operations.

The proposed new regulation six, which requires funds to have a separate bank account, is therefore also warmly welcomed.

We are also pleased to note that the DCLG has invited respondents to comment on whether a revised definition of ‘investment’, in line with the recommendations made in our report, should also be included within the investment regulations.

We encourage practitioners to respond to the DCLG.

Nigel Keogh is technical manager at CIPFA. The pensions panel report can be downloaded from The DCLG consultation can be downloaded from

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