Your guide to the government’s LGPS pooling guidance

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In the last of a three-part series reviewing the government’s guidance on the LGPS, we reflect on the sector’s governance requirements

Of course, the most radical shift seen across all the LGPS reforms we’ve seen over the past year to 18 months or so is the changing role that pools are being asked to play in the sector.

And, while the guidance does flag some things that we already know – such as the fact that authorities can only participate in one pool at a time (except if they’re in the process of moving from one pool to another) – there are still some interesting bits to come out of the guidance.

Asset management

Following a rundown of some requirements around what’s needed from both a pool and an authority to operate in this new landscape – including the pool’s FCA regulation requirements (authorised as either a full-scope UK AIFM or MiFID investment firm by 30 September 2027) attention next turned to asset management.

One key point highlighted in the guidance was around legacy assets where the best value is achieved through the asset continuing to be in the legal ownership of the administering authority.

Given its view, it explains: “The requirement here is, as with all assets, that the pool has control of the asset and is the sole decision maker as to when and whether it is appropriate to buy, hold, or sell an asset.”

Outside this, the guidance sets out who is responsible for what – which basically boils down to the fact that the authority is responsible for strategy, and the pool is responsible for implementation.

Additionally, when advising on the responsible investment aspect of the investment strategy, pools should be clear with partner funds about the expected impact on costs, scale, and delivery of the high-level objectives that different approaches are expected to incur.

There are some stipulations around investment advice, with the guidance stating that a pool’s advice is “not influenced by the requirements of other authorities in a pool or of what can be delivered by the pool in house”.

Pools – as part of their regulation from the FCA – will also be required to establish, implement and apply a written conflict of interest policy that details how potential conflicts will be identified and the measures to be adopted to prevent and manage conflicts of interest.

Additionally, while for the most part authorities are required to take investment advice from the pool, there are two exceptional circumstances where they can seek advice from outside of the pool:

Where a pool advises a very substantial shift in strategic asset allocation to that which it has recommended previously, or entry into a substantially new investment approach
Where a pool has said that it is not possible to implement an administering authority’s investment strategy, which may include where it has said it cannot implement the administering authority’s RI policy. In such circumstances, any additional advice obtained should support the administering authority in considering how its investment strategy may be adjusted to make it deliverable, to inform the conversation with the pool

This, it adds, is not expected to occur more than once in a valuation cycle.

Local investment

There’s also guidance on local investment, with it underlining the point that authorities must set a range for the proportion of their assets that they would like to invest locally, including a target percentage as well as a range of tolerance.

And, above and beyond requiring authorities to take into account the Local Growth Plans set by their strategic authorities, the guidance asks authorities to engage in “thorough dialogue” with their pool and other partner funds to ensure alignment can be achieved where possible.

As for authorities’ requirement to co-operate with their strategic authorities, they are able to delegate to their pools. The guidance adds: “This is likely to be the most effective and efficient approach, particularly where a pool can work with a strategic authority on behalf of a number of or all of its partner funds.”

Authorities also must report annually on their local investments in their annual report, including the total value and information on their real-world impact and contribution to regional economic development, based on information provided by their pool.

Pools’ annual reports

Alongside this, pools should be reporting the overall amount they’ve invested in local or regional projects in their annual reports, including investments in areas like infrastructure, housing and regeneration.

They may also provide qualitative insights through local investment case studies – which should highlight the nature of the investment, the rationale behind it, and the outcomes that were achieved – including job creation, environment improvements, or enhanced public services.

These should illustrate the real-world impact of LGPS investments for scheme members and local stakeholders.

Pools may also consider adopting a voluntary standard that offers a framework for measuring and reporting the social and economic impact of these investments.

Above and beyond the local investment stuff – as well as the more traditional stuff that annual reports feature, such as the performance of the pools’ asset classes – there are other things that need to be featured in the annual report.

This includes certain reporting requirements as MiFID investment firms and full-scope UK AIFMs as FCA-regulated firms.

Pools should also provide reports to their partner funds regarding the latter’s climate-related financial risks and opportunities. This can be either included in or alongside fund annual reports.

Additionally, they should provide data annually on assets to the Government Actuary’s Department, and should respond to any additional data requests issued by MHCLG from time to time.

Governance

Pools should give due consideration to the role of both shareholder administering authorities and non-shareholder client administering authorities in pool governance arrangements – with it adding that “it is important that the voice of shareholders and non-shareholder clients is heard by the pool”.

As part of this, pools should consider what matters are reserved to shareholders to decide, and whether these require unanimous agreement or majority vote. This could include major changes of strategy or changes to the company structure.

Due consideration should also be given as to where shareholders discuss and contribute their views on the pool’s operation and strategic direction. This could include a single committee, several subcommittees or working groups tasked with considering specific topics.

As for representation from its partner funds’ members and employers, it is – for the most part – a local decision as to whether member and employer representative views are communicated to the pool directly, or through administering authority representatives.

Pools are, however, encouraged to consider inviting member and employer representatives to speak to or observe meetings of the pool board, committees and working group – whether on an ad hoc or standing basis.

Where they are not invited, member and employer representatives who are local pension board or committee members should be allowed to request to attend particular meetings.

However, where member and employer representatives are not able to directly engage with the pool, it’s important to consider how they will be kept informed of the pool’s activity and decision making – for example through pool officer attendance at the local pension committee or board meetings.

Individual administering authorities, meanwhile, are responsible for monitoring the performance of their pool in implementation of their investment strategy, with shareholder administering authorities being responsible for holding their pool to account for its performance overall.

Additionally, participating administering authorities in a pool should collectively consider how the performance overall is reviewed. This oversight model should be developed in conjunction with the pool company but owned separately by the collective of participating administering authorities in the pool.

Governance arrangements should also set out clearly what recourse options there are if administering authorities are concerned about pool performance – particularly how they’ll respond if one or a small number of participating administering authorities are not satisfied by the pool’s performance, but the majority are content.

Turning next to conflicts of interest, the guidance says pools – when considering their operational model and conflicts of interest policy – will need to consider how the advisory and investment management functions of the company will operate to mitigate conflicts of interest and manage the interests of different clients.

Additionally, pools will need to comply with the FCA’s requirements on remuneration.

For example, a full-scope UK AIFM must apply remuneration policies and practices for relevant staff which are consistent with, and promote, sound and effective risk management, and does not encourage risk-taking that is inconsistent with the risk profile of the funds it manages.