24 September 2004

Dear Sir/Madam

With the agreement of the Minister, I enclose for your comments draft regulations which propose several amendments to the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 ("the investment regulations") and to the Local Government Pension Scheme Regulations 1997 ("the principal regulations"). Your comments are invited no later than 3 December 2004.

The attached draft regulations propose (a) an increase in the prudential limit on stock lending in the investment regulations; (b) amend the existing SIP provisions of the investment regulations to require LGPS administering authorities to include a policy statement about the representation of stakeholders on pension/investment committees, (c) introduce a requirement to prepare a communications policy statement and (d) introduce three minor amendments to the 1997 Regulations to update the references to fire authorities and conservation boards, and to ensure continued compliance with European legislation on the appointment of medical referees

In addition, the opportunity is being taken to seek views on whether the current investment regulations allow administering authorities enough scope to undertake all the measures they are currently considering or planning on corporate governance and activism issues. In particular, we would welcome views on whether there are any costs involved in taking such measures that may fall outside the scope of the current provisions on expenditure which an authority may meet from its pension fund.

The Office's letter of 23 October 2003 about The Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 2003 (SI 2003 No. 2719), explained that no change was being made at that time to the prudential limit on stock-lending provided in regulation 11 and paragraph 11 of Schedule 1 to the investment regulations. However it went on to say that, since representations for change had been received from a number of administering authorities, the current position would be kept under review.

Following subsequent discussions with key interested parties, draft amending regulations have been prepared. It is proposed that Schedule 1 of the investment regulations should be amended to allow an optional additional "headroom" limit of up to 35% of the value of an LGPS fund to be used for stock lending rather than only 25% as at present. As with existing "headrooms" provided under the Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 2003, the power for an authority to set this increased limit would be provided under regulation 11(2A), and any relevant decision would be subject to all the requirements of regulation 11A.

A decision to increase exposure to this type of investment could only be taken where the authority had first obtained "proper advice" and would have to comply with the general provisions of the investment regulations (including those relating to risk, prudency and diversification), and would only take effect after the Statement of Investment Principles had been revised and published to include the information specified in regulation 11A(4). While offering increased flexibility, the proposal would therefore seek to uphold the essential principles that govern the management and investment of LGPS funds. We would welcome consultees' views on whether this proposal should also include any other safeguard. It might, for instance, be helpful to include a requirement that an authority proposing to use the increased limit should have regard to specified relevant guidance - for instance an updated version of the 2001 "Guide to Stock Lending by Local Authority Pension Funds" produced by the CIPFA Pensions Panel, or the latest version of the "Stock Borrowing and Lending Code of Guidance" (with relevant Annex) issued by the Bank of England's Securities Lending and Repo Committee.

Further information about the regulatory and guidance regime for stock lending can be found on the website at www.xoq83.dial.pipex.com.

The Office's letter of 27^th February 2004 set out a series of proposals on the possible scope, form and content of amendments dealing with representation strategies. In the light of the responses, it is proposed that Regulation 9A of the investment regulations should be amended to require each administering authority in its Statement of Investment Policy to set out its local policy on a range of issues concerning the representation and participation of key stakeholders on pension/investment committees. Making this information transparent and in the public domain will enable interested parties to take a view on the local policies adopted by individual administering authorities and, where necessary, to engage in discussions with authorities about how effective representation policies can be taken forward.

By virtue of new Regulation 9A(3B), authorities will have until 3^rd October 2005 to publish the amended SIP including the new information required by new Regulations 9A(3B)(a) and (b).

As things stand, Section 7 of the Superannuation Act 1972 does not permit the Secretary of State to make regulations which impact on the constitution and membership of local authority committees. There are no plans at present to amend local government law to change the provisions regarding the composition of investment or pension committees. This must be a matter for individual fund administering authorities to consider, reflecting local circumstances and choice. But in exercising that choice, it is important that authorities recognise the desirability of achieving an effective and comprehensive level of stakeholder representation within the LGPS nationally.

The responses to our letter of 27 February showed some support for the idea of guidance to accompany any new regulation on representation. The CIPFA Pensions Panel, in particular, may wish to consider this idea further.

Our letter of 27^th February invited comment on proposals to amend the principal regulations to require each LGPS administering authority to prepare, publish and review, a policy statement setting out its communications strategy for the fund as a whole, and for the promotion of the Scheme among constituent (and new) employers, and with their employees.

The draft regulations have been developed in the light of the comments received in response to the February letter and the intention is that they will come into force on 1 April 2005. However, under new regulation 106B of the principal regulations, publication of the new policy statement will not be required until 1 April 2006. This should give administering authorities ample time to prepare for publication of the information required by new regulation 106B(2), although it is hoped that some authorities may be in a position to publish their statement before the statutory deadline.

For the avoidance of doubt, the word "member" where it appears in new regulation 106B(1)(a), is defined in Schedule 1 of the principal regulations and, in turn, by section 124(1) of the Pensions Act 1995, to include active, deferred and pensioner members.

The opportunity has also been taken to introduce three minor technical amendments to ensure that the 1997 Regulations continue to reflect changes made recently to overriding legislation, ie :-

adding conservation boards established under section 86 of the Countryside and Rights of Way Act 2000 as Scheme employers in Schedule 2 (Regulation 8). Pension Managers will wish to note the introduction of conservation boards to the list of Scheme employers in Schedule 2 (draft regulation 8). Two new boards will be established with effect from 1 February 2005 and it is proposed that this particular regulation will have effect from that date to allow membership of the Scheme to be available to employees of these boards from this date. Pension Managers in the areas concerned should take the necessary action on this basis.

amending the references in Regulation 6(9) and Schedule 2 to the Fire Services Act 1947, to take account of the Fire and Rescue Services Act 2004 (Regulations 3 and 7), and

amending Regulation 97(14) to reflect changes to European legislation on the appointment of medical referees. (Regulation 4).

Although not part of the statutory consultation exercise, views are invited on whether the current investment regulations provide authorities with the necessary legal powers to operate effective corporate governance policies and activism. In particular, your views are sought on whether the regulations provide fund authorities with the necessary vires to meet the type of costs associated with these activities. Recent trends may mean that there are aspects of the investment regulations that need to be reviewed and, where necessary, considered for amendment. Are activism and corporate governance, one of the ten Myners principles, areas which require investigation?. To this extent, it would also be useful if administering authorities could provide information about their actual, planned and potential activities in this area, and consider if there are any specific provisions that could be introduced to ensure that fund authorities continue to be in a position to comply with industry trends and Government recommendations.

Responses to this letter should be sent to Margaret Dunleavy, Local Government Pensions Division, ODPM, Zone 2/E6, Ashdown House, 123 Victoria Street, London SW1E 6DE (tel; 020 7944 6012) no later, please, than 3 December 2004. Electronic responses can be sent to margaret.dunleavy@odpm.gsi.gov.uk).

Should any consultees wish to discuss any of the proposed amendments during the course of the consultation exercise, they are invited to contact Paul Kirk on the Communication Policy Statement amendment or Margaret Dunleavy on the remaining proposals relating to the investment regulations.

The Office may wish to publish responses to this consultation in due course, or deposit them in the libraries of the Houses of Parliament or the Office’s library, unless we are asked specifically to treat a response as confidential. Confidential responses will be included in any published statistical summary of comments received and views expressed.

 

 

 

 

Yours faithfully,

BOB HOLLOWAY

County Councils (England)

District Councils (England)

County and County Borough Councils in Wales

London Borough Councils

South Yorkshire Pensions Authority

Tameside Metropolitan Borough Council

Wirral Metropolitan Borough Council

Bradford Metropolitan City Council

South Tyneside Metropolitan Borough Council

Wolverhampton Metropolitan Borough Council

Middlesborough Council

London Pensions Fund Authority

Environment Agency.

Town Clerk, City Of London Corporation

Clerk, South Yorkshire PTA

Clerk, West Midlands PTA

Local Government Association

LGPC

SOLACE

ALACE

CIPFA

New Towns Pension Fund

Trades Union Congress

UNISON

TGW

GMB

MPO

Audit Commission

UCEA

Investment Management Association (IMA)

Association of British Insurers (ABI)

National Association of Pension Funds (NAPF)

London Investment Banking Association (LIBA)

Financial Services Authority (FSA)

Society of County Treasurers

Society of London Treasurers

Society of Welsh LA PF Treasurers

CIPFA (Scotland)

PIRC

LAPFF

GAD

DOE (NI)

SPPA