The recent DCLG proposal to give government powers to overrule LGPS investment decisions is ill judged according to Catherine Howarth
It's rare for a government consultation on pensions to stir the interest of the public at large. However, that's exactly what has happened with the Department of Communities and Local Government's (DCLG) proposals to give the Secretary of State powers to overrule investment decisions by LGPS funds deemed to be at odds with UK foreign policy. So far more than 20,000 people have signed a petition to object.
Such a proposal is an attack on the discretion of people who sit on pension boards to make prudent investment decisions driven exclusively by consideration of members' best interests.
It would appear government is bothered by LGPS investment decisions that it believes to be ‘politically motivated'. Instead of remedying this with sensible guidance, the government has developed a proposal that risks fettering the discretion of LGPS pensions committees.
It would appear government is bothered by LGPS investment decisions that it believes to be ‘politically motivated'. Instead of remedying this with sensible guidance, the government has developed a proposal which risks fettering the discretion of LGPS pensions committees.
The genesis of the UK Law Commission's Review was an acknowledgement that many trustees are confused about what they are permitted to do with respect to social, environmental and ethical considerations. In ShareAction's view, misinterpretation and misapplication of trustees' fiduciary duties has long acted as a barrier to prudent investment in members' best interests. We welcomed the work undertaken by the Law Commission to clear up the confusion and to offer succinct guidance on how schemes can meet their duties.
The Law Commission is clear in its conclusions. Trustees' own political and ethical views, however strongly held or well intentioned, are not a valid consideration and must be excluded from investment decisions. On the other hand, schemes should consider any factors financially material to the performance of their investments, including social, environmental and corporate governance factors. Furthermore trustees may take non-financial considerations into account provided these relate to the views of the members and only when doing so would not involve significant risk of financial detriment.
The thoughtful assessment of the law undertaken by experts at the Law Commission, and based on two rounds of consultation with the wider pensions industry, would seem to be well worth embedding in guidance or indeed in regulations governing the LGPS.
Lack of clarity
In its consultation paper, the government appears to accept that despite technical differences between trusts and the LGPS, the duties of scheme administrators to their beneficiaries are the same as those of trustees as set out by the Law Commission. But in the framing of the announcement of this consultation the government has failed to be clear that while scheme administrators should not impose their own views on a fund, they are permitted to listen to members' views on non-financial issues.
If the government was simply proposing to remind local authorities that decisions in the LGPS should not be used to reflect the politics of the town hall, that might be fine. However, the government appears to be saying that while local authorities can't impose their political views, central government can. The investment criteria includes a requirement for LGPS administrators to say how they are investing in infrastructure, and if the government doesn't think they're doing enough, then it can overrule them.
As everyone knows the investment performance of individual LGPS funds varies widely. These funds cannot afford to be distracted by considerations such as central government's infrastructure policy. CIPFA chief executive Rob Whiteman puts the issue well in saying, "The funds must not become the investor of last resort, for example, for politically desirable infrastructure schemes that the markets do not see as investment grade proposals."
It is essential that LGPS funds have unfettered freedom to make investment decisions in the best interests of their beneficiaries. This ill-judged proposal from the DCLG deserves to be scrapped.
Catherine Howarth is chief executive of ShareAction
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