Revoking and replacing the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 – Sackers’ response to consultation


The Department for Communities and Local Government (DCLG) is consulting on proposals to revoke and replace the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009, which currently govern the management and investment of funds in the LGPS.

In this response

General comments

We welcome the DCLG’s efforts to move away from the current prescriptive approach to LGPS investment and move towards the “prudent person” approach, used by trust-based schemes, which works well in the private sector.

However, we have some comments on the proposals relating to the use of derivatives, which we outline below.

Use of derivatives

Question 4 of the consultation asks whether the regulation should be explicit that derivatives should only be used as part of a risk management tool and whether there are any other circumstances in which the use of derivatives would be appropriate.

In our view, restricting derivatives in this way would be both unnecessary and unhelpful. Our experience is that private sector schemes will use derivatives for a range of purposes which are not easily classified as “risk management” including, for example, temporary liquidity. We do not see any need for a more restrictive approach in relation to the LGPS.

The DCLG proposal is considerably narrower than the position for private sector schemes under the Occupational Pension Schemes (Investment) Regulations 2005, which do not restrict the use of derivatives as a risk management tool. It is also narrower than Article 18 of the IORP Directive[1], which permits investment in derivative instruments “insofar as they contribute to a reduction of investment risks or facilitate efficient portfolio management”.

Given the aim of deregulating the LGPS investment rules, with the onus on local authorities to determine a diversified investment strategy that appropriately takes risk into account, as well as bringing them more into line with the rules in the private sector, we do not consider it necessary to impose a more onerous restriction on the LGPS.

[1] Directive 2003/41/EC on the Activities and Supervision of Institutions for Occupational Retirement Provision