Local Government Pension Scheme (Management And Investment Of Funds) Regulations 1998: Time For Change?

Cynics in the legal profession are always keen to embrace legal uncertainty - they argue it keeps them in business. In the end of course, no one wins from uncertain, or still less, bad law. The Local Government Pension Scheme (Investment and Management of Funds) Regulations 1988 (the "LGPS Regulations") are, unfortunately for the LGPS sector, a case in point as they suffer not only from uncertainty as to the scope of the drafting or the intention behind the law, but also a widely held view that the LGPS Regulations are simply out of date because they take an arbitrary approach to asset allocation.

The case for change: an unlevel playing field?

Why these problems matter is not just that investment decision-making can be made more difficult for local authority funds, but also because the market place for institutional investors ends up being distorted by creating prudential barriers to investment of local authority funds where none are prescribed for private sector schemes. Hence the cost of investing can go up because of the need to find ways round the legislation by creating alternative structures.

So what are the differences between the public and private sector?

Until the Occupational Pension Schemes (Investment) 2005 Regulations (the "OPS Regulations") came into force, there were no statutory restrictions for defined benefit occupational schemes in the private sector at all (although there were, oddly enough, restrictions for defined contribution schemes until 1997). The OPS Regulations imported prudential rules into English law which derive from the Pensions Directive1. They prescribe a "prudent person" approach to the setting of investment strategies, so that trustees of private sector schemes are required to use their powers of investment in a manner calculated to ensure the security, quality, liquidity and profitability of their portfolios as a whole and to have regard to their schemes' expected future liabilities2 when determining the schemes' investments. Otherwise, the only asset-specific restrictions in the OPS Regulations concern derivatives and borrowing, but even then the constraints are expressed by way of purpose tests, not quantitative limits. Hence, derivatives may only be used if they reduce risk or facilitate efficient portfolio management and where the scheme is not excessively exposed to either a single counterparty or other derivatives. Borrowing is prohibited for private sector schemes, unless it is to provide...