The Local Government Pension Scheme Advisory Board has shared its draft response to a closed government consultation on statutory pooling and investment guidance which closes on Monday, warning about unclear policy intent and rushed delivery.

The SAB previously criticised the Ministry of Housing, Communities and Local Government’s decision to keep the guidance consultation closed, saying it would make its response public, which it has now done just ahead of the consultation closing today. 

SAB warned that rushing through big changes to the LGPS will create risks. It cites insufficient attention to thinking through the process and timescale for transition – including the most effective sequencing of the different changes that local authorities are being asked to implement – as well as the fact multiple changes are happening at once, including the McCloud remedy and dashboards connection.

The board adds: “It also seems that the detailed policy intent in some areas is still unclear or ambiguous and the rushed delivery of regulations to meet the 1 April timetable and statutory guidance with a timetable spanning the Christmas period [is] exacerbating this.”

To address this, the board is offering to work with MHCLG on a detailed roadmap, in a process that it says would provide “space for discovery, testing, and refinement”. 

Tight timescales are already affecting the implementation of reforms, as MHCLG had to share the guidance more widely before it could consider some feedback from SAB’s working groups, according to SAB. The board said this means further work is required on governance guidance – for example, how to manage conflicts around local investment between the interests of a fund and those of the administering authority was not included in the guidance. 

SAB also warns that the deadlines for an administering authority to transfer assets from one pool to another – set at 28 days and 21 days – are inadequate, adding: “It is not clear how these time periods have been chosen and AAs should have regard to their fiduciary duties in doing this properly, rather than being rushed into sub-optimal timing choices due to arbitrary targets set in Whitehall.”  

New powers to let the secretary of state give directions to pools and funds on pooling and investments remain a key concern, and SAB wants it to be made clear that fiduciary duty should come before politics. 

“While the current pensions minister has offered reassurances during the passage of the pension schemes bill, these powers will remain on the statute book indefinitely and future ministers may not be so respectful of the current non-politically partisan nature of the scheme,” SAB says. “We therefore seek clear assurances that the direction-making power must not be used to further political aims but should be used consistently with the fiduciary duty of the funds and the pools.”

It highlights that the wording around the powers being used “in the best interests of the scheme” are ambiguous, as ‘the scheme’ could be the LGPS as a whole – leaving it open to the secretary of state to override an individual pool or fund’s interests. 

On the investment strategy statement guidance, the board wants both the regulations and the guidance to make it clear that intervention would only be used “where necessary to protect the interests of members or scheme employers”, that the secretary of state would say what evidence is being relied on and share it with funds, and that the consultation would give the fund the opportunity to ‘comply or explain’.  

SAB adds that “the reasonableness of a [secretary of state] decision to issue a direction would be capable of being tested in court, not simply whether the direction itself had been complied with”; and that the consultation would include member representatives and any others with a legitimate interest in the decision. 

Lastly, it wants assurances that “any direction would be specific, time-limited and proportionate to the necessity to protect members’ interests”. 

The board is also critical of the wording around responsible investments, arguing that the guidance gives licence to pools to disregard funds’ RI policy if they feel it is not “practicable”, noting that “it seems that there is not even an obligation on them to inform the AA that they have done so”. 

The investment strategy statement guidance seems to suggest that pools could have their own RI policy, it adds, which SAB considers inappropriate unless it is an aggregation of the policies of partner funds.

“Pools having their own, independent RI policy risks creating greater difficulties in achieving consensus amongst all partners. It also raises questions of accountability given the pool is not directly accountable to scheme members or scheme employers,” it says. 

Similarly, the board is critical of the guidance where it refers to pools’ own stewardship and engagement policy “developed by the pool in discussion with partner AAs”, rather than in agreement with them. 

On local investments, the SAB welcomed that AAs can accept lower returns but adds that “this does need to be based on specific non-financial benefits that the AA has assessed as being worth the trade-off", and that the pool should help provide the evidence for such decisions.   

Under the proposed pool governance, members would see their input diminished, according to SAB.

“The board are disappointed at the very limited role that is set out for member representatives within pooling structures,” it writes, saying that the government has changed its position on this since the Fit for the Future consultation.

“This change is not explained and is an inappropriate extension of the guidance in an area which should be for local determination. It should be for the partner funds, as the pool owners, to decide their policy in this area,” SAB says. 

MHCLG’s guidance will accompany regulations that are being consulted on publicly. The guidance, along with regulations, is thought to contain much of the detail of the LGPS reforms contained in the pension schemes bill. 

Last month, the Lords Delegated Powers and Regulatory Committee branded the pension schemes bill “skeleton legislation”, saying it was “in large part a licence for ministers to make subordinate legislation”. 

The bill is currently in the House of Lords, where the plan to give ministers powers to direct investments has encountered resistance in the form of several amendments that have been tabled.