Investing pension funds in regeneration

In the current times where funding can be hard to come by and the public sector is asked to do more for less, local authorities are looking to maximise the use of their assets. One interesting question, write Sarah Morley and Julie Muscroft, is whether a local authority can invest its pension fund in regeneration schemes which might be for the good of the local area. This is an area being considered by the Local Government Association and the Treasury and it is likely that their views on this will be available soon.

Legal Framework

The main set of rules governing local government pension fund investments is contained in the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 (the 2009 Regulations). These consolidate and repeal a number of earlier regulations including the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 (the 1998 Regulations). Key changes relevant to this article are the greater separation of the funds of the pension scheme and of the local authority as a council and that local authorities are no longer allowed to use pension fund money for any purpose for which they have the power to borrow money.

The 1998 Regulations had allowed local authorities to fund their expenditure from their pension fund, since the definition of "investment" included using fund money for any purpose for which the authority could borrow money. Under section 1 of the Local Government Act 2003 an authority can borrow money for any purpose relevant to its statutory functions or for the purposes of the prudent management of its financial affairs. Therefore previously local authorities could use their pension funds for any purpose for which it had a statutory right to borrow.

The 2009 Regulations remove this right and also require the pension fund to be kept in a separate, dedicated bank account as from 1 April 2011. Regulation 12 of the 1998 Regulations which allowed the administering authority to pay interest on money borrowed from pension funds has also been revoked.

The 2009 Regulations continue to require the administering authority to (a) formulate a policy for the investment of its fund money which must take into account the advisability of investing in a wide variety of investments and suitability of particular investments and types of investments, and (b) publish a written Statement of Investment Principles (SIP).

The SIP is prepared after appropriate consultation with those the administering authority considers appropriate. It must take into account, amongst other things, the types of investment to be held, the balance between different types of investments, risk, the expected return on investment and the extent to which social, environmental or ethical considerations are taken into account.

There is now an additional requirement to state to what extent the administering authority has complied with the Secretary of State's guidance in this area. The Secretary of State's Guidance is in fact that provided by CIPFA called Investment Decision-Making and Disclosure in the Local Government Pension Scheme; A Guide to the Application of the Myners Principles which is available to buy from CIPFA. The first SIP for each administering authority under the 2009 Regulations should have been published by 1 July 2010. The SIP must be reviewed and can be amended from time to time.

As with the 1998 Regulations, the 2009 Regulations continue to set limits for the percentage of the fund which can be invested in different types of investment. Loans of pension fund money are now covered within paragraph 4 of Schedule 1 which allows the loans to be limited to 10% of the pension fund. Certain investments can be increased from an initial limit in Column 1, to a higher limit in Column 2 of Schedule 1, provided the administering authority has taken proper advice, acted in accordance with its investment policy and set out the detail of its decision in accordance with Regulation 15. So for example a contribution to a single partnership can be increased from 2% to 5% of the fund.

Regulation 13 of the 2009 Regulations does allow authorities to invest, without any restriction as to quantity, in any investment made in accordance with a scheme under section 11(1) of the Trustee Investments Act 1961. This section allows local authorities in England and Wales to invest their property in accordance with a collective investment scheme for which they and other participating authorities have obtained Treasury approval. It appears that such investments are without the limits set by Schedule 1 of the 2009 Regulations.

Practical Implications

It would appear that an administering authority can invest in regeneration projects provided it is an investment within the 2009 Regulations.

Firstly the SIP needs to be wide enough to allow the investment and the risk profile of the proposed investment must not offend the SIP and/or the Secretary of State's Guidelines as set out by CIPFA.

There are likely to be interesting questions in formulating investment policies and principles to allow a direct investment in local projects.

At present there will be many pension funds which will invest indirectly in regeneration and other infrastructure projects through exposure to investment vehicles such as investment trusts, where this may be considered to have an appropriate level of risk and return to the particular fund. However a decision to directly support local projects would have to be carefully considered and only implemented following independent advice to ensure that the administering authority was not motivated by its inherent conflict of interest in wishing to secure funding for a particular project and that such funding fitted within the principles in relation to risk and return in the SIP.

In addition, if the investment complies with the SIP, thought needs to be given as to what form it would take, as the administering authority will need to comply with the limits set in Schedule 1 to the Regulations. This would be a matter of structuring the investment so that it came within Schedule 1, probably as a loan or a contribution to a partnership.

It may be that authorities could adopt a strategy of investing in projects in each other's areas to reduce the risk of a conflict of interest. This would need to involve authorities communicating with one another and having some kind of informal arrangement in place to alert other pension funds about possible investment opportunities.

If the administering authority wished to join with other administering authorities to invest in projects over a wide region this would be possible within Regulation 13 (investments in accordance with section 11 (1) of the Trustee Act). It also appears that such investments could be done within Schedule 1, provided these were within the limits for the type of investment.

Final Thoughts

Using local authority pension funds to invest in regeneration projects is potentially a way of maximising the use of resources and getting value for money in these times of cuts and efficiency savings.

Sarah Morley is an Associate and Julie Muscroft is a Partner in the Public Sector and Projects team at Walker Morris. They regularly contribute articles and updates to reach…®, the Walker Morris knowledge database and alerter service.