Northern LGPS warns asset pooling plans are unlawful

The country’s biggest Local Government Pension Scheme (LGPS) pool has hinted it could take legal action unless ministers rethink guidance on asset pooling.

Northern LGPS has told local government minister Rishi Sunak it has “serious concerns” over proposed changes to pooling which it says go beyond ministerial powers and will cost millions of pounds if implemented.

The guidance, the pool claims, will result in a one-size fits all approach which would impact its ability to achieve best value for fund members.

The letter was accompanied by legal advice from Jason Coppel QC concluding the government would lose if Northern LGPS was to seek a judicial review at the High Court.

It warned: “In our view, the courts would conclude that, if issued in its current form, the draft guidance was ultra vires the secretary of state’s power.”

The warning was made in response to draft guidance issued in January by the government.

The letter – signed by Paul Doughty, chair of Northern & Merseyside Pension Fund, Brenda Warrington, chair of Greater Manchester Pension Fund, and Andrew Thornton, chair of West Yorkshire Pension Fund – said a proposed requirement to set up an FCA-regulated company was “unnecessarily prescriptive”.

More generally, it said that  “There is no evidence given in the consultation as to why the prescriptive requirements of the new guidance are beneficial to stakeholders.”

The pool’s legal advice said the draft guidance is a huge departure from the government’s original idea to introduce a less prescriptive, deregulated regime through the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016.

It said: “…the draft guidance purports to be guidance but it contains, in key respects particularly in relation to the need for a FCA-regulated company, directions as to how administering authorities are to engage in pooling”.

The formation or appointment of an FCA-regulated company would involve unnecessary and unjustified expenditure of up to £15m, the legal opinion added.

“Northern LGPS considers that incurring these additional costs would be inconsistent with the fiduciary duty of its constituent administering authorities to manage the assets of members, employers and taxpayers in the most cost-effective way.”

The advice added that the extra costs fall squarely within the scope of the New Burdens Doctrine, meaning the Ministry for Housing, Communities and Local Government (MHCLG) should fund them.

It also said that the guidance was preceded by an unlawful consultation

The QC added: “Should judicial review proceedings be commenced, it would also be for the secretary of state to demonstrate through evidence that his consultation was conducted whilst his policy was at a formative stage (in circumstances where the MHCLG appears to have been committed to this course for some time) and that adequate reasons for the proposal were advanced.”

The trio said the scale of Northern LGPS meant the draft guidance is “sub-optimal” for their needs and set out other areas for the government to consider:

The removal of the value-for-money criterion from the latest draft guidance would undermine the original point of LGPS pooling reform, it claimed;

The assertion that individual funds should be prepared to suffer an increase in their costs in order to benefit other funds in the pool or the wider LGPS is clearly at odds with authorities’ fiduciary duty, according to the pool.

Northern LGPS said it had been supportive of the pooling reforms but could not back the current proposals.

The letter said: “We have serious concerns both about the manner in which the [draft guidance] was presented for consultation and its contents. 

“We also believe that the original policy objectives behind asset pooling have been either overlooked or disregarded in the draft guidance; they certainly do not feature formally in the draft guidance and we are not aware that the government has changed those objectives.”

The group warned: “The government will no doubt be aware that in various fields of the law, judicial review proceedings have been brought to challenge the exercise of executive powers where the courts have determined that consultation exercises have been procedurally unfair to the extent that they have been unlawful.”

As previously reported by Room 151, the guidance would give administering authorities a deadline of 2020 after which they should not normally make investments outside their LGPS pool.

The guidance will limit the types of investment that member funds are allowed to retain.

It is the latest phase of the pooling process started by former chancellor George Osborne, designed to cut costs and encourage local government funds to invest in infrastructure projects.

by Chris Smith