Clarity needed as LGPS pools could be branded fiduciary managers

Under the CMA order, trustees wishing to delegate investment decisions for 20 per cent of more of their scheme assets to a fiduciary manager must run a competitive tender exercise including at least three companies. 

The order was backdated so that trustees who had already employed a fiduciary manager before the order was issued are required to run a tender exercise within five years of that appointment.

The order was not designed with LGPS investment pools in mind as they are not fiduciary managers in the traditional sense. But regulations from the DLUHC and the Financial Conduct Authority, intended to “sunset” the provisions of the CMA order as they affect the LGPS, have still not been finalised.

Jeff Houston, secretary to the LGPS Scheme Advisory Board, told Pensions Expert that the CMA had “agreed not to impose on the pools in the meantime”, but added that the FCA “will need to exclude LGPS pool companies from the requirement not to provide services to LGPS funds without a procurement process”.

“The LGPS is currently subject to the CMA order, but it was always the intention that LGPS funds and pools would be covered by eventual regulation from DLUHC and FCA, respectively, in order to ‘sunset' the CMA order,” he explained. 

“The issue here is to ensure that LGPS pool companies are not unintentionally defined as fiduciary managers in those regulations and therefore be subject to regular procurement rather than appointment by their owner authorities.”

Tender requirement would pose ‘significant issues’

Jill Davys, head of LGPS at Redington, told Pensions Expert that it is “very difficult to assess” when the sunsetting regulations might be published, “as there are a number of concurrent pieces of regulation/consultation which the LGPS [is] expecting”, not least around responsible investment and Task Force on Climate-related Financial Disclosures reporting, investment pooling guidance, and the McCloud remedies.

As such, it is unlikely the issue would be “top of the priority list” for DLUHC, she said.

It remains an issue, however, because the pool companies “have been set up as wholly owned companies by LGPS-administering authorities and are only there to provide services to the LGPS funds that have set them up. The companies do not offer services to other organisations and are unlikely to do so in the short term”.

“If LGPS funds were required to tender, then this would pose a significant issue for the newly formed investment pool companies, as they operate solely for the LGPS funds that have set them up and could result in significant additional costs in terms of tender requirements and transfer of undertakings [requirements],” Davys explained. 

“Any new provider would presumably be required to take on staff given they provide 100 per cent services to their LGPS funds, although that’s not totally clear given the ownership structure.”

Additionally, it is unclear whether the pool companies could be said to offer full fiduciary management, she continued.

“In the main, they are the implementation vehicles for LGPS funds to be able to carry out their strategic asset allocation by providing investment vehicles to meet LGPS fund requirements, rather than offering full fiduciary management (although there is a pool that could be classified as such),” she said. 

“LGPS funds are both shareholders and clients of the investment pool companies, which can sometimes result in difficulties in separating the roles that the LGPS fund holds within the pool companies, providing for some interesting discussions on occasion.”

Irwin Mitchell partner Penny Cogher, however, clarified that the rules “exist only as guidance for LGPS at present”, so there is “little risk of sanction”.

The FCA has been approached for comment.

*Additional reporting by Tom Higgins