Dorset County Pension Fund has set up an “expensive” special investment vehicle to circumvent troublesome Local Government Pension Scheme regulations, as it works to manage inflation.
The £1.7bn scheme decided to use the vehicle after LGPS investment regulations effectively prevented it from using derivatives. Criticism has been growing around the regulatory restrictions in the sector, and now the government is set to review them.
Nick Buckland, head of treasury and pensions at the fund, said it wanted to hedge inflation as it was the biggest risk to the scheme. Last year was a bumper year for schemes boosting inflation protection. (PW 27/05/13).
“One of the key tools to ensure effective and efficient implementation of inflation hedging is the use of a range of derivatives instruments,” he told delegates at the National Association of Pension Funds local authority conference last month.
“And currently the regulations do not allow this, even in a risk-reduction measure.”
The scheme’s fund manager set up a bespoke qualifying investment fund, a pooled fund arrangement in which it is the only investor and which allows complete control to purchase derivatives to hedge against prices rises.
But the QIF came at a significant extra cost due to legal and administrative expense and the time spent arranging it, Buckland added, calling for a review into the regulations.
Nigel Keogh, pensions technical manager at the Chartered Institute of Public Finance and Accountancy, said the LGPS investment regulations were “not fit for purpose”.
“Funds are seeking diversification as a matter of course, so for example the limits on particular asset classes are not really required any more, and in some cases are actually getting in the way of better diversification,” he said.
He called for the regulations to be brought into line with those in the private sector.
Also at the conference, minister for the Department for Communities and Local Government, Brandon Lewis, said he wanted a review of the LGPS investment regulations.
“In particular, I want to know if there are any obstacles that prevent you from maximising your returns,” he said.
“After all, this is taxpayers’ money you are investing and we must continue to get the right balance between risk and reward,” he added.
