To:

5 August 2005

Dear Colleagues

THE LOCAL GOVERNMENT PENSION SCHEME AND MANAGEMENT AND INVESTMENT OF FUNDS (AMENDMENT) REGULATIONS 2005

SI 2005 No. 2004

With Ministers’ agreement, I enclose a copy of the above regulations which amend :

the Local Government Pension Scheme Regulations 1997 ("the main regulations"), and

the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 ("the investment regulations").

The new regulations introduce additional flexibility into the prudential limit on stock lending in the investment regulations, and make minor technical amendments to the main regulations.

The amendments apply to LGPS administering authorities in England and Wales. They come into effect on 17 August 2005, except for the amendments made at regulations 3, 5, 6 and 7 which have retrospective effect.

Background

A statutory consultation paper was circulated on 24 September 2004 which proposed extra flexibility in the prudential limit on stock lending, in line with changes in 2003 to the prudential limits on several other types of investment. The great majority of the responses to the consultation were content with this proposal.

The investment regulations - Stock lending

Regulations 9 to 11 amend the investment regulations. The effect is to allow up to 35% of the value of an LGPS fund to be used for stock lending rather than only 25% as at present.

As with the existing optional "headrooms" for some other types of investment, the power for an authority to set this increased limit is provided under regulation 11(2A) of the investment regulations, and any relevant decision would be subject to all the requirements of regulation 11A. A decision to increase exposure to this type of investment could therefore only be taken where the authority had first obtained "proper advice", and would have to comply with the general provisions of the investment regulations (including those relating to risk, prudence and diversification). In addition, it would only take effect after the authority's Statement of Investment Principles had been revised and published to include the information specified in regulation 11A(4).

Authorities should note that regulation 9 inserts regulation 11A(3A) which was not in the statutory consultation paper. This stresses the importance of prudential assessment when deciding whether to use the upper limit. Regulation 10 concerns the review of decisions to use the upper limit.

Use of the upper limit is not subject to a requirement to follow specified guidance.

Prudential considerations are of course important when taking any investment decision involving stock lending, in particular when deciding on the extent of risk exposure to a single counterparty. Some information about stock lending can be found on the website at www.xoq83.dial.pipex.com.

Minor technical amendments to the main regulations : fire services, conservation boards, qualifications of medical referees

To ensure that the main 1997 Regulations reflect changes in overriding legislation, the statutory consultation paper proposed certain minor technical amendments. The following amendments are included in the final regulations :

references to the fire services in regulations 6(9), Schedule 1 (definition of "Scheme managers") and Schedule 2 (Scheme employers) of the LGPS regulations 1997 are amended to take account of the Fire and Rescue Services Act 2004 (see regulations 3, 5 and 6). Regulation 3 substitutes a new regulation 6(9). Note that regulation 1(3) provides for these changes to have effect from 1^st October 2004 in England and from 10th November 2004 in Wales;

conservation boards established under section 86 of the Countryside and Rights of Way Act 2000 are added to the list of Scheme Employers in Schedule 2 by regulation 7. This change has effect from 1^st February 2005 so as to allow membership of the Scheme to be available to employees of conservation boards from those dates, and Pension Managers in the areas concerned should take the necessary action on this basis;

the definition of "qualified in occupational health medicine" in regulation 97(14) is amended by regulation 4 to reflect changes to European legislation.

Explanatory Memorandum

The Stationery Office now publish an Explanatory Memorandum alongside new Regulations. The Memorandum briefly describes a statutory instrument and its purpose, and is prepared for the information of Parliamentary Committees which examine proposed regulations. The Explanatory Memorandum for these Regulations can be found in the statutory instruments section of the Stationery Office website at www.legislation.hmso.gov.uk

Corporate governance/activism

ODPM is grateful for the information and comments authorities provided on these issues also, and will consider whether any follow-up is desirable. We would like to reassure authorities who seem to have been concerned by it, that the invitation to comment did not imply any belief by ODPM that the powers in the investment regulations are insufficient to cover the activities authorities currently undertake. A recent Treasury consultation proposed revisions to the Myners principles, including principle 6 (activism). Any future action by ODPM in respect of the LGPS would take account of such wider developments.

General

The statutory consultation paper issued by ODPM on 24 September 2004 included proposals to introduce representation and communication policy statements. These have not been carried forward in these amending regulations to honour the agreement reached between the Deputy Prime Minister and the trades unions that both issues should be subject to further discussion as part of the new Tri-Partite Committee arrangements. We do know that some administering authorities have anticipated these proposals and have published statements in accordance with the draft regulations issued last September. Although there is yet no regulatory duty on authorities to do so, the preparation and publication of these statements is seen as an example of best practice and is to be encouraged. In the meantime, we will of course keep interested parties fully up to date with developments.

Any queries on these Regulations should be addressed in the first instance to Margaret Dunleavy, Local Government Pensions Division, ODPM, Zone 2/E6, Ashdown House, 123 Victoria Street, London, SW1E 6DE. Electronic enquiries can be sent to [email protected]

Yours faithfully

BOB HOLLOWAY

ADDRESSEES

The Chief Executive of:-

County Councils (England)

District Councils (England)

Metropolitan Borough Councils (England)

Unitary Councils (England)

London Borough Councils

County and County Borough Councils in Wales

South Yorkshire Pensions Authority

Tameside Metropolitan Borough Council

Wirral Metropolitan Borough Council

Bradford Metropolitan City Council

South Tyneside Metropolitan Borough Council

Wolverhampton Metropolitan Borough Council

Middlesbrough Council

London Pensions Fund Authority

Environment Agency

Town Clerk, City of London Corporation

Clerk, South Yorkshire PTA

Clerk, West Midlands PTA

Police Authorities in England and Wales.

Fire and Rescue Authorities in England and Wales

The Secretaries of:-

Local Government Association

LGPC

SOCPO

SOLACE

ALACE

CIPFA

New Towns Pension Fund

Trades Union Congress

UNISON

TGW

GMB

UCATT

NAEIAC

NAPO

Audit Commission

UCEA

Investment Management Association (IMA)

Association of British Insurers (ABI)

National Association of Pension Funds (NAPF)

London Investment Banking Association (LIBA)

Financial Services Authority (FSA)

Society of County Treasurers

Society of London Treasurers

Society of Welsh LA PF Treasurers

PIRC

LAPFF

CIPFA (Scotland)

Government Departments:-

GAD

DOE (NI)

SPPA

DEFRA