29 October 2003


Dear Colleagues


SI 2003 No. 2719

With Ministers’ agreement, I enclose a copy of regulations which amend the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 ("the investment regulations"). The new regulations introduce a degree of flexibility into the investment limits prescribed by regulation 11 and Schedule 1 of the investment regulations. The amendments will apply to LGPS fund authorities in England and Wales.


Following earlier consultations on the principle of optional extra flexibility, a statutory consultation document containing draft regulations was circulated in July this year. The responses to this showed general support for the proposals, although inevitably there were differences of opinion on some of the details.

Increased flexibility

The amendments provide LGPS fund authorities with the opportunity to increase their exposure to certain types of investments specified in Schedule 1 of the investment regulations - but only where proper advice has been obtained; where the decision has been taken in accordance with the general provisions of the regulations including those relating to risk, prudency and diversification and where the Statement of Invetsment Principles has been revised and published showing the information set out in new Regulation 11A(4). While introducing a degree of flexibility into the prescribed investment limits, the amending regulations therefore seek to maintain the essential basic principles of prudency and diversification which should govern the management and investment of LGPS funds.

The new headrooms are not mandatory. The extent to which they are used in practice will be for the investment committees of individual LGPS administering authorities to decide, having taken proper advice in the matter. Individual authorities may prefer to maintain their existing investment policy, and may decide not to adopt for their fund any or some of the new limits for the time being.

The new power to set higher limits is provided under regulation 11(2A).

Regulation 11A sets out detailed requirements which will apply where an administering authority decides to use any, or all, of the new headroom limits These include the provision of regulation 11A(2) on taking "proper advice", which is already defined in regulation 2(1). Regulation 11A(3) also ensures that the need for diversification and suitability of investments, as prescribed by existing regulation 9(3), is taken into account when use is made of the new headrooms.


Regulation 11A(5) and 11A(6) contain provisions relating to any review of a decision to use a new headroom limit.


Regulation 9A already imposes requirements about the content, publication and revision of each authority's Statement of Investment Principles (SIP). New regulation 11A(7) requires the administering authority to state in a revised SIP the relevant policy underlying any decision they make to increase their pension fund's exposure to a Schedule 1 investment to a level above the Column 1 limit. Other details to be included in the revised SIP include, by virtue of regulation 11A(4), a description of the investments subject to the new limits; the new limit; the reason for the decision; the period for which the decision will apply (including any earlier review period); and a statement that the decision complies with the 1998 Regulations (as amended). Similar provision is made about any decision taken after a review.

Under regulation 11A(7), the revised SIP must be published before any decision made under regulation 11(2A), or under regulation 11A(6) following a review, can legally take effect. In this context, "publish" means to make available, which includes publication via any electronic media, eg, web site or e-mail.

The only substantive difference between the amending regulations and the draft version in the statutory consultation document affects the limit on investments in single holdings. This remains at 10%, following concerns expressed by some consultees about the proposed provision of an upper limit of 15% on this type of investment. Regulation 3(3) and paragraphs 4, 6 and 7 of Part I of Schedule 1 refer.

Although the consultation paper included no proposals to increase the headroom on stock-lending, a minority of those responding did make a case for such a change in the regulations. These views have been considered carefully but no change is proposed to the current provision in paragraph 9 of Schedule 1 to the 1998 Regulations. However, the current position will be kept under review and a cross-section of interested parties will be invited to attend an informal meeting to discuss the relevant issues shortly.

Any queries 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






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

Middlesborough Council

London Pensions Fund Authority

Environment Agency.

Town Clerk, City Of London Corporation

Clerk, South Yorkshire PTA

Clerk, West Midlands PTA

The Secretaries of:-

Local Government Association

Welsh Local Government Association






New Towns Pension Fund

Trades Union Congress




Audit Commission


The Secretaries of:-

Investment Management Association (IMA)

Association of British Insurers (ABI)

National Association of Pension Funds (NAPF)

London Investment Banking Association (LIBA)

Financial Services Authority (FSA)

Government Departments:-