Radical reform of the Local Government Pension Scheme (LGPS) investment regulations is needed to achieve sufficient scheme performance and member protection, according to the National Association of Pension Funds (NAPF).

In a report released today at its local authority conference, the NAPF argues LGPS investment regulations are “overly prescriptive and out of date”. The association also called for a dialogue around greater cooperation between schemes.

“Local authority funds have never been under more pressure,” NAPF chief executive Joanne Segars said. “A new scheme to be introduced next year, auto-enrolment, and the abolition of contracting out will all have huge implications for the way they are run.”

Legislative, investment and regulatory architecture will have to be changed in order to combat an economic environment offering historically low gilt yields, the NAPF said.

LGPS investment regulations prescribe limits on the amount LA funds can invest in certain types of legal structures, such as limited partnerships or collective investment schemes. The report found this potentially leads to sub-optimal investment allocations for LA funds, and regulations have failed to keep up with funds’ needs for diversification.

The NAPF stressed that The Pensions Regulator (TPR) “must work with LA funds and understand their uniqueness”. TPR is planning to consult on their public sector codes of practice later this year, and there is a fear that its oversight may fail to reflect the needs of LA funds.

“The regulatory architecture needs to be clear in order to avoid mission creep and the risk of duplication of regulatory activity by The Pensions Regulator and the Department for Communities and Local Government (DCLG),” the association said.

The report also called for an open debate on the case for local authority schemes to work together, as the LGPS approaches a critical juncture in its history.

Working together in joint partnership through to full mergers would further drive efficiencies and drive down costs, the association said.

Options being considered include collective investment funds, which would establish a central entity having the expertise to procure, monitor and replace the best investment managers in each asset class. Administering authorities would still choose asset allocations and negotiate individual contribution rates.

“Local authority funds will have to place an even greater focus on finding efficiencies and maximising value for money,” Segars said. “This is already happening and we have seen some good examples of collaboration, but we should ask if more can be done.”

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