The Financial Conduct Authority’s (FCA) proposed reclassification of local authority pension funds as retail investors will threaten their ability to effectively manage liabilities and put £2.7bn of infrastructure investment in jeopardy, the Pensions and Lifetime Savings Association (PLSA) has said.
The comments come in response to the FCA’s consultation on Markets in Financial Instruments Directive (MIFID) II, in which the City regulator proposed reclassifying Local Government Pension Scheme (LGPS) funds currently considered as professional investors, as retail investors.
The watchdog explained the reclassification was to protect Treasury managers at local authorities from being sold complex investment strategies they do not understand, adding the MiFID regime uses client categories to recognise that investors have “different levels of experience, knowledge and expertise, and it tailors regulatory protections accordingly”.
It said the “re-calibrated quantitative threshold” for categorising investor types is specifically designed to ensure that only smaller, less sophisticated local authorities – such as parish and town councils acting in their treasury function capacity – are likely to fall below the required threshold.
“We believe this threshold will serve to identify local authorities for whom more complicated financial services may not be appropriate given their level of resources and potentially lower level of knowledge and expertise, and therefore should be treated as retail, rather than professional clients,” it added.
However, the PLSA rejected the reclassification as “unnecessary, does not reflect the experience and expertise of local government pension funds and will have serious implications for their ability to effectively manage their investments in line with their pension fund liabilities”.
It also said the move would severely impact LGPS funds’ ability to invest in certain asset classes, such as infrastructure, because as a retail investor, there is no guarantee that asset managers would be willing to do business with LGPS funds, or would not impose significant cost for doing so.
The trade body pointed to its latest annual survey in which LGPS respondents reported 1.1% of their assets are invested in infrastructure – equating to around £2.7bn of infrastructure investment at risk.
The regulator’s view jars with the government’s desire for the UK’s LGPS schemes to invest more in domestic infrastructure projects.
In the 2015 Autumn Statement the then Chancellor George Osborne announced plans for LGPS schemes in England and Wales to pool their assets to become six British Wealth funds with the ability to invest in UK infrastructure, each with at least £25bn assets under management.
LGPS funds in England and Wales have since pooled their assets into eight pools to meet this need, as well as to reduce running costs and benefit from economies of scale.
