STATUTORY INSTRUMENTS


1998 No. 2888 (S.168)

PENSIONS

The Local Government Pension Scheme (Management and Investment of Funds) (Scotland) Regulations 1998

  Made 16th November 1998  
  Laid before Parliament 27th November 1998  
  Coming into force 18th December 1998  


ARRANGEMENT OF REGULATIONS

Preliminary
1. Citation and commencement.
2. General definitions.
3. Definition of "investment".
4. Definition of "investment manager".
Management of pension fund
5. Management of pension fund.
Investment managers
6. Choice of investment managers.
7. Terms of appointment of investment managers.
8. Review of investment managers' performance.
Investments
9. Use and investment of fund money.
9A. Statement of investment principles
10. Investments under s.11 of the Trustee Investments Act 1961.
11. Limits on investments.
12. Use of fund money by administering authority.
Supplementary
13. Consequential amendments and revocations.

SCHEDULES

  SCHEDULE 1 Limits on investments.

  SCHEDULE 2 Consequential amendments.


The Secretary of State, in exercise of the powers conferred on him by section 7 of the Superannuation Act 1972 and of all other powers enabling him in that behalf, after consultation with such associations of local authorities as appeared to him to be concerned, and such representatives of other persons likely to be affected by the Regulations as appeared to him to be appropriate in accordance with section 7(5) of that Act, and not having considered consultation with any individual local authority desirable, hereby makes the following Regulations:

Preliminary


Citation and commencement


     1. These Regulations may be cited as the Local Government Pension Scheme (Management and Investment of Funds) (Scotland) Regulations 1998 and shall come into force on 18th December 1998.

General definitions
     2.(1) (SI2001/3649) In these Regulations-

"relevant institution" means -

(a) a person who has permission under Part 4 of the Financial Services and Markets Act 2000 to accept deposits;

(b) an EEA firm of the kind mentioned in paragraph 5(b) of Schedule 3 to that Act which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12(1) of that Schedule) to accept deposits; or

(c) a person who is an exempt person in respect of accepting deposits as a result of an order made under section 38(1) of that Act; (SI2001/3649)

(2) The definition of "relevant institution" in paragraph (1), together with regulations 3(5) to (6A) and 4(2) and paragraph 4 of Part I of Schedule 1, must be read with -


(a) section 22 of the Financial Services and Markets Act 2000;

(b) any relevant order under that section; and

(c) Schedule 2 to that Act. (SI2001/3649)

Definition of "investment"
     3.  - (1) In these Regulations "investment" and similar expressions have their normal meaning.

    (2) However, the following provisions of this regulation specify things which count as investments for these Regulations, although they might not otherwise do so, and exclude things which might otherwise count.

    (3) A contract entered into in the course of dealing in financial futures or traded options is an investment.

    (4) If the administering authority use fund money for any purpose for which they may borrow money, that counts as an investment.

    (5) An insurance contract is an investment if and only if the contract is made with a person within paragraph (6) for whom making the contract is business within class III or VII in Schedule 1 to the Insurance Companies Act 1982 (linked long term or pension fund management business).

    (6) The persons within this paragraph are-

(5) A contract of insurance is an investment if and only if it is a contract of a relevant class, and is entered into with a person within paragraph (6) for whom entering into the contract constitutes the carrying on of a regulated activity (within the meaning of the Financial Services and Markets Act 2000). (SI2001/3649)

(6) The persons within this paragraph are -

(a) a person who has permission under Part 4 of the Financial Services and Markets Act 2000 to effect or carry out contracts of insurance of a relevant class;

(b) an EEA firm of the kind mentioned in paragraph 5(d) of Schedule 3 to that Act, which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule) to effect or carry out contracts of insurance of a relevant class; or

(c) a person who does not fall within sub-paragraph (a) or (b) and who, because he has his head office in an EEA State (within the meaning of that Act) other than the United Kingdom, is permitted by the law of that State to effect or carry out contracts of insurance of a relevant class. (SI2001/3649)


(6A) A contract of insurance is of a relevant class for the purposes of paragraphs (5) and (6) if it is -

(a) a contract of insurance on human life or a contract to pay an annuity on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contract) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or not so specified); or

(b) a contract to manage the investments of pension funds, whether or not combined with contracts of insurance covering either conservation of capital or payment of a minimum interest. (SI2001/3649)

    (7) A stock lending arrangement is an investment if, and only if, it complies with the conditions in regulation 5.58 and 5.60 of section L of the Financial Services (Regulated Schemes) Regulations 1991 modified as specified in paragraph (8).

    (8) The modifications referred to in paragraph (7) are-

(7) A stock lending arrangement is an investment if, and only if, in respect of it, the conditions in rules 5.14.4R and 5.14.6R in the Collective Investment Scheme Sourcebook are complied with. (SI2001/3649)

(8) For the purposes of paragraph (7) -

(a) the references in rules 5.14.4R and 5.14.6R to the trustee must be read as if they were references to the administering authority; and

(b) the "Collective Investment Scheme Sourcebook" means the Collective Investment Scheme Sourcebook made by the Financial Services Authority under Part 10 of the Financial Services and Markets Act 2000. (SI2001/3649)

    (9) It is an investment to contribute to a limited partnership in an unquoted securities investment partnership.

    (10) A sub-underwriting contract is an investment.

Definition of "investment manager"
     4.  - (1) This regulation describes those persons who count as an "investment manager" for these Regulations.

    (2) A person is an investment manager if he is authorised under the Financial Services Act 1986 to manage the assets of occupational pension schemes.

    (3) A person is also an investment manager if he-

    (4) A European institution carrying on home-regulated investment business in the United Kingdom is also an investment manager. (SI2001/3649)

(2) A person is an investment manager if -

(a) he has permission under Part 4 of the Financial Services and Markets Act 2000 to manage the assets of occupational pension schemes;

(b) he is an EEA firm of the kind mentioned in paragraph 5(a) or (b) of Schedule 3 to that Act which has permission under paragraph 15 of that Schedule (as a result of qualifying for authorisation under paragraph 12 of that Schedule) to manage the assets of occupational pension schemes; or

(c) he is a person -

(i) who does not carry on regulated activities (within the meaning of that Act) from a permanent place of business maintained by him in the United Kingdom;

(ii) whose head office is situated in an EEA State (within the meaning of that Act) other than the United Kingdom;

(iii) who is recognised by the law of that EEA State as a national of that or another EEA State;

(iv) who is authorised under that law to carry on one or more regulated activities (within the meaning of that Act); and

(v) who is not prevented by that law from managing the assets of occupational pension schemes or assets belonging to another person. (SI2001/3649)



Management of pension fund

Management of pension fund
     5.  - (1) This regulation is about the sums which an administering authority must pay or credit to and may pay from the pension fund administered by them.

    (2) They must pay or credit to their pension fund, in addition to any other sum which the 1998 Regulations specify must be paid or credited to the fund-

    (3) In the case of an administering authority which maintains more than one pension fund, as respects sums which relate to specific members the references in paragraph (2) to the authority's fund are to the fund which is the appropriate fund for the members in question in accordance with Schedule 5 to the 1998 Regulations.

    (4) Interest under regulation 12 must be credited and paid to the fund to which repayment is due.

    (5) Interest under regulation 81(1) of the 1998 Regulations must be credited and paid to the fund to which the overdue payment is due.

    (6) Any costs, charges and expenses incurred administering a pension fund (except those incurred in connection with a FSAVC scheme) (SI2001/23) may be paid from it except - 

.

Investment managers

Choice of investment managers
     6.  - (1) Instead of managing and investing fund money for themselves, an administering authority may appoint one or more investment managers to manage and invest it for them.

    (2) However, they may appoint an investment manager only if they comply with paragraphs (3) to (6).

    (3) They must reasonably believe that the investment manager is suitably qualified by his ability in and practical experience of financial matters to make investment decisions for them.

    (4) The investment manager must not be their employee.

    (5) They must be satisfied-

    (6) They must have taken proper advice.

Terms of appointment of investment managers
     7.  - (1) Investment managers must, if appointed, be appointed on the terms set out in paragraphs (2) to (7).

    (2) The administering authority must be able to terminate the appointment by not more than one month's notice.

    (3) The investment manager must report to the administering authority at least once every three months on the action he has taken for them.

    (4) The investment manager must comply with all the administering authority's instructions except in circumstances permitted by his terms of appointment.

    (5) In managing the fund the investment manager must bear in mind-

    (6) However, paragraph (5)(a) does not apply where the investment manager only manages part of the fund and the terms of his appointment provide that it does not apply.

    (7) The investment manager must not make investments which would contravene the administering authority's statement of investment principles (SI2000/74), regulation 11 or Schedule 1.

    (8) In determining the investment manager's terms of appointment the administering authority must take proper advice.

Review of investment managers' performance
     8.  - (1) Where an administering authority have appointed an investment manager they must keep his performance under review.

    (2) At least once every three months they must review the investments he has made.

    (3) Periodically they must consider whether or not to retain him.

    (4) In reviewing an investment manager's decisions and appointment an administering authority must take proper advice-

Use and investment of fund money
     9.  - (1) An administering authority must invest any fund money that is not needed immediately to make payments from the fund.

    (2) They may vary their investments.

    (3) Their investment policy must be formulated with a view-

    (4) An administering authority must obtain proper advice at reasonable intervals about their investments.

    (5) They must consider such advice in taking any steps about their investments.

 

Statement of investment principles (SI2000/74)
     9A.  - (1) An administering authority must, after consultation with such persons as they consider appropriate, prepare, maintain and publish a written statement of the principles governing their decisions about investments.

    (2) The statement must cover their policy on-

    (3) The first such statement must be published on or before 3rd July 2000.

(3A) A statement published after 30th June 2003 must also-

(a) state the extent to which the administering authority comply with the ten principles of investment practice set out in the document published in April 2002 by CIPFA, the Chartered Institute of Public Finance and Accountancy, and called "CIPFA Pensions Panel Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom (Guidance note issue No. 5)"; and

(b) give the reasons for not complying where they do not do so. (SI2003/138)


    (4) The written statement must be revised from time to time by the authority in accordance with any material change in their policy on the matters referred to in paragraph (2) paragraphs (2) and (3A) (SI2003/138) and the statement as revised must be published.


Investments under s.11 of the Trustee Investments Act 1961
     10.  - (1) An administering authority may invest in any investment made in accordance with a section 11 scheme without any restriction as to quantity.

    (2) A "section 11 scheme" is a scheme under section 11 of the Trustee Investments Act 1961 (local authority investment schemes).

Limits on investments
     11.  - (1) Schedule 1 sets out the limits which apply to certain sorts of investments.

    (2) The percentages set out in the headings in Part I are the limits on the amount of each description of investment listed under those headings.

    (3) Those percentages are percentages of the total value of all existing investments in the fund before making the investment which is subject to the limit.

    (4) The limits in that Schedule only apply at the time the investment is made.

    (5) Part II of that Schedule sets out certain exceptions to the limits.

    (6) Part III of that Schedule applies for interpreting Parts I and II.

Use of fund money by an administering authority
     12.  - (1) An administering authority must pay interest on the total from day to day of any fund money used by them and not repaid.

    (2) That interest must not be paid at a rate lower than the lowest rate at which they could have obtained a commercial loan of that amount at 7 days' notice (otherwise than by bank overdraft).

Supplementary

Consequential amendments and revocations
     13.  - (1) The provisions in Schedule 2 are amended as set out in that Schedule.

    (2) Regulations P5, P6, P12(4) and P15(3) of the Local Government Superannuation (Scotland) Regulations 1987 are revoked.


Helen Liddell
Minister of State, Scottish Office

St Andrew's House, Edinburgh
16th November 1998



SCHEDULE 1
Regulations 7(7) and 11


LIMITS ON INVESTMENTS




PART I

1% limit

     1. Any single sub-underwriting contract.

2% limit

     2. All contributions to any single partnership.

5% limit

     3. All contributions to partnerships.

10% limit

     4. All deposits with a person specified in paragraph 12 or 13 of Schedule 2 to the Banking Act 1987 and all loans (but see paragraph 12). (SI2001/3649)

4. All deposits with -

(a) any local authority, or

(b) any body with power to issue a precept or requisition to a local authority, or to the expenses of which a local authority can be required to contribute,

which is an exempt person (within the meaning of the Financial Services and Markets Act 2000) in respect of accepting deposits as a result of an order made under section 38(1) of that Act, and all loans (but see paragraph 12). (SI2001/3649)



     5. All investments in unlisted securities of companies.

     6. Any single holding (but see paragraphs 13 and 14).

     7. All deposits with any single bank, institution or person (other than the National Savings Bank).

15% limit

     8. All sub-underwriting contracts.

25% limit

     9. All investments in-

     9. All investments in units or other shares of the investments subject to the trusts of unit trust schemes managed by any one body (but see paragraph 14). (SI2000/74)

     9A. All investments in open-ended investment companies where the collective investment schemes constituted by the companies are managed by any one body. (SI2000/74)

     9B. All investments in units or other shares of the investments subject to the trusts of unit trust schemes and all investments in open-ended investment companies where the unit trust schemes and the collective investment schemes constituted by those companies are managed by any one body (but see paragraph 14). (SI2000/74)

10. All insurance contracts Any single insurance contract. (SI2003/138)

     11. All securities transferred (or agreed to be transferred) by the authority under stock lending arrangements.



PART II

EXCEPTIONS TO LIMITS IN PART I

     12. The limit in paragraph 4 does not apply to a Government loan.

     13. The limit in paragraph 6 does not apply if-

     14. The limits in paragraphs 6 and 9 , 9 and 9B (SI2000/74) do not apply-



PART III

INTERPRETATION

     15. In this Schedule-

and "lent" must be understood in that way;



SCHEDULE 2
Regulation 13(1)


CONSEQUENTIAL AMENDMENTS


     1. In regulation 2(1) of the Local Government Pension Scheme (Transitional Provisions) (Scotland) Regulations 1998-



EXPLANATORY NOTE

(This note is not part of the Regulations)


These Regulations replace regulations P5, P6, P12(4) and P15(3) of the Local Government Superannuation (Scotland) Regulations 1987 (S.I. 1987/1850) which are now revoked.

The only changes of substance are-

The Occupational Pension Schemes (Investment) Regulations 1996 (S.I. 1996/3127), which impose restrictions on the amount of the resources of an occupational pension scheme which may be invested in employer-related investments, may further restrict or limit investments of fund money. Those regulations are made under powers conferred by, amongst others, section 40 of the Pensions Act 1995 (c.26) (restrictions on employer-related investments).