4 July 2003

Dear Colleagues

1. With Ministers’ agreement, I enclose, for your comments, draft regulations which make several amendments to the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 ("the investment regulations") which will apply to LGPS fund authorities in England and Wales. Your comments are invited no later than 29 August 2003.

2. We have previously consulted on a range of proposals designed, amongst other things, to introduce a degree of flexibility in the investment limits prescribed by Schedule 1 of the investment regulations but which still maintained the fundamental principles of prudency and diversification. In the light of the responses to that informal consultation exercise, firm proposals were circulated in November last year for the introduction of flexible headrooms in Schedule 1.

3. In general terms, the response to the proposed changes were favourable although some concerns were raised about extending the limit on certain types of investment vehicles included in Schedule 1. In taking forward the attached set of amending regulations we have tried to take these concerns into account, but we are also mindful that the new headrooms are not mandatory and that the extent to which they are used in practice would remain a matter for decisions by individual investment committees of LGPS administering authorities, having taken proper advice in the matter. We are satisfied that the proposed new regime maintains the fundamental principles of prudency and diversification although individual authorities may choose to maintain their existing investment policy and decide not to adopt for their fund all or some of the new limits for the time being.

4. The amendments will provide LGPS fund authorities with the opportunity to increase their exposure to certain types of investments restricted by Schedule 1, but only where proper advice has been obtained and the decision has been taken in accordance with the general provisions including those relating to risk, prudency and diversification.

5. Existing regulation 9A already imposes a requirement about the content, publication and revision of Statement of Investment Principles. Draft regulation 11A now sets out detailed requirements which will apply where an administering authority decides to increase any, some or all of the new headroom limits. This includes the provision of draft regulation 11A(2) on taking "proper advice", which is already defined in regulation 2(1). Draft 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.

6. Draft regulation 11A(7) will require the administering authority to state, in a revised SIP, the relevant policy underlying any decision by the authority to increase their exposure to a Schedule 1 investment between the existing and proposed new headroom. Other details to be included in the revised SIP include, by virtue of draft 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).

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

8. Responses and any initial queries should be sent to Margaret Dunleavy, Local Government Pensions Division, ODPM, Zone 2/E6, Ashdown House, 123 Victoria Street, London SW1E 6DE (tel ; 020 7944 6012) or e-mail margaret.dunleavy@odpm.gsi.gov.uk).

9. The Department may wish to publish responses to this consultation in due course, or deposit them in the libraries of the Houses of Parliament or the Department’s library, unless we are asked specifically to treat a response as confidential. Confidential responses will be included in any published statistical summary of comments received and views expressed.

Yours faithfully

The Chief Executive of:-

County Councils (England)

District Councils (England)

Metropolitan Borough Councils (England)

Unitary Councils (England)

County and County Borough Councils in Wales

London Borough Councils

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

LGPC

SOCPO

SOLACE

ALACE

CIPFA

New Towns Pension Fund

Trades Union Congress

UNISON

TGW

GMB

MPO

Audit Commission

UCEA

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)

Society of County Treasurers

Society of London Treasurers

Society of Welsh LA PF Treasurers

CIPFA (Scotland)

Strathclyde Pension Fund

Melton Borough Council

PIRC

LAPFF

Hymans Robertson

Legal & General

Hermes Focus Asset Management Ltd

Northern Global Trust Advisors Ltd

Government Departments:-

GAD

DOE (NI)

SPPA