Contact: David Wilson, ext 7407

1 Introduction

1.1 As part of its ongoing review of the Local Government Pension Scheme (LGPS), the Government has issued new draft regulations, planned to come into force on 1 April 2005. Comments have been invited on the proposed changes by 3 December 2004.

1.2 There are three main proposals in the new regulations:

· A rise in the percentage limit on the value of the stocks in the portfolio that can be lent by local authority funds to market brokers in return for commission (known as `stocklending') from 25% to 35%.

· The introduction of a requirement for local authority funds to produce a Representation Policy Statement as part of their Statement of Investment Principles (SIP) by 3 October 2005.

· A new duty for local authority funds to prepare, publish and review a policy statement setting out its communications strategy for the Fund and its promotion to employers and employees.

1.3 This report summarises the proposals, and a draft response to the Government is attached as an Appendix. It also briefly considers other questions concerning corporate governance raised in the Government's covering letter sent with the draft regulations.

1 Stocklending

1.1 Stocklending is a long-established practice that enables market brokers to borrow shares and other securities from pension funds and other investment institutions whenever they need them to deliver shares to purchasers. A pension fund as lender in effect disposes of shares in exchange for commission, reimbursement of dividends, interest and other rights foregone during the period of the loan, and the right to have the stocks replaced later. A pension fund is able to lend stock as a large investor with many holdings where trading is unlikely in the foreseeable future.

1.2 The Hampshire Pension Fund has been stocklending since the 1980s, and currently two of its managers, Deutsche and Schroders, undertake stocklending activities on its behalf, earning around £100,000 a year in commission for the Fund.

1.3 The new draft regulations would allow local authority pension funds to opt to increase the current headroom limit on the value of stocks that can be lent at any one time from 25% to 35% of total fund value.

1.4 Both Deutsche and Schroders would not expect to have more than 10% of their portfolios lent out at any one time. This in practice there would be no need for the Hampshire Fund to take advantage of this option if it is implemented by the Government. Hence, although this increase in flexibility should be welcomed, it has no immediate practical implications for the Fund.

2 Representation Policy Statement

2.1 The new draft regulations would require the Fund to include within its SIP a statement of its policy on representation by 3 October 2005. In the Hampshire Fund's case, the following would need to be covered:

· The fact that the County Council delegates its functions with regard to the Fund to the Pension Fund Panel, which will in future report to the County Council via the Governance Panel.

· The normal frequency of Panel meetings.

· The Panel's terms of reference, structure and operational procedures.

· The position with regard to representation for the Fund's members and participating employers.

2.2 The Fund's current SIP (approved at the Panel's last meeting on 3 November 2004) already sets out the delegation arrangements and the Panel's duties. There is already a clear policy on the frequency of meetings which can be incorporated. There are brief terms of reference for the Panel set out in the County Council's constitution. However, it would probably be necessary to expand on these to comply with the new proposed regulations, and there is no formal summary of the Panel's operational procedures. This work would need to be done jointly by the Chief Executive and County Treasurer. The policy on the representation of the Fund's members and employers is already clear (see item 6 on this Agenda) and can be incorporated.

2.3 Any proposal that will lead to further clarification of the Fund's representation arrangements should be welcomed. However, it could be argued that this proposed requirement is perhaps too prescriptive. All the Fund's policies in this area have already been made clear and are in the public domain.

3 Communication Policy Statement

3.1 The draft regulations propose that the Fund should prepare, publish and maintain a formal statement by 1 April 2006 setting out its policy for communications with:

· The Fund's pensioners and contributors, and their representatives.

· Prospective members.

· Member employers.

3.2 The statement would be separate from the SIP and would cover the provision of information and publicity, and its format and frequency. It would also need to address how the Local Government Pension Scheme is promoted to prospective members.

3.3 Some of these issues are already covered in the Fund's SIP. An expanded version of that section would cover the Government's proposed requirements. The Panel may wish to question the need for another separate published document. There is no reason why it should not form part of the SIP.

4 Corporate governance

4.1 The Government's covering letter accompanying the draft regulations also asks for views on whether the current LGPS regulations provide funds with sufficient legal powers to operate effective corporate governance and voting policies and to meet the associated costs.

4.2 The Hampshire Fund's voting policy is set out clearly in its SIP. The Fund has delegated to its investment managers responsibility for taking social, environmental and ethical considerations into account when assessing the financial potential and suitability of investments. Each manager is asked to engage positively, and exercise the Fund's voting rights where necessary, to make sure that companies comply with the principles of the Stock Exchange's corporate governance combined code.

4.3 This arrangement works satisfactorily, and the Panel may wish to take the view that no regulatory changes are needed.

5 Draft response

5.1 A suggested response to the draft regulations and other issues raised in the consultation is attached. It is based on the comments set out in this report.

Recommendation

1 That a response be submitted on the draft regulations as set out in the Appendix.

2 That the remainder of this report be noted.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE

None.