Statutory guidance

Local Government Pension Scheme: asset pooling

Published 29 June 2026

Applies to England and Wales

1. Introduction

1.1. This guidance is statutory guidance issued by the Secretary of State in accordance with regulation 19 of the Local Government Pension Scheme (Pooling, Management and Investment of Funds) Regulations 2026 (‘the regulations’). It relates principally to Sections 1 and 2 of the Pension Schemes Act 2026 and to Parts 3 (Asset pool companies) and 5 (Asset management) of the regulations.

1.2. The guidance should be read in conjunction with the ‘Guidance on preparing and maintaining an investment strategy statement 2026’ (investment strategy guidance).

2. Asset pool companies

2.1. The term asset pool company ‘pool’ is defined in Section 1(9) of the Pension Schemes Act 2026. Pools must be limited by shares and registered in the United Kingdom and solely owned by LGPS administering authorities or by another company that is solely owned by LGPS administering authorities. They must be established for the purpose – whether exclusive or in part - of managing the funds and other assets for which their participating administering authorities are responsible and making and managing investments on behalf of those administering authorities.

Requirement to participate in a pool company

2.2. Regulation 7 requires administering authorities to participate in a pool for the purpose of that company managing the funds or other assets for which that authority is responsible. Administering authorities may participate in a pool either by being a shareholder of the company, or of a company of which the pool is a subsidiary, or by contracting with the pool company as a client. Throughout this guidance, unless explicitly stated otherwise the term ‘partner funds’ is used to refer to all authorities participating in a pool, regardless of whether that participation is as shareholder or only as a client.

2.3. Administering authorities should give careful consideration to the merits of participating in a pool as a shareholder versus those of participating only as a client. Administering authorities should only be a shareholder of a pool if they have appropriate levels of resource, capacity and expertise to adequately fulfil the responsibilities associated with the role. In particular, administering authorities should consider:

• the additional governance requirements associated with being a shareholder of an FCA-regulated pool company, including the time and resource commitments to contribute effectively in shareholder decision making
• the regulatory capital requirements, including both upfront requirements and the potential for additional calls
• any additional costs associated with being a shareholder of the company

2.4. Administering authorities may only participate in one pool at a time. The only exception to this is in the event that an administering authority is in the process of moving from one pool to another, in which case regulation 23 allows for a period of 3 months during which the administering authority may participate in both companies simultaneously. It is recognised that in the situation where an administering authority is leaving a pool that is being wound up, and they are a shareholder of that pool, the administering authority will need to remain as shareholder while the wind up process takes place. In these circumstances regulation 23(2) allows administering authorities to remain as shareholders of their original pool solely for the purposes of winding up the company until this process is complete. It is expected that the administering authority’s funds and assets will be managed by the new pool within 3 months of their participating in the new pool.

2.5. The prohibition on administering authorities participating in more than one pool does not prevent a pool from investing in another pool’s investment vehicle in the course of implementing a partner fund’s investment strategy.

Requirement for pool companies to obtain FCA authorisation

2.6. Under Part 4A of the Financial Services and Markets Act 2000 investment management companies, such as the pools, must be authorised by the FCA for carrying out regulated activities.  The pools will need to be authorised by the FCA before they begin managing assets (within the meaning given in section 8(1) of the Pension Schemes Act 2026) on behalf of their partner administering authorities.

2.7. Regulation 8 requires that pools are authorised as either a full-scope UK AIFM (Alternative Investment Fund Manager) or as a MiFID investment firm prior to managing any assets on behalf of administering authorities. Pools will need to apply to the FCA for authorisation and any Part 4A permissions needed to operate their business.

2.8. From 30 September 2027 all pools will be required to be authorised as full-scope UK AIFMs who may – with the appropriate Part 4A permissions – also carry on certain MiFID activities.

2.9. It is expected that administering authorities will ensure a prospective pool holds the required authorisations as part of their due diligence prior to signing investment management agreements with the company. Administering authorities should ensure that they are kept updated by their pool about the status of its regulatory compliance, and any risks to it, on a routine basis. Pools must notify their shareholders and clients of any serious risk to their authorisations at the earliest available opportunity.

2.10. A pool is expected to notify the Secretary of State of any serious risks to its authorisation and any necessary Part 4A permissions where this could prevent the pool complying with regulation 8 or appropriately managing the investments of their participating funds. The notification must set out the risk and steps being taken to mitigate against it.

2.11. If a pool were to cease holding the authorisation needed to comply with Regulation 8 or appropriately manage the investments of its participating funds, it must notify the Secretary of State at the first available opportunity. The pool must set out in this communication or, if this would delay the first notification, as soon as is practicable afterwards, what the impact on participating administering authorities is and what actions are being taken to resolve the issues arising.

Resourcing the pool and charging costs to the funds

2.12. Participating administering authorities in a pool must ensure that the pool is adequately resourced to deliver what they require. It is for the shareholder administering authorities in a pool to come to an agreement between themselves and with the pool company on how costs are apportioned between them and agree the basis on which clients of the pool will be charged. Where pools have both shareholder and non-shareholder client administering authorities, care should be taken to ensure that differences in status do not result in inequitable treatment. How this is to be done is a local matter, but it is expected that prospective clients will be consulted on the way in which they will be charged. Administering authorities must meet the costs of pool membership from the pension fund.

2.13. Pools and their partner funds should give due consideration to economies of scale and value for money when considering pool resourcing and location strategies. This should include higher cost options where these can reasonably be expected to deliver better value for employers and taxpayers. Opportunities for collaboration and the sharing of expertise across the scheme, including between pools and between administering authorities in different pools, should be explored as a means of maximising scale and value for money.

2.14. Pools should be transparent with their partner funds about the drivers of costs being charged to administering authorities.

3. Asset management

Requirement for all LGPS assets to be managed by asset pool companies

3.1. Regulation 17 requires that an administering authority ensures that the funds and other assets for which it is responsible, with the exception of operational cash as set out in paragraph 3.2, are held and managed by their pool within 3 months of beginning to participate in that company. This means that the pool has control of all investments and is solely responsible for all investment management decisions, including in relation to legacy assets which remain in the legal ownership of the authority. Administering authorities must leave all decisions on how best to implement their investment strategy to the pool.

3.2. Management of the operational cash of the fund remains the responsibility of the administering authority and does not need to be delegated to the pool. Administering authorities should inform the pool of the levels of operational cash required to meet liabilities. Regulation 5 allows administering authorities to borrow if needed to pay benefits due under the scheme, but operational cash requirements should be managed by the administering authority in discussion with the pool in order to avoid recourse to borrowing.

3.3. The prohibition on borrowing in regulation 5 does not prevent the use of derivative instruments. These may be used where they contribute to a reduction in risk or facilitate efficient portfolio management (including the reduction of cost or the generation of additional capital or income with an acceptable level of risk). In principle, use of derivatives in Liability-Driven Investment (LDI) funds is consistent with this provision.

3.4. It is not necessary for pools to be the legal owner of assets to comply with regulation 17, provided that the pool has sufficient control over an asset to enable it to enact its investment management decisions in relation to an asset without having to seek permission from the asset owner in addition to provision in any investment management agreement.

3.5. It is recognised that administering authorities may hold legacy assets where best value is achieved through the asset continuing to be in the legal ownership of the administering authority, and that in some cases these assets may remain in run-off for many years. The requirement here is, as with all assets, that the pool has control of the asset and is the sole decision maker as to when and whether it is appropriate to buy, hold, or sell an asset.

3.6. Regulation 24 allows additional flexibility in circumstances where it is not reasonably practicable for assets to be under pool management and held by the pool within 3 months. It is for the pool to determine when this regulation applies. ‘Reasonably practicable’ is intended to cover situations where transitioning management of an asset would result in significant loss of value, as well as situations where it is not feasible for legal or other reasons. Where this regulation applies it is for the pool to decide the appropriate timing for the asset to be under pool management. Administering authorities must comply with the decision of the pool.

Requirement for asset pools to implement the investment strategy

3.7. All investment management decisions below those in the investment strategy must be made by the pool, as detailed in figure 1. This includes decisions relating to tactical asset allocation, investment manager selection, stock selection, investment stewardship (in line with the investment strategy statements set by administering authorities), and investment cashflow management.

Figure 1: The roles of administering authorities and asset pool companies in managing investments

Strategy / Implementation	Task	Definition	Administering Authority Role	Pool Role
Strategy	Investment Objectives	Objectives, priorities and preferences on risk and return, local investment, and responsible investment in accordance with the investment strategy guidance 2026.	Decide	Advise
Strategy	Strategic Asset Allocation	Long-term, stable allocation based on overall investment objectives and risk tolerance, set in accordance with the investment strategy guidance 2026	Decide or Delegate	Advise, Decide only if delegated by administering authority
Implementation	Tactical Asset Allocation	Adjustments to the asset mix, such as in respect of geographic allocation, consistent with the asset allocation strategy.	Monitor	Decide
Implementation	Investment Manager Selection	Appointment of external (or in-house) managers of specific investment mandates	Monitor	Decide
Implementation	Investment  Selection	Choosing individual investment opportunities based on detailed analysis of the opportunity	Monitor	Decide
Implementation	Investment Stewardship	Engagement with the invested companies, external managers, regulators and policy makers in line with Investment Objectives.	Monitor	Decide
Implementation	Investment Cashflow Management	Management of the disinvestment (or investment of contributions) in collaboration with administrators and Fund Actuary	Monitor	Decide

3.8. Pools must have regard to maximising the benefits of scale when deciding how to implement the investment strategies of their partner funds, while delivering administering authority investment objectives. This includes in relation to deciding when it is appropriate to utilise segregated mandates instead of collective investment vehicles. This is an implementation decision that must rest with the pool and not with the administering authority. Similarly, although it is reasonable for pools to discuss an administering authority’s preferences over investment style with them, it is ultimately for the pool to decide whether passive or active investment management styles will best achieve an administering authority’s investment objectives.

3.9. The investment strategy guidance sets out how pools and partner funds should work together on responsible investment policies to maximise areas of alignment between administering authorities in order to maximise the benefits of scale. Where the responsible investment strategies of the participating funds in a pool diverge significantly it may be appropriate to develop a small number of responsible investment options that administering authorities with similar approaches can align to, however it will not be appropriate for pools to establish multiple sub-funds or other vehicles in order to deliver minor differences of emphasis between the responsible investment strategies of different partner funds.

3.10. When advising on the responsible investment aspect of the investment strategy, pools should be clear with partner funds about the expected impact on costs, scale, and delivery of the high-level objectives that different approaches are expected to incur. As outlined in the section ‘Resourcing the pool and charging costs to the funds’ it is for the pool to agree with its shareholders how any additional costs arising from insistence on a bespoke responsible investment approach, over and above an aligned approach, are apportioned to participating administering authorities.

3.11. Regulation 14 requires pools to take ‘all reasonable steps’ to implement the investment strategies of their partner funds. Where it is genuinely not possible for the pool to deliver the investment strategy of a participating administering authority, the pool must explain to the administering authority what elements of the investment strategy it is not possible to implement and the reasons for this. The pool should support the administering authority to understand how the investment strategy could be adjusted to make it deliverable, while maintaining fiduciary duty to scheme members and employers.

Requirement for funds to take principal advice from their asset pool company

3.12. Regulation 10 requires that pools provide advice to their participating administering authorities on the content of their investment strategy and requires administering authorities to consider that advice before formulating their investment strategy.  This means that pools must be able to advise on all areas of the investment strategy, including responsible investment and local investment. This capability may be in-house or procured by the pool. Pools should consider whether there are advantages to utilising advisory expertise in other pools rather than developing specialist expertise in-house or procuring advisory services from private sector providers.

3.13. Pools must ensure that the advice that is given to administering authorities on their investment strategies and asset allocations is not influenced by the requirements of other authorities in a pool or of what can be delivered by the pool in house. Pools must be careful to advise each administering authority on the best approach to deliver their funding and other objectives.

3.14. As set out in section 6 below, in broad terms, the FCA requires that full-scope UK AIFMs and MiFID investment firms establish, implement and apply an effective written conflict of interest policy that details how potential conflicts will be identified and the measures to be adopted to prevent and manage conflicts of interest.

3.15. The pool must be the principal source of investment strategy advice to administering authorities. Administering authorities must not routinely test their pool’s advice against that of other advisors. Administering authorities should of course monitor and hold pools to account for the quality of service they receive, and this should be dealt with in line with Chapter 6 of this guidance.

3.16. However, in exceptional circumstances regulation 10(3) allows administering authorities to take additional advice from outside their pool. This advice must be ‘proper advice’ as defined in regulation 10(4). Exceptional circumstances may include:

• where a pool advises a very substantial shift in strategic asset allocation to that which it has recommended previously, or entry into a substantially new investment approach
• where a pool has said that it is not possible to implement an administering authority’s investment strategy, which may include where it has said it cannot implement the administering authority’s RI policy. In such circumstances, any additional advice obtained should support the administering authority in considering how its investment strategy may be adjusted to make it deliverable, to inform the conversation with the pool as set out in paragraph 3.11

3.17. Such cases should typically not be more than once in a valuation cycle. Wherever possible, administering authorities should consider procuring any additional advice jointly with other shareholder administering authorities in order to deliver value for money.

3.18. Circumstances that would not be considered exceptional include routine testing of advice on the investment strategy provided by the pool.

4. Local investment

4.1. The term ‘local investments’ is defined in Section 2(5) of the Pensions Act 2026, to refer to investments in, or for the benefit of persons living or working in, the area of the administering authority, or the areas of the other administering authorities participating in the same pool as the administering authority. Investments “for the benefit of persons living or working in” an area is intended to include the surrounding areas as well as the administering authority’s area itself, as investment in a region has beneficial impacts for those living and working across the whole region. ‘Local or regional’ should therefore be understood wherever ‘local’ is used.

4.2. As set out in the investment strategy guidance, administering authorities may choose a narrower area to target for their local investment preferences in their investment strategy. This may extend to their immediate local area, region or pool.

4.3. Local investments are not an asset class and may include investments in a range of different asset classes including private equity, private debt, property and infrastructure, although generally any investment made through public markets would not be considered a local investment unless a clear local benefit can be established. Typically, the investment sectors with the greatest potential for local investment are housing, regeneration, infrastructure, clean energy, small and medium enterprise finance, and natural capital.

The role of administering authorities

4.4. As set out in regulation 11, administering authorities, with the exception of the Environment Agency, are responsible for setting out their approach to local investment in their investment strategies, as set out in detail in the investment strategy guidance. In summary, administering authorities:

• must set a target range for the proportion of their assets which they would like to be invested locally. This should include a target percentage as well as a range of tolerance
• must take account of Local Growth Plans set by relevant strategic authorities, where these are available
• may indicate that they will take a different approach towards expected return or accept higher risks for local investments than for the rest of their portfolio, provided that doing so would not involve risk of significant financial detriment to the fund and that they have good reason to think that scheme members would support their decision
• should set out their preferences for the local area and region, and the sectors, they wish the pool to target

4.5. Administering authorities should engage in thorough dialogue with their pool and other partner funds to ensure alignment can be achieved where possible. Alignment means agreeing similar geographies and investment sectors to ensure that investments can be grouped together at greater scale where desirable.

4.6. Regulation 18 requires administering authorities to co-operate with the relevant strategic authority to identify and develop appropriate local investment opportunities. The term “strategic authority” includes Foundational, Mayoral and Established Mayoral Strategic Authorities in England, as well as Combined Joint Committees in Wales. Mayoral Strategic Authorities (including Established Mayoral Strategic Authorities and the Greater London Authority) document their opportunities for investment in an investment pipeline. This is supported by a Local Growth Plan – a 10-year strategic framework for growth including an economic overview, shared priorities and an investment pipeline.

4.7. The relevant strategic authority is the strategic authority for the area within which that administering authority is situated. Where no strategic authority has been designated in the area within which an authority is situated the requirements of regulation 18 do not apply, however it is expected that in such cases administering authorities will work with local authorities in their geographic area to understand local economic priorities and to identify and develop local investment opportunities.

4.8. Administering authorities may delegate the requirement to co-operate with relevant strategic authorities to their pool. This is likely to be the most effective and efficient approach, particularly where a pool can work with a strategic authority on behalf of a number of or all of its partner funds.

4.9. The requirement to ‘identify and develop’ does not mean that administering authorities need to become involved in the design of projects. The expectation is that administering authorities, either directly or via their pools, will support the strategic authority to understand what makes an appropriate investment for a pension scheme to invest in and, as outlined in paragraph 4.14, provide feedback to assist in the development of investable opportunities.

4.10. Administering authorities may recommend specific projects for local investment to their pool for their consideration. Partner funds should work together and with their pool to set a minimum criteria, including investment size for pools to consider. This should strike a balance between ensuring that smaller investments can be made by the pool and ensuring that the pool is able to provide cost effective due diligence, implementation, monitoring and reporting of local investments.

4.11. Administering authorities must report annually on their local investments in their annual report, including the total value and information on their real-world impact and contribution to regional economic development, based on information provided by their pool. It is not necessary for administering authorities to undertake or commission their own report on their local investments to supplement the information provided in their pool’s report.

The role of pools

4.12. The pool’s primary role is to implement the investment strategy the administering authority has set in relation to local investment in the same way as for other aspects of the strategy. This may present a different set of challenges to the wider strategy. Administering authorities may wish to take account of non-financial outcomes for residents and the local economy, and to accept greater flexibility with regards to return, risk, scale and cost. Pools must include advice on the local investment approach in their advice on investment strategies.

4.13. Pools should consider the following factors when implementing administering authority strategies:

• the availability of suitable local investments which meet the administering authority’s objectives may be limited and depends on a range of factors, including the geographic location of the administering authority and competition from other investors. Pools must never invest in unsuitable assets purely to meet the target range set by their administering authorities
• as with all assets, pools are responsible for conducting due diligence on potential investments. Due diligence may be more difficult and costly to carry out for local investments but should be proportionate
• MiFID investment firms are required to act honestly, fairly and professionally in accordance with the best interests of their clients and full-scope UK AIFM have a similar obligation in relation to the best interests of the funds they manage. They are required to understand the investment objectives of their clients and the funds for which they act, and to take investment decisions which are suitable for clients or, where relevant, comply with a fund’s investment objectives, policy and strategy

4.14. Where administering authorities have delegated the requirement to co-operate with strategic authorities to their pool, the pool must ensure that they fully comply with the requirements of regulation 18 and paragraphs 4.6-4.9 above on behalf of the administering authority. Even where this responsibility is not delegated, it is recommended that pools work with relevant strategic authorities and consider the Local Growth Plan and investment pipeline in their own right.

4.15. Pools should regularly engage with strategic authorities regarding investment opportunities and provide feedback to assist in the development of investable opportunities, particularly where specific action by strategic authorities, such as granting planning permission, could make the projects more attractive.

4.16. Strategic authorities will be required, by amendments made by section 43 of the English Devolution and Community Empowerment Act 2026, to cooperate with administering authorities, and/or with pools on their behalf, to identify and develop opportunities in their investment pipeline appropriate to the pension fund. Pools should have a suitable way for both strategic authorities and other authorities to recommend investment opportunities for consideration. Pools should ensure that recommendations are given appropriate but proportionate levels of consideration. If a project is not suitable for investment, for example if it is too small or has risk or return characteristics which do not fit the requirements of partner funds, pools should provide clear feedback.

4.17. Pools should engage in thorough dialogue with their partner funds throughout the process to ensure alignment can be achieved where possible. Alignment means agreeing similar geographies, asset classes and investment sectors to ensure that investments can be grouped together at greater scale.

4.18. Not all local investment opportunities will necessarily be connected to a strategic authority or the local growth plan, and pools should not feel restricted to investing in projects identified through these routes when implementing the local investment objectives of their partner funds.

5. Reporting by the pools

Pool Annual Report

5.1. Pools must produce an Annual Report which includes information on assets, cost, performance and local investment for partner funds, members and the public.

5.2. At a high-level, full-scope UK AIFMs are already required to provide an annual report on a fund’s (investment vehicle’s) activities over the year or other relevant accounting period. The purpose of the requirements set out here is not to duplicate the requirements already in place by the FCA. The requirements set out here aim to supplement the existing annual reporting requirements where there is a particular need in the context of LGPS pooling. The pool annual report does not need to be a separate document to the annual report required by the FCA.

5.3. The report must relate to the scheme year ending 31 March and be published by 1 November of the same year.

Performance

5.4. Under the FCA requirements, the annual report that full-scope UK AIFMs are required to provide must include an overview of the investment vehicle’s investment activities, its portfolio and its performance.

5.5. In addition, LGPS pools should report the following:

• their investment returns at the asset class level against a  benchmark index or performance target for all asset classes listed in the template strategic asset allocation
• at the partner fund level, total returns against the partner fund’s overall expected return objective

Cost

5.6. LGPS pools should comply with the LGPS Code of Transparency to ensure consistent, clear, and comprehensive reporting of investment costs. The Code provides a standardised framework for disclosing costs across asset managers and investment vehicles, enabling pools to enhance transparency and support informed decision-making.

Local investment

5.7. LGPS pools should report the overall amount invested in local or regional projects and provide an account of their contribution to regional economic development. This includes investments in infrastructure, housing, regeneration, and other place-based opportunities that support local communities.

5.8. In addition to quantitative reporting, pools may also provide qualitative insights through local investment case studies. These case studies should highlight the nature of the investment, the rationale behind it, and the outcomes achieved, quantified as far as possible—such as job creation, environmental improvements, or enhanced public services. These should illustrate the real-world impact of LGPS investments for scheme members and local stakeholders.

5.9. To further enhance transparency, consistency and credibility, LGPS pools may consider adopting a voluntary standard which offers a framework for measuring and reporting the social and economic impact of place-based investments.

Other reporting

5.10. FCA requirements. Pools are required to comply with certain reporting requirements as MiFID investment firms and full-scope UK AIFMs. These are not summarised here.

5.11. Fund annual reports. Administering authorities are required to produce an annual report under regulation 57 of the Local Government Pension Scheme Regulations 2013. All investment-related information for these annual reports must be supplied by their pool.

5.12. Climate-related financial disclosures. Pools should provide reports to their partner funds regarding the partner fund’s climate-related financial risks and opportunities, for inclusion in or alongside fund annual reports.

5.13. Government data collection. Pools should provide data annually on assets to the Government Actuary’s Department and should also respond to any additional data requests issued by MHCLG from time to time.

6. Pool governance

Shareholder and client representation

6.1. In considering their governance arrangements, pools will need to comply with FCA requirements, as well as the requirements of company law, and good practice in corporate governance.

6.2. Due consideration needs to be given to the appropriate roles of shareholder administering authorities and non-shareholder client administering authorities in pool governance arrangements. It is important that the voice of shareholders and non-shareholder clients is heard by the pool, but the best way of achieving this will vary depending on the number of partner funds in a pool, whether there are any non-shareholder clients, and whether the pool is owned directly by administering authority shareholders or indirectly via a holding company.

6.3. Shareholder representatives must be named individuals, and clear lines of delegation should be in place should the named representative be unable to fulfil their duties directly.

6.4. It may be appropriate to have shareholder (and, where appropriate, client) representatives attending meetings of the pool company board, in a voting or non-voting capacity as appropriate. The composition of, and attendance at, board meetings is a matter for the board, which should determine any such arrangements in accordance with its governance framework and regulatory obligations.

6.5. Where individuals hold roles both in relation to an administering authority and within the governance of the pool company (for example as a director), they must ensure that they understand and discharge the duties associated with each role appropriately. In particular, directors are required to act in the best interests of the company and must exercise independent judgement in accordance with applicable legal and regulatory requirements. Appropriate arrangements should be in place to identify and manage any actual or potential conflicts of interest.

6.6. Pools may wish to consider appointing one or more independent non-executive director(s) (NEDs) who are not directly linked to any individual shareholder or client and who can represent the interests of shareholders and clients on the pool board. A NED should have appropriate knowledge, skills and experience, in order to provide suitable support and challenge to the pool board.

6.7. Pools should consider what matters are reserved to shareholders to decide and whether these require unanimous agreement or majority vote. These may include major changes of strategy or changes to the company structure. These are decisions to be agreed by the pool shareholder group. Requiring unanimous vote can lead to stalemate and slow decision making, and it is recommended that this approach is reserved for the most critical matters only except where the number of shareholders is very low.

6.8. Due consideration should be given to the appropriate arena for pool shareholders to discuss and contribute their views on the pool’s operation and strategic direction. This may be a single committee, or a number of subcommittees or working groups tasked with consideration of specific topics. Governance documents should be clear about the level of knowledge and expertise attendees will be expected to have to perform in the role effectively. It is for participating administering authorities to determine appropriate representation in such forums, taking into account the need for sufficient experience, authority and understanding of LGPS and investment matters. The appropriate level of representation will depend on local governance arrangements.

6.9. Shareholder administering authorities are also clients of the pool, and pool governance models must be clear as to when administering authority representatives are acting as a shareholder and when as a client. In designing their pool’s governance model, pool shareholders should consider requiring that a different person represents an administering authority in its role as shareholder vs its role as client.

6.10. Where pools have non-shareholder client partner funds as well as shareholders, appropriate consideration should be given to how clients contribute to pool governance. Clients will not have the same decision-making role as shareholders, but it remains important that their views are heard.

Member and employer representation

6.11. The Local Government Pension Scheme Regulations 2013 require administering authorities to have an equal number of employer and scheme member representatives on their pension boards. Those regulations also require administering authorities to publish in their governance compliance statement whether scheme member and employer representatives are included on pension committees, and if so whether or not they have voting rights. Whatever way scheme members and employers are represented in the governance of administering authorities, their views must be taken into consideration in developing the investment strategy, which is the main driver of returns for the fund.

6.12. Understanding the views of members and employers will assist pools in interpreting fund investment strategies, particularly in relation to responsible investment. Pools and their partner funds must work together to ensure that member and employer views are understood by the pool. There are multiple approaches that could satisfy this requirement and how this is done is a matter for local decision. In choosing approach, consideration should be given to making sure that the pool hears a range of views from members that is representative of the views of the membership as a whole and not just those of a vocal minority.

6.13. It is a matter of local decision whether member and employer representative views are communicated to the pool directly, or through administering authority representatives. Pools are encouraged to consider inviting member and employer representatives to speak to or observe meetings of the pool board, committees and working groups, whether on an ad hoc or standing basis. Where this is done, the terms of participation should be clearly defined.

6.14. Where member or employer representatives are not invited to attend pool meetings on a standing basis, member and employer representatives who are local pension board or pension committee members should be allowed to request to attend particular meetings. This is to make sure the pool is aware of member and employer views on issues it is considering and to support transparency by enabling representatives to report back, subject to any restrictions around commercial confidentiality, to members and employers on the work of the pool. Pools are not, however, required to accept such a request.

6.15. Where member and employer representatives are not able to directly engage with the pool, it is important to consider how they will be kept informed of the pool’s activity and decision making, for example through pool officer attendance at the local pension committee or board meetings.

6.16. Pools must publish their policy for ensuring that the pool has a good understanding of the views of members and employers.

Holding the pool to account

6.17. Individual administering authorities are responsible for monitoring the performance of their pool in implementation of their investment strategy. Shareholder administering authorities are responsible for holding their pool to account for its performance overall. The senior LGPS officer assisted by the independent person will play a key role in this process.

6.18. Administering authorities should monitor performance through regular data and reports on performance from the pool, and report on findings to their pension committee or officer holding the delegation. The local pension board must also be kept informed. Administering authorities may wish to share joint teams to enable them to do this at proportionate cost. While external support may be sought, it should not be routinely necessary.

6.19. It is expected that data received from the pool will include cost data provided under the LGPS Code of Transparency and Cost Transparency Initiative. The participating administering authorities in a pool should agree with their pool the level of detail that is required, for example whether templates are to be aggregated at asset class level. Pools must be prepared to justify their decisions to administering authorities if there are concerns about costs relative to risk and return achieved.

6.20. The participating administering authorities in a pool should also collectively consider how the performance of the pool overall is reviewed. The oversight model should be developed in conjunction with the pool company but owned separately by the collective of participating administering authorities in the pool. The participating administering authorities in a pool may wish to invite a third party to conduct a fiduciary management review on their behalf of the performance of the pool. This should take place as and when required and should be proportionate.

6.21. Governance arrangements should also set out clearly what recourse options there are if administering authorities are concerned about pool performance. In particular, shareholders should consider how they will respond if one or a small number of participating administering authorities are not satisfied by the pool’s performance, but the majority are content.

6.22. Whatever governance arrangements are agreed will need to enable the shareholders to take into account client administering authorities’ views when making decisions, where applicable. Client administering authorities will need to have arrangements to effectively hold the company to account for its delivery of their investment strategy, including through LGPS senior officer engagement and requirements in their contract with the company.

Conflicts of interest

6.23. The pools are wholly owned by the shareholder administering authorities and exist only to deliver the investment strategies of their participating administering authorities - both shareholder and client. They do not aim to generate profits. This removes most significant sources of conflict, but it is possible for actual or perceived conflicts of interest to arise in pool governance and operations. Pools should work with their partner funds to identify any conflicts and set out how they will manage these in a robust conflict of interest policy.

6.24. The FCA requires full-scope UK AIFMs to maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to identify, prevent, manage and monitor conflicts of interest from adversely affecting the interests of its funds and fund investors, and MiFID investment firms have a similar obligation. The FCA also requires that full-scope UK AIFMs and MiFID investment firms establish, implement and maintain an effective conflicts of interest policy. This must identify the circumstances which constitute or may give rise to a conflict of interest entailing a material risk of damage to its funds, the fund investors or clients, and specify procedures to be followed, and measures to be adopted, to prevent or manage those conflicts.

6.25. In considering their operational model and conflicts of interest policy, pools will need to consider how the advisory and investment management functions of the company will operate to mitigate conflicts of interest, and how to manage the interests of different clients in the pool. Pools will also need to comply with the FCA’s requirements on remuneration. For example, a full-scope UK AIFM must apply remuneration policies and practices for relevant staff (staff whose professional activities have a material impact on the risk profiles of the funds it manages) which are consistent with, and promote, sound and effective risk management and which do not encourage risk-taking that is inconsistent with the risk profile of the funds it manages.

7. Directions by the Secretary of State

Powers to direct participation in an asset pool by an administering authority

7.1. Regulation 9 allows the Secretary of State to direct an administering authority to participate in a particular pool, to direct that an administering authority ceases to participate in a particular pool, or both. The direction may also require that a pool named in the direction and any of its participating funds must take steps specified in the direction to enable the administering authority to comply with the direction.

7.2. These powers can be exercised where the Secretary of State considers that to do so  is in the best interests of:

 - any employer or member of the scheme (pension fund) administered by the administering authority being directed to join or leave a particular pool  - any other administering authorities participating in the pool that the authority is being directed to join or leave  - any employer or member of a scheme (pension fund) administered by any of the other administering authorities in the pool an administering authority is being directed to join or to leave - the scheme as a whole

7.3. Prior to making such a direction, the Secretary of State is required to consult all administering authorities and pools that would be named in the direction, as well as any other administering authorities participating in a pool named in the direction and any other bodies that the Secretary of State considers it appropriate to consult. This consultation should seek to establish whether there are any better means of resolving the issue of concern within an adequate timeframe, what the impact of such a direction would be, and whether the proposed direction is the best approach or whether an alternative direction would be preferable.

7.4. It will usually be appropriate for any such consultation to last for at least 30 days to allow those consulted adequate time to respond, however this remains at the discretion of the Secretary of State.

7.5. Regulation 9 also gives the Secretary of State power to carry out enquiries to obtain additional information to inform a decision on whether to issue a direction or what a direction should require. Administering authorities and pools must comply with any such request for information. In the event that the information cannot be provided by the administering authority or pool, a response to the Secretary of State must be provided setting out the reasons why it is not possible to provide the information.

Power to direct the manner in which pools carry out investment activities

7.6. Regulation 20(4) allows the Secretary of State to direct a pool to carry out any investment management activities in a manner specified in the direction. This power may be exercised where the Secretary of State has grounds to believe that the manner in which a pool is carrying out (or intends to carry out) investment activities risks significant detriment to:

• one or more of its participating administering authorities, including detriment to the members and employers participating in a scheme (pension fund) administered by them
• the scheme as a whole

7.7. Detriment may include situations where the Secretary of State has grounds to believe the pool is investing in a manner that does not prioritise achieving maximum benefits of scale. Examples include the use of more sub-funds than are required to effectively implement the investment strategies of participating funds, or utilising segregated mandates where a collective investment vehicle would be more appropriate.

7.8. This power may not be used to direct a pool company to invest or not invest in a specific asset or asset class, sector or region.

7.9. Prior to issuing such a direction, regulation 20(6) requires that the Secretary of State consult the pool that it is intended to name in the direction, any administering authorities participating in that pool, the Financial Conduct Authority, and any other person that the Secretary of State considers it appropriate to consult. The consultation must invite views on:

 - whether the issue of concern is sufficiently intractable to warrant a direction  - whether there are better means of resolving the issues that the direction is designed to address  - whether there could be any unintended consequences of a direction, including whether a direction could put a pool in conflict with the requirements of their FCA authorisation.

7.10. It will usually be appropriate for any such consultation to last for at least 30 days to allow those consulted adequate time to respond, however this remains at the discretion of the Secretary of State.

7.11. Regulation 20 also gives the Secretary of State power to carry out enquiries to obtain additional information to inform a decision on whether to issue a direction, or what a direction should require. Pools must comply with any such request for information. In the event that the information cannot be provided by the pool, a response to the Secretary of State must be provided setting out the reasons why it is not possible to provide the information.

Power to direct pools to comply with guidance

7.12. Regulation 20(1) and (2) allows the Secretary of State to direct the pool company to comply with this guidance or with any other guidance issued under regulation 19.

7.13. This power may be exercised in such situations as the Secretary of State is satisfied that the pool is failing, or has failed, to comply without good reason. The direction must specify the contents and date of issue of the guidance with which the pool is required to comply, and the grounds upon which the Secretary of State has come to the view that the pool is failing or has failed to comply with guidance without good reason. This includes the evidence that the Secretary of State has relied upon to inform this view.

7.14. Before issuing such a direction, regulation 20(6) requires that the Secretary of State consult the relevant pool(s), any administering authorities participating in that pool(s), the Financial Conduct Authority, and any other person that the Secretary of State considers it appropriate to consult. The consultation must include seeking views on:

 - whether the issue of concern is sufficiently intractable to warrant a direction  - whether there are better means of resolving the issues that the direction is designed to address  - whether there could be any unintended consequences of a direction, including whether a direction could put a pool in conflict with the requirements of their FCA authorisation.

7.15. It will usually be appropriate for any such consultation to last for at least 30 days to allow those consulted adequate time to respond, however this remains at the discretion of the Secretary of State.

7.16. Regulation 20 also gives the Secretary of State power to carry out enquiries to obtain additional information to inform a decision on whether to issue a direction, or what a direction should require. Pools must comply with any such request for information. In the event that the information cannot be provided by the pool, a response to the Secretary of State must be provided setting out the reasons why it is not possible to provide the information.