The reclassification of local government pension scheme funds as retail investors under incoming European rules will have serious consequences for infrastructure investment, warned the Pensions and Lifetime Savings Association.
The trade body for U.K. pension funds and their members issued the warning in its response to a Financial Conduct Authority consultation paper on the Markets in Financial Instruments Directive II, aimed at strengthening European derivatives and other financial markets.
MiFID II proposes classifying local authorities, including those that administer LGPS funds, as retail investors rather than professional clients to improve investor protection.
In its response, the PLSA said a reclassification is “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 will also severely impact their ability to invest in certain asset classes, such as infrastructure.”
The FCA has proposed a provision for local authority pension funds to be classified as elected professional status. Requirements include a quantitative aspect, with the FCA proposing an increase in the portfolio size of the client's financial instrument portfolio — defined as cash deposits and financial instruments — to £15 million ($18.4 million) from €500,000 ($522,000); and a qualitative test, requiring an assessment of the expertise, experience and knowledge of the client. However, the PLSA said the process of reclassification in this way is time consuming and “provides no guarantees that future investment strategies will be able to be effectively executed with existing managers or on existing terms.”
The association wants the FCA to distinguish between the investment activity of local authorities and local authority pension funds, allowing the latter to retain professional client status and to continue its effective investment strategies; and for the watchdog to provide reassurance that investment allocations in place prior to the implementation of MiFID II, in January 2018, will not have to be terminated prior to that date.
“It is not appropriate to leave funds with little time to adjust mandates, which will result in extensive costs, risks to the funding of the scheme and potentially large market exodus,” said the PLSA's response, noting that England and Wales' 89 LGPS funds have a total £241 billion in assets.
The FCA launched its consultation paper in September. The comment period closed Wednesday.