The Government published a consultation on various proposals relating to the Local Government Pension Scheme (LGPS) on 14 November 2024.  

This covers forcing the LGPS funds to pool their assets, mandating investment within the UK and local areas and improving governance. Its stated aim is to ensure that fragmentation and inconsistent governance do not prevent the LGPS from acting as the ‘engine of growth’ for the UK economy.  

But will these proposals bring the holy grail of growth to the UK economy?

Pooling

The Government's view is that further progress towards pooling will bring greater efficiencies. It has said it proposes that whilst individual funds will retain responsibility for investment strategy, implementation of and advice on that strategy should be the responsibility of the pools. Funds would be required to transfer all their assets into the pools by March 2026  and the pools themselves will all be required to be investment management companies authorised by the Financial Conduct Authority.

The Government's view is that these proposals will drive greater efficiencies by removing duplication, streamlining decision-making and ensuring that decisions are made by those who are best placed to make them. Greater scale is seen as bringing greater negotiating power on fees and more capacity to diversify investments.

Although it is not (yet) requiring pools to merge, the pools will be expected to explain why a merger with another pool(s) is not desirable. It also seems clear that, although funds will formally retain responsibility for investment strategy, pools and funds are expected to work together to agree on a ‘common approach’.

Unsurprisingly, consolidation of administration is also on the horizon with the government seeking views on whether pools could do more of this or whether funds could collaborate more.

Investment

'Growth is the government's number one mission' and the LGPS is seen as being able to bring important investment capacity to that mission.  In order to increase local investment, funds would be required to set out their approach to local investments, to cooperate with local and combined authorities in identifying local investment opportunities and then report annually on local investment.

Governance

The Government has cited research from the Pensions Policy Institute that returns could be increased by up to 2% per year with improved governance, as risk is managed better and opportunities are identified and taken due to improved agility and effectiveness.  

It therefore plans to introduce recommendations from the Scheme Advisory Board's Good Governance review including requirements for:

• introduction of a senior officer with delegated responsibility for overall management and administration of the fund;
• a biennial independent governance review;
• a governance and strategy, including a conflict of interest policy;
• preparing and publishing an administration strategy;
• improved accessibility of annual reports;
• new requirements for training and knowledge for those involved with the management of LGPS funds.

In addition, funds would be required to appoint an independent advisor.

Pools would be required to ensure a representative from all partner funds on their boards and to publish asset performance and transaction costs.

Analysis

Although the consultation says that the Pensions Review has been set up with the twin aims of improving pension outcomes and increasing investment in the UK, it is clear that it is the latter aim which is much more important to the Government, certainly as far as the LGPS is concerned.

The Chancellor has taken inspiration from large Canadian pension funds (the Maple 8) in putting forward these proposals but it's not clear that these proposals will guarantee the UK growth she is looking for.  

The Maple 8 has a similar proportion of assets invested domestically to the LGPS and whilst the average LGPS investment return is a bit lower than the Maple 8, so are its average costs. Whilst larger funds can be more efficient, have better governance and negotiate better fees with external managers, is bigger always better? There may come a point where improvements plateau - and of course, size can bring its own problems. Growing pains may also mean that it takes a while for efficiencies and improved performance to be realised.

The elephant in the room is, of course, whether the Chancellor's aims are compatible with the interests of members and employers. Employers will certainly welcome improvements in investment performance and reductions in cost (which should result in lower contributions) - but will they get these by investing locally? Will a move towards a ‘common approach’ on investment strategies suit employers with shorter time horizons in the LGPS as well as those with longer? Members will welcome the service improvements that better governance should bring - so long as size increases don't bring other problems.

Lots of questions but no guaranteed answers!  The Government has set out its own questions in the consultation with responses due by 16 January 2025.

For help with responding to the consultation or to discuss any of the issues raised above, please contact Doug Mullen or Lauren Broderick.