This summer the Government has been consulting on investment policy within the Local Government Pension Scheme (England and Wales) (the “LGPS”). The consultation, which ends next week on 2 October 2023, seeks views on five main areas, one of which is a proposal for increased investment into high growth UK companies via unlisted private equity, including venture capital and growth equity.
This forms part of the Chancellor’s Mansion House reforms, which focus on consolidation and investment policy for both the LGPS and private sector schemes.
The Government wishes to see LGPS funds and pools doubling their current allocation into private equity, with a total ambition of 10% investment allocation, as part of a “diversified but ambitious portfolio”. This will be an increase from the 2022 reported average of 4.3% cross the LGPS funds, and is also double the target agreed between the Government and large private sector DC providers.
The Government’s view is that increasing private equity investment presents promising opportunities for both LGPS funds and the UK economy as a whole. According to the consultation document the 10% target: “… will help drive business investment throughout the country, in a way that allows everyone in the UK to benefit from the growth of our economy, by boosting LGPS investment returns, incentivising companies to grow and list in the UK, and grasping productive opportunities of the future.”
Of course, while investment in private equity comes with the potential for high returns, it is also associated with greater risks. What is paramount when LGPS administering authorities make decisions on investments is their (quasi) fiduciary duty to act in the best financial interests of scheme members. Primarily, investment powers must be directed to achieving what is the best for the funding position of individual LGPS funds. In addition to this, on average LGPS funds are currently well funded – the LGPS overall being 107% funded as at 31 March 2022. It will be interesting to see if these two factors might lessen LGPS fund appetite for more risky investment, and whether the Government’s proposed 10% target for private equity investment might be seen as just a bit too optimistic.
If you would like to discuss any of these points, please do contact our Pensions Team.