We last wrote about the Government's proposals to make changes to LGPS investments in November.  To recap, as part of a package of measures known as the Mansion House reforms, the Government was consulting on significant changes to the way in which LGPS Funds invest - including:

• accelerating the consolidation of LGPS assets and expanding pooling to encompass fewer, larger pools.  In particular, it was proposed that a deadline would be set for all LGPS funds to transfer their listed assets (as a minimum) into a LGPS pool by 31 March 2025;
• LGPS funds and pools being required to have a plan to invest up to 5% of assets under management in “levelling up” in the UK; and
• 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”.

You can read more about the changes proposed for LGPS investments in the consultation in our earlier updates here and here.

What has happened since?

On 22 November the Government published its consultation response.  The key conclusions were as follows:

• Regulations will be amended to require funds to set out a plan to invest up to 5% of assets in levelling up in the UK (and to report annually on progress);
• Investment Strategy Statement ("ISS") guidance will be amended to require funds to “consider” investments to meet the Government's ambition of a 10% allocation to private equity;
• Revised ISS guidance will set out that funds should transfer all assets to their pool by the 31 March 2025 deadline.  Implementation will be on a “comply or explain” basis, whereby detailed rationale will need to be given for any asset remaining outside the pool, as well as a plan for future pooling; and
• Revised guidance on pooling will be published, to include a preferred model for pooling which pools will be expected to adopt over time.  The response says that the revised guidance will “set a clear direction for all funds to move towards delegation of strategy implementation and manager selection, in order to deliver the benefits of scale for all”.

Last month, the Chancellor gave his Spring Budget.  As we commented at the time, there were no radical new proposals for public sector pensions, but we did see another incremental step along the road towards utilising LGPS assets to advance the pensions and growth agenda with the announcement of new investment disclosure requirements – including a requirement to report on pooling progress.

Have our questions been answered?

In our November post, we identified a number of key questions that the consultation paper failed to address including:

• How will the proposals for increased investment by LGPS funds and pools in private equity be squared with the (quasi) fiduciary duty owed by administering authorities to scheme members? 

This concern was raised in consultation responses - in fact 84% of responses were opposed to the proposal in respect of private equity investment, with the most commonly cited reason being a perceived conflict with funds' fiduciary duties.  The Government's reply is that an “ambition” for funds to invest 10% of assets in private equity is not the same as mandating it and that “administering authorities would be under the same requirement as currently to act in the interests of members under their fiduciary duty”.  It says that “investments in private equity should only be made as part of an appropriate and diversified investment strategy which aims to provide good returns in the interests of scheme members, employers and tax payers”. The conclusion is that guidance will express the Government's “strong preference for progress on a voluntary basis”.  

The Government response reveals an interesting perspective on the position of the LGPS as being “favourable” to make a greater contribution to UK growth since members benefits are “guaranteed in law and do not depend on investment returns".  Unlike most DB schemes, the LGPS is open to new members and therefore has the freedom to invest for growth over the long term, and to benefit from these more illiquid but potentially higher return investments says DLUHC.

Similar considerations apply in respect of the requirement to publish plans to invest up to 5% of assets in “levelling up”.

• How will the conflict between A) the proposals to accelerate the transfer of assets into the existing pools and B) the proposal to reduce the number of pools be resolved?

This question was not addressed in the Government response.  In relation to the acceleration of transfer of assets into pools, it is noted that this is one of the proposals on which “many or most” responses expressed concern.  The Government says it recognises that March 2025 is a challenging deadline for Funds to transfer all listed assets into an LGPS pool but says that “a step change is necessary to deliver the benefits that greater scale will deliver”.  It therefore intends to push forward with both the proposal and the ambitious timescale.  

On driving greater scale through reducing the number of pools, the Government response reveals respondents raised concerns about the potential negative impact of more merging in terms of transition costs and administration - some suggested existing pools have only been around for a relatively short time and should be given more time to bed in and to prove their value.  

However whilst the fundamental tension between the two objectives that we identified in our previous post was not expressly addressed, the Government did specify that the focus in the short term “should remain on accelerating the transition of assets, improving governance and ensuring greater transparency and accountability” and that there was no intention to mandate a reduction in the number of pools in the immediate term.  The reduction in the number of pools appears to be a longer term ambition - with a future envisaged where a smaller number of larger pools will have at least £200bn of assets under management.

• Who will pay for all the advice the Funds need to meet the new targets?

Unsurprisingly perhaps, the Government response was silent on the question of who pays for all of the advice Funds will need to meet the new targets.

In respect of the new reporting requirements regarding LGPS investments (proposed as part of this same consultation, and brought in as part of the Spring budget as we reported here), the Government did recognise in its response that "there may be increased costs arising from a change to the asset classes reported but that these can be met from the fund".

• How will the Government ensure sufficient appropriate investment opportunities are available to allow Funds and pools to meet the new levelling up / private equity asset allocation plans?

This is another key question that was not fully addressed in the Government response.  One respondent did note that if all funds are competing for similar investments at the same time, this could drive up prices.  In respect of private equity investment opportunities, the response does note that LGPS pools will be encouraged to “develop and strengthen partnerships” with the British Business Bank (a government owned “economic development” bank designed to support smaller businesses with accessing financial markets) in order to access its pipeline of investment opportunities.

What happens next?

With a General Election looming large on the horizon within the year, whilst the Government appears committed to pressing forward with the changes outlined, its far from certain that progress will continue at the current rate.  The Labour party has indicated it supports a broadly similar productive finance agenda but has yet to publish its manifesto so it is unclear what degree of priority will be placed on pushing through these LGPS investment reforms.  

In the meantime, we look forward to publication of the updated Regulations and ISS guidance implementing the conclusions in the Government's response, and hope for further detail in respect of some of the questions that remain to be answered.