We last considered LGPS investment and pooling reforms in late June, just before the General Election, when we speculated as to what a new Labour Government might mean for public service pension schemes. 

At the time, though the manifesto was light on detail, the mood music indicated that (if elected) the new Labour Government was likely to pick up the baton where the previous Government left off when it comes to reforming LGPS investment and pooling requirements – the productive finance agenda had clear cross party support.  And certainly the early signs are that that prediction is likely to come to fruition – the Chancellor’s keen focus on growth means LGPS funds and their assets have been at the heart of the new Government’s plans in its first months.

As we await the Autumn budget (due next week), we reflect on what we know so far about the proposals for the LGPS under the new Government, how the industry is responding and what might happen next.

Pensions review

In the Labour party manifesto we were promised there would be a wholesale review of the UK pensions landscape and, as we reported in August, phase one of that review is currently underway.  The first phase focuses on DC and LGPS funds – for LGPS funds broad themes include consolidation, improving governance and “encouraging” investment in UK assets to boost growth.  At the time of writing, the 3 week call for evidence which forms part of this first phase review has recently closed (on Wednesday 25 September). 

Against this backdrop, we turn now to consider the latest position on two of the key areas which the previous Government had proposed to reform, and which are under consideration as part of the current review – acceleration and expansion of asset pooling and encouraging investment of LGPS assets to boost UK growth.

Pooling

In October 2023, the then Chancellor Jeremy Hunt announced in his Autumn statement that LGPS funds would be required to transfer all their listed assets into pools by March 2025.  This formed part of the Mansion House reforms which included a push to accelerate and expand the pooling of LGPS assets to encompass fewer, larger pools.

There’s been no indication so far from the new Government that it intends to deviate from that requirement but equally no confirmation that they intend to press forward with it.  The revised ISS guidance promised by the previous Government in its November 2023 consultation response has not been published. 

So the position on acceleration and expansion of pooling is not clear at this stage, as might be expected given this is a key part of the current pensions review.  We do know that the Chancellor is looking to learn from the Canadian “Maple 8” model of a smaller number of larger public pension funds, and that she met with representatives from those funds over the summer. 

The Chancellor’s theory is that larger schemes will be better placed to invest in productive assets such as infrastructure projects.  However, the SPP response to the call for evidence notes that consolidation and / or increased pooling does not automatically translate into greater investment in UK assets: 

“Such an outcome is, however, far from guaranteed. Decisions around the investment strategies and risk appetites required to meet future LGPS liabilities may not change with scale without corresponding changes to governance structures and fiduciary duties.

Consolidation would require significant time and resources to implement, especially if it was to be mandated. Pools are already a significant size. If pools haven’t already identified opportunities that they want to invest in, would consolidation result in greater investment in UK assets?” 

Indeed, far from being a result of lack of scale, the responses identify a number of other reasons why funds and pools may not be investing in the range of assets that the Chancellor might hope them to.  For example, one challenge identified in responses to the call for evidence, and by the industry more broadly, is the availability (or lack of) of good quality assets of the prescribed nature.  The PLSA’s 12 recommendations for investment interventions include establishing “a pipeline” of investable assets.  The assets will also have to be competitive in the global marketplace – the UK investments need to be more attractive than comparable assets.  And the PLSA advocates for providing incentives for pension funds to invest in UK companies, compared with non-UK, noting that this is “common in many other countries”.

Another barrier to investment in a broader range of assets can be decision-makers themselves.  The SAB response highlights that implementing its Good Governance recommendations (also one of the SPP’s 3 headline suggestions) would “support local investment by a wider range of funds by ensuring that all decision-makers have the skills and knowledge to discharge their functions confidently and properly manage potential conflicts of interest.”

Investment changes 

Readers may recall that in a consultation response published last November, the then Government proposed that:

1. Regulations would 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); and
2. Investment Strategy Statement ("ISS") guidance would be amended to require funds to “consider” investments to meet the Government's ambition of a 10% allocation to private equity;

At a high level, again, there has been no indication from the new Labour Government that it intends to depart from that direction of travel in terms of seeking to utilise LGPS assets to drive growth in the UK.  This is clear from the current eco-system review and the recent call for evidence, which includes in its scope “encouraging pension investment in UK assets to boost growth”.  However, as yet no specific measures have been tabled and it is not clear whether or not the changes to investment regulations and ISS guidance set out above will be implemented – we would expect the new Government to say that much depends on the findings and outcome of the review. We note with interest though a suggestion by the Pensions Minister, Emma Reynolds, at last week’s PLSA conference, that she was not ruling out mandating minimum levels of UK investments for pension schemes. Not surprisingly, some quite strong opposition to the idea of mandation has been voiced publicly by some of the biggest UK public service pension schemes, including the USS and the Greater Manchester Pension Fund. 

In terms of the ambition to “encourage” investment in UK assets, a key concern flagged in many of the responses to the call for evidence is the challenge posed by the Government’s aim to “encourage” funds to invest in a particular way, and how it might seek to achieve this whilst not restricting funds’ freedom to invest in the best interests of their beneficiaries (member, and arguably employers). 

In some senses it may be seen as “easier” or more appropriate for the Government to seek to direct the way in assets are invested in a public sector pension scheme than it would be to interfere in the way private trusts use their assets.  However, it has of course been clearly established that pension committees are subject to the same fiduciary duties as trustees when it comes to using and investing fund assets.   In its call for evidence response, the LGPS Scheme Advisory Board (“SAB”) indicated that “decisions on asset allocation are the key driver of value in LGPS and SAB would be cautious about anything which distorted the proper consideration of the funds’ fiduciary duty”. 

The SAB has also recently published a statement on fiduciary duty, in the context of increased pressure and lobbying in relation to ESG considerations.  That statement makes clear that “value, risk and yield of investments should […] drive an administering authority’s [investment] decisions”.

Comments

At the moment, LGPS funds and pools find themselves in something of a “no man’s land” – the direction of travel might be clear, but as yet there is no clear plan or proposal for how to get there.  The steps set out by the previous Government for achieving accelerated and increased pooling (to drive consolidation) and for increasing the amount invested by LGPS funds and pools in UK productive assets may or may not be taken forward by their successors. 

For the time being it seems to us that the most appropriate approach is for funds to continue on with their current objectives and strategies, unless and until the position changes.  In most cases it would seem logical to conclude that transferring listed assets into existing pools makes sense, in order to benefit from the pool’s economies of scale and better bargaining power. 

In general, the message from the industry seems to be focused on evolution not revolution – making sure that existing pools are in order and working to their full potential before seeking to further consolidate or make large scale changes. For example, the PLSA’s response to the call for evidence makes 3 headline recommendations in respect of the LGPS:

• to implement the LGPS Scheme Advisory Board’s Good Governance Review and ensure that the current fund and pool structures work well.
• to continue transferring assets from pension funds to pools where this is in the interest of scheme members.
• to increase the resources devoted to the operation of the LGPS.

Merseyside Pension Fund’s investment decision making may well have caught the Chancellor’s eye in recent weeks following its recent buy in of a section of benefits with a insurer – a path well trodden by DB schemes in the private sector but much less common in the LGPS.  This type of low risk investment (where schemes pay a premium to insurers in return for offloading risk) is perhaps the opposite of what Rachel Reeves is hoping for from the LGPS, and, although unusual in the LGPS, perhaps goes to show the scale of the challenge she faces in persuading pension boards to invest in such a way as to drive economic growth.  On the other hand, a recent survey by Octopus investments and mallowstreet asked 27 LGPS funds for their views on social infrastructure and revealed that 96% of schemes invest in clean / renewable energy and 64% in social infrastructure.  60% had allocations to affordable housing and healthcare.  The majority of funds attributed their investments in social infrastructure to “its risk return profile and diversification benefits”.  So the appetite to invest in long term projects, and in a way that benefits UK plc is already there and being actioned – perhaps this suggests that a stronger steer from the Government, together with a more readily available asset supply, would be sufficient to tip the balance and drive increased investment in UK growth assets by LGPS funds.

Next steps

Following conclusion of the call for evidence, we understand that an interim response to the first phase of the pensions review will be published in the coming weeks.  A full response will follow in the New Year. 

Should you require any advice in respect of the current investment duties and pooling requirements for LGPS funds, please do get in touch with Michael Hayles or your usual Burges Salmon pensions contact.