Government to pool LGPS assets to create pension megafunds that could invest £80bn

Local Government Pension Scheme

 

The LGPS in England and Wales will manage assets worth around £500bn by 2030. These assets are currently split across 86 different administering authorities, managing assets between £300m and £30bn, with local government officials and councillors managing each fund.

 

The government said: “Consolidating the assets into a handful of megafunds run by professional fund managers will allow them to invest more in assets like infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants – most of whom are low-paid women – whose savings are managed.  

 

“These megafunds will need to meet rigorous standards to ensure they deliver for savers, such as needing to be authorised by the Financial Conduct Authority. Governance of the Local Government Pension Scheme will also be overhauled to deliver better value from investment decisions, which independent research suggests could free up money in the long term to support local public services. 

 

“Local economies will be boosted by the changes as each administering authority will be required to specify a target for the pool’s investment in their local economy, working in partnership with local and mayoral combined authorities to identify the best opportunities to support local growth.”

 

If each administering authority were to set a five per cent target, that would secure £20bn of investment in local communities, the government added. It said that a new independent review process will be established to ensure each of the 86 administering authorities is fit for purpose.

 

Defined contribution schemes

 

Meanwhile, defined contribution pension schemes are set to manage £800bn worth of assets by the end of the decade.

 

There are currently around 60 different multi-employer schemes, each investing savers’ money into one or more funds. The government said it will consult on setting a minimum size requirement for these funds to ensure they deliver on their investment potential.  

 

The government will also consult on measures to facilitate this consolidation into megafunds, including legislating to allow fund managers to more easily move savers from underperforming schemes to ones that deliver higher returns for them.

 

Mansion House speech

 

In her Mansion House speech Ms Reeves said that she welcomed the reforms from the previous government to encourage more pension fund investment in productive assets, and will take them forward.

 

She said one of her first steps as chancellor was to announce the Pensions Investment Review led by the first ever joint Treasury and pensions minister Emma Reynolds.

 

Ms Reeves said in her speech: “Australian pension schemes invest around three times more in infrastructure investment compared to defined contribution schemes in the UK… and 10 times more in private equity, including in high-growth businesses, compared to the UK.

 

“One of the key reasons for this is the much larger size of their funds… while our pensions landscape remains highly fragmented.”

 

Ms Reeves added: “That means many of our pension funds do not have the capacity to invest at the scale required. And more often than not, it is Canadian teachers and Australian professors reaping the rewards of investing in British productive assets through their pensions schemes rather than British savers.

 

“That’s not good enough… and we need to change that. So tonight, we are publishing the interim report of the Pensions Investment Review.

 

“It sets out our plans to create Canadian and Australian-style ‘megafunds’ to power growth in our economy… and start the most significant set of changes to the pensions landscape since the Turner Review… underpinned by a clear commitment to legislate for these changes for the first time… in the Pension Scheme Bill next year.”

Ms Reeves said that “significant consolidation” of the defined contribution market and each of the 86 LGPS administering authorities consolidating all their assets into eight pools, will deliver “real change in our economy”.

 

Ms Reeves said: “Through consolidation of the [defined contribution] market and Local Government Pension Schemes into megafunds… previous domestic and international experience suggests… that we could unlock around £80bn for investment in private equity, including exciting growth businesses… and in vital infrastructure projects including transport, energy and housing projects here in the UK.

 

“We will take a more proactive approach to working with investors to ensure that capital is directed to the UK’s biggest growth opportunities.”

 

Sector reaction

 

Commenting on the announcements, Steve Simkins, partner and public sector leader at Isio, said that the consultancy firm supports scaling up the LGPS to achieve greater impact, but that “it’s essential that this is done thoughtfully”.

 

He said: “While current proposals focus on a top-down structure, a bottom-up approach is equally critical to meet the diverse needs of numerous employers and their employees past and present. As it stands, valuable insights from initiatives like Maple 8 – such as professional leadership, clear risk management and enhanced member services – are not yet being fully implemented across the board.”

 

Mr Simkins said that moving to ‘megafunds’ would require LGPS fund mergers, which would be a time-consuming process that likely will not affect this parliament.

 

“Additionally, with mandated investment classes off the table, questions remain about if and how the government might mandate all assets to be directed through these new megapools,” he said.

 

“Under current regulations, local LGPS funds have control over asset class decisions, with the megapools simply serving to manage these assets.

 

“Without regulatory change, the megapools won’t dictate the asset allocation, putting the government’s £80bn UK investment target for companies and infrastructure at risk. Balancing the government’s national investment ambitions with the autonomy of local councils is, therefore, a ‘wait and see’ situation.”

 

Elsewhere, Phil Jenkins, managing director and founding partner at Centrus, said that megafunds would have better capability to invest directly in infrastructure rather than through third-party fund managers, which is the case now.

 

But in aggregate, it may not increase their appetite for allocation to infrastructure, he said, although pooling funds together should be more efficient.

 

In addition, Mr Jenkins said that it is not yet known whether there will be more investment in social housing from these megafunds than is the case from pension schemes currently.

 

“Pension funds are one of the main sources of equity investment into the sector at the moment, so anything that serves to potentially unlock more of that over time is a good thing and is positive,” Mr Jenkins said.

 

“But I don’t think it’s a silver bullet, and it’s not going to be a quick process. The government is talking about bringing forward legislation next year with a view to forming these funds by 2026 and then there’s going to be the whole process of integration, so I think it’s going to take quite a long time both to enact and to see the investment impact starting to come through into the market.

 

“You might start to see some of that coming through towards the end of this term of parliament – it’s not going to be a quick process.”

 

Robbie McInroy, head of LGPS client consulting at Hymans Robertson, said the pension actuarial firm is pleased to see that the government has heeded the warning of the LGPS community and decided to seek solutions within the current structure of the LGPS.

 

“The LGPS is highly efficient at providing benefits and value for money for employers and taxpayers, but it is a delicate ecosystem,” he said.

 

“Allowing the LGPS funds to continue to make the strategic decisions on asset allocation means that local accountability is maintained. Local control of pension costs is an important element of local service provision – a similar concept to the government’s devolution drive to empower regional areas. 

 

“The proposals also represent a significant increase in the services that the pools offer their funds. It is imperative that this is done in a way that doesn’t distract the pools from doing the day job of providing the required level of risk and returns for their funds.”

 

However, Melanie Durrant, a partner in the public sector consulting team at Barnett Waddingham, which acts as a fund actuary to several funds in the LGPS, said the LGPS reforms deliver more enforcement but lack transformative change.

 

“Local Government Pension Schemes were holding their collective breaths for ‘the biggest reform in decades’ at the Mansion House speech, especially given the build-up from the early communications and Labour’s vocal ambitions for UK growth,” she said.

 

“Given that crescendo, the end result has been a bit underwhelming. In reality, the proposals are more of the same, but with a greater degree of enforcement of pooling. There is no merger of funds, and no mandate to invest a per cent of those assets into the UK’s domestic markets.”