Local Government Pension Schemes (LGPS) should make their asset allocation decisions without interference from politics, pensions industry commentators have warned, in light of a recent proposal by the UK government to double the funds’ investment in private equity.

On Monday evening, chancellor of the exchequer Jeremy Hunt announced a proposal to get LGPS funds to double their investment in private equity to 10%, as part of his Mansion House reforms.

He said there would be a call for evidence on doubling private equity investment, which he said could “unlock” a further £25bn by 2030.

The proposals also require pension funds to have a plan to invest up to 5% of their assets to support the government’s ‘levelling up’ strategy.

Joanne Donnelly, secretary of the Scheme Advisory Board, said that many LGPS funds are already likely to be meeting the 10% ambition.

She added: “It’s clear from scheme-level assessments collated by the Scheme Advisory Board annually that funds (in England and Wales) are continuing to diversify their assets and invest more in alternative asset classes, like private equity and infrastructure.”

Donnelly said that this is something that LGPS pools have assisted funds with “given the higher levels of due diligence required, and the complexity of some investment opportunities”.

She added that the sector would welcome more engagement with the British Business Bank and appreciate support that can be offered to provide easier access to suitable investment opportunities.

Philip Pearson, partner at Hymans Robertson, believes that any external directives “may backfire” and lead to “poorer outcomes” for scheme members and sponsoring employees.

He said: “Private equity has a higher risk [level] than most other asset classes, so sizing the allocation for an individual fund requires careful consideration of its objectives, risk appetite and interaction with the rest of the portfolio.”

Chris Smith, investment manager for UK equities at Jupiter Asset Management, agreed that there are still “a lot of questions to answer” around the proposals.

He added that it is also “unrealistic” to expect the reforms to make a “meaningful” difference to growth or investment in the UK in the short term.

For now, he said that it is “crucial” that the pension compact remains “voluntary both in letter and in spirit”.

He said: “Fundamentally, pension fund trustees have a fiduciary duty to carefully and thoughtfully maximise the risk-adjusted returns for their members, and trustees should be making these important investment decisions independently without interference from politics.”

With no “stated intention to change regulation” in the Mansion House reforms, Clifford Sims, council member of the Society of Pension Professionals, said that the proposal to double LGPS investment in private equity is “less problematic” than its proposal to mandate a 5% allocation to the levelling up agenda.

Sims said: “Changing pensions legislation to require a 5% allocation to specific projects, however laudable, smacks of the problems that led the government to lose its Supreme Court case on requiring local authorities not to invest in a way that frustrated its defence and foreign policy aims.

“Put simply, funds’ fiduciary duty must prevail over government policy in non-pensions areas.”

Sims added that LGPS funds should “retain autonomy over asset allocation”.

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