The UK’s Local Government Pension Scheme (LGPS) is facing wide-ranging regulatory reform later this year, including further pooling requirements and reporting rules relating to climate impacts.
Delegates at the Pensions and Lifetime Savings Association’s (PLSA) Local Authority Conference this month heard that the Department for Levelling Up, Housing and Communities (DLUHC) – the department responsible for local government and the LGPS – was planning a major consultation, to be published in the autumn.
Teresa Clay, head of local government pensions at DLUHC, said: “The existing [LGPS] framework is no longer fit for purpose, and that is why we are looking to consult on a strengthened framework, which will aim to deliver much more substantial investment in levelling up… [and] effective management and reporting of climate risks and a stronger position on a responsible investment generally.”
Reporting requirements in line with the recommendations of the Task Force on Climate-related Financial Disclosures is also scheduled to form part of the consultation. It emerged during the conference that the LGPS Scheme Advisory Board, which oversees the LGPS in England and Wales, had been pushing for this to be delivered in time for the COP26 conference in November last year, but it had been delayed within DLUHC.
Clay added that the government also wanted to see the LGPS continue to reduce costs and demonstrate “better performance” in the context of the new regulatory framework.
A political influence on the push for a more cohesive scheme is the UK government’s Levelling Up project. This wide-ranging policy initiative is aimed at increasing investment in regions outside London and the southeast of England. As part of this, LGPS funds have been asked to invest up to 5% of their assets into UK-based infrastructure projects.
Roger Phillips, chair of the LGPS Scheme Advisory Board, told delegates that this kind of requirement made consistency of reporting essential.
Presenting the Scheme Advisory Board’s annual report for the 2020-21 financial year, he said: “We need to understand better how [infrastructure assets are] defined within individual funds. This is very important because, when we have government talking to us about allocating 5% to infrastructure investments […] we need to make very clear what the definition of that is, and are we properly capturing it.”
In addition, a consistent and detailed approach to asset reporting would help demonstrate how much the LGPS is already investing in UK infrastructure and other local or regional investments, Phillips added.
“None of us have a problem with investing in UK infrastructure, providing we recognise that we are a pension, we are not some grant giver – we need to have a return,” he emphasised.
Asset pooling was to play a major part in the forthcoming consultation, Clay said, as government ministers were growing impatient with a perceived lack of progress on the project.
“Ministers are very focused on their goals and there is a level of impatience about the progress so far,” Clay stated. “It is recognised what a huge effort it’s been and the benefits that have been delivered, but there is some impatience on progress so far.”
The consultation will include rules and guidelines for funds aimed at speeding up the move to pooled arrangements. Clay said this may include a timeline for the remaining assets outside of pools – estimated at approximately a fifth of total LGPS assets – to be brought into a pool.
“Progress has been a bit slower and more incremental that I would have hoped”
Mike O’Donnell, outgoing CEO of the London CIV
Asked if pooling could become mandatory, Clay said such a move would be a “very significant step” that would likely require new primary legislation to be passed by parliament. She added: “We very much hope that it will be possible to see the kind of progress we need on a voluntary basis.”
Cost savings through pooling totalled roughly £200m when last assessed in August 2021, and are forecast to reach £700m by 2024. In the 2020-21 financial year, assets held in pooled investment vehicles – including but not limited to the eight pooling companies – increased by four percentage points to 66% of all LGPS assets.
Mike O’Donnell, outgoing CEO of the London CIV, the pool for London’s 32 boroughs’ pension funds, agreed that the pooling project needed to go “further and faster”. “Progress has been a bit slower and more incremental that I would have hoped,” O’Donnell said. “I think the absence of a sufficiently clear strategy and framework regarding pooling means we’re still suffering a bit.”
One of the aims of the planned consultation is to put the LGPS in a better position to use its scale effectively on the world stage.
A PLSA conference panel discussing class action lawsuits urged LGPS funds to use their influence to engage with legal cases in the US if there is potential for asset recovery, with Sarah Wilson, CEO of proxy advice firm Minerva Analytics, highlighting the danger of companies misstating environmental credentials to the detriment of shareholders.
With £342bn (€397bn) in assets across the system, the LGPS as a whole ranks among the biggest public sector pension schemes in the world.
However, the LGPS’s fragmented nature means that the system rarely presents itself as a single entity. Phillips emphasised several times in his remarks the importance of reporting consistently and accurately to aid the ability of the Scheme Advisory Board to engage with policymakers and other stakeholders supported by strong data.
The DLUHC’s consultation is scheduled for publication in the autumn, but more details have yet to be confirmed.