Industry calls for thoughtful execution of UK LGPS ‘megafunds’ reforms

The UK pensions industry has called for thoughtful execution of reforms to Local Government Pension Scheme (LGPS) funds as the government looks to unlock more than £20bn for investment in local communities.

In her first Mansion House speech, Rachel Reeves, the UK’s chancellor of the exchequer, announced a number of different measures in what she dubbed as the biggest pensions reform in decades.

One of the measures includes changes to LGPS funds aiming to free up money for local public services in the long term and secure more than £20bn for investment in local communities.

Under the proposals, LGPS funds 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 – many of which use the UK’s existing eight investment pools.

The government said that consolidating the assets into a handful of ‘megafunds’ run by professional fund managers will allow them to invest more in assets such as infrastructure.

The ‘megafunds’ will be authorised by the Financial Conduct Authority (FCA) and the government said the governance of local schemes will also be overhauled to deliver better value from investment decisions.

The government added that each administering authority will be required to specify a target for a 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. It added that if each administering authority were to set a 5% target, that would secure £20bn of investment in local communities.

A new independent review process will be established to ensure each of the 86 administering authorities is fit for purpose, the government added.

Chris Rule, chief executive officer of Local Pensions Partnership Investments (LPPI), said that pooling has delivered “early successes”, however, there is “much greater potential”.

Recently LPPI reported that it was able to deliver £200m in savings for its partner funds a year before its target.

Rule said: “The Pensions Review provides the potential to build upon success to date and accelerate progress. Since the launch of the review the government has been proactive and very broad in its engagement and we look forward to continued dialogue.”

Rule said that LPPI will work with partner funds and wider sector colleagues to better understand the details of the consultation, adding that there is opportunity for greater collaboration across pools and funds.

Michael Hayles, partner in the pensions team at law firm Burges Salmon, said that with the scale of assets under management, it is “no surprise” to see that the ‘megafunds’ will be under much greater scrutiny – starting with a compulsory requirement for FCA regulation.

He said: “We are told to expect an ‘overhaul’ of LGPS governance to deliver better value for investment decisions […] many in the industry would like to see implementation of the scheme advisory board’s Good Governance recommendations.”

He pointed out that after “weeks of speculation” the picture is now “much clearer” for LGPS funds about what is in store but many questions remain unanswered.

This includes how investment allocation decisions will be made and by whom, and whether the shift away from local decisions will risk making LGPS investments more politicised. He also added that the government is not clear on what the review of the administering authorities will entail.

Thoughtful execution

Dan Carpenter, partner and LGPS investment lead at XPS Group, said that in order to be successful, it is important to reflect on and address the elements that have to date held back many LGPS administering authorities from greater adoption of the existing pools.

He said: “These issues include concerns over organisational stability of the pool, combined with limited resources or capabilities leading to gaps in the available offerings. Together this means more than half of assets are currently invested outside of the pools. Not all pools have sufficient capability to provide the full range of services required.”

Carpenter said that the case for greater scale leading to better outcomes is compelling, but in order to drive progress, pools need to be invested in and positioned to attract LGPS participation, rather than administering authorities being coerced into something that they consider sub optimal.

He said: “This drive needs to be pull rather than push.”

“This drive needs to be pull rather than push”

Dan Carpenter, partner and LGPS investment lead at XPS Group

Steve Simkins, partner and public sector leader at Isio, agreed that it is essential that scaling up the LGPS needs to be 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.”

Simkins added that moving to ‘megafunds’ would require LGPS fund mergers, which he said is a “time-consuming process that likely won’t impact this Parliament”.

He also said that 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 ‘megafunds’.

“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,” Simkins explained.

He said that the emphasis on supporting regional economies through a commitment of £20bn in local investments is “encouraging” aligning the LGPS with the broader local government ecosystem.

However, he said that given the LGPS’s robust funding status, this same sum could be mobilised directly without delay, rather than waiting for these new investments to materialise.

“In its ongoing review, we urge the government, alongside the new Office of Value for Money, to review the distribution of funds across the LGPS and it many employers who are serving our communities,” he said.

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