The UK pensions industry has raised concerns that government proposals to reform the Local Government Pension Scheme (LGPS) could undermine fiduciary duty and local decision-making.
A technical consultation on new regulations implementing the government’s Fit for the Future reforms of the LGPS closed last Friday, prompting a wave of responses from industry bodies.
Pensions UK highlighted risks to local accountability and fiduciary responsibilities. The association said the Secretary of State’s new powers to direct administering authorities (AAs) to join a pool could override local authority and governance.
It urged the government to exercise such powers “in consultation with the AA” and not to let statutory powers override existing shareholder agreements.
The LGPS Scheme Advisory Board (SAB) shared the concern, noting that the government could force pension funds into a pool even if existing members “do not believe that it is in the best interest of their beneficiaries, or where the pool documentation is clear, new shareholders can only be admitted with the agreement of the existing shareholders”.
Responsible investment
The SAB also raised concerns about responsible investment under the draft regulations.
It criticised what it sees as a shift from requiring funds to set out an ESG/RI policy as part of fiduciary duty, to describing ESG as mere “priorities and preferences” that could be overridden by a pool on “financial grounds”.
The board argued that this risks moving key judgements about the balance between financial and non-financial factors from funds to pools.
“That means that it is ultimately pools and not funds that determine the acceptable balance between the financial and non-financial considerations on [responsible investments]. This seems to directly usurp the fiduciary duty, which sits, rightly due to the greater accountability, with funds,” the SAB said.
It also criticised the Ministry of Housing, Communities and Local Government’s (MHCLG) decision to circulate the accompanying statutory guidance non-publicly, arguing that this limits transparency despite the guidance carrying substantial operational and governance implications.
The board said the guidance should have been consulted on openly, with administering authorities asked to respond by January 12.
Pools’ expanded role
Pensions UK also questioned the expanded role of pools. Previously focused on advising on strategic asset allocation, due diligence, and execution, pools could now be expected to advise on local and responsible investment allocations, potentially identifying or developing opportunities.
The association said this blurs governance responsibilities and called for clarity that pools should remain advisory on strategy and implementation, leaving sourcing to AAs.
Maria Espadinha, policy lead for LGPS at Pensions UK, said: “We support the drive for increased scale, stronger governance and accountability across the LGPS, but it is crucial that new regulations are proportionate, workable in practice, and do not undermine fiduciary duty or local decision-making.
“Our members have identified a number of operational, legal and practical challenges that must be addressed if the reforms are to deliver their intended benefits for scheme members.”
She added: “The LGPS is one of the largest and most successful funded pension schemes in the world. Its strength lies in local accountability and a deep understanding of members’ needs. Any regulatory changes must enhance, not erode, these foundations.”
