With the consultation on Local Government Pension Scheme (England and Wales): Next steps on investments closing later today, the UK pension industry has warned that the government’s proposals may lead to unintended consequences and urged that investment pools should be reformed before a pooling mandate is enforced.

At the beginning of July, the UK’s chancellor of the exchequer, Jeremy Hunt, outlined government plans to unlock up to £75bn of additional investment from defined contribution (DC) and LGPS funds to help grow the UK economy.

This included a deadline of March 2025 for all LGPS funds to transfer their assets into LGPS pools, suggesting that each investment pool should exceed £50bn and increase investment in private equity to 10% of their assets.

Responding to the consultation, the LGPS board has urged ministers to “seriously consider” how the messages in this consultation could negatively affect progress with pooling.

“If there is a prospect of some pools ceasing to exist in the relatively near future, then that will give many funds occasion to pause transfers and also reconsider their participation in that particular pool,” it said.

“This is precisely the opposite effect to what the minister is trying to achieve,” the board noted.

The LGPS board added that if the number of pools is to reduce, ministers needs to “carefully balance” any further marginal gains through increased scale against what “may prove a greater cost of disruption” both in terms of fees, tax charges and diversion of management attention at both funds and pools.

“There is no indication in the consultation of how this process is expected to occur nor what the respective roles of government, pools and funds would be,” it said.

The board stated that it should also be recognised that there are potential risks associated with greater size, such as concentration risk and the loss of ability to be nimble and to take advantage of smaller opportunities.

Clifford Sims, chair of public sector at the Society of Pension Professionals (SPP),  expressed concern over “tight timelines” of the LGPS pooling proposals, as authorities “must ensure the stability of pool operators before any transactions occur, all while facing competing priorities like the implementation of the McCloud judgement and pensions dashboard preparations”.

Sims also expressed concern about proposals to classify passively managed assets as not being “properly” pooled simply because of the legal model used to hold them.

Clifford Sims at Squire Patton Boggs

Clifford Sims at SPP

He said: “This could create an artificial rationale for driving further pooling and would involve unwarranted costs and defeat the economic case for pooling.”

Sims also highlighted the absence of a cost-benefit analysis, particularly concerning the proposed move of significant passive portfolios to the pools.

“Such an analysis would be crucial in justifying the benefits of such policy proposals,” he added.

Steve Simkins, partner at Isio, agreed that if the LGPS pools get too big “there could be diseconomies of scale”.

He said: “The government’s proposal to push beyond £50bn might be a step too far.”

He noted that to be the most effective, LGPS pools should specialise in certain asset classes and LGPS funds should be allowed to participate in each of the specialist pools to access their chosen asset class.

“We agree that funds should retain control of their strategy, in particular with reference to the profile and preference of their employers, with pools providing funds with the investment options required to manage and meet the needs of each fund’s employers,” Simkins continued.

He added that pools should be reformed before the pooling mandate is enforced, otherwise funds will be forced to invest in pools which are “later disbanded”.

SPP’s Sims also highlighted that there are significant governance risks in the proposed pooling structure, not least if the pools provide advice to funds.

He said: “We can already see vested interests in play in current market conditions, with the existing pools’ limited provision for low risk investments being one of the barriers to enabling the LGPS to take advantage of the very significant funding improvements since March 2022.”

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