Proposals for LGPS funds to invest 10% of assets in private equity ‘unhelpful’

The UK pensions industry has called government proposals to increase the Local Government Pension Schemes (LGPS) investment into private equity to 10% of their assets “unhelpful”.

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

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

The LGPS board called the plans for LGPS funds to invest 10% of their assets in private equity to boost UK economic growth “unhelpful”.

It said: “Asset allocation is the key determinant of success and requires careful consideration of the specific circumstances of the fund and is based on taking expert professional advice from actuaries, investment consultants and others. Statements from ministers cheerleading particular asset classes, albeit well meant, are not relevant or particularly helpful to that process.”

Counter-intuitive

Steve Simkins, partner at Isio, meanwhile said that encouraging more investment in private equity counters the objective to reduce costs through pooling and also limits the current opportunity for LGPS funds to move to lower risk assets “which should be in greater demand given the very significant shift in markets that followed last year’s mini-budget”.

He said: “At the moment the LGPS is fully funded on a low-risk basis, a position that can be protected with lower risk assets.”

With the LGPS able to reduce its risk, Simkins said private equity is “less attractive”. He added that the focus should be on lower risk private credit and infrastructure which can also create local impact.

“Private equity investments are often exposed to non-UK markets so if growing the UK economy is a driver, it makes more sense to direct LGPS assets towards investments which support UK people and places, in line with the levelling up approach,” Simkins explained.

He added that any private credit or levelling up investment should be considered in the context of a fund’s wider investment strategy and fairly assessed in relation to other investment opportunities available.

Simkins also stressed that the requirement to increase private credit and levelling up investments should not apply to employers who want to or need to de-risk.

Disruption

Clifford Sims, chair of public sector at Society of Pension Professionals (SPP), said the proposals would “fundamentally disrupt the good work that has been achieved since 2015 to achieve a balance between administering authorities and pool operators”.

Sims added that the sovereignty of funds is “paramount” and whatever merits there may be in supporting local investments or investing in private equity, the idea that funds should be directed to help with levelling up and the government’s own ambitions for private equity represents an attempt to “usurp the power of investment for non-pensions purposes”.

While SPP expressed support for the efficient exercise of statutory powers given to administering authorities to meet LGPS members’ benefit obligations and the proper discharge of fiduciary duties, it said the consultation appeared to ignore the importance of these duties.

This specifically relates to the “levelling up and private equity” proposals and the integration of investment and funding risk management.

Sims urged the UK government to be mindful of the fact that the Supreme Court “clearly” ruled that assets owned by LGPS authorities are not “public money”. He added that the proposed ‘targeted interventions’ could be contrary to fiduciary duty of LGPS funds to make investment decisions to fulfil pension obligations.

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