There are assets worth £361bn inside the UK’s Local Government Pension Scheme (LGPS), and for more than a decade government has pondered how its investments could be shepherded to boost the country’s economy.
The trouble for those in charge of the nation’s finances is that the cash is governed by 86 local authorities up and down the country who are responsible for the scheme’s pensioners. Nearly two million people currently rely on the funds for their pensions, and another two million are currently paying into the scheme.
In November 2024, however, chancellor Rachel Reeves announced she will push ahead with a consolidation plan – known as pooling – that she says will make an extra £80bn available for investment in the UK, in particular infrastructure projects and private markets.
‘For too long, pensions capital has not been used to support British start-ups’
The plan would see LPGS money pooled into eight investment vehicles, or ‘mega pools’, each of around £30bn–£50bn, achieving a scale that would, arguably, reduce their running costs and cut their investment risk significantly.
‘What the government and Rachel Reeves want,’ says William Bourne, a veteran consultant to LGPS funds, ‘is to get the LGPS to be behind more of the financing of investment in the UK. She’s taken the view that scale is the way to do it, and that’s why she’s pushing hard for pooling.’
Pooling
In 2015 LGPS went through an initial wave of pooling under the then chancellor George Osborne, which created eight pools for the funds to use. Of the total assets in the LGPS funds, £178bn is housed in the pools’ investment vehicles. A further £107bn is managed by the pools but outside those vehicles. The rest continues to be managed by the 86 councils, with much of that in illiquid assets.
What the government wants is more of the funds to be integrated into the pooled investment vehicles.
Taking her cue from Australian and Canadian public pension funds, Reeves said during her Mansion House speech on 14 November that reforms to LGPS will help ‘unlock’ tens of billions for investment. She added: ‘For too long, pensions capital has not been used to support the development of British start-ups, scale-ups or to meet our infrastructure needs.’
There are two major issues: timescale and fiduciary duty
Cautious welcome
But will the policy work? There is some scepticism within LGPS itself. A survey of 95 LGPS staffers by Room151 and Schroders found that 32% believe there is already enough scale in the scheme to support UK growth assets, while 32% think it isn’t the role of LGPS to focus on UK growth, and 20% feel there aren’t enough investment opportunities in the UK regardless of the scale pooling aims for.
Elsewhere, there is some optimism. Pranesh Narayanan, a research fellow with the Institute for Public Policy Research, says if the pools are able to coordinate their efforts with newly minted investment-targeting bodies such as the National Wealth Fund and Great British Energy, ‘there is a chance this works’.
That’s not to say pooling is without its difficulties. There are two major issues to resolve: the timescale and the fiduciary duty or governance problem.
Who is accountable for the performance of investments?
The chancellor wants the 86 funds to have their assets properly pooled by 31 March 2025. Bourne says that, though the policy is ‘well written’, that timescale looks forbidding. When the original pooling wave took place in 2015, pools didn’t become operational until 2018.
The consolidation of railway worker pensions into Railpen also took around three years. Bourne says neither of these examples bode well for the chancellor’s plan. ‘The timescale is impossible. There is a lot riding on the pools already being established and funds just moved over. Not nearly as easy as it sounds.’
Fiduciary duty
Then there is the fiduciary duty question: who is accountable for the performance of investments? Would it be the pools, and their investment staff running asset allocation strategies? Or would it be the 86 funds and their pension boards watching from the sidelines?
This is a tough governance question for the current consultation to resolve. Bourne says the local authorities who administer the funds will be ‘very uncomfortable they are being asked to give up almost all control but still retain responsibility’.
‘You have to invest for the benefit of your pensioners and no other purpose’
There are measures to strengthen governance in the consultation but it remains far from clear how they will resolve. Justin Wray, head of policy at the Pensions and Lifetime Savings Association, points out other governance concerns still to be addressed include whether investment managers pursue ‘objectives other than members’ benefits.’
In other words, how to resolve the tension between the fiduciary duty of the 86 to act in the best interests of members and the government’s desire for increased investment in the UK? Funds are perfectly entitled to seek the best returns wherever they can be found in the world. ‘There are risks that could arise if the governance is not strong,’ Wray says.
Targets
Currently about 30% of LGPS assets are already UK-based, according to Wray.
‘If you look at the Canadian pensions industry, the inspiration for these reforms,’ says Narayanan, ‘they don’t actually invest a great deal in Canada, they invest in international assets. They are still looking for the greatest returns, and often they are found in opportunities in other countries.’
While the consultation proposal suggests the chancellor is not looking to ‘mandate’ asset allocation to the UK, or to any particular asset class, Bourne says the government may suggest targets and ask pools to disclose how they have performed against them.
‘It comes back to the fiduciary duty,’ he says. ‘That duty says you have to invest for the benefit of your pensioners and not for any other purpose, including political reasons. I think the government recognises this and that’s why it probably won’t go down the mandate route. It’s more likely to go the very strong encouragement route.’
Further LGPS consolidation has been on the cards for some time and forms part of the government’s effort to lift the UK economy through investment. There are big governance issues still to settle in the current consultation, but the big push to have LGPS boost the nation is on.
