Briefing Note: Government consultation – LGPS (England & Wales): next steps on investments

The long-awaited government consultation on Local Government Pension Scheme (LGPS) investments has now been out long enough for the government’s vision for the future to sink in. Here, we follow up our 60-second summary with our views on the key themes of the consultation, as well as areas where we feel more clarity is needed.

In summary

• We agree that pooling should be completed as quickly and extensively as possible, where it’s achieving clear benefits for funds. But the government should give further consideration to the ambitious timescales, as well as reasons for funds to maintain assets outside of the pool.

• The challenge of passive assets also needs a sensible approach from government.

• To increase the scale of pooling, we’d like to see clear evidence and a reason for targeting £50–75 billion of AUM, to justify the further costs, especially where it will only be achieved by merger

• Further thought is also needed on the optimal scale for different asset classes and potential diseconomies of scale, including the governance impact of pushing together several member funds.

• The use of in-house management has benefits, but there are also arguments for using third-party investment managers, and a ‘one size fits all’ approach should be avoided. 

• Under improved governance, we agree that high-level investment strategy decisions should remain with pensions committees, but we predict issues with the pools taking on all other implementation considerations. We see the decisions as being intertwined, so given the fiduciary responsibility of individual authorities to ensure pensions are paid, individual funds must keep a say in how their strategies are implemented. 

• We’re also concerned about the pools providing investment strategy advice to their member funds. Some are not currently equipped to provide this, and it could concentrate risk.

• On adopting best practice, we don’t feel there’s clear evidence of one single approach being better than the rest. There are strong benefits to different approaches that we feel need to be preserved.

• On financing support for Levelling Up, it’s helpful to receive clarity on how the government sees the role of the LGPS. Many funds will already meet the requirements, but their already stretched pensions teams will also have to accommodate additional reporting. Meanwhile, it’s unclear how genuinely attractive investment opportunities will be originated by pools and funds.

• We believe it’s not appropriate for government to prescribe allocations to specific asset, eg a 10% allocation to private equity, given the fiduciary responsibilities of individual authorities in respect of managing their fund’s assets and their responsibilities in ensuring pension payments are made.

This consultation sets out a number of positive steps for LGPS investments, but some areas require further thought and detail from government. We’ll be responding to the consultation prior to the 2 October deadline, setting out our opinions to government, and would encourage all interested parties to make sure they have their say on these extremely important issues for the LGPS.

Webinar on-demand

Watch our special edition webinar on-demand, where we focused on the consultation. Kate Dickson was joined by David Walker to discuss our views on the consultation and the key points that we will be setting out in our response. 

Watch on-demand

If you would like to discuss anything covered in this briefing note, please get in touch.