Commenting on today’s announcement from the Department For Communities and Local Government (DCLG) “Local Government Pension Scheme: Investment Reform Criteria and Guidance”, which sets out the Government’s guidance on how the Local Government Pension Scheme (LGPS) should pool assets, John Wright, Head of Public Sector at Hymans Robertson, said:

Tucked away in today’s Spending Review was the announcement that Government has published guidance for pooling LGPS assets into up to 6 British Wealth Funds, containing at least £25 billion of Scheme assets each. 

The guidance makes it clear that the Government will allow LGPS to suggest how pooling arrangements will be constituted and operate – this is the right thing to do.  It also sets out the criteria for pooling that all submissions should adhere to. These include articulating the benefits of scale, strong governance and decision making processes, reduced costs and value for money and an improved capacity to invest in infrastructure.

This is all pretty much as expected based on discussions over the last few months between Government, LGPS funds and others working with the LGPS community. 

The LGPS community is vigorously engaged in a process of investigating ideas and the best ways forward for pooling, looking at how to make substantial savings without compromising performance. It is important to establish first what should be done but allow funds time to figure out who they should pool with. 

Some funds are making progress with the “who” as well but it is right that the timetable allows some leeway for funds to work out the right groupings and partnerships to get the best outcomes for the long term. The timetable makes some allowance for this with initial proposals in February and final detailed proposals by July, but we should remember that the aim should be to identify the best proposals for the long term and taking time to get this right will pay dividends in the future.

Discussing the Government’s criteria of seeing improved capacity to invest in infrastructure, he added:

Some infrastructure investment is appropriate and attractive for pension scheme liabilities but the costs of investing in infrastructure are too high currently, and the supply of, and access to, the type of infrastructure investment LGPS funds need – assets generating income streams linked to inflation - is limited. 

In that context it makes sense to explore ways of making it easier and less costly for local government pension funds to invest in the kind of infrastructure LGPS funds need and want. It would be wrong to mandate how much local government pension funds invest in infrastructure – it is important that local government pension funds are able to invest in a range of different investments including stocks and shares, property and government bonds in the UK and elsewhere to deliver the best outcomes for pension scheme members and employers who pay contributions. 

Currently around 1% or £2bn of local government pension fund money is invested in infrastructure.  We expect the amount of money invested in infrastructure will increase when pools are created to enable local government pension funds to invest in infrastructure more easily and cost effectively.

Concluding, he said:

The Government expects ambitious proposals from the LGPS community and we’re confident that LGPS will deliver.

For further information or images, please contact:

Matthew Whitbread / Alexander Burley 

Hill + Knowlton

matthew.whitbread@hkstrategies.com / 0207 413 3515

Alexander.burley@hkstrategies.com / 0207 973 5925