Local Government Pension Scheme (LGPS) funds will be required to publicly disclose their UK equity investments, with the government potentially taking “further action” if allocations don’t increase, Jeremy Hunt revealed in the Spring Budget.
To ensure greater pension fund investment in the UK, the government “will build on the Edinburgh and Mansion House reforms to unlock more pension fund capital”, Hunt said in his speech to Parliament.
The Treasury disclosed plans last week requiring DC pensions schemes to publicly disclose their level of investment in UK business, he has now extended this to the LGPS.
Going forward, LGPS funds will have to present an annual summary of their asset allocation including any investments in the UK and an update on the progress of pooling.
The chancellor also warned that he would “consider what further action should be taken if we are not on a positive trajectory towards international best practice”.
According to the official budget papers, the government will introduce the reporting requirements for LGPS funds in England and Wales “as early as” April 2024.
However, this information is already publicly available in fund’s asset allocation documents.
Raised eyebrows
Hunt compared UK pension schemes performance to Australian funds, suggesting: “I remain concerned that other markets, such as Australia, generate better returns for pension savers with more effective investment strategies and more investment in high-quality domestic growth stocks.”
The need for diversification and currency risks are some of the reasons why the LGPS might be cautious to increase their exposure to UK stocks, Aoifinn Devitt, London CIV’s CIO, told Room151: “Global investments have been a long-term driver of portfolio performance, especially in the context of a weakening Sterling, global exposure has been very beneficial for the LGPS,” she argued.
Her views were echoed by Louis-Paul Hill, associate partner at Aon: “We would point out that LGPS funds tend to have a much higher allocation to growth assets such as equities, than their private sector counterparts, due to their long-term nature and the security both of employers and of benefits for members. However, while it is true that funds’ allocation to UK equities may well be lower than Government would like, and is likely to have fallen materially over time, it’s important to consider why that is the case.
” UK listed companies make up only around 4% of the total global equity market and UK equities, as measured by the FTSE-All Share index, have returned around 7% per year on average compared to 10.5% per year from the MSCI All World Index over the last 20 years – and/or an average of 5% per year compared to 13% per year over the last 10 years. This supports Aon’s, and many LGPS funds’, preference to invest globally through considering a global investment opportunity set” he said.
Mary Lambe, head of LGPS Governance at Aon, added:“Reporting on the percentage allocated to UK equities won’t, of itself, change investment behaviour and from a governance perspective, nor should it. As noted in our response to the recent consultation “Next Steps in Investment”, we don’t believe Government should be mandating how LGPS funds invest, and it is not clear how that fits with the fiduciary duty of Pensions Committees.”
Richard Parkin, head of retirement at BNY Mellon Investment Management: “UK pension funds started reducing their UK equity exposure over 25 years ago whittling down their UK holdings from 70 to 80% of equity assets to negligible holdings today.
“Indeed, many pension schemes’ equity holdings now track global stock market indices where the UK represents a paltry 4%. When we look around the world, we find comparable countries such as Australia and Canada still have a strong domestic equity bias despite relatively small stock markets.
“The chancellor’s announcement requiring schemes to disclose their UK equity allocation will do nothing more than confirm what we already know that pension funds generally have no bias to the UK. More direct action will be needed to bring about any real change and drive greater UK investment.”
Iain Campbell, head of LGPS investment at Hymans Robertson said that the new reporting requirements for the LGPS were no surprise as such, but that the focus on the UK has “raised eyebrows.”
“This appears to be another shift in the government’s wording around the role they wish UK pension funds to play in supporting the UK economy. Previously, the focus has been on “venture and growth capital” and “productive finance”, so further clarity will be needed on what exactly, will be defined as UK equities, and whether this is just one of a number of UK asset classes that will need to be reported on,” he said.
Administrative burdens
The PLSA broadly welcomed the proposals. But Nigel Peaple, director of policy and advocacy for the industry body, warned of increased administrative burdens. “LGPS pension funds already have a high burden of reporting compliance, so it will be important to ensure that the new requirements are reasonable and proportionate.”
The budget papers also stated that government will work with the LGPS to “consider the role they could play in unlocking investment in new children’s homes”.
‘LGPS can’t make up for gov shortfalls’
This follows on from Hunt’s announcement to provide £45m match funding to local authorities to build an additional 200 open children’s home placements and £120m to fund the maintenance of the existing secure children’s home estate and rebuild Atkinson Secure Children’s Home and Swanwick Secure Children’s Home.
Campbell added: “With regards to the potential for the LGPS to help with funding for building more children’s homes, this was again somewhat of a surprise.
“It can only be presumed that it ties in with the government’s levelling up agenda, albeit it on a somewhat more focussed issue. Given the purpose of the LGPS and the fiduciary duty of pensions committees, this must be done in a way that stacks up financially for the LGPS – the risk-adjusted returns must be acceptable, and the governance requirements cannot be too burdensome.
“We must always remember that the LGPS is there to pay benefits, not to make up government spending shortfalls.”
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