UK chancellor Jeremy Hunt has announced far reaching reforms for the LGPS, including plans to reduce the number of LGPS Pools, a push for a full consolidation of all assets, and to increase private equity allocations to 10%.
Speaking at the annual Mansion House Dinner in the City of London, the chancellor set out a host of planned changes to the UK pensions industry aimed at boosting private investment into the UK economy amid record high borrowing costs for the UK government.
Hunt’s plans for the LGPS include a direction to set the minimum asset size for LGPS Pools to £50bn, a step which would significantly reduce the number of LGPS Pools in operation. Currently, only two of the eight pools – Border to Coast and LGPS Central – meet this threshold.
Bigger and better?
The chancellor also set out a target that all LGPS assets should be pooled by March 2025, a measure which goes beyond his initial spring budget announcement, which focused on the pooling on listed assets. The new target could pose a challenge for some LGPS funds which have opted to place illiquid assets outside their pools.
In a policy consultation document released today, the government highlighted that so far, the pace of pooling has been uneven. It estimates that just under 40% of all assets have now been pooled, with LGPS Central having pooled only 30% of its assets and LPP as much as 80%.
The government sees the pooling of all assets, including unlisted assets as the key driver to achieving economies of scale. It predicts that once all assets have been pooled, 5 of the 8 pools would meet its criteria for having assets in excess of £50bn. Beyond that, the government consultation also advocates the potential merger of some existing pools.
Mike Weston, pension scheme chair of trustees at the Institute of Cancer Research and former CEO of LGPS Central welcomed the proposals. “Bold headlines, which if implemented will undoubtedly deliver more economies of scale and governance to benefit LGPS scheme members, sponsoring employers and local communities. But is there time to turn words into actions before the next General Election? I really hope so.”
Private equity boost
Moreover, Hunt also set out an ambition to double LGPS investments in private equity to 10%, claiming that this shift in asset allocation would “unlock” £25bn of investment by 2025. But neither Hunt, nor the policy consultation document released today imposed any hard targets on LGPS allocations, acknowledging that every fund was different and that private equity should be part of a broadly diversified portfolio.
Nigel Peaple, director of Policy and Advocacy at the PLSA responded to the announcement with the argument that increasing the size of pools was no panacea to bolstering investment in the UK, instead, the government could focus on supporting good governance at LGPS schemes. “Perhaps of more importance than anything else is ensuring there is a pipeline of suitable investment assets – which is why we support a bigger role for the British Business Bank announced today” Peaple said.
LGPS schemes already tend to have a relatively high allocation to private markets, which in most cases involves a combination of private debt and equity as Philip Pearson, partner and head of LGPS at Hymans Robertson said: “With the government announcing a consultation about its ambition to double existing LGPS investments in private equity to 10%, it is important to note that private equity is already playing a big role in the portfolios of long-term investors like the LGPS.”
But Pearson also warned against the government taking on an overly interventionist stance on asset allocation: “External directives on asset allocation may backfire, leading to poorer outcomes for scheme members and sponsoring employers. Private equity is higher risk than most other asset classes, so sizing the allocation for an individual fund requires careful consideration of its objectives, risk appetite and interaction with the rest of the portfolio.”
“We generally recommend investing via global private equity mandates as this typically leads to superior investment outcomes. UK private companies are able to secure funding from these programmes if they offer prospective returns which are competitive globally. But we also believe there is a case for allocating a percentage of capital committed to smaller companies located in the UK regions, opportunities which may historically have fallen below the radar of the major global private equity houses” he added.
Many LGPS investors have previously expressed concern about being bound to set allocations to private markets.
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