With only months left until the next general election, the UK government is putting increased pressure on Local Government Pension Scheme (LGPS) funds to further consolidate the management of their assets, Room151 can reveal.
Last week, local government minister Simon Hoare sent a letter seen by Room151 to all administering authorities to investigate the pace of pooling and explore the prospects of potential fund mergers.
The letter, sent on 15 May, is asking administering authorities to outline how they intend to complete the pooling of listed assets ahead of the March 2025 deadline to ensure their fund is efficiently run and delivers economies of scale. Authorities have been requested to send in their responses by 19 July.
Simultaneously, the government is also hosting a series of roundtable discussions with LGPS representatives to discuss the completion of the pooling journey. One roundtable was held last week and another two meetings, discussing the prospects for LGPS funds consolidation, are due to be held this week, industry sources told Room151.
In the past, Hoare has stated that he was “giving serious thought” to the idea of reducing the number of LGPS funds and that there could be a better way to manage LGPS assets.
The government also appears to be increasingly concerned that several funds might not meet its deadline of having all their listed assets pooled by March 2025, as announced in the Autumn Statement, industry sources said.
Bromley councillor Keith Onslow, who also acts as the chair of Bromley’s Pension Committee is attending some of these meetings with the government and expressed his concerns about plans. “There seems to be a lot of progression here which doesn’t have a lot of substance.
“The real issue with pensions and investments is the investment performance. Any savings on expenses could be minuscule with adverse performance on investments due to the government forcing funds to invest in assets they’d rather not invested in,” he warned.
Having said that, he welcomed the conversation: “I have great concerns over this but I am pleased that the minister is engaging and we get an opportunity to set out our views, which I will be doing on Thursday.”
Neil Mason, speaking in his capacity as chair of the PLSA’s LGPS Policy Board broadly welcomed the initiative, stating it was good that the government was talking to the industry.
“I wonder whether the government is seeking an answer to the wrong question. If the recommendations of the Good Governance Report were implemented, a lot of the issues around governance, efficiency and consolidation would solve themself,” he argued.
But he also emphasised that any consolidation effort had to be initiated bottom-up.”It is important that the LGPS solves this themselves and seeks to be innovative and positive in answering the challenges that are being set. I don’t think we can afford to be defensive this is ultimately for the benefit of our stakeholders,” he stressed.
LPFA consultation
This comes as the London Pensions Fund Authority (LPFA) commissioned Hymans Robertson to launch a survey exploring the potential consolidation of London Funds.
The survey will investigate appetite among funds for either merging two or more funds into a single entity or to consolidate functions such as administrative services. The latter has already been put into practice by some London funds.
“The local government minister has made it very clear that he intends to reduce the number of funds, it now looks like someone has fired the starting gun,” an industry source told Room151.
Councillor Onslow expressed his scepticism: “I am very concerned that Hymans has taken on this project, it doesn’t look very much like a survey and more like a move to merge funds,” he warned.
“Hymans Robertson believe that any conversation about the future structure of the LGPS should be led by LGPS funds proactively, and that any changes proposed should be evidence based and result in clear benefits, particularly for employers and members. By helping LPFA to facilitate a conversation on consolidation in London, we want to support LGPS funds to drive the future of the scheme,” the consultant said.
The 32 London funds are widely expected to be at the heart of the government’s consolidation efforts due to their significant number and the fact that the individual funds are all relatively small but continue to pursue independent asset allocation and fund governance within the London CIV pool.
While LGPS regulations currently do not specify guidelines for the merger of funds, in some cases, funds have successfully merged. This includes, for example, the Richmond LGPS fund, which agreed to merge with Wandsworth in 2017.
The issue of reducing the number of funds remains politically sensitive due to the political heterogeneity of the boroughs which the funds represent. Suggestions to consolidate the number of London funds were put forward by then LPFA CEO Mike Taylor in the years prior to pooling.
However, the initiative was not warmly received at the time by all of the London boroughs and ultimately, LPFA joined the LPPI pool, rather than London CIV.
Push on pooling
In addition to pushing for fund mergers, the government has also not yet taken the potential for a merger of pools off the table. UK chancellor Jeremy Hunt had announced in his Autumn Statement that he aimed for all LGPS pools to have more than £200bn in assets by the end of 2040. He did not specify whether this could be achieved through asset growth or pooling; many in the industry saw it as an indication that he aimed towards further consolidation of pools.
In his Spring Statement, Hunt had made fewer explicit references to the size of pools but had warned that he intended to take ‘further action’ if funds did not further increase their allocations to UK equities.
Hoare has only taken on the role of Parliamentary Under-Secretary of State for Local Government in November last year, and with the Labour Party leading by more than 20 points in the polls, it appears unlikely that he will remain in post for much longer than a year.
But the Labour Party has already made it clear that it intends to press ahead with LGPS pension fund consolidation, as the party said in its plan for financial services released in February.
“Labour is both perplexed and frustrated at the pace of pooling. They are wondering what they need to do to drive it further,” said Ewan McCulloch, chief stakeholder at Border to Coast Pensions Partnership, in a recent PLSA briefing on the future of the LGPS.
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