On the close of the government’s Local Government Pension Scheme (LGPS) pooling consultation, organisations and professionals in the sector have expressed their support for the evolution of pooling, but warned that this should not be to the detriment of funds’ fiduciary duty.
In July, as chancellor Jeremy Hunt outlined that he was looking to UK pension funds to help boost the economy in his Mansion House speech, the Department for Levelling Up, Housing and Communities (DLUHC) launched its consultation on proposals relating to LGPS investments.
The key elements of the government’s proposals were that all LGPS assets should be pooled by March 2025, a direction to set the minimum asset size for LGPS pools to £50bn and the ambition for funds to allocate 10% to private equity assets as well as 5% to levelling up assets.
Focus on governance
In response to the consultation, £46bn Northern LGPS highlighted that the pool is “very, very supportive” of the original pooling objectives set out in the November 2015 Investment Reform Criteria and Guidance, but highlighted that it has concerns around the “top-down structure” of the most recent consultation.
Gerald Cooney, chair of Northern LGPS, said: “We believe that perspective needs to be altered to a more collaborative model, which has proved successful in practice and demonstrated by the Northern LGPS. In this approach, funds are recognised as having a strong and active role in the governance of pools.
“They are able to hold the pool, its board and executives to account and there is an important role for member representatives in that too.”
Northern LGPS’s consultation response also highlighted that it agrees that pooling should be completed as “quickly and extensively as possible, where it is achieving clear benefits for funds”.
“However, the general feel of these proposals is that they are a collection of measures designed to help pools prosper.
“Clearly this should in turn deliver benefits for LGPS funds; but speaking on behalf of an LGPS fund, it would have been reassuring to see some references in the consultation to LGPS members, employers and local taxpayers who are ultimately funding the scheme and will suffer the consequences of any future underperformance,
“The LGPS has performed well, is fully funded, and open to new members. In short, the LGPS should be seen as a success story and as such reform should be carefully considered so as not to undermine its track record of providing pensions to beneficiaries in retirement in a sustainable and affordable manner,” Cooney added.
Private equity focus ‘too narrow’
Despite operating on a very different model, £60bn pool Border to Coast also emphasised the importance of governance, adding that scale could only deliver benefits if it was accompanied by effective governance.
While Border to Coast has already more than 20% of its assets invested in private markets, it warned that the government’s proposed 10% private equity allocation for the LGPS was “unnecessarily narrow and could have unintended consequences” . Instead, Border to Coast suggested a broader definition of private growth capital.
Alluding to the government’s recent policy U-turn on net zero, the pool also said that in order to attract institutional investment, the government needed to provide policy certainty.
While Border to Coast was broadly supportive of the pooling deadlines set by government, it also said that further clarity with regards to legacy illiquid assets and the pooling of passive funds was needed.
‘The LGPS is not a sovereign wealth fund’
Steve Simkins, partner at Isio stressed that role of the LGPS as a pension fund and its main priority is to pay pensions on behalf of its members.
“The LGPS needs to be effective from the bottom up (providing good outcomes for employers and members) as well as the top down (consolidation of funds and pools)” he said.
“The Mansion House reforms do not address the bottom-up perspective and may be at risk of undervaluing it. After all, the LGPS is a pension scheme, not a sovereign wealth fund.”
However, Simkins warned that the government’s proposal to increase the scale pools to beyond £50bn “might be a step to far”.
“Achieving effectiveness and efficiencies through consolidation is to be supported, but if the LGPS pools get too big there could be diseconomies of scale,” he added.
Concern over transitioning assets
In response to the consultation, the Pensions and Lifetime Savings Association (PLSA) stated that they agreed with the government’s intention to increase pool’s scale as it would be beneficial to funds. However, the association highlighted that it had concerns over its intention of building “scale as quickly as possible” and by the proposed deadline of March 2025.
The PLSA argued that assets should be transitioned to pools in an “efficient and well governed manner, without artificial timelines which could be detrimental to value”.
In its response, the association also highlighted concern over the government’s ambition for LGPS funds to allocate 10% to private equity as this specific target allocation could impact a pension funds’ fiduciary duty.
Tiffany Tsang, head of defined benefit, LGPS and investment at the PLSA, argued: “The core objective of the LGPS remains paramount: securing assets with an appropriate risk profile to be able to fulfil pension obligations to members.
“Therefore, it is important that both further consolidation and investment targets should only be undertaken if they align with the fiduciary duty to invest in the interests of scheme members.”
The PLSA suggested that instead the focus should be given to growth capital in private markets as a whole, rather than just focusing on private equity.
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