The UK government is calling for LGPS funds to increase their allocations in growth assets and contribute to ‘levelling up’ the British economy. Regulators are also pushing LGPS funds to accelerate their timelines for pooling and may soon require these schemes to adhere to the Task Force on Climate-Related Financial Disclosures (TCFD) requirements. Given the breadth of these proposed reforms and the governance challenges schemes will likely encounter if enacted, managers should keep an eye on three key questions.

As part of Westminster’s plans for ‘levelling up’ the economy, regulators and politicians are advocating for LGPS trustees to invest up to 5% of their portfolios to projects that support this agenda. Much of this is expected to go towards private market investments, and given that LGPS funds typically have long time horizons and high allocations to growth assets, commentators frame this as a win-win scenario that will benefit both schemes and the nation’s emerging sectors like advanced life sciences and innovative technologies.

Listed equities provide another avenue for LGPS funds to support the British economy, yet presently most LGPS equities exposure is concentrated on markets outside the UK. To resolve this some experts propose that LGPS trustees should consider ‘reshoring’ their global equities allocations to UK equities. All of this may unlock substantial changes in LGPS asset allocations.

Despite the benefits that may come from more LGPS investment in British markets, some pension professionals remain sceptical and worry that this may ultimately harm investment returns. Another point of contention is that dictating how LGPS trustees invest puts them in conflict with their broader mandate of delivering value for members and the local councils.

The Department for Levelling Up, Housing and Communities (DLUHC) recently launched its long-awaited consultation on LGPS reform. One key area of focus in these proposals is for LGPS funds to accelerate of the pooling of their liquid investments by March 2025.

Trustees are making steady progress consolidating their assets in the eight LGPS pools, and as a result many LGPS funds are improving their governance standards and delivering better value for members and local councils. 

Unfortunately, not all participating schemes are equally benefiting from this process, which is creating friction within the pools. In fact, some schemes favour the previous status quo and are even weighing the decision to exit the LGPS pools, which is creating uncertainty about the long-term viability of pooling.  

To reconcile some of these challenges, the Pensions and Lifetime Savings Association (PLSA) stresses the need for supervisory bodies like the Pension’s Regulator (TPR) and DLUHC to coordinate their resources and guidance more effectively. They also warn many LGPS trustees are struggling to keep pace with the complexity of ever expanding regulatory requirements, which hinders their progress with pooling.

Pooling is also appealing because the greater scale and expertise of larger assets allows LGPS trustees to actively support the country’s net zero ambitions and sustainability objectives. Interestingly, data collected by mallowstreet as part of our DB Climate Risk Report 2021, published in partnership with AXA Investment Managers, highlights that many LGPS funds were already taking steps two years ago, by thematically investing in clean technology and sustainable infrastructure. There was also a lot of LGPS appetite for solutions that contribute towards biodiversity protection.

Detailed climate reporting is one of the main things LGPS trustees look for in an asset manager. Our analysis of data from the Trustee Report 2022, produced in partnership with Janus Henderson Investors, shows that many LGPS funds favour working with managers that have an established track record on engagement and active stewardship. TCFD reporting capabilities are also important, and likely to become a bigger priority in the coming years now that the government has closed its consultation which will require LGPS to provide annual climate risk reports.

Consolidating the remaining LGPS funds into the pools will help many schemes save money and increase their exposure to a broader range of asset classes with ever stronger ESG credentials. However, this new arrangement will also result in fewer LGPS mandates for asset managers, thus making an already crowded market even more competitive. If you are actively targeting this market, please contact our team to find out about upcoming events and research opportunities.