Merging Local Government Pension Scheme asset pools could do more harm than good, several people have warned ahead of the closing date of a government consultation on LGPS investments. 

 

The consultation, ‘Local Government Pension Scheme (England and Wales): Next steps on investments’, was launched in the wake of the chancellor’s Mansion House speech and closes on 2 October. It focusses on the acceleration of pooling, having fewer pools of £50bn to £75bn, and driving more LGPS assets towards private equity and ‘levelling up’.
 
However, some pensions experts and the LGPS Advisory Board have warned of potential disruption, uncertainty over costs versus benefits and losing access to smaller investment opportunities that could support the ‘levelling up’ agenda. 

 

The Advisory Board believes further changes and uncertainty over pooling could negatively affect its progress. 

 

“If there is a prospect of some pools ceasing to exist in the relatively near future, then that will give many funds occasion to pause transfers and also reconsider their participation in that particular pool. This is precisely the opposite effect to what the minister is trying to achieve,” it says.  

 

The SAB also cautions that costs and benefits should be carefully balanced when contemplating the merger some asset pools, noting that “there is no indication in the consultation of how this process is expected to occur nor what the respective roles of government, pools and funds would be”. 

 

Size comes with risks as well as benefits, it argues, including concentration risk and a lower ability to invest dynamically or invest in smaller opportunities.  

 

The board is generally critical of what it calls a “very top-down structure” being outlined in the consultation, “with the secretary of state potentially giving directions, pools having ownership of most decisions and individual LGPS funds left with quite residual functions. We believe that perspective needs to be altered to a more collaborative model, where funds are recognised as having a strong and active role in the governance of pools. They should be able to hold pool executives to account and there is an important role for member representatives in that too.”  

 

It argues that success in pooling has come mainly from alignment of strategies rather than just asset size, a factor DLUHC refers to as well. For this, SAB says good governance, engaged ownership and relationships of trust are key. 

 

“That can’t simply be mandated, and there is an ongoing role for DLUHC and the Scheme Advisory Board to facilitate that process,” it says.  

 

However, engaged ownership of pools requires educated decision-makers, and the SAB supports the government’s push for increased transparency on outcomes and training of pension committee members. 

 

 

Pooling has significantly reduced management fees for underlying funds thanks to the greater negotiating power of collectives, said Iain Campbell, senior investment consultant at Hymans Robertson. 

 

These lower manager fees are an ongoing benefit but have to be seen in the context of one-off set-up costs of pools, which were high. In 2021, Teresa Clay, head of local government pensions at DLUHC, revealed that the net savings from pooling across the entire LGPS were estimated at just £30m, which was expected to increase to £350m by 2023. 

 

   

A further change in the structure of LGPS investment operations would create new legal and transition costs, meaning it would take even longer for any benefits to be realised.  

“Every single view I've heard from any sort of experts said it will be very expensive to merge pools,” Campbell said. 

 

Size can also hamper investors, he agreed, and like the SAB, he thinks increased size could make it more difficult to invest in smaller opportunities – like those that might help to level up the UK’s regions. 

A single pool having more masters could also mean a loss of efficiency. “It's going to be a lot more difficult to please an increased number of funds with a single investment solution. So then you might find [pools] need to develop more than one version of that solution, which goes against the whole point of pooling,” said Campbell. 

DLUHC has not shown the extent of the benefits of further pooling, he argued – funds and pools might question whether a costly, large-scale exercise should be started without a clearer view on any potential benefits. 

The many questions the consultation raises should be answered soon, Campbell suggested, to avoid single funds changing their behaviour amid uncertainty over the future. 

 

The proposals could be fast-tracked, but what happens if there is not enough time before the next general election, due by January 2025 – and a different government comes to power? 

 

“Labour has been supportive of pension scheme investments into the UK economy, not just in the LGPS but private sector as well,” said Campbell. “They would potentially just pick this up and run with it. There might be some tweaks to it, but I don't imagine it would go away with a change of government.” 

 

This view was echoed by the South Yorkshire Pensions Authority, which partners with the Border to Coast pool.  

 

It found that “while timescales for implementation may differ, the result of the general Election which is due next year is not likely to change the direction of policy”. 

 

While both major political parties apparently agree about using pensions money for UK growth, views are more divided in the pensions sector. 

 

SYPA said: “While we might differ on some of the detail of the proposals made, the direction of travel is one that is supportive of the approach to pooling which the Authority and Border to Coast have taken and of the approach to place-based impact investing which the Authority approved last March. Therefore, the broad tenor of any response will be positive.” 

 

SYPA said in its draft consultation response that it has benefitted from pooling beyond the original objectives, pointing to work on climate risk and its greater influence as a steward.  

 

However, it did “have some concerns about the impact” of consolidation of pools, which it fears could destabilise the current system. It also said that SAB’s good governance recommendations should have been included in the consultation. 

 

The Society of Pension Professionals, which represents advisers, shows itself far more worried about DLUHC’s ideas. They would disrupt the balance between funds and pool operators, it said, and fears the proposals would undermine the sovereignty of local authority funds.  

  

Clifford Sims, chair of SPP Public Sector, had harsh words for Westminster's attempts to tell LGPS funds how they should allocate assets. 

 

“Whatever merits there may be in supporting local investments or investing in private equity, which many LGPS funds have already shown they are willing to do, the idea that funds should be directed to help with levelling up and the government’s own ambitions for UK-centric private equity, represents an attempt to usurp the power of investment for non-pensions purposes,” Sims said.  

  

He added: “The government should be mindful of the fact that the Supreme Court clearly ruled, in the Palestine Solidarity Campaign Limited judgment of 2020, that assets owned by LGPS authorities are ‘not public money’.” 

 

    

In June this year, the government introduced legislation in the House of Commons which would overrule this judgment. The legislation would prevent councils, their pension funds and others from boycotting countries or companies that the UK has friendly relations with. It is currently at report stage before moving to the House of Lords. 

 

   

The SPP also highlighted the absence of a cost-benefit analysis, particularly for a proposed move of significant passive portfolios to the pools.  

 

What is your view of the government’s new pooling proposals?