Will LGPS pools stick with their operating models?

Pardon the Interruption

This article is just an example of the content available to mallowstreet members.

On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.

All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.

A £34bn local authority pension pool has launched a tender for an authorised contractual scheme operator. As some pool operator contracts come to an end and the government wants to see further consolidation, will LGPS pools revisit their structure?  

The Access pool is procuring for a five-year contract from March 2025 – with the option to extend by five years – in an exercise led by Hampshire County Council and which closes on 10 May. Access selected Link Fund Solutions, now Waystone Group, in March 2018 for seven years.   

Access looks after most of the pension assets of Cambridgeshire, East Sussex, West Sussex, Essex, Hampshire, Hertfordshire, Isle of Wight, Kent, Norfolk, Suffolk and West Northamptonshire, with the Access Support Unit in Essex providing day-to-day support.  

What are the current operating models?  

There are two main pooling models currently adopted by the LGPS. In some pools, a pool company is structured as an FCA-regulated entity owned by the underlying administering authorities.  
“The pool companies under this approach will have responsibility for the design and set-up of all the investment solutions offered to their funds. They may or may not have in-house investment management capabilities but will be responsible for selection and monitoring of any third-party investment managers,” explains Iain Campbell, who heads up LGPS investment at consultancy Hymans Robertson. 
Other pools, while governed by the LGPS, have outsourced their fund operator. In these cases, the pool is formed with a joint committee, set up under legal terms such as an inter-authority agreement, to represent the underlying local authorities. Under this model, the committee selects and monitors the pool operator, which sets up investment solutions that the funds will invest in. The operator is responsible for the selection and monitoring of asset managers, with the LGPS funds providing input around their needs. 
“Both structures offer similar benefits, they are simply delivered in different ways,” Campbell says. 
As well as these two core models, he stresses that pooling has also been achieved through:  


What are the chances of a reset? 

The operating models of the eight Local Government Pension Scheme pools in England and Wales are all slightly different, says Mike Weston, a professional trustee at Pi Partnership and former chief executive of LGPS Central. While five of them have Financial Conduct Authority-regulated pool companies, one has “no real pool infrastructure at all", and two – including Access – have outsourced their ACS operator and their investment provider, he notes.  

The pros and cons of the various models “will depend on who you speak to”, says Weston, and points out that there is no shared framework for assessing and comparing the success of the current pool companies.  

The lack of comparability is perhaps contributing to the fact that pools have thus far kept the same operating models they chose at the outset of pooling. Weston thinks there is no reason why these could not change, provided all of a pool’s stakeholders were in favour. 
However, “at the moment, pools are more focussed on delivering good investment performance, responsible investment, cost savings, internal governance and how to react to the government’s consolidation agenda, than on fundamentally changing their operating models”, he noted.  
Chancellor Jeremy Hunt said in the Autumn Statement 2023 that LGPS pools should reach £200bn. In a consultation response that followed, the Department for Levelling Up, Housing & Communities said that because the LGPS could reach around £950bn in 2040, “we should therefore look towards a smaller number of pools with assets under management averaging £200bn in the future”.    
While contributions and investment returns will mean pools will grow organically, some pools will therefore need to merge if the proposal goes through. Weston thinks that within a merger, the pool operating structure would be reviewed and could be one of the things that change.  
Ultimately, there are several factors at play, however. So whether this would happen would partly depend on which pools are pursuing the merger and what their exiting operating models are, he adds.  
Campbell agrees that “in theory, [operating models] could be changed”, adding: “Whatever model has been chosen, there will be evolution over time as pools extend the range of services provided and the needs of partner funds evolve.” 
He thinks it is too early to say what impact the government’s £200bn target for pool size will have on pools and their operating models, observing that this goal is longer term and that pools will grow naturally. 
For Campbell, it is not clear that it is a useful objective, however: “There is no hard and fast evidence that this is the right goal. There are other considerations such as the size of specific investment mandates to optimise scale benefits, regardless of the overall size of the pool.”  
Do you expect operating models to evolve and how? 

More from mallowstreet