The government is consulting on forcing local government funds to pool more of their assets and give greater say on investments and advice to the eight asset pools, which will be required to be Financial Conduct Authority authorised if they are not already. The new rules could apply from March 2026. 

 

As part of its drive to create ‘megafunds’ that invest in private markets in the UK and elsewhere to boost the country’s economy, the government is proposing to accelerate consolidation in the Local Government Pension Scheme. The 86 authorities in the LGPS for England and Wales already use eight asset pools, but these currently vary considerably in how much of partner funds’ assets they manage and how they are structured.

The percentage invested in pooled vehicles currently ranges from 6% to 95%, and total assets under pool management from 45% to 100%.

"The government’s view remains that in order to deliver the full benefits of scale AAs would need to transfer 100% of their invested assets to their pool with no new investments being made outside the pool, including local assets,” the consultation, which closes on 16 January 2025, notes. 

To make the asset pools more like Canada’s pension funds, the government proposes several governance changes, although it has stopped short of requiring funds to merge into one or more mega organisations. 

Among others, local authority pension funds would be required to fully delegate the implementation of investment strategy to the pool, and to take their principal advice on their investment strategy from the pool. Pools would be required to be investment management companies authorised and regulated by the FCA – currently five of the pools have this structure. The pension funds would also have to transfer legacy assets to the management of the pool. 

With concerns that large investors could be less interested or able to invest locally, the consultation also proposes that local authority funds need to set out their approach to local investment in their investment strategy including a target range for the allocation and “having regard to” local growth plans and priorities, though the pools would then conduct due diligence on the opportunities. 

Not least, the government is also taking into account the Scheme Advisory Board’s 2021 Good Governance Review, proposing that committee members would need to have the right knowledge and skills and councils would need to show a training strategy and appoint a senior LGPS officer, while pool boards would have to appoint shareholder representatives. 

The proposals do not go as far as some feared – a merger of funds could have been an option – but will still require considerable change in relatively short time. 

Asset pool LGPS Central has said it remains committed to working closely with partner funds.

Its chief executive Richard Law-Deeks said: “We welcome the clear guidance from government for the expected timeline to transition all assets and will support our partner funds to deliver on this in the swiftest, responsible and most cost-effective manner.” 

Hymans Robertson’s head of LGPS investment Iain Campbell believes pooling should be completed “as quickly and extensively as possible, where it’s achieving clear benefits for LGPS funds but with sensible exceptions where moving assets would incur unnecessary cost or waste”.   

 

The proposal to allow funds only to set very high level objectives and strategic asset allocations “is a monumental change for the funds and likely unpopular”, he said.  

 

Campbell also has concerns that requiring the administering authorities to take advice on setting investment strategy from the pools, who implement the strategy, “introduces a potential conflict of interest and may lead to sub-optimal strategies that ultimately cost the LGPS”. 

 

He welcomed that local investments are considered in the consultation but called for a “realistic” timeline to increase this, to allow for the supply of new projects 

 

“This will avoid forcing capital into a small set of opportunities, ‘bidding up’ prices and pushing down returns,” he noted. 

 

Steve Simkins, public sector leader at consultancy Isio, highlighted that under current regulations, local LGPS funds have control over asset class decisions, with the megapools simply serving to manage these assets, so regulatory change will be needed. 

 

“Balancing the government’s national investment ambitions with the autonomy of local councils is, therefore, a 'wait and see' situation,” he said. 

More than half of assets are currently invested outside of the pools, and not all pools have sufficient capability to provide the full range of services required, noted Dan Carpenter, LGPS investment lead at XPS Group. 

  

“The case for greater scale leading to better outcomes is compelling, but in order to drive progress, pools need to be invested in and positioned to attract LGPS participation, rather than administering authorities being coerced into something that they consider sub optimal,” he said. “This drive needs to be pull rather than push.”

What are your thoughts about the proposals?

Anthony Fletcher

Mike Clark

Joanne Donnelly

Richard Law-Deeks

Richard Tomlinson

Sam Gervaise-Jones

Neil Mason

Iain Campbell

Calum Cooper

Steve Simkins