A consultancy, together with a number of Local Government Pension Scheme funds, is pressing the government to reconsider its proposals for the LGPS, as a consultation on the future of the scheme closes on Thursday.

In November last year, the government presented its plans for how it wants the LGPS in England and Wales to change in order to support UK economic growth. Among others, it proposes for the pools to become the primary strategic adviser to the pension funds whose assets they invest, as well as deciding on how to implement the investment strategies.
 

   
Responding to the consultation closing today, consultancy Hymans Robertson has coordinated a paper co-signed by 26 LGPS funds and two independent advisers that raises significant concerns with the proposals, calling on the government to change its plans. 

The paper argues the restructuring as proposed would put the assets in the LGPS – about £400bn – at risk due to “unintended consequences” and “the potential for poor investment returns”, warning of knock-on effects on local taxpayers. 

It says pools would be marking their own homework as they would report and assess their own performance, and raises competition concerns, with pension funds unable to switch pools if they are unhappy. 

The signatories are also worried about the risk of conflicts from central government influencing pools. In addition, they cite fee structures, lack of innovation and assets being siphoned into “pet projects” of influential pool staff as concerns.

The paper suggests a different approach, whereby funds could continue to procure their own investment advice. Hymans’ poll of 80 LGPS funds found 95% would prefer to retain autonomy to choose their own advisers.

Iain Campbell, who heads up LGPS investment at Hymans, said the performance of the LGPS to date was testament to the value added from the investment advice received by external advisers under the existing model. 

“Funds should retain the option of using this tried and tested route – and select their adviser,” he said. “Pools can then be included as an option once they have developed the services.” 

Hymans proposes that funds should continue to procure their own advisers, with investment strategy advice limited to that which is implementable by the pools, including giving the ability to invest in other pools’ solutions where a fund’s own pool does not offer one. The paper says this would prevent the issue of funds making investments outside of pools or pressure being placed on pools to provide niche solutions for only a single investor or small level of assets. It would also mean advisers could put forward investment ideas that are not yet offered by the pool, it argues.

“Where not appointed as the primary provider of advice, pools should be a key participant in the investment strategy advice process, providing input into the advice from an implementation perspective,” the consultancy adds.

Campbell said the proposal would lead to greater efficiency and strategic consistency between funds without the cost of pools building their own advisory service, instead allowing them to focus on expanding their local investment capabilities. 

“This is perhaps the most difficult of service for the pools to build but has the largest potential for impact on the UK economy,” he said. 

Figures from consulting firm Isio show the aggregate funding level for the 87 funds in the LGPS in England and Wales increased to 125% in the three months to the end of December, from 112%, thanks to reduced liabilities as gilt yields rose. The high funding level has allowed LGPS employers to avoid hiking contributions in recent years. 

The next full valuation is due as at 31 March this year. The improvements in market conditions and the upcoming 2025 actuarial valuations mean the focus for the LGPS should now be on funding and investment strategies, to re-set employer contributions and risk management, believes Isio.

It said the most effective way to find funding for local and regional government would be through reduced employer pension contributions. Isio estimates about £25bn, more than 5% of the LGPS’s assets, could be freed up that way. 

 

The consultancy’s public services leader Steve Simkins said 83 of the 87 LGPS funds are now over 100% funded on a low-risk basis, whereas none were as of 31 March 2022, adding: “This should prompt serious consideration by all involved.” 

 

He said the high funding levels and gilt yields were no longer a market blip but the new normal. Given the funding challenges of local authorities, some of the combined £8bn a year they currently contribute for pensions should be redirected towards local resources, he suggested. 

This means the focus should be on the valuation and contribution levels now, rather than pooling and investments. 

 

“The short-term focus of getting all assets into the LGPS pools by 1 April 2026 and investing £20bn of this into local and regional economies is starting to feel misplaced. Better outcomes could be achieved by concentrating on the actuarial valuation deadline of 31 March 2025, which will reset employer contributions and investment strategies for the next three years,” Simkins said. 

 

“More pooling can follow and then be structured in way which best fits into a future with lower net cashflows and reduced risk levels.” 

 
The signatories of the Hymans Robertson paper, alongside the consultancy, include: