Despite government assertions that cost savings will be made from pooling, total investment management costs in the Local Government Pension Scheme in England and Wales increased by £152m over the year to 2025. 

The Scheme Advisory Board on Wednesday released the latest annual report to the end of March 2025 for the scheme serving 6.81m people, pulling together information from 86 annual reports by 87 funds. 

The chair of SAB, cllr Roger Phillips, said the scheme has “continued to operate effectively in a demanding environment that is characterised by political change, operational pressure and heightened scrutiny”.  

The scheme has been in the focus of politicians amid sluggish economic growth over the past three years. LGPS funds were ordered by central government to regroup from eight into six asset pools by March this year, bearing their own transition costs, and are heavily nudged to make ‘local’ investments to support UK regional growth and regeneration under new legislation. Meanwhile, Reform UK – the most successful party at this month’s local elections, winning 14 councils and over 1,450 seats – has said it would close the scheme to accrual and turn it into a sovereign wealth fund.  

Stronger funding and governance arrangements, along with “a sustained focus on evidence-based decision-making" have supported stability across the LGPS, Phillips said. 

The £402bn LGPS is estimated to be 114% funded. It remains invested mainly in listed equities (48%), with 6% each in infrastructure and private equity. Bonds make up 16% and 8% is held in property.

It revealed that while assets increased by 3.2%, investment management costs went up 8.5% in a year. Management fees increased £84m, transaction costs by £67m and performance fees by £4m, the Scheme Advisory Board said, while other investment costs went down by £5m.

The report notes: "It seems that in recent years, as funds have diversified they have reduced equity exposure and given up some return."

A SAB spokesperson said it was a difficult year for a range of asset classes, including private equity, and speculated that costs were driven higher by pooling. While the board does not have detailed information about the breakdown of investment management costs, it suggested that the change “will have been driven by increased transaction costs as funds transfer remaining assets to the investment pools”. 

 

The spokesperson argued there is benchmarking evidence showing how LGPS pools have negotiated “significant” reductions in investment costs for their partner funds.  

 

“However, this has happened against a background of changes in structure,” they added – establishing the pools – and “changes in asset allocation towards more expensive asset classes” such as infrastructure.  

 

This has led to increases in reported costs in the short term, the spokesperson said, and did not rule out further increases in cost. 

 

However, “over the longer term, we would expect to see investment management costs falling”, the added. 
 

Returns disappointed, as the average fund delivered 3.4% over one year and all funds failed to achieve benchmark performance. Over three years, equities delivered the best returns at 6.5%, while private market assets showed varying performance, with infrastructure posting 6.4%, private debt returning 5.8% and private equity just 2.5% – a steep fall from the high returns of previous years. However, over one year, active equities also underperformed, with more than two-thirds of equities are currently managed actively in the LGPS.

Despite recent lower returns, the longer term performance is still "well ahead of inflation and funds’ actuarial assumptions", according to the report.

Administration and governance costs rose even more than investment costs in percentage terms – up 13.3%, or £39m, in a year to reach £329m, driven by a £30m uptick in administration costs, as administrators are dealing with the McCloud fix and benefit changes. 

“This kind of increase was always to be expected as funds have so many new administrative challenges to address – such as implementing the McCloud remedy and preparing for connection to the new pensions dashboards. There are also increasing expectations around member communications and digital services that funds are rightly responding to,” the spokesperson said.   

However, they stressed that value for money is important, adding: “The Board is establishing a new peer support offer which will help funds to share best practice in delivering administration services.” 

Funding remains strong, ticking up from 113% to 114% over the year, when weighted by assets under management of 75 of the constituent funds that reported estimated funding levels. Detailed funding information will be published later this year, providing a basis for contribution levels. Many local authorities are expected to seek contribution reductions as funds carry surpluses.