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‘Pushing ahead with the biggest set of reforms to the pensions market in decades’, the recent Mansion House Speech heralded the creation of pension ‘megafunds’, designed to ‘tackle the fragmented pensions landscape’ and harness increased investment power.
These megafunds have an eye to Australia and Canada, where, the Government states, ‘pension funds take advantage of size to invest in assets that have higher growth potential’, and which it hopes could deliver around £80bn of investment in ‘exciting new businesses and critical infrastructure’ while ‘boosting savers’ pension pots’. To do so, it has published consultations on compelling consolidation across certain defined contribution (DC) schemes, as well as a raft of changes affecting the Local Government Pension Scheme (LGPS).
This briefing focuses on the reforms proposed to the LGPS and some practical steps administering authorities (AAs) and pooled funds can start taking now. For more on DC consolidation, see our companion Insight.
LGPS – Mansion House Proposals
The LGPS is one of the world’s largest funded pension schemes and will manage assets worth around £500bn by 2030. The consultation on the proposed reforms to the LGPS focuses on asset pooling, UK and local investment, and governance. It sets out the steps it will expect the LGPS’s 86 funds and eight pools to implement.
At the heart of the proposed changes is a desire to better utilise the £500bn assets through consolidation and targeted national and local investments – driving economies of scale and savings for members and boosting the economy through impact investment in infrastructure and growth sectors.
The consultation closes on 16 January 2025, with the Government proposing to move to the new model from March 2026 on a ‘comply or explain’ basis. Further, by 1 March 2025, each pool (working with their partner administering authority) is asked to submit evidenced proposals on how they would meet the new requirements, addressing costs, timelines, potential barriers and solutions. It’s an ambitious timeframe, particularly with the workload the LGPS funds and AAs currently face, including upcoming valuations, McCloud issues, dashboard implementation and ongoing governance compliance.
A summary of the key changes proposed in the consultation
- fully delegate the implementation of their investment strategy to their pool, and to take their principal advice on their investment strategy from their pool;
- transfer legacy assets to the management of the pool;
- set out their approach to local investment in their investment strategy including a target range for the allocation (having regard to the Government’s local growth plans and priorities);
- work with local authorities, and other relevant authorities and bodies, to identify local investment opportunities;
- set out their local investment and its impact in their annual reports;
- publish a governance and training strategy (including a conflicts of interest policy) and an administration strategy;
- appoint a senior LGPS officer with overall delegated responsibility for the management and administration of the fund; and
- undertake independent biennial reviews to consider whether the AA is fully equipped to fulfil its responsibilities.
- become investment management companies authorised and regulated by the Financial Conduct Authority (FCA), with the expertise and capacity to implement investment strategies (five of the eight pools are already established as FCA-regulated entities, and three of these have an existing internal management body);
- conduct suitable due diligence on potential investments and make the final decision on whether to invest; and
- review the makeup of their boards to ensure that:
- they include representatives of their shareholders (ie, the AAs);
- they improve accessibility and transparency for members; and
- their committee members have the appropriate knowledge and skills.
What steps should AAs and the pools start taking now?
AAs should:
- conduct an audit of the assets they hold outside their pool and take advice on the practical steps needed to transfer those assets;
- consider the Government’s investment strategies local to their fund and take advice on the investment opportunities available to them;
- update the investment strategy with their proposed approach to local investment;
- prepare (or revisit and consider updating) a governance and training strategy (including a conflicts of interest policy) and an administration strategy; and
- consider who might be best placed to be appointed (or recruited) as the fund’s senior LGPS officer.
Pool boards should:
- take advice on becoming an FCA-regulated investment company, if they are not already, and ensure their board comprises representatives from their AA shareholders;
- take advice on establishing an internal management function, if they do not already have one, and the standards the internal management function will be required to satisfy and adhere to; and
- conduct an internal gap analysis of the skills, knowledge and understanding of its members.
How can we help?
A great deal of change has been proposed but, equally, the wholesale structural upheaval some had anticipated has not materialised. We will be left with the same number of LGPS funds and pools as we currently have, albeit there is a lot of work to be done and changes to be made to comply with the proposed requirements. This is in contrast to the proposed reduction of providers of DC workplace pensions, where consolidation is guaranteed to be a feature of the coming years in that part of the market.
Please contact public sector pensions expert Chris Crighton should you have any queries in relation to the proposed reforms and how TLT can help you.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.
Date published
11 December 2024
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